Solar A/S (SOLARB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Solar Full Year Results Call for 2020. [Operator Instructions] Today, I am pleased to present Jens Andersen, CEO; Michael Jeppesen, CFO; and Hugo Dorph, CCO. Speakers, please begin your meeting.

Thanks a lot. A very warm welcome on a -- welcome to our Fourth Quarter Webcast, but also the ending of our 3-year thread period. Together with me, I have Hugo Dorph, our CCO; and Michael Jeppesen, our CFO. The agenda for today is, I will give you a general business update, sent by me. Then Hugo will give some more insight into our new strategy, which we call the CORE+. And finally, Michael will present our 4Q results and our guidance for the year 2021 before we go to the question and answer session. Page 3, please. In 2020, we managed to increase our total EBITDA by DKK 95 million or equal to a plus of 26% to an EBITDA of DKK 455 million, and that was despite a slightly negative organic growth due to primarily COVID-19. With an EBITDA of DKK 456 million equal to a plus of 4.2%, our core business posted the best result in more than a decade and EBITA increase in almost all entities. Similar, our related business also improved its result by DKK 18 million to a minus of DKK 1 million. With a return of invested capital or ROIC of more than 15% after tax, I humble allow myself and my team to conclude that we have exceeded our financial targets in this strategic period that now has come to an end. At the Annual General Meeting the March 19, the Board of Directors will propose that dividend of DKK 28 per share, which is an increase from DKK 14 per share last. Page 4, please. As expected, we also successfully implemented SAP eWM in Solar Nederland in the last week of January 2021. This completed the implementation of SAP eWM through our Solar, a journey that began in June 2018. Furthermore, I can also announce that we will start the extension of our central warehouse in Denmark. The extension will consist of a huge out of store solution with 125 robots and 100,000 bins. Furthermore, we will expand our building space for loan goods, and we will do that in a green and energy efficient way to secure a green footprint as well. Our new strategy is launched now, and it builds on the journey, we began, in 2018. And the cornerstone of the CORE+ strategy is to be a leading green digital sourcing and service company in our industry. We wish to develop Solar in a profitable way by enabling key markets to focus on 4 strategic areas, and that is industry, it's concepts, but it's also trade and climate and energy. Our aim is to grow the sales of concepts and industry sales and introduce trade and climate and energy to our remaining markets. This will, of course, be supported by maintaining a very strict cost cut. Our financial ambitions until '23 or with the new strategy is further to expand our EBITDA to minimum 6% and to improve our ROIC to 17% after tax. Our gearing remains unchanged, and that is in the level from 1.5 to 3. All our ambitions, and that is also including nonfinancial targets, ESG targets can be seen on Page 17 in our annual report. Finally, I would like to thank all dedicated and skill in Greece and Solar. Together, we succeed with this strategy, despite COVID-19, and I'm 100% convinced that we will do it again with our CORE+ strategy. I will now give the word to my colleague, Hugo, and he will give you some more insights into our new strategy. Please, Hugo.

Thanks, Jens. Yes, we have named our coming strategy period CORE+ because it builds on our strong performance in our core business. So CORE+ is about continued focus on developing our core by doing more of what we've already proved works, as Jens just very clearly laid out and capturing 2 powerful trends that pave perfectly to Solar's strength. So in CORE+, we've selected 4 focus areas to drive profitable growth. The 2 you recognized from our last strategy period and 2 are new areas that we've managed to develop in recent years and that are now ready for prime time. The 2 familiar areas are concepts and industry. With concepts, we want to grow concept share across all customer segments. And in industry, we want to become the preferred supplier to 4 selected industry segments. And the 2 new areas are trade and climate and energy. And in trade, we want to grow with a focus on retail, e-tail and what we call e-trading customers. And with climate and energy, we want to focus on climate and energy solutions in all segments. With CORE+, we position Solar as digital and green. These are 2 powerful trends, impacting our industry, and Solar is uniquely positioned to benefit from both. And let me go into that, you mean to -- the next page, let's see, Page 6. We see a digital transformation happening all across our industry, app usage, digital integration and virtual design and construction are all on the rise. The opportunity is huge, not least, in terms of cost savings and productivity gains, at least for those who are willing and able to work in new ways. Solar already leads our peers on digital with the highest digital order share, we are essentially a digital company, uniquely wired to reap the benefits. We also see a growing demand for green solutions in all our markets. Many are closely linked to the technical solution areas we already serve and master. Electrification of society has the potential to supercharge Solar's business. And we've been engaged for more than 10 years, both on the solution areas and on tracking and reducing our own CO2 footprint. So how do we work with these 2 trends in our business. As you may recall from our logo, here in the top right corner, we use stronger together to emphasize our role in our value chain, working closely with our customers as well as our suppliers to drive productivity forward. And that same dynamic applies with our opportunities in digital and green. Working closely with first move of customers, suppliers and technology partners, we challenge our industry to move forward on digitalization. Our higher digital order share is the perfect enabler of both automated and data-driven operations, efficient integration with our suppliers and digital services, including self-service for our customers. We call this Digital Together. At the same time, global attention on sustainability present Solar with both market opportunities and operational demands. Our customers, our suppliers and our employees expect us to run a responsible business. They rely on our expertise in bringing sustainable products and solutions to market. And jointly, we're able to contribute to a more sustainable world, and we call it Green Together. Digital and Green shape our operating plans for our 4 strategic focus areas, supporting installers on heat pumps, solar panels, EV chargers, et cetera. Selling green solutions to industry and trade customers, using digital channels and sales tools, developing our concepts around green requirements, serving offshore wind customers, finding new trade customers through data science and digital marketing and further automating our operations. And Digital and Green and productivity often go hand-in-hand. So our investments in warehouse automation is not only digital, it also supports more productive picking, energy savings, opportunities to reduce the use of packing material as well as cost savings and a better working environment. So let's go to the next slide on targets. With CORE+, we've set specific targets for each of our focus areas for achievement by 2023. With concepts, we aim to increase our share, especially in Sweden, Norway and the Netherlands. We target a concept share of 25% of revenue for the core business, which is up from the current 21%. With a starting point of DKK 600 million last year in climate and energy, we aim for 5% annual growth. And in industry, we aim to grow our share of revenue, particularly in Sweden and the Netherlands to support our ambition of 30% of core revenues. This is up from currently 27%. And finally, in trade, our ambition is to expand our segment focus in trade across all our markets, as Jens said. With this, we aim for a compound average growth of 5% over the coming 3 years with a starting point of DKK 874 million for 2020. And as Jens mentioned, we also expect this to contribute to an EBITDA margin above 6%, which corresponds to a ROIC above 17% after tax. At the same time, we aim for gearing of our business in the range of 1.5 to 3x our equity. We also expect to grow our already industry-leading digital order share to 70%, which corresponds to more than DKK 8 billion, transacted digitally every year. And finally, we've set a number of goals for Solar's environmental and social contributions as well as on the governance. We commit to increasing gender diversity. We want to convert all our electricity to renewable sources. We want to install solar panels and EV chargers at all of our major sites. And finally, we want to support our customers in the green transition by training at least 2,000 students in renewable solutions at our Solar School. And obviously, with our green focus, this is an area we will expand further on, as the year progresses. So with that, I want to hand the word to Michael, to go through more of the numbers.

Let's turn to Page #9. I can say that Q4, in a nutshell, reflects exactly the same things we saw in Q3 and Q2, meaning a slightly lower revenue was more than compensated by increasing gross margin in combination with lower cost, consequently leading to an increase in earning. But if you look at the revenue in Q4, in terms of DKK, it declined slightly. We came out just above DKK 3.0 billion. Adjusted for a number of working days, organic growth ended negative with minus 2.1%, whereas we had a positive growth of 2.6% last year. If we take a deep look at our segments in Q4, we did see negative growth, both, within installation and trade. It should be noticed, however, that the impact of our better business initiatives are mainly directed towards these segments and we were at least seeing quite an impact there. And we also noticed that if you look at the main segment, installation earnings actually went up. If we take a look at industry, we do still see challenges within OEM, but infrastructure, as expected, continues to deliver strong double-digit growth rate. Marine & Offshore actually were slightly positive during Q4. And as you may recall, in Q3, we reported minus 21%. So it's really a change to the better. Having that being said, the reference point was probably also slightly easier in Q4 than in Q3. Now if we turn to the next page, slide is 10, with an EBITA of DKK 145 million, Q4 was the ninth consecutive quarter with year-over-year growth in EBITA. The main driver was the increase in gross margin, which delivered astonishing 1% increase. This was, however, supported by a one-off income of approximately DKK 8 million related to extraordinary price increases, additional bonus, et cetera, in Norway, which had an impact of approximately 0.3% points. If we look at the costs in absolutely terms, they were down with DKK 14 million. FX had an impact of DKK 1 million, meaning the real cost savings were DKK 15 million. The main contribution, if we take a look at the external operating costs are the same as what we've seen in previous quarters, it's travel, entertainment, costs on cars and similar costs. We do, and this is also a part of our guidance, partly expect these costs to normalize during 2021. One thing that should be noticed, in particular, is loss on debtors. We did see an increase from DKK 1 million in '19 to DKK 8 million in '20. So we came from almost 0% to 0.26%. Now it should be noticed that the loss we saw in 2019 was, by all standards, exceptional low. If we now look at what actually happened in Q4, it's -- and this is very important for us to emphasize, this is not a general increase. We have seen a few mid-sized installers, and there -- who have gone into financial problems. It's a classic situation where they have projects that fails. So we do not see this as a result of COVID-19 of government support packages being reversed. We see it as more like a one-off event. Turning to Page 11. If we look at the full year performance, in total, we spent DKK 25 million on SAP eWM rollout. And as Jens was saying, we finalized the last one successfully without any impact on the business in the last weekend in January. We spent some money on restructuring and moving into AutoStore, which, as you may remember, in Q1, did cause us a little bit more challenges than we anticipated due to COVID-19 restrictions. These were partly offset by DKK 8 million on other -- from other income. So core business, thereby went up with approximately DKK 100 million, or DKK 82 million, if we adjust for the one-off due to price increases of DKK 18 million related business up with DKK 20 million. So in essence, we managed to lift the earnings for DKK 95 million from DKK 360 million to DKK 455 million. This is the best result in a decade. Turning to the next page. If we take a look at the cash flow, we are, of course, particularly happy to see the positive impact from operating activities of DKK 432 million, which I'll comment on shortly. Investing activities actually came in positive with DKK 213 million. Of course, this is the sale of BIMobject that has -- that lifted up. Financial investments were negative with DKK 397 million, but this is mainly due to repayment of noncurrent interest-bearing debt of DKK 245 million, installment on lease liabilities and change in current interest-bearing debts. But if we take a closer look at the operating activities, we're particularly happy to see that the improvement that we've seen on inventory all through the year also were maintained here despite that we are now coming to the end of the high season. The main contribution is from receivable, DKK 235 million. It should be noticed that we did see organic -- negative organic growth also in December. But the main driver of this is the normal seasonality effect. To say that, and this is again important, we do not see any delay in payments from customers whatsoever. If we look at the impact from liabilities, there is a positive impact of DKK 26 million, and this is despite that, we are now starting to see the support packages being reversed, which meant that they came down from DKK 73 million to DKK 51 million or, in the quarter, an impact of DKK 22 million. The remaining DKK 51 million will be repaid during early 2021. So turning to the next page, Page 13. As I said, one of our focus areas in 2020 was to reduce the inventory level. And I would say we have delivered on that promise. If you look at the networking capital in total, we have reduced it. If you look at it at year-end, we came down from 11% to 9.7% at the quarter. Looking at the average, we also see a drop from 11.9% to 11.5%. This, of course, in combination with the sale of BIM, and in particular, the increased earnings, brings our gearing down to 0.2% at the end of last year 2020. Turning to next page, 14, guidance 2021. Please notice that the guidance is now on EBITDA level, but we will give you the bridge to the EBITA. The guidance is based on the assumption, and we'll not see any significant lockdown in our business segments or any other COVID-19 related lock-on effect. It's also based on the assumption that loss on trade receivables will be under 2020 level. And by that, we mean the full year 2020, not the level we saw in Q4. Do not expect that to repeat itself. Revenue-wise, we expect a revenue of DKK 11.55 billion, corresponding to an organic growth of 2%. Our Better Business project, that's an integrated part of our CORE+ strategy, will continue, and that is expected to take out revenue of approximately DKK 200 million. Adjusting for this, this actually means that we are expecting an underlying organic growth of approximately 2%. From a high-level perspective, if we look at the financials, we can say that we did see cost of DKK 25 million for SAP rollout. We had approximately DKK 25 million nonrecurring income, court case and the price increases in ML, more or less offsetting each other. Cost will normalize partly here, this year, compared to last year, which is expected to have a negative impact of DKK 20 million, leading to the underlying performance of DKK 617 million EBITDA, which we expect to increase with DKK 33 million, bringing us to DKK 650 million or an EBITA of DKK 465 million. Thank you.

Thank you, Michael. Thank you for that. Now it's time for question and answers. So please...

[Operator Instructions] We have a question from the line of Mikael Petersen from SEB.

The first is relating to the DKK 200 million expansion that you're doing. Can you try to split up how much is AutoStore, and how much is the physical warehouse capacity?

Yes. I recall the numbers from yesterday. I think it's close to DKK 100 million. That is the expansion of buildings. And the rest is, not only AutoStore, it's also conveyor systems. I think the conveyor system is around DKK 40 million, and the rest is mainly AutoStore, but also software installations. So that's -- and it's DKK 250 million, Longwood, Longwood, yes.

So it's an end -- it's quite a lot of automatization that is taking place.

Yes. So it's not only AutoStore and billing expansions, but it's also Longwood's areas, where we are using some, what we call, rank systems for handling that. That's also to make the -- but in event, a path better over time and the working conditions.

Okay. And then, of course, it's exciting to see that your CORE+ new initiative guiding for at least 6% margin. Can you be a little bit more specific? Is it possible to reach 10%? Or is it between 6% to 8% or what's your like general perception of the potential of this?

I would say, it's, unfortunately, impossible to reach 10% or 8%, it says 6%. And of course, if we were sure we would be able to reach 6.5%, we probably have sent that. And so yes, the target is we need to go above 6%. And that's as specific as we can get.