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Edited Transcript of SOLAR B.CO earnings conference call or presentation 8-Aug-19 9:00am GMT

Q2 2019 Solar A/S Earnings Call

Kolding Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Solar A/S earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jens E. Andersen

Solar A/S - CEO, MD of Denmark & Member of Executive Board

* Michael H. Jeppesen

Solar A/S - CFO & Member of Executive Board

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Conference Call Participants

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* Alexander Borreskov

Carnegie Investment Bank AB, Research Division - Analyst Assistant

* Simon Møller Blok

Nordea Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Solar A/S quarterly report for the second quarter 2019. (Operator Instructions) So today, I am pleased to present CEO, Jens Andersen; and CFO, Michael Jeppesen. Please begin.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [2]

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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 second quarter webcast for Solar. Together with me, I have my colleague, CFO, Michael Jeppesen. The agenda for today is a general business update from me, also on our strategic focus areas. Then Michael will take over and make a presentation of the second Q results. And finally, we have our Q&A session.

In Solar, we are now halfway through the Q-instructed period. And for our core business, we still aim for an EBITA margin of at least 4% as one of our main 2020 financial targets. Looking at our first half year performance in 2019, revenue was above our expectations and EBITA was on par with our expectation. But we also have bought some business activities from Onninen, and that I will explain a little bit about later. We expect 2019 revenue of at least DKK 11.6 billion. And we reconfirm our EBITA on DKK 365 million, which is equal to an improvement of DKK 38 million or similar to 12% improvement compared to 2018.

I think in this quarter, the most important market information is that we have strengthened our position in Sweden. And that is within heating and plumbing and climate and energy by acquiring business activities from Onninen. The integration was more than successful and on time. And I have to say it's with great pleasure and a warmhearted thanks to all our dedicated people in Sweden and in Denmark, who have made an incredible good job with this integration.

However, to harvest the full potential of the acquired activities, we also need to adapt the number of FTEs. So we have dismissed 45 people and also informed that 8 branches will be closed as soon as possible, at the latest the first quarter of 2020. And just for clarification, all direct cost related to that is booked in second quarter for both the 45 people and the 8 branches which we will close down.

If we take a look at our strategic focus areas, we overall see a quite okay progress and as planned. We see that industry is really stepping up now. And it's very nice to see that our first half year of 2019, we really had a strong performance on industry. If we turn to strategic suppliers, we still pursue growth opportunities. And of course, we harvest synergies cross-border. And again, I have to say that industry -- our industry team have done a very strong job because we're increasing quite rapidly on our concepts within industry.

Talking about industry, we also have trained our sales guys out there in what we call the total cost of ownership approach. The training is really based -- and it's really basic training, but we involve customers, we involve suppliers. And I think we really had a good training session. Moreover, to match the customers' purchasing patterns, we are expanding our product assortment. I also explained that last time. But we recently created 30,000 new products within Mechanics and made them available in the Danish market. And in the next quarter, they will also be available within the Norwegian and the Sweden market.

Last but not least, operational excellence. In 2018, we took a big step in moving close to 100 work or employees to Poland from the core business in our regional setup. And now we also have established what we call a centrally led market and sourcing organization covering both commercial market, product management and sourcing. And as I've said before, to optimize the handling of small- and medium-sized goods and provide strong competitive logistics, we implemented AutoStore in Norway. And since mid-June, these automated stores and retrieval system has been fully operational. And as expected, we have seen that our calculated benefits have exceeded our original goals and that really starts to materialize.

I will now give the word to Michael for an update on the financial performance for second quarter. Please, Michael.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [3]

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Thank you, Jens. If we turn to Slide #5. Please notice that STI has been deconsolidated also for the figures in 2018, meaning that it's been disclosed as discontinuing operations.

Looking at the revenue. It increased from DKK 2.7 billion to almost DKK 2.9 billion, equal to a growth of almost 5%. More important is that the shift in trend that we did see back in Q4, where our core return to growth again continued not only on -- into Q1 but also into Q2 with an organic growth of 5.6%. In particular, we're very happy to see that Sweden, with an organic growth slightly above 3%, is now returning to growth, starting to regain business.

If we then turn to Slide #6, looking at the EBITA. We ended at DKK 60 million versus DKK 56 million last year. However, it should be noticed that the underlying improvement is actually stronger than what appears. We had the acquisition, as Jens mentioned, of the activities in Sweden, which had a negative impact of approximately DKK 5 million. And in addition, we managed to compensate for the full impact of Easter, meaning if we compare to last year, Easter were only to a limited effect in Q2 whereas this year, we have the full effect of Easter.

If you look at the margin, we can see that there is a substantial improvement on external operating cost, EOCs, and a similar negative on depreciation. This is mainly the effect of the change in accounting policy regarding leasing, which is now being capitalized. Now despite the challenges on freight costs and quite strong growth within low-margin areas in Norway and also again the full impact of Easter, we actually managed to strengthen the underlying margin from 2.0% to 2.3%.

Looking at Slide #7. We can see the EBITA per company. And we do see improvements in all countries except Sweden. Notice please that it was actually in Q2 last year that the problems in Sweden actually started to materialize. So in core, we managed to improve the EBITA from DKK 62 million to DKK 66 million whereas related remain unchanged at minus DKK 6 million.

MAG saw a very disappointing development, where growth in June came to a sudden and unexpected halt. However, we see that MAG is returning to growth -- the growth path expected again here in July, now again delivering 2-digit growth rates. Of course, we have launched a series of initiatives in MAG in order to adjust not only the cost base but also to strengthen the gross margin and to make sure that we stick to the growth path that originally was expected.

Turning to Slide #8. Looking at the half year result, and this is a more transparent way to compare with last year because we do not have any impact of Easter moving from one quarter to another, we can actually see that core business delivered an improvement of DKK 16 million, equals 12%. And related business improved to DKK 4 million, bringing the earnings from DKK 125 million to DKK 145 million. We did spend DKK 5 million on the acquisition. That was a net negative impact ending at DKK 140 million.

Turning to Page #9, cash flow. Looking at the cash flow in Q2, we see a minor negative impact from operating activities. I'll comment on this shortly. Investing activities were up to DKK 78 million. However, it should be noticed that we upfront did pay DKK 40 million for the acquisition of the activities from Onninen. In addition, the last installments on the investments in Norway, AutoStore, were also paid here in Q2. If you look at the IT investments done, this is mainly our Webshop, our new Webshop, as we are constantly improving, and our SAP eWM, so that is our warehouse management system.

If we now look -- and then we have quite a difference also on financing activities compared to last year. And this is simply due to a reclassification of short-term debt that has been reclassified to financing activities. If you look that the operating activities and take a closer look on that, that's on the right side on the slide, you can see we only see minor changes, except from liabilities where there's a negative impact of DKK 123 million. However, this is compared to Q1, whereas if you compare to Q4, it remains flat. So we don't see any structural changes in this. We more see it as a one-off event.

Looking at the next slide, that is 10. We can see that net working capital has increased slightly. Part of it is, of course, because we saw the temporary setback on liabilities but also the impact of the acquisition we did, where we have the full balance sheet impact, but only a very limited P&L impact is a part of the explanation. This actually adds in its own right 0.6%. As mentioned in the announcement, we did acquire mainly inventory. And we are, of course, currently working in Sweden to normalize the inventory level, and of course, expect this to happen gradually during H2. If you look at the gearing, we can see that there is a minor increase from Q1 to Q2 from 2.5 to 2.6. All other things equal, we will expect the gearing to start to reduce in the coming quarters.

Looking at the guidance at Slide #11. As Jens said earlier, we reconfirm our guidance with DKK 370 million for core. And this is including the additional expected DKK 10 million cost that the acquisition is expected to have. And for related, we reconfirm the minus DKK 5 million in total DKK 365 million -- if we look at the markets, we also reconfirm the outlook we gave in Q1. We still see that there is a risk in the Swedish market to slow down in Q2, but this was in line with what we also said in Q1. Thank you.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [4]

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Okay. Thank you, Michael. Then it's time for question and answers. And let's start with the gentlemen in room, and hopefully, there will be someone on the phone as well. But please, if you have any questions?

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Questions and Answers

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [1]

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Alexander from Carnegie. So if we look at MAG45, we just get a bit of color on the growth, which was a bit below sort of your long-term expectations. And at the same time, if you could give a bit of coloring on your full year guidance on the profitability because if my math is somewhat correct, then for the first half of the year, you've had a loss of DKK 7 million, but you're guiding for a DKK 5 million loss, give or take, for the full year. So are you expecting it to breakeven in the second half of the year or actually turn slightly profitable? And what will be the main driver of this?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [2]

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If we look into MAG, you can say they were on this path to profitability. And they actually tracked very well during the first 5 months as expected, improving. June was a very, very nasty surprise to us. And it was a sudden stop in the sale to a handful of key accounts. Talking to the customers, they have reconfirmed that their total expectations for the year remain unchanged. So they still expect to reach the same volume as originally anticipated. So we see this as a temporary setback basically. And we can see in July that they are back to 2-digit growth rates again. So give and take, they should be able to deliver plus/minus. And the guidance, it is approximately, I'm not going to give you 100% guarantee, it's going to be minus DKK 5 million [compared to] minus DKK 7 million.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [3]

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At least compared to the core business, it's small figures. I know it's still also for us a disappointment. But at least compared to the core business, it's still small figures. But we fully admit that June was a very negative surprise for all of us. The first week was pretty okay. Then the last 3 weeks of June was only declining. Whether it has something to do with the overall environment, with trade war, et cetera, we don't know yet. But at least we saw a very negative surprise in the revenue of June in the last 3 weeks, yes. But as Michael also stated, July at least looked better.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [4]

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As a follow-up on the trade war, have you seen any impact from trade war fears or trade war on the industry segment?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [5]

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No, we have a -- of course, within the food and beverage, we know that some of the big players, of course, they feel and also are very sensitive about it. At the same time, there is this, I don't know, pig disease in China. So they have something else which is improving their business. So we don't see anything at least not hitting Solar so far. But of course, there's a lot of rumors. There's a lot of uncertainty. But so far, we haven't seen any major impact on Solar, no.

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Simon Møller Blok, Nordea Markets, Research Division - Analyst [6]

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I'm Simon from Nordea. And I have a question regarding Sweden. You say that you have or are planning to implement further initiatives to improve earnings in the coming quarters. Could you elaborate a bit on what kind of initiatives they are? And -- yes.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [7]

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As also mentioned in our report, we dismissed 45 people, and we will close 8 branches in the coming month. So at least that is always -- that is official. And then it's also booked in second quarter, I have to say. So those costs have been taken. That is one thing. We are back on the growth track in Sweden. But we need to work more on the profitability or the gross margin. And we have a get-well plan, which we are working on at the moment.

We have some very strong people from our organization, who are very close to the Swedish organization to support them, not to help but to support them in regaining the profitability as soon as possible. But we don't have a time limit. At least we are growing again, we have taken the necessary steps on the cost side. Now we need to regain our margin. And that's what we will do over the next coming month.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [8]

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Just a question on Norway. So obviously very strong organic growth there. And I saw that you've had a few impressive wins with Bane NOR and Forsvarsbygg. I was just wondering, are they part of the growth you saw in Q2? Or are they future drivers?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [9]

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They are starting up now. So they are future drivers.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [10]

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All right. And then I was wondering, is it possible to get an update on your concept progress in your key markets?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [11]

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No, it's not. I would love to do that. But we are progressing pretty well. Of course, it's, as we have said before, operational excellence was year 1; industry, year 2; and concept, year 3. And I think so far at least, we can see that industry is really growing in year 2. And year 3, hopefully, I can be more open about the concept here, but it's growing. And it's basically Holland and Norway are doing well. And our industry segment are doing really well. So it's going in the right direction. So I think at least the progress on our strategy is really good, as expected. And also as we're climbing the rope up, so I think we are pretty comfortable, and we have really a great team around it. So we are pretty sure about we will deliver as promised.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [12]

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Can I take one more? In terms of the Onninen acquisition, have you already seen any sort of purchasing synergies? Or is that something to consider going forward? Or do you see any potential for that at all?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [13]

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There's always a potential. And you always get surprised when you start to dig into it. And it was a part of the integration plan that was set up. And they are being harvested as well. So the short answer to the question is yes. Of course, it's not something that will add percentage to the overall margin, definitely not. But we are making sure to think that there is a potential we are working with continuously.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [14]

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And also because the size of the Swedish operation on the HWS is now close to double up compared to where we were in the first quarter. So it seems like a good case for us. And at least I have to say it again, what the Swedish team and the Danish team have done together within 2 months to acquire such a, I would say, quite a big business and then integrate it within 2 months, I think that's really impressive, I have to say that, and also taking the cost immediately.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [15]

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Yes.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [16]

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So we're very pleased about that. Thank you, Alexander. Okay, Simon? Okay, anyone who is on the line with questions?

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Operator [17]

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(Operator Instructions) There are currently no questions for today from the phones. So can I please pass it back to you?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [18]

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Thank you. Thank you for listening in. Thank you for the gentlemen in the room and the good questions and hopefully also fair answers. So thank you for today, and have a nice day. Bye-bye.