Solar A/S (ZVR.F) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Solar A/S Q3 Report 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jens Andersen, CEO. Please go ahead.

Thank you. Dear all on the line, a warm welcome to this third quarter webcast for the Solar Group. Together with me, I have my colleague, CFO, Michael Jeppesen. The agenda for today is a general update with some highlights in the quarter, then a short summary how we invest in future growth. Then Michael will present the financial highlights for the quarter and our guidance expectations for 2025. And finally, and hopefully, we will have a Q&A session. Next slide, please. If we go into the highlights, revenue in Q3 decreased to DKK 2.8 billion, similar to an adjusted organic growth of minus 2.1%. When adjusted for Solar Polaris delivered to a major solar park project, organic growth amounted to minus 0.4%. Revenue in Q3 was in the low range of our own expectations. Segment-wise, our organic growth amounted to minus 2.3% for Installation, which are the biggest segment and minus 6.2% for Industry and finally, a plus of 15.3% for Trade, mainly driven by Solar Polaris. If we then turn into the EBITDA, then I can say from first Q to third Q, we delivered an EBITDA of DKK 296 million, highly impacted by nonrecurring cost of DKK 65 million. Looking isolated at third quarter, the EBITDA amounted to DKK 110 million and was in the low range of our own expectation. Adjusted for nonrecurring income in only Q3, the underlying EBITDA margin amounted to 3.9%. If you want, you can see the results from the individual markets at Page 33 in our quarterly message. As we speak, our Halmstad warehouse in Sweden has been vacated, and we are now operating our total Swedish business from one warehouse in [indiscernible]. This was originally planned to take place next year, but we managed to do the transition already in third quarter this year. Short about the guidance. Michael will turn into that later, but we expect a revenue now at DKK 12 billion and an EBITDA of DKK 460 million, which is in the low range of our previous EBITDA guidance of between DKK 450 million and DKK 510 million. Next slide, please. Investing in future growth. As many of you may recognize, we announced Wednesday, 22nd October that we are in the process of acquiring Sonepar Norge. With this bold acquisition, we will be one of the leading electrical distributors in Norway with a combined revenue of DKK 2.5 billion after the merger. This is for us and also for our Norwegian team, a very transformative move in Norway. We expect closing early December and integration to be finalized by the end of first half year 2026. Swedish warehouse in Kumla, as you all recognize, we have a big investment going on in Kumla. And when Kumla is operational in 2026, all our main market central warehouses will be fully automated and digitalized. In other words, we are close to the ending of a huge investment program that has been going on for the last 7 years. We have invested more than DKK 2 billion in central warehouses. And as I said before, that will change solar dramatically when we end up this big program. The remaining investments in Kumla is DKK 70 million in Q4 this year and then finally, DKK 160 million in 2026. All in all, a gross investment of approximately DKK 600 million. Thus, our investments in automation, digitization and standardization, we think have set the stage for future growth and improve operational performance to new standards going forward. The 1st of October this year, we decided to upgrade our digital platform and the ambition is at least to be on par or -- and hopefully beyond our competitors. The upgrade includes investments in new data platforms and AI to digitalize sales and strengthen customer insights. Furthermore, last but not least, to enhance customer experience through improved e-commerce features, including a new search engine and platform. And already in the first half year of 2026, the first customer segment will be able to use the new platform. I will now give the word to you, Michael, for some insights. Please, Michael.

Thank you, Jens. Please turn to Page 6. Now revenue in terms of DKK decreased with 1.6% in the quarter, meaning that we came out with DKK 2.8 billion versus close to DKK 2.9 billion last year or equal to an adjusted organic growth of minus 2.1%. As also mentioned by Jens, the impact from Solar Polaris affected the growth positive with approximately 2 percent points, that meaning the remaining part of the business saw a headwind of approximately minus 4%. Looking ahead, the effect from Solar Polaris will reduce for 2 reasons. One, the current project is coming to an end here in Q4. And in addition, the reference point, meaning the revenue they generated last year will increase substantially. So instead of lifting the organic growth between 2 to 4 percent points, we expect to see a negative impact from them in Q4. If you look a bit on the main segments, Installation, only Poland, we did see real positive growth, but it's fair to notice that Denmark came in very, very close. Holland and Sweden faced more headwind. And I would say, particularly Sweden was a surprise to us. We did expect, as also communicated on several occasions that the Swedish market would start to pick up by now. It doesn't seem to be the case. We have fairly good insights in the Swedish market, and it's not because that we are losing market share. As regard to Norway, this can be explained by the loss of one major customer, as also announced previously. We still believe that all markets will start to improve, also supported by the initiatives that we have kicked off. If you look at Industry, once again, the main positive driver was Marine & Offshore in Norway, but actually also in Norway supported by utility and OEM and MRO. Unfortunately, not enough to set off the setback we saw in other countries. In Denmark, we did see headwind in all subsegments. As regard to utility in Denmark, we see that the customers really have scaled down on their investments, and we actually expect this to last for the remaining part of the year, which also is reflected in our guidance for the year. MAG45 is still seeing 2-digit negative growth. However, for the first time this year, the order backlog has started to increase. It's still early days, but potentially, this could be the first positive sign of that we are starting to reach a turning point within MAG45. Trade, particularly D&Y -- which is particularly -- which mainly is the D&Y did see headwind across all countries. Now please turn to Page 7. The EBITDA of DKK 110 million in Q3 was in the low end of our expectations. If you look at the underlying EBITDA of DKK 180 million, there is a setback compared to the underlying margin last year. This can mainly be attributed to the loss of gross margin. If you look at the gross margin, we saw a decrease of 0.9% in the margin compared to last year, of which 0.3% can be explained by the dilution that we get from Solar Polaris. The remaining part of the drop can be explained by fierce price competition in the market, but also a lack of the cyclic inventory gains that we traditionally see here in Q3. So compared to Q2, where we actually managed to strengthen the underlying margin, we did see a setback. We still, however, expect this to change in Q4 due to a huge range of initiatives that we have set in motion. Despite our initiative both last year and also in year-to-date on cost containment and processes optimization and staff reduction, this was not sufficient to set off the drop we did see in revenue. So we did experience a slightly diluting effect on the margin from the cost side. We'll continue to have a strong focus on this. And as also announced, we did several initiatives in this quarter in order to reduce and ensure that we can strengthen the margin going forward. We're very pleased, I would say, with the transition from Halmstad to [indiscernible]. It is, as Jens also said, moving ahead faster than anticipated, and it's also freeing up more cash than what we initially anticipated. And I think it should be noticed at the same time that the Swedish organization has managed to improve the service level towards our customer with this move. Loss on trade receivables remains under control. Please turn to Page 8. Now a short look on the year-to-date. We have an organic growth of approximately 1%. But again, if we adjust for Solar Polaris, we are actually looking at minus 1.1%, but it's an average. It has accelerated in Q2 and Q3. The main setback for the year-to-date can be explained by the drop in gross margin, but the initiatives have ensured that the cost in the underlying business, that means excluding the one-off cost, remains more or less flat, meaning we have been able to offset not only the setback in revenue, but also salary inflation and ordinary inflation. On a comparable basis, you can see we actually have a drop of 0.6% compared to last year, and you can -- it's more or less explained by the margin. Please turn to Page 9. Operating activities came out with a plus of DKK 64 million. And if we take a closer look at that, we can see a continued reduction in inventory level, freeing up cash, which is in line with our expectation. Having that been said, the current level remains still above what we would see as the optimal point, meaning we'll continue our journey here. There is a minor increase in the accounts receivable, but that's basically seasonality [indiscernible] number. Investing activities came out with DKK 94 million. We invested DKK 58 million in Kumla, that is the new central warehouse. And as Jens also mentioned, this will continue throughout the year where we expect to invest DKK 70 million, leaving DKK 160 million to be invested next year. And the main part of this will happen in H1. Please turn to Page #10. If we look at the net working capital as an average for the last quarters, we see a continued reduction coming down from 15.5% last year to now 14.8% in Q3. So despite the negative growth, we've actually managed to reduce the investment in net working capital, not only in absolute figures, but also in relative figures. So we are very pleased with the trend. And we, of course, will continue to work on prolonging this effect. Looking at the gearing level, we see an increase from 2.7 to 3.4, which is above our guidance on gearing, which is from 1 to 3. Assuming the acquisition will be approved early December, the gearing will remain in the same ballpark for the remaining part of the year despite the seasonality effect. But basically, what will happen is that you get a P&L effect from the acquisition of 1 month potentially, but you get the full balance sheet effect. Looking ahead, we will do to the investments that we have [ done ] continue in the coming quarters before we gradually will start to reduce this due to an end to the investment program, as Jens also mentioned. Now please turn to the last page, Page 11. We refine our guidance for 2025. Bear in mind that when we came out with the first guidance for the year, we expect the growth to take root in the second half. We revised that just after the summer vacation. And it seems that this is not really going to materialize. Hence, we will be in the low end of our guidance in terms of earnings. We now expect a revenue of DKK 12 billion, where we previously were DKK 11.75 billion to DKK 12.25 billion, and we expect an EBITDA of DKK 460 million versus previously in the range of DKK 450 million to DKK 510 million. We're not directly affected by the tariffs that have been imposed by the U.S., but we can definitely not rule out any knock-on effects having a negative impact on our MRO OEM customers, which remains the main part of our Industry segment. And this is also where we faced the most headwind for the year. And as you can also see in our segment report, it's the most profitable part of our business. We continue, of course, to monitor the market very closely, and we stick to our initial assumption that we'll see a continued recovery. But of course, the timing and the strength of it is absolutely unpredictable. We do, however, have seen a few small, and bear with me, it is early days, green leaves within this area, where we now within the -- if we dive further down in the segments, we can see that the SME, which means the very small MRO OEM customers, they have actually started to grow now. So the main challenge is still the major -- the midsize and the large OEM customers where we are still seeing indexes around [ 80% ] or even below this level. But the small ones have started to grow. They moved from [ 100% ] index to approximately [ 105%. ] Yes. And then in the lower right corner, you can see a like-for-like comparison with our guidance where we try to take out the one-off effect, meaning on a comparable basis, we now expect DKK 525 million versus last year DKK 565 million in EBITDA. Thanks.

Thank you, Michael. Then it's time for questions, if you have any, please.

[Operator Instructions] We will take our first question, and the question comes from the line of Kristian Tornøe from SEB.

Yes. I have a couple of questions. So first question to your guidance. Just to clarify, Michael, you talked about potential 1 month of Sonepar Norway if the deal is approved. Is that included in your guidance? And can you quantify how much?

It's basically within the rounding areas because assuming it gets approved early December, the impact is going to be like 0.2%, 0.3% of the total revenue. So I would say that it's within the rounding areas. We do not -- even if it gets approved, which is still the underlying assumption, we do not expect any P&L effect from it whatsoever. So it's neglectable, I would say. It's beneath the threshold given that we give guidance in hundreds of millions DKK.

That is absolutely fair. Then again, to the guidance. So obviously, with a fairly exact guidance, your implicit Q4 guidance on revenue and EBITDA is fairly easy to calculate. I am, however, struggling slightly with the items in between because if you buy a gross margin in Q4 similar to what you had in Q3, you would need your fixed costs to decline substantially year-on-year and vice versa. If you assume unchanged fixed costs, your gross margin needs to come up substantially. So maybe just elaborate a bit on the assumptions between revenue and EBITDA for Q4.

It's absolutely a fair question to raise. And the underlying assumption is we will be able to strengthen the gross margin rather substantial. We launched a portfolio of initiative supported by some models that -- newly developed models that create higher transparency enable us better to benefit from, say, for the sake -- this is for illustration purpose only, if you have a step-wise increased bonus model with one supplier and a supplier of similar product doesn't have a similar, then this model can optimize where we should place our purchases. So the guidance has taken part of this into consideration. In addition, similar to what we've done in other years successfully, we launched extraordinary supplier negotiations. And this is maybe one the -- I can also discuss how much money this will bring in. But we already now see the effect of the expected purchase of Sonepar in Norway, meaning that there are suppliers who start to reach out to us and certainly things that we could not do and they've been fighting over for months. Certainly now they just send a check. I can give you an example, a supplier sent DKK 2 million or DKK 1.5 million, which we've been struggling for quite some months and certainly was paid. So we're starting to see a lot of good things coming through. So we are reasonably comfortable with it, I would say. Of course, there's always uncertainty. It's a future prediction. But if you look at the potential as we calculated it, compared to what we've taken into the guidance, there's also room for that everything will not succeed. So it's based on the assumption that the gross margin will increase. Also bear in mind that the gross margin, I think this is important to note in Q3 was particularly low because we did not get these capital gains on the inventory that we normally would see. This has dropped to 0 in -- mainly in Norway and Sweden, but also in the other countries. We do not expect this pattern to repeat itself here in Q4.

At least we see the cover prices increase quite dramatically.

So just to follow up, I mean, this pattern which you described on the gross margin, are you already seeing that in your October numbers?

To a certain extent, we -- I'm not updating on all the companies here, but I know Denmark on these initiatives were ahead of the plan where they should be in October. And I would say if that trend continues -- I mean there was nothing in October on these initiatives that told us that this is not going to work. I would say, it actually confirmed it. I haven't seen the final October figure. That is the disclaimer here. But what we can see and what we get reported, we are ahead of.

Fair enough. That's quite clear. Maybe just on your fixed cost then we have seen that in the past 2 quarters trend up, say, 1% to 4%. I don't know there was some -- a bit of extraordinary in Q3, but is that still how we should think about your fixed cost in Q4, sort of a sliding inflationary increase then?

No. I wouldn't expect that, to be honest. So the main driver is not savings. It is the gross margin.

It will be for the remainder...

It will be. All right. And then maybe just on the gross margin, you highlight price pressure. So in this gross margin improvement you're expecting, is there an element of you assuming price pressure to ease? And more generally, how do you address price pressure? What's your strategy when prioritizing volume versus price?

Pricing is a difficult thing to predict. So we take it more or less customer-wise. And then, of course, there is a fierce price competition, especially because we have been close to -- in a non-inflation scenario. Now we see also from the vendors that price increases will start to materialize, and we also see the copper price going up. Whether that will be put into the market, that is always a big question to answer. At least so far, we have seen, I would say, more or less a crazy or fierce competition among our competitors in all markets in order to gain volume. But one day, you need to have your cost to serve lower if you want to proceed with that way of doing business. And that's also why we have invested heavily in AutoStore and now also in our customer -- or digital customer platform, simply to lower our cost to serve to be the best-in-class to compete in -- if the market conditions will be as we have seen it in '24 and '25. So our revenues have [ lowered ] our cost to serve and therefore, still be able to compete if that is the new trend, so to say.

Understood. And then just maybe 2 questions on the Sonepar Norway acquisition. Can you give any flavor of what level of depreciation and amortization we should expect? And also how will revenue from this business flow into your Installation and Industry segment? What would be the split?

I can take the last question first. By far, the main part of it is Installation. On top of my head, I think it's approximately 85% and you have 10%, which is Industry and then 5% other. So this is how you should think of it. What was the first question, Kristian, I forgot?

So you've been clear on the EBITDA impact and the synergies, but what about depreciation and amortization?

Yes, sorry. We have not made a purchase price allocation yet. We need to get access to now to be able to do this in a clear way. But given that we basically hold the assets that we need, I would say, depreciation on property, plant and equipment shouldn't change anything whatsoever. So it's basically a matter of the allocation of the purchase price if parts of it will be registered as customer list and the rest at goodwill. And to be honest, we simply don't have these figures yet, no.

Okay. And when should we expect that clarity? Would you have it when you close? Or should we wait until your full year report?

I think you should wait until we report on Q4, assuming we close in Q1 -- sorry, 1st of September.

Yes.

Excellent. And then just my very last question, I promise here. Solar Polaris, just to be crystal clear, there are no expected revenue from any solar projects in Q4. Was that what you're saying?

It's wearing off substantially. And last year, they were performing more or less on the level we've seen in the last couple of quarters this year. And this is why you get quite a negative effect within the quarter.

Okay...

Due to the...

Sure. No, that makes sense. And is there a pipeline here? Would it be fair to assume solar projects in our '26 estimates? Or what -- I mean, how are you thinking...

Let's see. We are working on some huge ones, but so far, they're not in the book. But as we speak, we have our quotation out with some very big ones. So let's see if we succeed or not.

But basically, again, as we discussed, doesn't carry that much operational leverage. So even if they win a project for the sake of the rationale of DKK 100 million, you shouldn't expect an EBITDA effect of more than 5 plus/minus. I mean it's in that...

It's a rough business.

We are in. So I would looking at the total, it doesn't matter that much. And to a large extent, they have very low fixed cost and very high variable cost. That's basically what I'm trying to say. So on the group, it doesn't matter that much, not in terms of EBITDA. It can have an impact on a more substantial impact on the revenue clearly.

No, I fully understand. But obviously, I'd like to get my revenues estimate as quantified...

Yes. So we share it. But I mean, it's more -- if you win it, you get maybe DKK 100 million, DKK 200 million in revenue. And if you don't, you get like 0. So there's nothing in between there basically. And they don't have a size where they run 10 projects in parallel, can't even 1, maybe 2 major projects in parallel. That's pretty much...