Elmera Group ASA (ELMRA) Earnings Call Transcript & Summary

Welcome, everyone, to Elmera Group's Third Quarter 2020 Results Presentation. My name is Morten Opdal, Investor Relations at Elmera, and I will be guiding you through today's presentation. Today's presentation will be held by our CEO, Rolf Barmen; and our new CFO, Henning Nordgulen. And we will conduct a Q&A session after the presentation. We encourage you to submit your questions during the presentation as there is some delay on the broadcast. The first speaker is Mr. Rolf Barmen.

Good morning, everyone. And thank you, Morten. Welcome to our digital third quarter presentation. My name is Rolf Barmen, and I head up the company. Please turn to Page 2. With me today, I have as introduced, Morten, Head of Investor Relations. He will conduct the Q&A towards the end of the session. I have also with me the group's new CFO, Henning Nordgulen, who will present the financials. Henning is a very experienced CFO, some of you will probably know him from his former position as CFO of Sbanken and Deputy CEO as well. He has also a solid experience from heading up the B2B division in Sparebanken Vest and have international experience from working with the shipping sector in London. He took up the position just a few weeks ago, the first of October, but he has already impressed us with his capacity. But first, let me start by repeating some facts about our business units, which you can see on Slide #2, and elaborate a little bit on where the business units belong with regard to reporting segments. Our new CEO of Fjordkraft took up his position from mid-August. Magnar Øyhovden with his new management team now has the largest end-user company in Norway within our sector, having business lines both in the Consumer segment and in the Business segment. TrøndelagKraft and Gudbrandsdal Energi also operate in both segments. TrøndelagKraft is the market leader in Trondheim and a local brand of mid-Norway region. Gudbrandsdal Energi, however, is a national fighting brand, award-winning for best customer succession 10 years in a row with its own administration on Vinstra in Gudbrandsdal headed by Marius Røed Sveipe. The Nordic segment consists, for the time being, of Nordic Green Energy and has retail operations in Finland and Sweden and also have business lines in both the Consumer and the Business segment. Per Heiberg-Andersen is the CEO of Elmera Nordic, and he is also responsible for further expansion in the Nordics. Roger Finnanger, Head of Business, is responsible for B2B activities across all our brands as well as in the Nordic Green Energy in the Nordics segment. Betalservice offers payment solutions to companies in the group and, in future, also outside the group. Revenues from this company is consolidated in the Consumer segment. And last but not least, the New Growth Initiatives segment consists of business lines from several business units. It is Kraftalliansen, our alliance concept, serving smaller, middle-sized energy companies with services like power purchasing, applications and marketing campaigns. It is AllRate, offering billing and rating services to end-user companies as well as great companies. It is Fjordkraft Mobil and Gudbrandsdal Mobil, offering mobile services to their respectively electricity customers. It is our solar and panel and EV -- solar panel and EV charging offerings, they're also booked in this segment. And finally, Metzum, our software company offering cloud-based billing systems to the energy sector. That's a joint venture between us and Rieber & Søn. We have 40% each ownership. And this is not distributed to any of our reporting segments. Metzum expects to serve more than 1.1 million customers per month within the end of 2023. That's a growth actually of approximately 300,000 customers from today's volume. So we have great expectations to that company. That was a brief interaction of our business units. So let's go to this quarter's highlights. Next slide, please, Page 3. This quarter was a really strong quarter for the group. Actually, the best third quarter ever. The group's net revenue adjusted was at 15% year-on-year, while EBIT was up 33% year-on-year. Comparable figures year-on-year acknowledge the reclassification of interest costs related to our power purchase, and Henning will come back to this in his part of the presentation. In the Consumer segment, the positive trend in customer development continues from the last quarter. And in third quarter, the growth was 3,500 deliveries. We had a strong momentum at the end of the third quarter and have experienced -- accelerated growth, actually, into fourth quarter. And this is -- of course, we are very happy with this development, of course. In the Nordic segment, the peak, off-peak differences and area price differences still are significant and continue to impact the profile costs. But positive volume effect have offset the negative impact from these profile costs this quarter. The sales activity was on the top level across all the brands in the business segment. And the pipeline for the next quarters is actually all-time high. Solar panel solutions continue to be in high demand and sales capacity has continuously been increased to meet the increased demand. The digital adoption rate of our customers is high in a time where awareness and consumption control are key focus areas for many of our customers. And currently, more than 400,000 customers through our own brands and our alliance partners are utilizing our smartphone applications. Next slide, please, Page 4. Some words on the market development. Electricity prices have been, as we all know, at a very high level and also very volatile. This is driven by geopolitical situation in combination, of course, with both reduced nuclear power generation, but also all of our -- across Europe, weak hydrology. And as mentioned, the peak/off-peak price differences and area price differences are still significant. And this, of course, due to grid congestions in the Nordics. And we can see this from the price levels in the northern part of Norway, which have been very low. We see that there is a clear trend though that high electricity prices also stimulate consumers to reduce their consumption. No doubt about that. And what we also see is that the high price level, combined with a weekly increased interest rates, are also significantly affecting the financial costs related to power purchase and power sales as such. And Henning will come back to that a little bit later. However, our funding situation is robust, and we have sufficient facilities to handle power purchase also in a high-priced segment. So next slide, please, Page 5. As mentioned, the growth in the Consumer segment has been pleasant. It was positive in the quarter, and we are, of course, very satisfied with the trend in deliveries. The average consumption per delivery is down in the segment, driven by higher electricity prices and increased customer consumption awareness. The number of deliveries in the business segment is stable from last quarter. Volume per delivery is slightly down, not as much as in the Consumer segment. But overall, the volume in the Business segment is increasing due to the fact that we have a customer growth year-on-year of around 5,000. In the Nordic, the number of deliveries is fairly stable. And also here, we see that the average volume for deliveries is down. Next slide, please, Page 6, moving on to our new growth initiatives. The alliance volume also is down, and this is also due to higher spot prices. Customer awareness of energy consumption also is present by the customers of our alliance partners, of course. The number of Extended Alliance deliveries technically decreased by 5,000 due to what we thought was a loss of one of our alliance partners, but this partner will return in the fourth quarter. Our smart phone application was made available to 10 alliance partners in this quarter and is now available for more than 50,000 customers in the alliance. And this app is set up with each of the alliance partner's visual profile and gives them, of course, a stronger value proposition towards their customers. Our solar panel solution, again, traction, of course, from the higher electricity prices. We have a capital-light approach to this business line, and we are cooperating with Solcellespesialisten on installation services, yes. The number of mobile subscribers decreased by 5,000 in the third quarter, but the trend has reversed in the fourth quarter -- in the beginning of the fourth quarter now and as of the moment is positive. In general, the activity level in the various new growth initiative is high, and we see significant growth potential from this segment going forward. Next slide, please, Page 7. Regulatory updates. We used to have this slide to introduce you to our thoughts of the regulatory issues that are present. There have been a couple of regulatory changes implemented with effect from the 1st of November. The changes have been expected, and we are well prepared for the changes supported by the certification of Trygg Strømhandel. Worth mentioning is that the notification period for variable contracts has been increased from 14 days to 30 days, which improves the value proposition and provides the customers with increased price predictability. Secondly, increased price transparency on the invoice and supplier websites are required. The proposals on mandatory low maximum price of all electricity sale in Norway are not getting political support. The price mechanism is important in order to align demand and supply in a situation with scarce energy resources, and a maximum price would interfere with this. Lastly, there is an ongoing consultation regarding a new legislation to facilitate standardized fixed price contracts to the B2B markets. We work intensively, together with both Energi Norges and, in particular, with Statkraft as our power purchase partner to design services that give business customers affordable predictability. That being said, the services, we already offer to business customers with a time frame of 1 to 3 years horizon. You know that the fixed price -- new fixed price contracts, they are set to last for 3, 5 and 7 years. But the products we now sell with a time frame from 1-year to 3-year horizon, they will still be the most demanded services from our point of view. Before I give the word to Henning, I'd like to sum up. This quarter, high activity across all business lines. Strong financial performance, actually, the best third quarter in our history. And not to forget, a very positive customer growth sentiment. So thank you for now. Henning, the floor is yours. Welcome, Henning, and good luck.

Next slide, please. Thank you, Rolf, and thank you for the introduction. I'm very pleased to join the Elmera team here for my first earnings presentation, and I look forward to meeting with the investors. Next page. Next page, Slide 9, please. Before we go into the details, I would like to draw your attention to an update in our reporting. We have decided to change the classification of interest expense related to electricity purchase from Statkraft Energi AS or SEAS, which is the group's main supplier of electrical power. Previously, this has been recorded in a direct cost of sales. But from this quarter, the interest component to the SEAS agreement will be reported in the interest expense line. The updated classification reflects that with the current high elspot prices, significant increase in the LIBOR interest rates, finance expenses have become a more significant factor in our P&L. The sales interest expense in the third quarter of 2022 was NOK 19.4 million and comparable restated figure for Q3 '21 was NOK 2.4 million. You will find an overview on Slide 18 in the appendix showing the restated figures from the first quarter of 2021. Then if we look at the group's adjusted net revenue and EBIT. On the left-hand side, net revenue adjusted increased by 15% year-on-year to NOK 424 million, primarily driven by improvements in the Business and the Nordic segments. The margins have been strong also in this quarter. On the right-hand side, the group's EBIT adjusted increased to 33% year-over-year to NOK 121 million, driven by positive development across all segments. The EBIT adjusted margin over the last 12 months was 33% for Q3, slightly down from the comparable quarter last year. Next page, please, Page 10. Moving to the segments. The Consumer segment showed an increase in net revenue from the third quarter of '21 despite the 30% decrease in volume year-on-year. EBIT adjusted was NOK 62 million in the quarter, which was significantly up from last year as we have succeeded well in managing the variable product with increased profitability in combination with customer growth in the segment. The Business segment shows growth in adjusted net revenue from NOK 89 million in the third quarter last year to NOK 107 million this quarter. Product margins across all product categories improved versus last year, and volumes sold increased by 3% despite the 2% decrease in the volume per delivery. EBIT adjusted increased to NOK 9 million from the third quarter last year. Next slide, please, Page 11. When it comes to the Nordic segment, net revenue is up NOK 20 million while EBIT adjusted is marginally down. We experienced negative peak/off-peak price effect also in this quarter, but this was offset by positive volume effects from hedges. In the new growth initiatives, net revenue increased by NOK 9 million from the third quarter last year, with Mobile being the main driver for the growth. EBIT adjusted increased by NOK 5 million year-over-year and was marginally positive in this quarter. Next slide, please, Page 12. Let's give some more insight in the Nordic segment. As you remember, we stopped marketing fixed price contracts in February this year, but have residual exposure in Q4 and Q1 before this finally tapers off in Q2 next year. The current status in the segment is that the residual volume risk in fixed-price contracts has been hedged according to our volume estimates. That is, we do not estimate negative effects on volume deviations. However, we still have uncovered risks related to peak and off-peak price differences, which is what we refer to as profile risk. With the current price and volume outlook, and the visibility we have so far in Q4, we estimate that the negative EBIT adjusted of NOK 40 million is likely for the Nordic segment in the quarter. Looking forward, the prospects are promising. The market in Finland is rapidly moving from fixed to spot-based products, which is more in line with the Norwegian market. This means that the value proposition and the digital solution and the concept we have in Norway and in our Norwegian brands become more relevant also in the Nordic segment. Next slide, please, Page 13. Given the macroeconomic outlook, including high interest rates, higher energy prices and so forth, many predict an increase in payment defaults and bankruptcies. This risk is also on our agenda, but we have strong confidence in the robustness of our established credit practices. This includes scoring and classifications of customers when granting internal credit lines, close monitoring of development and cooperating with external parties for credit scoring and debt collection. Here, our historical track record is very strong, and we see limited changes in customer behavior and payment behavior so far. To summarize, we considered a provision of NOK 75 million at quarter end, sufficient given the risk we see in our receivables. Next slide, please, Page 14. Over to net working capital. The net working capital was NOK 541 million at quarter end, down from NOK 650 million for 30th of June. And the working capital level at quarter end is dependent on the power purchase settlement for the previous months as well as being subject to fluctuations in invoicing and payment patterns. On the right-hand side, you can see the development in net cash. We started the quarter with a net debt of approximately NOK 1.5 billion, ended with a slightly reduced net debt of NOK 1.4 billion. The main drivers are the quarter-over-quarter decrease in net working capital and the cash EBIT adjusted in the quarter, which was at NOK 80 million. Then finally, over to the next page, Page 15. As Rolf explained initially, the situation in the power market remains extraordinary. But for Elmera, we see positive development in many of the elements behind the drivers of our profitability. The EBIT adjusted targets for the year were set in a different interest rate and pricing environment and before we decided to change the SEAS interest expense classification. However, on a comparable basis, EBIT adjusted for 2022 is expected in line with the original targets. And that concludes our presentation. I now give the floor to Morten, who will facilitate the Q&A session. Thank you for your attention.

Thank you, Henning. We are moving over to the Q&A session, and we have received some questions already. The first one is the following: What is your view on the regulatory situation? Maybe you can comment a bit on that, Rolf.

I think that we know we have experienced almost 10 years with quite high predictability when it comes to the regulatory framework. The regulator's focus has been concentrated on leveling the playing field. Multiple measures, which we have acknowledge and supported, have been put in place. There was a situation, the impact of the gas situation is obviously a matter that puts pressure on the politicians, but it doesn't actually put pressure on the regulatory framework as such. We do understand the need for the politicians to take actions and the support scheme put in place. From our point of view, it's a very good measure for mitigating negative effects to the end users. The instrument both eases the burden for the end users, and at the same time, it stimulates some of these savings. But from our point of view, based on multiple meetings and conversations with stakeholders and politicians, our take from that is that the majority understand that -- the majority of the decision-makers understand that the way the retail market is regulated in Norway is the best way of organizing such a marketplace. And this is also supported by experts from universities. And according to a keynote speaker at [indiscernible] a couple of weeks ago, Europe look to Norway to learn from our way of organizing the market. So this is why we believe that the regulator will continue to regulate the market in a balanced way and continue the path they have followed for a long time now, level the playing field, increased transparency, support the Trygg Strømhandel certification and strengthen focus on importance of the retailer's role in the value chain. So basically, I really trust in the way of the regulatory framework we already have. That was a long answer to a short question, but it is important that we get our point of view quite clear here.

Absolutely. A question on the Consumer segment. What was the hedging impact on the Consumer segment in the third quarter?

Am I in the picture?

Yes, yes, yes, you're in the picture.

Well, as stated in the presentation, we did realize strong margins on the [ various ] projects. And the value proposition for variable is predictability. But the customer, in our opinion, also supported by the increase of the notice period from 14 to 30 days. And in terms of managing the derivative products in order to get visibility of our obligation towards the customers, we entered into forwards and other derivative products to achieve visibility on -- before we execute on our pricing. So -- and then it's really the competitive picture, pricing correctly and such circumstance that dictates our margins in the product. And this quarter, we were successful in managing the pricing and our hedging so that we both had an attractive proposition for the customers and realize attractive margins for Elmera.

Good. We've received a couple of questions regarding dividends, how we look upon dividends, dividends versus share buybacks, et cetera. I can give a comment on that. We have our dividend policy, which we stand by. This year, we also used our 5% share buyback approval from the Annual General Meeting. And we will, of course, consider the way of distributing cash to shareholders in the future. Yes, we will consider that, depending on, of course, how we view the share price and other factors. We have a question on the SEAS interest expense reclassification. Why are we doing this?

No, it's -- I could take it. And it's simply that, as I said in the presentation, with the current price levels, with the very significant increase in the LIBOR rates, this factor now becomes a more significant element in our accounts in our disclosure. And it's, in our opinion, the correct and appropriate disclosure to move the interest expense related to using the credit that we can in the sales agreement to the financing expense line. So it's just a matter of moving to the correct disclosure. We understand that you need to do some work then in reconciling the historical figures and also to our targets, and that's why we've provided an extra slide so you can then analyze the figures going back in history to Q1 of last year.

Exactly. And we also have a question on why we are not changing our outlook when we are doing this reclassification. Just to be clear, when we are maintaining our outlook on EBIT adjusted, that is before the reclassification. So that includes the SEAS interest expense component into that calculation. And we have provided, as Henning said, the details for the Q3 and then also for the history into the appendix slide on Page 18. One question on M&A. What can we say about the M&A potential going forward? Do you want to make some comments on that?

Yes. We have slowed down our interest, of course, as we have said many times now, in the Finnish market. The Swedish market is interesting due to the fact that there are more players there that are more equal to us when it comes to product management and the product offerings. We have seen now in Norway that there are several retailers that are struggling, and this was also expected. And I think we talked a bit about this last time we addressed the investor market. So we believe that there will be some possibilities also here in Norway going forward, but we will look for the right prospects for our company. Yes. But Finland is definitely off for now. Sweden, some interesting prospects there. And we expect the Norwegian market to be set for further consolidation due to the fact that many of other retailers now struggle on the financial side. The business model doesn't -- and sustainable, actually.

Good. A question on the Nordic segment. You're guiding on losses for the Nordic segment in the Q4. How should we think about this for Q1?

Well, we decided to give an estimate for Q4 as well visibility now almost half into the fourth quarter. Yes, there is a residual profile risk also in Q4 before this really tapers up in Q2 and then lapses. And we do not have the visibility on Q1 to give such indication at this stage. We will expect to do that when we release Q4. And again, I would like to repeat that although we have to mitigate these challenges in the next quarters, we will look positively on the prospects on the Nordic segment as we now have a strong value proposition, which is -- has become even more relevant for the Nordic segment.

Question on the regulatory side. If you can share some comments on the impact on our Business segment if the government decides to move on with the standardized fixed price contracts.

We are working now, as I said, very closely with Statkraft to design products that are -- or that gives -- and the customers -- the business customers' predictability -- affordable predictability to be fair. And of course, this gives us a possibility to sell offerings or sell price plans with a longer-term effect. And that will be good for us actually due to churn risks and that kind of things. But still, we think that -- we know that this will make a major or have a major role on our normal business-to-business activity due to the fact that most of these companies, they want to hedge their purchase in a time frame of 1-year to 3-year horizon. So even though we are doing a lot of work now, we don't think that this will be very demanding -- that the demand for this kind of product will really fly very high. So -- but it will put us in a position that we can have a long-term relationship with these kind of customers, and that's a good thing. So I think we look upon this as a possibility for the company actually, and we applaud the initiative.

Good. Final question. Can you elaborate on the delivery trend you've seen in the fourth quarter post the [ Tiber ] announcement?

As I said, the growth has accelerated. Normally, we don't disclose any sales numbers or customer growth in the quarter. But of course, this is a very special situation. And we can say that in the Consumer segment, we have a growth in October on about 20,000 customers. So that's really significant acceleration. So yes, it's been an amazing October month for us.

Good. That concludes the Q&A session, and we like to thank you all for your attention and wish you all a nice day.

Thank you very much.