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

A very warm welcome to this first quarter webcast for the Solar Group. I'm here together with CFO, Michael Jeppesen; and our Investor Relations Director, Dennis Callesen. The agenda for today is a general business update with some highlights for Q1 presented by me. Then I will elaborate over the topic preparing for future growth. Then Michael will take over and present our first year results, including a high-level cash flow status. And of course, finally, we will have a Q&A session. Next slide, please. If we look into the highlights, revenue increased to DKK 3.2 billion. Adjusted organic growth amounted then to 6.5%. If we adjust for a big growth in Solar Polaris, which has made a major solar park project organic growth amounted to 4.3%. As expected, we saw positive adjusted organic growth in all main markets and across all main segments in Q1. Installation delivered adjusted organic growth of 4.7%, Industry of 3.3% and then finally, astonishing 30% in Trade. One of our strategic focus area that is Climate & Energy also showed positive organic growth amounting to 37%. However, if we adjust for Solar Polaris deliveries to a major solar park project again, the real, I would say, or clean organic growth amount to 14%. Next slide, please. Sweden, our new or upcoming new central warehouse in Kumla is ahead of schedule. This allows us to optimize the completion of the relocation of the warehouse in Örebro and Halmstad by moving our inventory from Halmstad to Örebro and thus vacating the Halmstad warehouse earlier than expected. In Q1, this resulted in approximately DKK 12 million in transition costs, which were initially expected in 2026. In Q1, we also initiated several mitigating measures to adjust our operating model to the market conditions, including cost containment, process improvements, but also staff reductions. Consequently, costs in Q1 included restructuring costs of approximately DKK 40 million. The full year cost savings resulting from the 2025 restructuring are estimated at approximately DKK 60 million. This structural change alone will support our financial target into 2026, where we have a goal with an EBITDA above 5% with an improvement at approximately 0.5%. When adjusted for restructuring and transition costs, our external operating costs and staff costs decreased to 16.4% coming down from 16.8% last year. EBITDA at DKK 74 million was on par with our expectation, and we confirm our 2025 EBITDA guidance in the range of DKK 530 million to DKK 600 million. Next slide, please. Preparing for future growth. By 2026, the AutoStore system will be operational in our 4 main markets, managing 280 robots, picking products from more than 270,000 bins. Additionally, we have increased our warehouse capacity across Denmark, Sweden and the Netherlands by 25%. The initiative focused on automation, but also digitalization and standardization. And that represents a total investment of more than DKK 1 billion over the last 7 years period. Our investments in warehouses, upgrade and expenses have increased capacity and enable us to take advantage of market opportunities. By moving up to 70% of all picks to AutoStore, we have improved the work environment, but also minimize noise and reducing lifting. The high degree of automatization reduces cost and allows us to accommodate minimum 10% volume growth without adding one extra labor cost. Thus, our investment in automatization, digitalization and standardization has set the stage for future growth and improved operational performance into new high standards. I will now give the word to Michael. Please, Michael.

Thank you, Jens. Please turn to Page 7. Now revenue in terms of DKK increased to 6%, resulting in DKK 3.2 billion versus the DKK 3.0 billion last year or equal to an organic -- adjusted organic growth of more than 6%. This means that the trend we saw in Q4, where we, for the first time in several quarters, returned to growth not only continues but also as expected, accelerates. One of our strategic focus area, Climate & Energy delivered very strong results and came up from DKK 285 million to almost DKK 400 million. Of course, this was supported by Solar Polaris deliveries to a huge solar park in Denmark, but even if we adjust for this, we still see organic growth within Climate & Energy. So the sequential improvement that we saw starting last year continued into this year. As expected, particularly Installation is now gradually moving out and up, and we are particularly happy to see that Denmark almost reached 10% organic growth. It should be noticed that Denmark was actually the first country where we saw the headwind within Installation, and now they are also ahead of in moving up. If we take a closer look at Industry, particularly Marine/Offshore and Utility delivered very strong growth rates, whereas MRO and OEM remained stagnant. Regarding the latter, this is, however, actually an improvement compared to what we have seen during the last couple of years. MAG45 was actually slightly below last year. This was as expected. We know that a few key accounts have postponed their investments. So we were aware of this. This is expected to continue throughout the main part of 2025 with a potential pickup late Q4. So no surprises here. Trade, if we take Polaris out of it, actually came out with 6% organic growth. And this is quite an achievement because the development within DIY, which is the main subsegment were more or less stagnant. So it is the other subsegments which actually drive the growth, meaning we are getting more and more customers on board. So to summarize, the quarter was as expected. Please turn to Page 8. With an EBITDA of DKK 74 million, Q1 was on par with our expectation. But if we look at the underlying EBITDA, meaning we disregard the restructuring and the transition costs totaling DKK 52 million, we end up of DKK 126 million, which is an increase compared to last year. Looking at the gross margin, we saw a decrease of 0.3% compared to last year. This can, in all material aspects, be explained by the diluting impact from Solar Polaris. Bear in mind that when we look into Solar Polaris, this is a slightly different creature. So although they may have a very low gross margin, there's currently any cost below gross margin on these projects. So if we compare the underlying margin, it is more or less in line with what we saw in the preceding quarters last year. Regardless, it's still our assessment that there remains a fierce competition in the market. We do not see this having eased yet. As expected, we are benefiting from the initiatives we carry out last year where we also focused on cost containment and process optimization and staff reductions, successfully ensuring that the cost didn't dilute the margin further. Actually, it strengthened the margin. Now as Jens also mentioned, in order to secure this development, we did in Q1 carry out further initiatives, which on a full year will bring in savings of DKK 60 million, but be cost neutral in the year. Of course, we'll have to carry the weight of DKK 12 million from the transition from Halmstad central warehouse. So regardless of the initiatives we've done, we'll continue to have a very strong focus on this to ensure that we keep the development that we've seen so far, moving us towards the 5% next year. Please turn to Page 9. Now operating came out negative -- operating activities came out with a negative effect of DKK 88 million. If you take a closer look at it, we can see that the main reason for this is a substantial increase in accounts receivable. This is, of course, the normal seasonality that we always see. We continue to reduce the inventory. And even though we reduced it with DKK 45 million, it still remains above what we would see at the optimal point, but we will continue the work. Looking at the investing activities came out with net DKK 78 million. We did, in total, invest DKK 126 million in PPE, of which the DKK 115 million relates to Kumla. We also, as expected, received the proceeds from the sale of Duiven, that is the old central warehouse in the Netherlands, DKK 76 million. In addition, we invested DKK 26 million in intangible assets. As you may remember, last year, we upgraded our SAP ERP platform to S/4HANA, thereby ensuring us many years of runway. We have continued this process and are now upgrading our EVM system also to S/4HANA. In addition, we are, of course, investing heavily in our more customer-oriented system, for instance, our web shop integrations and the likes. Please turn to the next page. If you look at the net working capital and see it as an average for the last 4 quarters compared to last year, there we were at 16.7%. Now we're down to 14.7%, meaning we continue to reduce net working capital as a percentage of the revenue. Of course, despite this, the gearing is slightly up. Last year, we were at 2.1 here at the end of March. Currently, we are at 2.4. This is well within our range, albeit it's slightly higher than what we normally see. The main reason is, of course, the investments we're doing in Kumla and of course, also because we paid out DKK 110 million in dividend in the quarter. Please turn to Page 11. Now as also stated by Jens, we confirm our guidance for 2025. This means we still expect a revenue in the range of DKK 12.3 billion to DKK 12.8 billion and an EBITDA in the range of DKK 530 million to DKK 600 million. Now regarding tariffs, we are not directly affected by any tariffs imposed by the U.S., but of course, we're not immune to any potential knock-on effects. We'll, of course, continue to monitor the market development very closely and act accordingly, but it is rather unpredictable. Despite this increased uncertainty, we stick to our initial assumption of a continued recovery, albeit we could argue that both the timing and the strains could become more unpredictable. So we still expect all markets to be either stagnant or to grow in 2025, resulting in all over growth in all main segments. Thank you.

Thank you, Michael. Now it's time for questions and answers, of course. So please, if there are any.

[Operator Instructions] And our first question comes from the line of Kristian Tornøe from SEB.

A couple of questions from my side. So you say the quarter was as expected, yet you are announcing this efficiency initiative where I understand the material part is the staff cost reduction. So maybe just elaborate a bit on the motivation for doing that.

Yes. Kristian, it's more or less -- we have decentralized some of the centralized function within commercial market and also done something else, I would say, with the shared services. We have put that under Solar or IT, so we call it for the future, Solar Digital. That means we want -- as we have done with AutoStore in our operations, we want to digitalize even more, and that's why we have put that under our CDIO, Anders Solberg. So there, we did some changes, but the major part of our changes was within commercial market, where we have now a much smaller group entity, and then we have decentralized product management, category management and partly also sourcing into the countries. So that was the majority of the staff reductions. Also, some middle managers were I would say we had -- it was too complex, and we were too many compared to the market conditions as we see it right now. So that's the majority of our structural change.

You should bear in mind, Kristian, we also already when we came out with the Q4 announced that we would do restructurings again this year, and we have a target of reaching the 5%. And a part of that is we need to become more efficient. So we've been working on this for a while, I would say. It's not a sudden idea even though it may look like that.

No, it wasn't.

Yes, that's definitely fine. But sort of along the same line, I understand your sort of description of demand being somewhat unpredictable in the current macroeconomic environment. But should your industry segment be sort of negatively impacted by this, what can you do? Because obviously, you also highlight that you reduced cost last year and then you have another round this year. Is there more to do should demand not come as expected?

There's always something to do, I'm sure there is. But I would say that what we see right now, of course, we're a little bit concerned about the machine builders exporting to U.S. We haven't seen any major effect yet, but I'm sure that it might be that the reality will come within a couple of months. And I don't think we want to reduce further on that behalf because they will also come a day after the tariffs, hopefully, and we have very skilled and good people. But then, of course, there are other opportunities. As we have seen, climate energy is now growing again. There will be a lot of opportunities within defense in the different markets. We haven't seen that yet, but we are sure that, that will come something positively out of that. And again, from the vendor side, we only have, I think, 1 or 2 vendors directly selling out of U.S. into solar. So we're not affected on that part as well.

But you could add that within the industry, the 2 subsegments, I assume that it's OEM and MRO you are aiming at. Of course, there's, as Jens saying, the defense industry. But having that being said, there's still quite a market. There's still a lot of small and midsized customers that we can address. And we expect with the organizational change that we've done to get some more traction on this. So I would say it's also a matter of trying to onboard new customers, although we do know that within industry, it takes more time compared to installations. So you should bear that in mind. But there are also opportunities in this. That's basically what we're saying.

But you are sure the uncertainty has increased, that's for sure. That's also what we're writing.

That makes good sense. And then just my last question on your Installation segment. in terms of your project business, can you elaborate on sort of your order intake and then what you're seeing in this part of installation as typically a good leading indicator for the rest of the year?

We are still growing on our order intake on projects. So it's still positive, also more positive than we expected from the very beginning of the year. But of course, it's also very cyclic. But so far, we had a good start in 2025.

I will now hand over to Dennis for web questions.

First question. One of your competitors was out in Danish media a few weeks ago flagging the risk of price pressure from Chinese products floating the market. What is your assessment of the dynamic? And what is your general thought around the risk upside, downside from the current trade tensions?

Yes. For sure, there is also -- it's a good question, but also quite difficult to answer because we haven't seen anything yet, but potentially, there will be some effect. In my mind, it could be on PV panels because that is also last year, we had a very hard hit on PV panels. So it's really down from where it was the normal. Last year, they were down by 50%. So there's also a limitation how low they can go. On the rest of the products, we cannot use U.S. material in the Nordics. So at least that part will not be imported into EU. I would say some of our vendors could, of course, potentially get better prices. And that will, of course, we will turn to our advantage. I think that's maybe the most positive part for solar and our competitors, I would say. And again, within metal and steel, we are not that highly affected because, of course, we have trunks and things like that. But again, there, we are not hit as hard as some of our steel wholesalers, because we are only indirectly depending on steel.

You continue to pursue cost containment, process improvements and staff reductions have designed the same time, in my understanding, is that the Solar's strategy is about raising competencies across the organization to secure growth. What is your main focus at this point?

The main focus by continuously making improvement on cost as we have done with AutoStore is, of course, to invest in digitalization and AutoStore, but it's not because we want to get rid of competencies. No, that's opposite. We want to invest in competencies and we want to, I would say, lower our normal labor costs to the highest possible degree by using IT to the maximum, AutoStore to the maximum, AGVs, maybe collaborative robots, et cetera. So we're investing in technology and competence and not in buildings like some others do.

So just to be absolutely clear on this, it's not like we're running a lawn mover to the costs. We're doing it interesting. We're doing changes to ensure structural change to ensure that we become more efficient using new technologies that also enable us to invest in new competence.

That's also why when Kumla is done, and that is the mid of 2026. I would say, over the last 7 years, we have prepared for future growth, and we have, I would say, the highest standard within our industry to pick and pack. So from that day on, at least mid-2026, I would say we have a very strong operational setup in our warehouses.

The next is 3 questions from [ Stock-IO ], who will take one by one. First is, with the growth package from Germany and more expected stimulus in the EU, how do you expect this to impact the business going forward to '27?

We hope that there will be an impact. But so far, it's very difficult to predict. They will invest heavily as stated in defense. And of course, there will be a lot of small SMEs in Denmark that will support that also out of Poland and Holland. And then they have a huge packet on infrastructure because they are -- you know yourself, if you drive through Germany, sometimes the telephone simply switch off because there's no net. That part is a strong leg in our strong vertical in Solar. And of course, potentially, we could deliver from Vejen -- our central warehouse in Vejen to the northern part of Germany. And -- but we haven't seen it yet, but we're open for business to the northern part of Germany when it comes to that.

Second question from Stock-IO. Do you expect to keep the dividend at around DKK 15 per share in 2025?

Well, for the time being, we really don't know. The dividend is always decided at the Board of Directors meeting, which is regarding the dividend for '25 will be decided when you know the '25 and have a very good opinion on the cash flow for '26 because there are several factors that need to weigh against each other before they decide. So in a nutshell, for the time being, we really don't know.

Third question from Stock-IO, wouldn't it make more sense to shift to share buyback program instead of dividend program with the stock being historically at a quite low point, if you expect to see increased operational performance in the future?

It's a bit along the same lines. At every meeting with the Board of Directors, we assess the capital structure of the company. And as you may know, the Board of Directors did at the Annual General Meeting ask for permission to acquire own shares. So it's a tool that's available. But again, it's a Board of Directors meeting decision. It's -- so for the time being, and you will, of course, know if we have decided otherwise because we would have to announce it. No such decision has been made. But it's being discussed at every meeting, what's the most -- what's the best for the company and the shareholders.

Can you expand on the quarterly EBITDA margins? Margin performance in Sweden and Norway, both around 0%. What do you expect from these geographies going forward?

There's no doubt both Norway and Sweden are impacted also by the restructurings that we did. So you should adjust for that, but they are still low. Sweden is probably the market that's been hit the hardest by the setback we have seen. But having that been said, historically, they have also been able to bounce back the fastest when the trend turns. But there's no doubt currently they're running on a much lower level than what we expect going forward. And it's also an underlying assumption for our 5% that they will increase. However, we do not disclose how much. But I think you should be careful about just assessing everything out of this quarter, because the figures are slightly different than what you see due to the restructurings.

Final question. Why do you like AutoStore, which is not the fast warehouse automatization? Is it because it's cheaper than, for example, shuttles since all buildings can be used? Or is it because it's often low electricity demand, or both?

I would say the electricity part is, of course, a good part. It's not why we invest. In the way we work where you can order until 6:00 in the afternoon, it's the perfect solution. If you have a lot of branches, like some of our competitors, the shuttle solution is even better. And then bear in mind that in solar, electrical products are often very small, and that fits very well to AutoStore because you can store your products easily on fewer square meters than you can do with shuttles. But before we had MiniLoad that also served us well for 15 to 20 years. So -- but at least our choice was AutoStore, and I think others have done the same because they are doing tremendously well and others choose shuttles.

No more questions from our side.

Okay. Yes. But thank you for listening in. Have a nice and sunny day. Thank you. Bye-bye.