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Edited Transcript of SOLAR B.CO earnings conference call or presentation 31-Oct-19 10:00am GMT

Q3 2019 Solar A/S Earnings Call

Kolding Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Solar A/S earnings conference call or presentation Thursday, October 31, 2019 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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* Alexander Borreskov

Carnegie Investment Bank AB, Research Division - Analyst Assistant

* Simon Møller Blok

Nordea Markets, Research Division - Analyst

* Yiwei Zhou

SEB, 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 third quarter 2019. (Operator Instructions) 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 third quarter webcast for Solar.

Together with me, I have my colleague, Michael Jeppesen, which is our CFO. The agenda for today is, as usual, I will say, a general update from my side, then Mike will present the 3 -- or the third quarter results and also the guidance for 2019, and finally, there will be a question-and-answer session.

In Solar, we keep focusing on energy-efficient solution and product assortments to drive the green transition. More specifically, in Solar Norway, we started up a Sun Partner program, but now it has also developed into a Climate and Energy Partner program with a broad assortment covering light, sun panels and heat pumps.

In Denmark, we have established a new customer center in the heart of Copenhagen. Here, we are focusing on sustainable solutions where it is possible at all. For instance, we have started to deliver our Fastboxes (foreign language) as well as using paper packaging instead of plastic materials.

It's only to emphasize that everybody is talking about the green transition or sustainable electrification. In Solar, we already now see a huge market, and we see a very positive margin going forward. So at least our investments now really starts to pay off within the green transition.

If we then turn to the next page. We have our 3 strategic focus areas. I will start with strategic suppliers. Without increasing the number of stock-keeping units at our local central warehouses, we are constantly expanding the number of products a little bit through our main digital platforms. Currently, we have [literally] at hand 215,000 products, and it's our ambition to expand that into 500,000 products within a year or 2. If we did not create or have taken the bold decision of establishing a common shared service in Lodz in Poland last year, this would never have been possible country-wise. So we are very pleased to see that our decision last year really pays off now. Our overall goal is clearly to increase the share of wallet at our customers, mainly within our industry segment.

Talking about industry. Here, we, as we have said before, are prioritizing a few selected key verticals. And we see a good trend and we also sense that more and more customers are attracted because we have this regional approach.

Within infrastructure, we have recently hired in a new and very strong VP to cover the Scandinavian market. He brings a strong track record from the industry and vast market and product knowledge.

As you might recover, we already now have a significant infrastructure position in both Denmark and Norway. But of course, we also need to expand that into Sweden and Holland as well, mainly as we see it.

Within operational excellence, we have a lot of activities. In the last weekend of September, we implemented SAP eWM or more precise, extended warehouse management system, at our central warehouse in Örebro in Sweden. The implementation was, again, I would say, very successful and not a single customer claim were notified.

A really big thanks to the project team as well as the Sweden's organization for more than a well done job.

With 2 very successful implementation at our central warehouses in Sweden, we are now ready for the next move, and that is in Denmark, which we expect to implement in the first quarter of 2020.

Parallel with our SAP eWM rollout, we're also in the middle of implementing AutoStore in Holland. The Dutch Autostore solution is an extended version of what we did in Norway earlier this year, but basically playing in the same commercial business bundles, as we have seen in Norway and already can see be fulfilled.

In addition, we have also, on the more soft side, taken the next step at our journey to be a more centrally led organization. And that is simply to stay relevant towards our customers, towards our suppliers because the market is changing, and we have to adapt to that. So to serve our customers even better than that we have created in third quarter, what we call, Solar Operations, which were the former name of Solar Supply Chain. Mainly, it consists of both material planning, the warehouse's operations but also the transport and services, which are connected to our customers.

Also, within, what we call, common market and sourcing, we have designed a Global Category Management position that is covering 10 different product categories. And also there, it's our goal and ambition to consolidate, maintain and develop the product categories cross-border instead of doing that country-wise.

I will now give the word to Michael for an update on the financial performance for the third quarter, and of course, also our guidance for 2019. Please, Michael.

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

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Thank you. If we turn to Page #5. Please notice that we have deconsolidated STI in -- also in 2018, meaning that the figures we are seeing is only the continuing business, whereas STI is reported as discontinuing operations.

If we look at the revenue, it increased from to DKK 2.6 billion to almost DKK 2.8 billion, equal to an organic growth above 6%. What is more important is to notice that the trend shift we show in the core business in Q4, where we returned to growth, again, continued in Q3, where we managed to deliver an organic growth of almost 7% in the core business. In particular, we're very happy to see that Sweden, that -- who returned to organic growth in Q2, continued this trend into Q3 and is regaining its business.

Looking at the next slide, that is #6. EBITA ended at DKK 105 million versus DKK 93 million. That's actually an increase of 13% compared to last year. Actually, you could argue that the underlying improvement is slightly stronger than what appears from the figures. We had this small acquisition in Sweden, which also, in Q3, had a minor negative impact. And despite the very successful rollout of SAP eWM in Sweden, it always triggers additional costs in the period up to the implementation.

Looking at the margin, we see a substantial improvement in the external operating costs, EOC, as we call them, but at a more or less similar negative impact on depreciation. This is the impact of implementing a new accounting policy regarding leasing.

If we look at the gross margin, we see it being diluted compared to last year, mainly due to a less favorable customer product mix in the growth areas in the Netherlands, with actually on group basis had a negative impact of 0.4%. Despite this, we actually managed to compensate this by being more efficient. So staff had a positive impact on the margin of 0.4%. So in total, we managed to increase from 3.7% to 3.8%. Or if we look at core, we see a similar from 4.1% to 4.2%, absorbing the costs, additional costs in Sweden.

Turning to the next slide. If we look at the earnings per company, we see a good development in Norway and Holland. Sweden, we're below last year, and that was also as expected. But compared to Q2, we actually see an improvement in the Swedish earning, they are gradually picking up, and they are following the plans, the get well plan that we have developed.

In core, we managed to improve the EBITA from DKK 99 million to DKK 111 million, whereas related in that unchanged at a minus of minus DKK 6 million, which were very disappointing.

We saw in MAG a disappointing development where we had negative growth in the last half of the quarter mainly. And as a consequence, we have initiated several restructuring activities, which has had a cost of DKK 2 million in this quarter, but will deliver full year savings of DKK 7 million going forward.

Turning to the next slide, looking at year-to-date, earnings in core business is up 10% despite Sweden being below last year, or in terms of Danish krone from DKK 235 million to DKK 258 million. Also related, we've seen improvements, but not to the extent we actually did expect.

Looking at the cash flow at Page #9. Operating activities generated DKK 144 million, which I'll comment on shortly. If you look at investing activities, they are up from DKK 30 million to DKK 40 million. The main part of the PPE investments are related to our investments in AutoStore in the Netherlands, and the IT investment is mainly our CTP platform and -- but of course, also to a small extent, our extended warehouse management system.

Financial activities, minus DKK 88 million. Bear in mind that there's been a reclassification of short-term debt, if you compare with last year, and this is also -- and there's also an impact of implementing the new accounting standards on the leasing.

If you look at the right side of the slide, we see the cash flow from operating activities. Noncash items is DKK 140 million. There's, of course, a huge impact from the impairment of BIM.

Looking at the network and capital elements, that's inventory, receivables and liabilities, we see a minor increase in inventory. Normal seasonality would actually mean a higher increase in inventory, but we're still in the process of normalizing the inventory in Sweden. Bear in mind that when we acquired the ongoing activities, we basically acquired quite a lot of inventory. Receivables remain flat and there was a small increase in liabilities.

Turning to the next page. You can see that net working capital remained flat compared to Q2. Bear in mind that we still have the full balance sheet impact from the acquisition in Sweden, but we still only have a part of the P&L effect. So in terms of percentages, this has an effect of approximately 0.2.

Looking at gearing, it came down from 2.6 to 2.2, driven by cash flow, but also the pickup in earnings. All other things even, we expect the gearing to continue to reduce in the coming quarters.

Guidance, Page #11. We reconfirm our outlook for '19 in the different markets. And we reconfirm our EBITA of DKK 365 million. However, we increase our expectations in core with DKK 10 million given the track -- the good track record year-to-date, and we reduced the related similar with minus DKK 10 million, so the net impact is 0. Looking at revenue, we changed our guidance from at least DKK 11.6 billion to approximately DKK 11.75 billion. Bear in mind, we have a negative impact on FX, which give us quite some headwind.

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

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Yes. Okay. Thank you, Michael. Now it's time for Q&A.

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Questions and Answers

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [1]

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I don't know. Let's start with the gentlemen in the room, and then we'll take the ones who are on the line, please, if there's any questions.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [2]

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Yes, Alexander Borreskov from Carnegie. If you just start out with MAG45. So when we sat here after Q2, you mentioned that you had gotten indications from the customers of MAG45 that the revenue that wasn't there in Q2 would sort of pick up in Q3 and Q4. I was just wondering what sort of happened since then?

And when you talk about a strategic review, could you elaborate a bit on what you're actually reviewing?

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

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Mike, take that.

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

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Yes. If you look at the revenue, it's true. And actually, the trend we saw in July supported that information. There was actually a rather strong growth in July, but we came to a complete halt in August and September, where we actually did see negative growth.

And what we -- the information we're getting now from the main customers is that the payoff has been postponed until next year. This is also why we had to change our expectations. If you look into the guidance now, you'll actually see that we're guiding for negative growth in Q4. And basically, we expect the trend to continue. The trend we've seen in Q3, we don't expect any payoff in Q4 in the revenue in MAG. However, when we talk to the customers, it appears that they have quite a strong pipeline coming in, but we've still decided to initiate some rightsizing of the company to a newer reality.

So as we speak, that is ongoing.

Not only the [freight side], we're also looking at what we can do to drive more revenue and better margin. Strategic revenue in our terms means that all options are basically open and we are doing an in-depth analysis of the company, of the market. And of course, we need to assess what to do going forward.

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

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When we made our strategy in the beginning of 2018, we wrote that, if 3 years were gone and it was not EBITA positive, we would make a strategic review, and that's what we're doing because we have been owner of MAG45 for now 3 years. So that's what we're doing.

So no decisions yet. But of course, we need to make a deep dive to see what is the right solution for Solar and MAG45 going forward.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [6]

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All right. And just to make sure I understand, you haven't lost any customers in MAG45. So it's more of a postponement of revenue?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [7]

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We haven't lost any customers. Actually, we continue to regain customers and actually also new sites. So it's not that we have lost customers, definitely not.

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

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All right. And if we move to -- towards your core business, which is performing very well. If we look at Denmark, the organic growth you're seeing there, is that mainly driven by the installation or the industry business?

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

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In third quarter, it was both, I would say. But installation is still tracking pretty well, but we would anticipate that the growth going forward will be a little bit more modest but the market is still okay. The project market will be lower going forward, especially in the big cities like Copenhagen and Aarhus and Örebro, et cetera. But then we see a huge market for climate amenity, which talking about that, now we really see that it's not only talk anymore, it's really orders which are coming -- charging stations, heat pumps, light, LED. So a lot of orders is now coming out of this mega-trend. So that's great.

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

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Okay. So when you say that you expect activity in the installation business to be down in the second half relative to the first half, is that still up year-on-year?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [11]

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It's still up. It's still up, around 4%. Yes.

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

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So we shouldn't necessarily expect negative organic growth in the installation business?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [13]

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No, no, no. It's a more modest growth also in 2020, but it's still a growth scenario.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [14]

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In 2020 as well?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [15]

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Yes.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [16]

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Yes, what we see.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [17]

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What we see right now, yes.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [18]

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And if we look at Norway, you improved profitability quite a bit in the quarter. What was the underlying reasons for that? Is that the AutoStore implementation? And -- or the contract wins?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [19]

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I think it's a combination of several things. If you look at the growth in Norway, it is in a lot of segments, actually. And we can see, particularly marine offshore, is growing again. We took a huge downturn in marine offshore. But that has -- it seems to have rebound rather strong in this quarter. But basically, almost all segments in Norway are growing at the moment. So it's a more balanced growth, you can say, compared to what you are seeing in the Netherlands.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [20]

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And talking about Autostore, of course, that's a part of it. But I think the commercial side of Autostore is that we have expanded a number of products. And there, we see a lot of growth coming from the expansion. So the share of wallet per customers is increasing.

The Autostore, is of course, a matter of productivity. I think, a positive part is also that we have expanded our assortment a lot, which now pays off.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [21]

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And just to pivot a bit to Onninen. When we sat here after Q2, you were quite pleased with what you've seen so far. I was just wondering if you could get an update on whether there's -- with a bit more time in the books, if you've learned anything new?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [22]

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Well, basically, you can say the integration went very well. So now it's a bit like trying to separate the hot and cold water after you mixed it, but we're still pleased with the way these things are going. As expected, this is also what we've seen. The entire revenue did not transfer, that wasn't to be expected either. You always lose some revenue. So we still see that there are quite some opportunities, not only within the heating and plumbing part, but also in the retail segment that we got. Although it seems to be a slightly different creature compared to what the Swedish organization normally are working with. It's a separate unit. It has to be like that. So I think it's -- I think it's like -- it's still a bit honeymoon in it, I think. But you still need to work with some other things in order to get the profitability, but we are still very happy with it, definitely.

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Operator [23]

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(Operator Instructions) So we go first to the line of Simon Blok at Nordea.

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Simon Møller Blok, Nordea Markets, Research Division - Analyst [24]

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So a question on Sweden from my side. So the division obviously performed better here in Q3. And in the report, you mentioned that you have implemented some further initiatives here in Q3 to improve earnings going forward. Could you elaborate a bit on what these initiatives are?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [25]

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The sound here is a bit unclear. If I understand your question right, because it was a bit coming off, you're asking to the initiatives. I missed whether -- was it in MAG that you were...

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [26]

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It was in Sweden.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [27]

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Okay. Yes. Good. What is happening in Sweden is, we did this plan, the integration plan. And of course, the major part was done in Q2. But there are things that will happen in Q3, Q4, and also, I think the last 2 or 3 branches that will be closed down in Q1 next year, where it simply takes some time to make the full transition. And it's that in each type of initiatives that we are looking into, also because we knew that it's very difficult to assess how much of the revenue can you actually retain. And by law, all staff transfers and then you need to adjust to the revenue you see. And that adjustments were executed here late Q3 in order -- what you can call a kind of a rightsizing. So that is what we are referring to. There's still -- we still count too many costs related to this. For instance, we have rented additional warehouses, one in Halmstad, where we have a central warehouse and one in Örebro, small central warehouses close to the real central warehouse, but it drives costs. And this is also what we were referring to that we've still not normalized the inventory. So we have 2 months on the shelf. So we need to get that done. And that is what we're working on.

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Simon Møller Blok, Nordea Markets, Research Division - Analyst [28]

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Okay. And then also one question on Netherlands and Norway. You mentioned that the gross margin would have been hit from lower-margin customers and products in these regions. Is this something we should expect going forward? Is it more of a temporary nature?

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [29]

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I think it's a more temporary thing. We took some direct orders with a very low margin. Of course, if you look at our nominator and denominator discussion, that will dilute our ambition for reaching our 44% on EBITA. So I think it's -- it was a few one-off -- very big orders, but a few one-offs. So it's definitely not something we will do in our core business for more than a few selected orders. So I hope that answers your question.

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Operator [30]

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Okay. So we'll now open the line of Yiwei Zhou at SEB.

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Yiwei Zhou, SEB, Research Division - Analyst [31]

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I have 2, and firstly, looking to the other business, could you elaborate a bit around the development in the quarter? And I can see the revenue and the top line, you had DKK 150 million compared to Q3 last year was DKK 275 million. And then on the gross margin I think, could you add a little bit of color here?

And then second question is on the gross margin development. And so there has been sort of a downward trend for the last 3 quarters. And what will be the initiatives to improve? Or do you expect it would be continued at same level or decline -- have further decline in the coming quarters? Yes. I'll keep -- 2 questions for now.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [32]

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The other continues amongst a lot of different things. It continues in DIY, deliveries and then also retail segment in -- I will say DIY. It's mainly in the Netherlands, where we have seen quite a drop in the revenue to this segment. And to a smaller extent, there's also Norway has seen a setback in that segment. But yes, it's a bit of a mix of a lot of things. So it's not our main concern. And the main focus is the industry is a bit more opportunistic, I would say, in general.

Your question on the gross margin is -- if you look at this quarter, we're still fighting with freight costs being too high. They actually have a negative impact of, I think, 0.1% in this quarter. And then we had this mix shift. Apparently we're very good at growing really low-margin businesses. As Jens were stating before, that we maybe have been a bit too aggressive this quarter in order to reach these high growth rates. So it's not that we expect -- this is not a general trend, I would say.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [33]

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No way. And I need to comment that the Netherlands alone declined our margin with 0.4% this quarter, which is of course, not acceptable. So I hope that we have answered that pretty clearly that we should take orders, but at least there has to be a limit how low we can go. And in Holland, they had definitely went too low, that's for sure.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [34]

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Again, we could grow at all costs, basically. I mean.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [35]

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So the margin will be, hopefully, more balanced in the coming quarters.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [36]

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And a more balanced customer product mix than what we've seen in this quarter.

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Simon Møller Blok, Nordea Markets, Research Division - Analyst [37]

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Okay. And just want to clarify, the 0.1% margin impact was on a group level? Or was it on a divisional level?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [38]

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It's on group level. Only done by Holland on its own.

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [39]

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Yes. On the one point, the 0.1, as I remember, freight costs was, that's also on group level. Have a negative impact. Freight costs.

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Operator [40]

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(Operator Instructions) As there are currently no questions on the phones, can I pass back to any questions in the room?

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [41]

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Yes, I can go for a couple more. So you say that in the Netherlands, they went too low on margins in order to win orders. Does that mean we should expect growth in the Netherlands to slow down going forward?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [42]

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That could be a conclusion, rather have a low growth which is profitable than have a high growth which is not profitable. So of course, that could be a conclusion. But that being said, the Dutch market is still very good and it's strong.

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Alexander Borreskov, Carnegie Investment Bank AB, Research Division - Analyst Assistant [43]

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All right. And just a final question on your warehouse management system that you're implementing in Sweden and you're going to implement in Denmark next. Could you just give a bit of coloring on sort of the business rationale behind it? Is that also the SKUs?

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [44]

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It's mainly a risk assessment because we have an in-house developed system which we need to phase out, a very old system. So it's more a risky thing that it's -- outer store. That's about productivity. So it's a business case. But I think I will leave the wording to Michael because he is deeply involved...

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Michael H. Jeppesen, Solar A/S - CFO & Member of Executive Board [45]

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Deeply involved in that, yes. The old system is actually the old legacy system, which is based on COBOL as a mainframe system. And it has turned out that it's become -- I mean, we simply are not driving efficiency here because it's difficult to make any changes in the system. Short term, we don't expect any benefits from the SAP rollout, and we're actually convinced going forward that is going to give us some opportunities where we can make some processes more efficient. We simply have to hold the opportunities to do that. But we took a decision when we did this rollout that we would keep it as close to standup as possible and make as few changes as possible. We've done quite some ERP rollouts. We took some hard learnings there. And one of the takeaways that we have at least is that people can only absorb a certain amount of changes. Then we'd rather get it done and over and then start to improve with the at least 1, 2 and 3. So that's the overall thinking. So short term, you shouldn't expect any improvements. But I think long term, we will drive improvements out of it, yes.

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Jens E. Andersen, Solar A/S - CEO, MD of Denmark & Member of Executive Board [46]

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Thank you. Any more questions? No? Then we will say, have a nice day, and thank you for listening in. And let's talk next quarter again, hopefully. Bye-bye.