Welcome to the Solar Interim Report for Q1 2023. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press five star on your telephone keypad. This call is being recorded. Today, I'm pleased to present Jens Andersen, CEO, and Michael Jeppesen, CFO. Speakers, please begin.
Thanks a lot. A warm welcome to this first quarter webcast for the Solar Group. Together with me here in our headquarter in Vejle, I have my colleague, CFO, Michael Jeppesen. The agenda for today is a general business update with some highlights here in the beginning of year 2023, presented by me. I will give you some insight about our Climate & Energy segment, but also our latest acquisition of ThermoNova. Mike will then present our first Q results, including a high-level cash flow status, naturally, some comments to our guidance for year 2023. Finally, we will have a Q&A session. Next slide please. Highlights. Revenue increased to DKK 3.7 billion up from DKK 3.5 billion last year.
Adjusted organic growth at group level amounted to 6.7%, with especially Solar Norge and Solar Nederland posting double-digit growth rates. Climate & Energy, one of our four strategic focus areas, delivered very strong growth rates corresponding to a revenue of almost DKK 400 million. This was despite a very unexpected slowdown in demand for smaller heat pumps in Denmark in Q1. We expect this to be temporary due to uncertainty among homeowners, how and when the financial government support for phasing out fossil energy sources in climate zone will be relaunched. So far, we have heard there will be a relaunch in June, but we haven't set, we haven't got the date yet. The industry segment posted 10% in adjusted organic growth, while the installation and trade segments posted adjusted organic growth of 4% and 9% respectively.
A strong development in our underlying gross margin compensated for increased costs, and we are therefore satisfied with our EBITDA result of DKK 280 million, as it is on par with our own expectation and last year. Our EBITDA guidance for 2023 is unchanged with a result of approximately DKK 900 million, but our revenue is lower with DKK 200 million to a revenue of DKK 13.5 billion. That is only due to FX headwind from Swedish and Norwegian krona. Next slide, please. For the past 2 years, our Climate & Energy focus area has posted average growth of 40%, achieving 10% of sales in 2022. With our acquisition of ThermoNova, we have now established an even stronger position within Climate & Energy and underpinned the support we offer to our many installation customers specializing in green solutions.
Next slide, please. ThermoNova adds an additional solution to our Climate & Energy assortment, and we are now able to provide our customers with energy-efficient, high-capacity heat pumps for large buildings. It is our prediction that the increase in demand from high-capacity heat pumps will mirror the development we have seen in the private market in recent years, a market that has been characterized by a strong demand for energy-efficient solutions to replace fossil heat sources. In order to meet the future demands, we are expanding the ThermoNova production significantly at least fivefold. Until the expansion is in place, we will only focus on the Danish market and then later start to introduce the ThermoNova assortment to additional markets. Hopefully, that could be in the beginning of next year.
The opportunity within industry will be driven by the general ambition to reduce CO2 emissions and will be further enhanced by the expected introduction of a CO2 tax in 2025. I will now give the word to Michael for some more insights to the financials. Please, Michael.
Thank you, Jens. Please turn to page 7. Revenue in terms of DKK increased with almost 6%, despite we faced some headwinds from FX. Even with the FX headwind, we came out with almost DKK 3.7 billion compared to DKK 3.5 billion last year, equal to an adjusted organic growth of 6.7%. Similar to what we have seen in the preceding 4 quarters, price increases remain a substantial part of the organic growth we experience. We did actually see growth in volume in the beginning of the quarter, whereas we in March saw, as expected, a negative growth in volume, but still positive organic growth. Our strategic focus area Climate & Energy continued to deliver very strong results, as Jens mentioned, delivering DKK 400 million.
Despite this quite surprising negative development we saw in Denmark, it's particularly heat pumps, as also mentioned by Jens, which came to a complete stop, and we do still expect this to bounce back, given that the underlying need for sustainable green solution remains unchanged. If you take a look at the three main segments, they all deliver growth rates. Particularly industry came out with strong two-digit growth rates. Looking at installation, there is no doubt that with the current growth level of around 4%, we do see a setback in volume. We take a closer look at industry, we saw solid growth in almost all sub-segments, particularly marine offshore and MRO came out very strong, but also OEM, whereas utility was slightly more challenged.
All in all, with the exception of the full stop almost in Denmark of sale of heat pump, the development is fully in line with our expectations, including the trend that we are seeing. Turning to page 8. With an EBITDA of DKK 280 million, Q1 was on par with last year. You look at the underlying financial performance, eliminating one-off effects, we did actually see a minor improvement. Albeit cost of goods only improved the margin with 0.1%, the underlying margin actually improved with 0.4% when adjusted for one-off price effects. We do still see a positive effect of our strategic focus areas that continue to deliver. During Q1, we did, as anticipated, see that price increases from suppliers are starting to normalize.
We still face a lot of price increases, but at a substantial lower level compared to what we saw last year. As expected, we faced headwinds from cost, in particular our External Operating Costs, EOCs. Consequently, we have launched quite a lot of initiative, which includes cost containment, process optimization, but also unfortunately, staff reductions in order to secure that we can keep the cost development well below the inflation. Turning to page 9. Looking at cash flow, we see a positive impact from operating activities of DKK 101 million, despite the normal seasonality. I'll comment on this shortly. DKK 162 million, mainly of course, the acquisition we did of ThermoNova. If we take a closer look at the operating activities, we see the main change is within receivables, which add DKK 304 million, which is the normal seasonality.
This was, however, offset with the increase in liabilities. Inventory did, however, increase with DKK 122 million. This was driven by the increased Climate & Energy products where we are building inventory. In all fairness, it had to be said that of course, the slowdown in sale in Denmark, we did see at the end of Q1, of course, also had a negative impact on the development of the inventory. We do still expect the inventory level to reduce during 2023, despite the investments we need to do in our globe, in our growth area, Climate & Energy. Turning to page 10. Looking at the net working capital, we see an increase in Q1, where the average increased from 14.5 in Q4 to 15.3 in Q1. The main driver being the increased inventory value, as mentioned at the previous slide.
However, compared to the end of the quarter in Q4, the net working capital level remains more or less unchanged. Despite the increase in net working capital, and thereby also the invested capital, we actually managed to deliver 23% in OIBDA after tax, which still is a very satisfactory level. Looking at the gearing level, we see the normal seasonality kicking in, combined of course, with the payment of dividend, investments of DKK 162 million, and of course, also the increased net working capital, bringing the gearing up to 1.3 from the starting point of 0.9 at the beginning of the year. Turning to page 11. We now expect a revenue of DKK 13.5 billion versus previously DKK 13.7 billion. The reason being the headwind from FX. Consequently, this unchanged correspond to an organic growth of approximately 2%.
Despite the headwind we face from FX, we reconfirm an EBITDA of DKK 900 million. In both 2022 and 2021, we had substantial positive one-off income of DKK 215 million and DKK 112 million respectively. We do not expect this to happen in 2023 remain, meaning that our guidance do not assume any significant one-off income, which also is in line with what we mentioned at the beginning, that we see that the number of price increases that are coming through are slowing down for the time being. If you look at the markets where we're operating in general, we expect them to be stagnant or even negative in all segments, despite the effect we see from price roll over from last year, and with particularly increasing uncertainty in H2.
During the last year, we managed to be in ahead of inflation. As you may remember, the last quarters in 2022, we did see an accelerating cost inflation, and as expected, this continued into Q1. We expect this to continue during the remainder of 2023. As mentioned previously, we will continue to implement the necessary mitigating action. Thank you.
Thank you, Michael. Now it's time for questions and answers or the Q&A session. Please.
Thank you. To ask a question, please press five star on your telephone keypad. To withdraw your question, please press five star again. We will have a brief pause while questions are being registered. The first question will be from the line of Kristian Johansen from SEB. Please go ahead. Your line will now be unmuted.
Yes, thank you. A couple of questions from me. Maybe first of all, in regards to heat pumps in Denmark. In your annual report, you disclose Climate & Energy revenue to be roughly DKK 1.3 billion. How much of that is heat pumps in Denmark?
I think the fair answer here, Kristian, is we simply don't remember the figure. A main part of the sale we did see in Denmark during last year was driven by heat pumps. It was a substantial part of it, but to give you any exact figure, we simply don't know.
We need to investigate that.
Yeah.
I have a feeling, but I won't say a figure which I'm not 100% sure of. We need to investigate that.
But there's no doubt-
Yeah.
There's a shift happening right now, because what drives the development in Denmark, where we're gradually getting into speed again, is the sale of solar panels, which were not really the case last year.
Okay. That does make sense. It would be nice to just to have a sort of magnitude of the revenue at least...
Yeah.
to say. Fair enough. Let's get back to that once you've had a chance to actually look at the right figure. To the net working capital development. Where should we expect the net working capital to sales ratio to be at the end of the year?
All other things equal, it should improve compared to what you saw last year. You should not expect a return to the levels you have seen in previous years. This is simply because there is a structural change. Climate Energy products, to a large extent, you need in advance. Secondly, there's quite a long lead time, which also means all other things equal, that your investment in inventory will be substantially higher. If we kind of take the Climate Energy products out of the inventory, the remaining part should return to the levels we've been used to as our suppliers' ability to deliver is assuming that continues to improve and get back to the normal level.
Expect for the time being, at least that compared to the levels we've seen in previous years, we will be some percent pointages above simply due to the change that it's now Climate & Energy, which is the main growth driver.
All right. That makes sense, although, you didn't necessarily guide very exactly for where you expect it to be besides sort of at a lower ratio than at the end of last year.
We should expect improvements during this year in total, despite the investments we're doing in Climate & Energy. It is at a too high level. We were, as I think I mentioned, also surprised by the sudden stop in Denmark. Bear in mind, there's a lead time of 4 months, which means it takes quite some time for us to react on the changes that we see. I mean, the goods are already in a.
The goods are already in a container on their way up here from Japan, for instance, South Korea. It reacts quite slower.
That's true. That makes sense. Just to your cautiousness around growth for the second half of the year, which I fully understand why you express that, but maybe the question more goes to your actual visibility. What can you actually see, for the second half of the year and what's more sort of just a cautious view given the uncertainty out there?
I would say the visibility is, I mean, what we see right now is that it's fairly volatile, the development we are seeing. Traditionally, we know from experience that that is a potential indicator. We also are aware of the fact that throughout the value chains, inventory has been built up all over, and they will probably sooner or later start to normalize, if they've not already started to normalize. We are very much aware of that our customers have a high inventory level than what they traditionally have. They will start to normalize that as well. That's going to have a negative impact albeit it will be temporary. If you look at the order, the projects that we are winning, there is a change in the structure, I would say.
It's related to industries investing, it's not residential building. I would say that part has more or less come to a full stop. We see in industries investing in new buildings still and in renovation of buildings as well. It's still a very limited part of our revenue. I would say transparency is. It has not really changed much, I would say, compared to what we have seen before. The concern is this volatility we see in the revenue. What we can see is that the number of picking lines are lower than normal or at the same time last year.
That is of course a clear signal that the market has slowed down, and we are measuring that every day. The number of picking lines are down, that's for sure, in all markets. It's not that we have gained any new insights since we came out with the guidance.
Nope. Nope.
I would say everything is more or less playing out, with the exception from heat pumps in Denmark, but we expect that to be temporary, as we expected when we gave the guidance the first time. That's also why our guidance in volume, it's the same as the original guidance. I know the FX part, but in volume, it's based on the same assumptions.
Understood. Just the last question to your ThermoNova acquisition. A ballpark estimate for the revenue in ThermoNova for 2024, what would that be?
I think that's still very early days. We're currently in the process of ramping up production, and at the same time we are strengthening the organization with a focus on Denmark as a starting point because this is where we have the best foundation. I think that's too early a question to come up with anything firm on that.
I think you'll, you know, you'll have the figure at the beginning of 2024, but of course, there will be a solid growth in ThermoNova, that's for sure. We already predict that in 2023, but of course, the production needs to be ramped up before we can start selling, to other markets. Mm-hmm.
We see a strong interest from our existing customers in this, I would say it's.
Huge interest.
It's quite
Yeah
... I will not say surprising because we were expecting for those 90, and that is playing out of course. We are starting to convert it into orders, but we also need to be a bit cautious because we can simply not manufacture, and we don't wanna disappoint. The first step is strong focus on increasing the capacity and They're working day and night on that as we speak.
Yeah. Sure. I understand, and I was understanding your course, just give me the rainbow. I think my questions more reflect the fact that I feel left a bit in the dark on the revenue part here, given the fact that you've not disclosed the revenue of the company. We don't really know how much revenue it generated when you acquired it. If I understand you correctly, we shouldn't expect a huge jump here in 2023, but obviously with the investments you're doing, there should be some contribution to growth in 2024. It's just simply-
Yeah. Yeah.
the magnitude of the
It feels like in all events it's on the basis of. Yeah. Well, okay, given the current FX rates, it's DKK 13.5 billion.
Mm-hmm
... so, it's not-- I mean, there is a limit to what can be done with the time frame of 1.5 year plus, I would say. We'll make sure as this starts to materialize and become more and more significant, that it becomes more transparent too. That's a fair-.
That's true.
That's a fair request.
It's a fair request. Mm-hmm. All right. Just very low-key, reporting-wise, Will ThermoNova just be incorporated in the country revenue or will it be other markets that we see it for like 45? Or how will you template them?
No, what will happen is that the revenue will go through in first instance the Danish unit, and that gets eliminated because it's internal revenue. similar if and when we start to sell in other markets, but Denmark will be the first one. If you look at the segments result, it's the end customer. What we call the end customer. If the end customer is an installer, it will appear in the installation segment. If it's an industry customer, it will appear in the industry segment, and if it's other, it'll appear there. This is how it will play out. We can say potentially, depending on which type of the segment you're looking at, will be spread all over.
It will be in Denmark, because if you look at the graphic segment.
Sure. That makes perfect sense. Great. That was my questions. Thank you so much.
Thank you. Thank you, Kirsten.
Thank you, Kristian. As a reminder, to ask a question, please press 5 star on your telephone keypad. We will have a brief pause while questions are being registered.
We have received two questions online in the pause maybe.
Yes, please go ahead.
We received a question from Nikolai. Can you quantify, if any, the positive support to the gross margin from inventory?
Yeah. We can actually.
It's approximately DKK 25 million in Q1 compared to DKK 35 million last year. It is as expected reducing, and the major part of it being in January and February whereas it was negligible in March basically.
If you take out the one-offs, the real gross margin or the operational gross margin is up 0.4%.
A second question from Daniel: Do you see growth in Poland, Netherlands, and Norway, and which potential do you see in these markets?
I would say Poland is like a rollercoaster economy. It has really slowed down in Poland temporarily, but now we see orders and offerings are coming in again. As I said, Poland is definitely. We're also pretty small in Poland. It's a very fragmented market. Of course, the war in Ukraine, if it ever lasts, but at least we all hope for that will give a really strong situation in Poland going forward. At the moment, it has temporarily been down, and now it's starting to move in the right direction. Holland and Norway, it's mainly driven by Climate & Energy. It's amazing how much they are investing in Climate & Energy in those two countries.
The rest is more or less a picture of what we have seen in Sweden and Denmark, that the normal, installer revenue is a little bit down, it's really compensated by Climate & Energy in Norway and Holland. I hope that is sufficient.
There are still no questions, so I will hand it back to you for any closing remarks.
Okay. Thank you for listening in and have a really nice day. bye-bye.