Elisa Oyj (ELISA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Elisa's Fourth Quarter 2022 analyst meeting and conference call. I'm Vesa Sahivirta, the Head of Investor Relations. And here together with me is again a very familiar team, CEO Veli-Matti Mattila; and CFO, Jari Kinnunen. We have also some audience and we start this meeting with a presentation followed by Q&A. [Operator Instructions] And I think we are ready to start, so I give word to Veli-Matti, please.

Thank you, Vesa, and good morning, everybody, on my behalf as well, and welcome to our interim report Q4 2022 event. Fourth quarter was a good quarter. We had solid performance in all of our business areas at Elisa. Revenue was growing 5.1% as our comparable EBITDA was growing 3.9%. Mobile service revenue continued a good growth as well with -- by 5.4 percentage points. In Finland, postpaid churn decreased. So even if the competitive intensity is high in our business, it came down to 16.2%, when in the third quarter, we had 18.6%. Postpaid subscriptions grew by 23,500, while machine-to-machine and IoT subscription base was growing even by 35,400. In the fixed broadband business, subscription base was decreasing 1,500. So that business is relatively stable. The good momentum in 5G continues. We are leading the business here, also network covering now 86% of the finished population in over 200 towns and cities. And our Board has made a decision to propose to the AGM a dividend of EUR 2.15, a payout ratio being 92%. Overall, we can say that we had a record year with 7% revenue growth, 7% EPS growth. And in 2022, Elisa bypassed the EUR 2 billion mark in the revenues first time in our history. EBITDA was growing, for the full year, to 4.2% to EUR 735 million. EBITDA percentage being 34% -- 34.5%, slightly down mainly due to the dilutive impact from our digital service businesses growing faster than the telecom revenues. Earnings per share went up to EUR 2.34 and CapEx, EUR 255 million, 3% growth. CapEx per sales was as guided 12% of revenues. And in the operational KPI side, we saw also great growth in the mobile service revenue, 6.6% in mobile subscriptions, 3.4% growth. In the fixed broadband side, we saw some decline, minus 2.5%. And in the postpaid ARPU also growth of 5% churn slightly coming down and the mobile data consumption is increasing continuously with 17% growth rate. Looking at the development over the quarters, the revenue growth really coming from all businesses, mobile and fixed services as well as from digital service businesses and equipment sales. In the mobile service revenues, of course, 5G is contributing more and more to the growth as well as the upselling of 4G subscriptions as well as the price increases with product changes that we do every now and then. EBITDA is improved, of course, by the revenue growth as well as our productivity improvement, understanding that the EBITDA percentage has a dilutive impact from the -- our international digital service business, strong growth. The churn now has a bit decreasing trend. And we have also seen that the competition, while being keen, the -- maybe the campaigning and the strongest campaigning has not taken place in 4G that much as we've seen over the past quarters. If we look at then the business segments. In the consumer side, revenue growth was 4% as well as the comparable EBITDA growth. The positive drivers from all businesses, then we had, of course, the interconnection price declines that impacted the interconnection revenues. They also impact on interconnection cost. So in that sense, EBITDA neutral. But then traditional fixed-line business as it has been for years and years decreasing. It also impacted negatively to the revenues as early as well. In the corporate side, the revenue was growing at 7%. All the businesses contributing to the growth and the same negative impact from interconnection prices and fixed-line -- traditional fixed-line business, but we also had the Frinx and Cardinality acquisitions to positively impact to the revenue side. Comparable EBITDA was also 4% for the corporate customer segment. We continue to execute our well-proven strategy, long-term development and long-term result creation. Our mission is a sustainable future through digitalization and we have many daily activities and many impacts with our work to a sustainable future, not only in the environmental perspective, but also in other dimensions. We believe that even if we have created already some results with the 3 focus areas of our strategy. There's a very, very strong potential for further results in all of the 3 strategic focus areas. In the mobile business, we continue to see the higher speeds taken by the customers also the smartphone base is moving towards 5G now, 38% of the smartphones are 5G capable, while they were 33% in the third quarter and 83% of the voice subscribers are at 4G or 5G speeds. Our 5G coverage reaches over 277 locations, over 86% of population. And even in Estonia, where we started our commercial operations for 5G, we have over 70% coverage and that has been built during the second half of 2022. Our upselling is continuing with good results. The average billing increase of 5G upgrades is more than EUR 3 continuing. In Estonia, we also won a 700 spectrum [ 2x, 10 ] megahertz slice of 700 megahertz frequency spectrum earlier. We also won 130 megahertz spectrum of the auction in 3.5 gigahertz spectrum auction. And also Elisa's active investments in optical fiber network continues, and our fast connection is already available to more than 1 million locations via optical fiber or cable modem. In digital service businesses in the domestic side, our entertainment video service is progressing very well. The new original series continued their success Summer of Sorrow won four Golden Venla awards. They are Finnish Oscars in a way. And also, the 3rd season of All the Sins became our most viewed series in 2022 and it has been sold to over 60 countries, including also the services of HBO and Showtime -- SkyShowtime. The biggest live event -- esports event: Elisa Masters Espoo 22 was also held by Elisa, thousands of daily visitors and over 1 million viewers via global broadcasting. So we are also active in this developing new entertainment video service domain. In our IT services, IT business grew with improved profitability, especially due to automation and customer demand for our cybersecurity services remained high with a special focus on proactive services and improvement of continued and resilience. In the international business domain, our Elisa industry is making a great developments forward. We have record order intake for Elisa Industry in the fourth quarter. And we have seen customers to remain active even in the end of the year. Elisa Polystar also had a record order intake in fourth quarter and also strengthening the position in North American market with contract expansions. Elisa Videra business outlook remains strong with deliveries to 52 countries in 2022. We continue to work according to our mission. It is really giving purpose for all Elisa's that we can in the 4 domains: Digital, social, environmental and economic sustainable future really make impact in the society. In our ESG indicators, the mobile network energy efficiency in Finland has been improved -- change in energy consumption per gigabyte from Q4 level to 2021 was minus 5.7%. According to our target setting, we are moving forward our population coverage to more than 100 megabit per second. Connections in Finland is also progressing proportion of female supervisors at Elisa is also getting improved step by step and the patent portfolio is developing well. The size of active patent portfolio now is 337, while the amount of first applications was 12. We have also piloted a distributed energy storage solution, which utilizes the base station battery capacity to save our energy cost and also offers a possibility to provide local electricity transition system operator with the grid balancing services. And this is a really exciting new opportunity, which we also have been able to develop utilizing the machine learning AI capabilities, which are needed with this kind of a distributed energy storage. And it really has -- can have impact, if all Elisa's base station batteries are included in this, we can provide 100 [indiscernible] hours per day of capacity. And it is a significant at especially when there would be a peak demand we can really impact on the prices for all electricity buyers. This is very exciting. And of course, this is also a solution that we are selling to other telecom operators. As the next step in our continued sustainability improvement work, we have also our long-term environmental energy management systems receiving ISO 14001 and ISO 5001 certification -- 50001 certification. Our climate reporting score improved to A- in CDP, the Global Climate Disclosure Project, to which we have been reporting systematically since 2011. And also, Elisa's sustainability report won the climate change category in the Finnish annual sustainability reporting evaluation. So we are doing many activities, but in our key focus areas in the sustainability, we also are making tangible impact to a sustainable future with digitalization. And finally, about our outlook, the development of general economy inclusion and many uncertainties. And beginning of this year, even more uncertainties that we normally have. And of course, due to this, the growth of -- in Finnish economy is expected to stall and in particular, uncertainty relating to Russia's war in Ukraine, such as inflation, energy prices and global supply chains will continue. Competition remains key. Our revenues -- revenue will be at the same level or slightly higher than in 2022. Comparable EBITDA will be at the same level or slightly higher than in 2022. However, EBITDA growth potentially is more challenging in the first half of the year. CapEx will be maximum 12% of revenue. Now I'll give the word to Jari to continue, please.

Thank you. Q4 continued strong trends, both revenue-wise as well as earnings wise. And the whole financial year 2022 was best ever in terms of revenue and the earnings. Q4 revenue growth, 5% or EUR 27 million increase inside that increase negative interconnection impact, EUR 2 million. Equipment sales increased EUR 5 million. In both segments, service revenues continued to grow and corporate segment service revenue increase was EUR 13 million, driven by mobile, digital and fixed services, a negative impact from fixed voice. Consumer segment, service revenue increase was EUR 11 million mobile and digital services increasing and negative impact from traditional voice. In expenses, Materials and Services increase was EUR 12 million. Three quarters of that relating to equipment sales increase. So equipment purchase cost higher as a result of that. Employee expenses, EUR 8 million increase impacted by acquisitions, increased number of personnel 2% collective labor agreement increased beginning of the year and higher expenses relating to short-term and long-term incentive plans. Other operating expenses remained flat. EBITDA increased 4% or EUR 7 million to EUR 185 million. Depreciations fairly much same level as a year ago. EBITDA growing 7% or EUR 8 million to EUR 119 million and slight improvement in EBIT margin to EUR 21.2 million. Financial expenses same as previous year, and EPS growth 9% of EUR 0.05 to EUR 0.60. In Estonia, growth trends also continued and both revenue and EBITDA were growing. Revenue 5%, mobile and fixed services as well as equipment sales growing. EBITDA growth, 9% margin improved to 31%. Subscription -- mobile subscription base remained fairly flat and churn remained at a low 10% level. Then CapEx -- reported CapEx for Q4, EUR 97 million, excluding licenses and leases and acquisitions, EUR 88 million. And full year CapEx, excluding licenses, leases and acquisitions EUR 255 million, which is in line with 12% CapEx to sales guidance. And main CapEx relating to 5G coverage increase and other network and IT investments. Cash flow, solid cash flow in Q4, EUR 86 million, both reported and comparable cash flow, negative impact through higher CapEx and taxes and positive impact through higher EBITDA as well as net working capital change, which was EUR 27 million in Q4 versus EUR 11 million a year ago and lower inventories and receivables impacting positively. Operating EBITDA -- operating cash flow conversion, 52% and for the whole financial year 2022, 65%. Also solid financial position and balance sheet position continuing. Cash and committed credit facilities end of Q4, EUR 385 million. Net debt came down from Q3 -- net debt-to-EBITDA came down from Q3 from 1.9x to 1.7x in line with the target range between 1.5x to 2x. Equity ratio also in line with target at 40.6%, target being higher than 35%. Return ratios improved compared to previous year. Return on equity at 30.5% and return on investment, 18.4%. And average interest expense or interest-bearing debt 1.3%. And solid financial position and cash flow and balance sheet supports strong distributions and Board of Directors proposal to AGM for dividend is EUR 2.15 per share, total amount EUR 345 million. Additionally, there is a proposal for EUR 5 million share buyback authorization. And this would mean dividend growth, 4.9%, and dividend yield 4.3% against the share price end of last year. And payout ratio, 92%, in line with distribution policy, 80% to 100% of previous year's result and will be ninth consecutive year of growing distributions, underlying strong and long-term commitment to competitive shareholder remuneration. And now I will give word to Vesa, please.

Thank you, Jari and now we move on to Q&A part, and we start from the audience and the first question goes here. Artem, please.

Artem Beletski from SEB. Two questions from my side. So the first one is relating to guidance for this year. And as you mentioned, EBITDA growth will be more challenging in the first half of the year. Is it fair to say that challenges are more related to basically Q1, if so say, is the biggest pressure of what you are facing is electricity prices. And in Q2, prices are likely to be lower with some support to be provided by PPI deal, which will be in place for you?

Well, we have -- as we have said earlier that we have our 10-year wind power PPA contract to start during Q2. So it's not only the Q1 where we have a bit lower kind of level support from our hedging, if you will. It is also somewhat during Q2. That's why we have said that H1.

Okay. Very clear. And then the second question from my side is really, so to say, MSR growth and what are your thoughts looking at upcoming quarters? So there has been some deceleration, but we have seen, so to say, more rational markets on consumer side, 5G uptake has to be still quite good, but macro uncertainty and so on. So please, could you provide some color as you have done in the past?

Well, we expect the mobile service revenue to grow kind of low or mid-single digits going forward. Strong growth continued, 5G momentum is strong. We see also the kind of price levels of 5G to kind of be staying well. There is no kind of discounts for 5G that much in the market as we've seen. Also, it seems that also in the 4G part of the market, we have done price increases to the front book, but also in the smaller kind of segments to the back book pricing and they seem to be also moving well ahead. So they could -- will contribute also to the service revenue growth. But of course, always when doing price increases, it depends also on the market response and how it will move ahead. But we are positive that the low to mid-single-digit mobile service revenue growth can be sustained.

Next question, Kimmo.

Yes, it's Kimmo Stenvall, Op Markets. Back on the guidance, as you said that -- or in your presentation, the corporate revenue is -- or the order backlog is quite nice in the international services and mobile service revenues are growing. So my question on the EBITDA guidance on Artem also touched, is the electricity prices the only worry that you have on the first half of the year? Or is there any some other also cost items that are rising that much that has triggered this comment to you from you?

Thank you. As we were talking about in the outlook that the uncertain level overall for the business and for -- not only for H1 and but also including the full year, the uncertainty is higher than we normally have the uncertainty ahead of -- in the beginning of the year. So there are, of course, many things that can impact also negatively going forward. What happens with when a customer -- for the customer demand, there's uncertainty. So far, we have not seen any dramatic changes, actually, like I said, in the international digital services, customers, B2B customers have been very active also in the end of the year. But there is uncertainty due to the Russian war in Ukraine especially, creating all kinds of challenges in the global markets. and then for many of our customers. Also. even if the electricity prices for consumers in Finland, the outlook is somewhat more positive. Still, it is a very big thing for our consumer customers having maybe impact on their demand, especially, we think then in the entertaining video services side. But also there, so far, there has been -- has not been any major impact. So that is, of course, overall which impacts not only in H1, but the full year, then -- the main reason for making the statement about the slightly more challenging EBITDA growth opportunity for H1, it is really relating to what we know, and it is the energy price hedging that we have. We have hedged now approximately 90% for the full year 2023, but the hedging for H1 is -- the level is a bit lower. And also the average price is a bit higher than we had in '22, especially relating to H1. And this the 10-year wind power contract is, of course, something that will give us pricing that we already said in the summer of '21, helping us from some point in time in Q2 onwards.

Okay. Then on the broadband market, I understand that you have a very, very high penetration of fiber connections in your network. And it seems that the market is fluctuating quite -- not so big numbers, but overall, I think in Elisa's case, it is usually a negative change on the broadband subscription base. So what is behind this kind of trend that we have seen in a couple of quarters?

Well, there has been, of course, let's say, less good development in the corporate side for broadband, fixed broadband overall. And of course, as well, we have not always been so keen on competing for the very low price part of the fixed broadband market where the big apartment buildings are having really, really low prices. So we are looking after the better ARPU fixed broadband customers, even if it comes a bit with the cost of a number of customers.

Any further questions from the audience at this point of time? No, we don't seem to have, so we'll take first question from the conference call lines, please.

[Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs.

And just two questions from me. One on the energy price drag in the first half of the year. Just to dig into the detail on that. And then secondly, on your -- some of the repricing you've been doing. So just on the energy price drag, as you say, you've hedged quite a lot, some of which I'm guessing is at a higher price, but presumably you know broadly or roughly what that drag will be on EBITDA in the first quarter. Could you just give us your sense on what the absolute number is in terms of the price drag in Q1 and Q2, just to give us a sense of how much of a headwind it will be in the first quarter and if possible, second quarter as well? And then second question was on the B2B back book repricing. Could you give us a sense of the scale and scope of that back book repricing? How material is it in terms of the size of the repricing? How much of your B2B revenue base does it cover in terms of both fixed and mobile. Just to get a sense of the proportionality that would be great.

Thank you, Andrew, for great questions. In terms of the energy price difference -- average price difference in -- between H1 and H2, we can say that the H1 price is slightly higher than H2. And then to your second question, repricing the B2B side, now the B2B business side in the back book. We certainly cannot do backlog repricing that much on the large corporate customer segment because we have kind of annual or 2-year or 3-year contracts, and they are kind of set. But of course, there is more back book pricing possibilities in the entrepreneur and SME segment. But of course, now there is a quite good understanding that the inflation, especially the energy prices for these valuable digital services can be visible also in price increases, including also the larger corporate customer segment. But unfortunately, I cannot give you a bit more data on those numbers, but we can pull through the back book price increases to some extent and also then, of course, the front book pricing.

Can I just follow up on the headwinds from the energy? So what exactly does that mean? Are we talking about 2 percentage, 3 percentage, 4 percentage point headwind on the EBITDA growth for the first quarter, but just still struggling a little bit to understand how much of a headwind we should expect to see there from the energy price?

We are not disclosing any numbers, but we can say that the average price level is slightly higher in H1 than we will have in H2.

Is it -- can I ask -- is it enough to see negative EBITDA trends in the first quarter or not that large?

We will have same level or slightly higher EBITDA for the full year, and we have strong drivers for improving revenue and also our productivity. But like I said, there is a more challenge to have a stronger growth for EBITDA during the first half of the year.

The next question comes from Ondrej Cabejsek from UBS.

I've got two questions, please. One is on the 4G pricing dynamics. If you could talk to us in terms of what the gap today not just in terms of pricing, but in terms of ARPU, in particular, between 4G and 5G? And how has that evolved over the [indiscernible]? Because I presume a lot of the back book repricing and some of the front book of pricing changes that you did on 4G specifically, the gap presumably has narrowed quite a bit. So that would be a helpful comment. And then second question, just in terms of bigger picture on CapEx going potentially beyond 2023. First of all, with 5G coverage reaching kind of the vast majority of the population this year? And then digital services becoming an ever bigger part of the revenue base. Is there a case to be made that the CapEx to sales ratio over time should potentially trend a bit lower than 12%? Or are there any projects that will require new investment, maybe more competition in fiber that would be pushing the level back to 12%, even though implicitly the mobile CapEx is actually going up as a percentage over the past 6 years.

Okay. First, in regards to the 4G pricing and price increases, as you may remember, during the October, we raised the prices, i.e., the new sales prices, front-book prices in 4G. Actually, we have done the same during this week. And we can say that the difference between 4G and 5G list prices is somewhat smaller now after these 2 front book price changes that we did for 4G. What we get more from 5G customers on average is a bit more than EUR 3 per month versus 4G customers. That's maybe for your question number one. Then in regards to CapEx, we are not quite thinking, even if we have a longer-term investment kind of programs at Elisa for 5G or any other kind of technologies or large IT system renewals, multiyear projects, we do not think investments on annual level as projects, and we tend to kind of have good opportunities to invest to the max 12% level. So even if we might or might not, I'm not saying that we will have less investment to 5G this year. But if we -- even if we would we will have probably something else that we still have a max 12%. So I wouldn't see that we will have less than 12% investments, but the guidance is pretty solid, max 12% for CapEx this year.

I have a quick follow-up on the 4G versus 5G kind of ARPU delta that you have. What implications does that really have? So is it maybe easier now to upsell people to 5G because the gap is smaller? Or is it conversely a bit more difficult to pass through further price increases on the back book going 4G because the effective pricing is now so close to 5G. What are the implications of that gap narrowing, please?

Well, certainly, the -- when the price difference for 5G is somewhat smaller than 4G, 5G becomes maybe a bit more attractive overall for customers to choose. But we have still many customers who are buying new 4G subscription. Not everybody is just trade going to 5G. So it has really meaning for customers upgrading themselves within 4G domain, for example.

The next question comes from Peter Nielsen from ABG.

Just a question on cash flow, please. The cash flow is lower in '22 then slightly lower than in '21, Jari, could you give us any sort of thoughts on indication on how we should view the outlook for free cash flow in '23, please, including should we assume higher interest cost than on the tech side. But any sort of thoughts on how we should view the cash flow outlook for this year would be very much appreciated. And then just a small follow-up on Digital Services, where growth rates seem to have come down in Q4. You've said all along, Veli-Matti, that there will be fluctuations among quarters. So I guess that was to be expecting. But are we seeing sort of at least a temporary slower growth in Digital Services also coming into this year, perhaps macro-driven?

Thank you, Peter. Good. I'll let Jari to respond first question regarding the cash flow. But in terms of the Digital Service business growth, we can say that there is just fluctuation, especially in the international software businesses that we have different quarters for the revenues. But -- the fourth quarter was strong for our Elisa -- Polystar Elisa industry and also especially for the order intake. There is somewhat more maturity coming to the domestic digital service business is also impacting to the growth rate. And even if you didn't ask, by the way, fourth quarter was the first time when our Digital Service businesses revenue was higher than our fixed service revenue business. Jari, please about the cash flow.

Yes, 2022 cash flow after investment, that was EUR 300 million and excluding acquisitions, EUR 321 million, which was 5% or EUR 17 million below year 2021. And there was change -- the negative change in net working capital in last year, which is the main -- makes the main difference in comparison to previous year and now in Q4, there was improvement in net working capital change. In fact, it was EUR 70 million better the change than what it was in 2021. So first part of last year, net working capital was contributing negatively. And we are not guiding cash flow, but we are not expecting same kind of negative impact as we had in the beginning of last year, repeating this year.

The next question comes from Sami Sarkamies from Danske Bank.

I have two questions. First, going back to the MSR growth topic. It cooled down from 7% level to 5% in the fourth quarter, even though you've been making a material price increases. Can you elaborate on the negative drivers like Estonia and then think about the outlook for this year, what's your expectation that you will be able to maintain current level? Or should we assume return to sort of more typical 3% to 5% range? And then I have a second question on cost inflation.

Okay. If we start from the MSR, let's say that the comparables, of course, also bear the results we are making quite steady development on up-selling in absolute terms, but of course, the comparables influence a bit the price increases that we did lever very much to the front book, so they didn't have that much impact yet during the fourth quarter for MSR. Also Estonia, we have made some price kind of increases there as well, not making an impact yet to maybe to the fourth quarter that much, but later on -- but it's not that Estonia or any other things directly kind of impacting negatively. It's just that we make comparable -- the comparable is quite strong, what we had earlier and we make a steady development moving forward with 5G and up-selling. And the level of MSR, as I said earlier, is low to mid-single digit. That's what our estimation is for the year.