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Edited Transcript of SOLAR B.CO earnings conference call or presentation 6-Feb-20 10:00am GMT

Full Year 2019 Solar A/S Earnings Call

Kolding Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Solar A/S earnings conference call or presentation Thursday, February 6, 2020 at 10:00:00am 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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* Simon Møller Blok

Nordea Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Solar Annual Report 2019. (Operator Instructions) Today, I'm pleased to present CEO, Jens Andersen; and CFO, Michael Jeppesen. Speakers, 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 fourth quarter webcast for Solar. Together with me, I have my colleague, CFO, Michael Jeppesen.

If we turn to Page 1. The agenda for today is a general business update from my side. Then Michael will present the 4Q results and also our guidance for 2020. And then finally, there will be a Q&A session.

Then we take the next page. Our core business achieved the best financial result in a decade, and almost all entities in our core business delivered a strong EBITA increase in 2019. At the same time, we generated a strong cash flow, allowing us to propose a dividend distribution of DKK 14 per share at the upcoming general meeting mid-March 2020.

A rough calculation gives a yield of more than 4%, which leave us among some of the best dividend shares at NASDAQ. Just entering 2020 and looking at the last year of our strategy period, the focus on our financial targets will be even more intensified.

If we start with our focus areas, strategic suppliers. We can announce today, after 2 years of dedicated work, that we have completed a range of 7 different solar concepts to our customers but also cross-border. Due to the wide assortment we have achieved, we also reached the highest level of concept shares ever in our long history. But especially, Solar Denmark passed a remarkable milestone in 2019 as they reached a total concept revenue of more than DKK 1 billion in Denmark alone.

Then talking about industry. Also there, we have an intensified focus. And also here, we passed a huge milestone. For the first time ever, the segment profit on industry was higher than the segment profit on installation. So our intensified focus on industry verticals has really given us a lift up and lived up to our high ambitions and goals in this strategy.

All in all, the outlook for 2020 within industry looks promising, especially within the vertical infrastructure where we have already a strong position in Scandinavia, mainly in Norway and in Denmark. But here, we see really good growth opportunities. The investments already have started within 5G as backbone for the 5G network but also extended fiber bandwidth as demand for data and digitalization grows rapidly.

So electrification. And then if we take page number -- or the next page, please. But electrification as a megatrend is much more than green and renewable energy. It is also about the massive need for the right infrastructure behind the digitalization of our society and all the connected devices we soon will have in cars and buildings, et cetera.

Last but not least, I will make a short update on operational excellence. As already mentioned, in the last week of September, we implemented SAP eWM, or more precise, extended Warehouse Management system, at our central warehouse in [Örebro] in Sweden. The implementation was really successful and not a single customer claim was noted.

This year, we have 3 implementations in front of us, and the next in line will be Solar Denmark, then Solar Norge and finally, Solar Nederland. Based on the 2 implementations we have done in Solar Sweden, we now pretty precisely can estimate a price tag of roughly DKK 10 million per rollout. Michael will talk about that a little bit later.

Talk about automation. We are also now so far in the implementation of AutoStore in Solar Nederland that we daily extend the number of picking lines from the system. The Dutch AutoStore solution is an extended solution compared to the Norwegian solution we implemented in the first half year of 2019 but bringing the same commercial business advantages.

In addition to our solid EBITA improvement in our core business, I am more than pleased that we also have succeeded upgrading more of our central warehouses with the commercial advantages that will bring us in the nearest future, and that is from 2020 and into the future because we are close to finalize the AutoStore solution in Holland.

On Page 3, you can see our own SunDryve installation. It's a parking place with sun panels as rooftop, and we hope that airports, municipalities, et cetera, could be future customers of a similar solution. Already now, more than DKK 1 billion of our revenue is based on green products and solutions. And we see a quite increasing market demand in all markets in northern part of Europe.

I will now give the word to Michael for an update on the financial performance for the fourth quarter and of course, our guidance for 2020. 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. With an organic growth of almost 3%, we came very close to DKK 3.1 billion in revenue in Q4. We are particularly happy to see that our industry segment in core continues to grow above the average. And as Jens said, we also passed the milestone there with -- in the industry segment now delivering a bigger contribution to our earnings compared to our installation segment.

Installation was -- the gross installation was positively impacted by a continuing strong growth in Netherlands, however, still mainly due to low-margin products. So if you look at the next page, we can see that EBITA on group level was up from DKK 109 million to DKK 115 million. If we look at core isolated, we managed to increase from DKK 113 million to DKK 121 million. It's particularly notable that we managed to increase the gross margin with 0.5% despite the additional sale in the Netherlands of low-margin products. This in itself had a negative impact of 0.2% on a group basis.

Staff cost had a slightly negative impact on the margin with 0.5%. It should be noticed that we carried out additional restructurings in MAG45, we spent costs on the eWM rollout, but also the AutoStore had a negative impact on staff cost.

Looking at EOC or external operating costs, as we call them, you can see there is a positive impact of 1.1%. And you see a similar negative on depreciation, minus 1.1%. This is the impact of the implementation of IFRS #16 on leasing. If you look at it on EBITA level, it has an insignificant impact.

Turning to the next page. Looking at the cash flow in Q4, we can see that, as expected, we had a very substantial positive impact from operating activities with DKK 305 million, which I'll comment on shortly. Investing activities were up to DKK 48 million, which is an increase compared to last year. The main part of the PPE investment was in AutoStore in the Netherlands. We also invested approximately DKK 9 million in software, mainly our CXP platform, that is our customer experience platform and to a lesser extent, in eWM. It should be noticed that most of the expenses relating to eWM is being expensed in the P&L and only an insignificant part is being capitalized.

If we take a closer look at the operating activities, it's particularly notable that receivable gave a positive contribution of DKK 269 million, which is a substantial improvement compared to the DKK 142 million we saw last year. The DKK 269 million is, however, the normal seasonality, whereas in 2018, the last working day was a Friday, then there was a weekend, followed by a Monday, the 31st of December. So the DKK 269 million is the pattern we normally see and expect here due to year-end. Minor increase in inventory, DKK 33 million, but it's at a level -- lower level compared to what we normally see in this season.

Looking at the full year, we saw, as Jens was mentioning, again that core delivered the best result in a decade. We ended with a total EBITA on DKK 360 million, and we were, therefore, largely on par with our expectations. Looking at core, they delivered DKK 379 million versus DKK 380 million, whereas related was disappointing with minus DKK 19 million; versus expected, minus DKK 15 million. As I mentioned previously, we are in the process of carrying out quite some substantial restructurings in MAG45, and this, of course, had a short-term negative impact of the result not only in Q4 but also in Q3.

Looking at the cash flow from the full year. We saw that operating activities delivered DKK 298 million, which is including minus DKK 2 million from discontinuing activities. We spent a total of DKK 194 million. That's partly the investment we did in the Swedish business of DKK 40 million. We invested DKK 110 million in PPE, mainly AutoStore in Norway but also in the Netherlands. And finally, we did invest DKK 35 million in intangibles, and that is mainly our CXP platform and to a lesser extent, the extended Warehouse Management system.

If we take a look at the operating activities, and here, we are only looking at the continuing activities. You should notice that we did sell a small training business in Norway in the beginning of '19. If we look at it, we see a minor increase in inventory. We mentioned this during the last call also that this is one of our focus areas. Receivables were flat, and there was a minor decrease in liability. There is nothing structural in this. This is just the normal fluctuation. So in total, we ended with a very strong cash flow of DKK 300 million from operating activities.

Looking at the next slide, we can see that net working capital as a percentage of revenue increased slightly and also slightly more than what is due to the acquisition of the small business activities in Sweden. We are, as mentioned in Q3, in the process of normalizing this, and we're doing this in a structured way without jeopardizing our ability to serve our customers. Gearing ended at 1.7, or if we calculate it as an average, it's 2.0 and is within our guidelines for it.

Looking at the next slide, our expectations for 2020. For core, we expect a revenue of DKK 11.2 billion or equal to approximately 1% organic growth. It is notable that we, in our project Better Business, expect to do pruning of approximately DKK 200 million in revenue. So basically, the guidance is based on an underlying organic growth of approximately 3%.

For -- in EBITA, we expect, in core, DKK 400 million, which includes DKK 30 million of cost for rollout of Warehouse Management in Denmark, Norway and then, last, the Netherlands. So basically, we are expecting an underlying EBITA of DKK 430 million. This gives us an EBITA margin of approximately 3.8%, which is slightly below our original expectations of 4%. This is mainly due to that we see Sweden is simply one year behind the original plan. And we, of course, expect Sweden to continue the good progress that they are showing and to catch up.

Looking at related, this is mainly MAG. As I mentioned previously, we've done quite some substantial restructurings in order to set a new baseline. So from a cost perspective, we think we are very much in control. What we can see in MAG is, despite we saw headwind also in Q4, is that the order backlog is increasing. This is meaning that we're building a very, very strong pipeline, and we are very close to all-time high now, and this trend has continued into January. So we are fairly comfortable that they will deliver an improved result this year compared to the one we saw last year. So we are guiding a 0 result.

So this means basically that on a group basis, we expect total revenue of DKK 11.8 billion with an EBITA of approximately DKK 400 million. Given the strong cash flow we have seen, we do expect to pay out DKK 14 per share, which will be proposed by the Board of Directors at the Annual General Meeting. 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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Thank you, Michael. Now it's time for questions and answers, if there are any, so please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Simon Blok from Nordea.

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Simon Møller Blok, Nordea Markets, Research Division - Analyst [2]

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One question from me. I have one question regarding the margin progression that we've seen in Norway in the second half of 2019. How much of this is related to the AutoStore? And what kind of effect do you expect to see in the Netherlands once the AutoStore solution is implemented?

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

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Yes, I will take that. Yes, but what we see in Norway is, of course, a result of AutoStore. That means that the operating costs are lower compared to the past. But it's also a much better product mix, which, at the same time, gives us an increased gross margin and very strong or a very solid growth within the industry. So it's a combination of 3 elements: strong growth in industry; margin or a better product mix; and finally, a successful AutoStore implementation, which have lowered the cost for serving our customers.

If we talk about Holland, I cannot disclose the number at ease, which we, of course, will reduce with -- in Holland. But I can tell you that the internal interest rate on the AutoStore case is more than 20% after tax. So it's a strong case.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [4]

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So if I can add a little to this, also looking into this year, we will -- you see the full year effect of the AutoStore in Norway and will have a positive impact from the AutoStore in the Netherlands also for approximately 9 months, which is, of course, a part of the increase that we expect to see. So we have not seen the full impact from Norway yet.

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

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But when you're implementing AutoStore, you have a lot of costs, which is in the P&L, and those costs are more or less done. So we are starting to make picking lines also in the AutoStore solution in Netherlands. I think around 2,000 picking lines per day. So it's really up and running now. And soon, we will have the system in full progress.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [6]

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I think it's fair to say that we're very happy with the way it's been managed in the Dutch organization as well.

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

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Exactly, and also in the Norwegian organization. It's a strong solution, and it will, as I said before, leave an interest rate on the good side of 20%.

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Operator [8]

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(Operator Instructions) And as there are no further questions, I'll hand it back to the speakers.

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

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Thank you. It was easy, at least, to answer the questions this time, so thank you for all who have listened in. And have a very nice day, and look forward to talk to you. If you want, you can always contact us, Michael and I, through mobile, if you want a one-on-one discussion. So thank you, and have a nice day.