Eltel AB (publ) (ELTEL) Earnings Call Transcript & Summary

Hello, and welcome to Eltel Audiocast with Teleconference Q1 2020. [Operator Instructions] Today, I am pleased to present CEO, Casimir Lindholm; and CFO, Saila Miettinen-Lähde. Please begin your meeting.

Thank you. Hello, everyone, and welcome to this audiocast. My name is Casimir Lindholm, and I'm the President and CEO of Eltel. With me, I have our CFO, Saila Miettinen-Lähde. We will today present Eltel's Q1 report. I will start by going through the highlights of the third (sic) [ first ] quarter on Page 3. We have won significant and strategically important contracts in both the Power and Communication segments in Finland and Sweden. This is a statement and testament that Eltel continues to deliver high-quality services and therefore is the customer's first choice. These new contracts, mainly frame agreements, are predictable and repetitive business with healthy margins and low working capital requirements. I will get back to these contracts in more detail later on in the presentation. By the end of the quarter, our net working capital was reduced by more than EUR 74 million year-on-year, and we reduced our net debt by more than EUR 60 million compared to Q1 2019. Our strategy aims at increasingly focusing on Nordic countries and is progressing according to the plan. And during the quarter, we signed agreements to divest our German Communication business as well as our Swedish business area, Aviation & Security. The latter was a process driven by the Swedish authorities. We were not active in that sales process. But all in all, it's a good thing that it goes through now and of course, it strengthens our financial position going forward. I will also get back to these divestments going forward. During first quarter, we managed to improve our EBITA despite the expected decrease in net sales. The current pandemic outbreak of COVID-19 had a minor impact on Eltel in the first quarter, resulting from decreased availability of workforce due to travel restrictions and somewhat increased rate of sick leaves. All in all, these impacts are minor and we don't anticipate that COVID-19 will have a major impact going forward either. We have a few project postponements and work restrictions imposed by customers. So we have some projects mainly in Germany and in Poland where we have restrictions from our customers. Otherwise, in the Nordics, most of our work continues as normal. We have received a position as a critical provider of our services both from customers and authorities during these exceptional times. So we are in a strong position looking at that as well. And last but not least, we have secured our financing to mid-Q1 2022 during the quarter. We now turn to Page 4 and look at our recent frame agreements that we have won. Since the start of the year, we have signed 5 major frame agreements. We can, all in all, see a trend in the market, that we are winning larger contracts because we're delivering high-quality services to our customers and the volume comes more and more in the bigger, larger cities in the Nordics. Because we're the market leader in the Nordics, our strength lies in these big frame agreements. And one part, of course, is also our geographical presence all over the countries in the Nordics. In more remote areas, we meet local smaller competitors, and in these geographies, the market is different. But we can live with that and we focus on the big frame agreements and the big rollouts. The advantage with the larger frame agreements is that it's mostly a repetitive business. It's a predictable order intake and low net working capital. And of course, all in all, the market in the Nordic is stable, and also during this COVID-19 times, our customers are doing well. So that, of course, helps our position as well in the market. Let's turn to Slide 5 and look at the divestments. In January, we signed an agreement to divest Communication Germany to Circet Group. This divestment will strengthen our balance sheet as well as support the Nordic focus. We expect a positive cash flow impact of EUR 19 million, and it will have a positive result of approximately EUR 13 million on group EBIT in Q2. In March, we signed an agreement to divest Aviation & Security with Luftfartsverket, the Swedish Transport Administration. This is partly a result of the condition stipulated in new Swedish Security Protection Act. As mentioned before, this process was driven by the Swedish authorities. We have had a good discussion with Luftfartsverket all through the process, and the transfer of the entire business area has been the best and most effective solution for all parties, including employees, customers and other stakeholders. We expect a positive cash flow impact of EUR 17 million, and it will have a positive result of approximately EUR 6 million on group EBIT, also that in Q2. Now let's turn to Page 6 and take a look at our large High Voltage and Power Transmission International projects. We have the strategy, the plan that we are to focus on the Nordic markets where we have market-leading position. We are focusing on reducing our net working capital, and as you might remember, in 2019, we significantly reduced our working capital tied up in Poland in High Voltage projects by approximately EUR 30 million. During this year, in 2020, we are looking to finalize roughly 10 large capital-intensive projects in High Voltage and in Power Transmission International. This is, of course, important in that sense that we are, in 2020, closing all the projects in Africa and the 1 project in Georgia and also looking to close the project we have in Norway in Reisadalen. So all in all, this means that we will then, in 2021, be a Nordic service company with operations then in High Voltage only in Poland and Germany. We might see some postponement in few of these projects that should be closed in 2020 that would partly go over to Q1 2021 due to the corona impact. All in all, we have EUR 43 million in this project portfolio remaining that we need still to reduce before these projects are closed. In accordance with our strategy, we are no longer entering into this type of large capital-intensive projects. So the ones that will be left then in Poland, the 3 bubbles that you see here in the middle of the picture and to the right, those are roughly EUR 20 million all-in-all each. So those are the big projects left. And we are not entering even that size of projects going forward where, if not, the terms and conditions are clearly better than they have been in the past in High Voltage. So with that, I now hand over to Saila as we turn to Page 7 to look at the group overall numbers.

Thank you, Casimir. As said, I will now review the overall key figures for the group, which are presented here on Page 7. Net sales, the top line, in our case, came down by 5.7% to EUR 236.6 million, and that is down from EUR 251 million last year. Our organic growth in segments Power and Communication decreased substantially less at 1.5%. And dividing that into the segments, we saw a 14.2% decrease in Power. However, Communication grew in organic net sales by 5.5%, which underpins the positive change that we're starting to see as based on our Nordic strategy. Our operative EBITA came to minus EUR 2.1 million, which shows a slight improvement from minus EUR 3 million last year. The operative EBITA margin was at minus 0.9%, again, slightly upwards from minus 1.2% the year before. Our cash flow very typically shows a strong seasonal pattern, being weaker in the first half of the year compared to the second half. And in line with this development, our operating cash flow remains negative at minus EUR 4.7 million in the first quarter. However, this shows a very significant improvement from minus 33.8%, which we saw in the previous year. One of our key achievements year-on-year was the EUR 60 million reduction in our net debt from EUR 194 million to EUR 134 million. And that clearly is another sign of the turnaround that we're working on. In line with this, as Casimir already mentioned, we also saw a substantial reduction, more than EUR 70 million, in our net working capital year-on-year. With this, I will move on to some more detailed information on the segments, and we move on to Slide 8. Now net sales in segment Power came down by 14.7% to EUR 74.2 million. Organically, we saw the already mentioned minus 14.2% development in the net sales. The key factors within this development contain reduced volumes and projects realized in High Voltage, which was anticipated. And this concerns particularly programs which also was the most hit COVID country in our sort of overall market during March. We also saw some lower volumes in Smart Grids, as expected, and this is due to project completions both in Norway and Denmark. And in Sweden, the negative development came from ramp-down of projects as well as then the Service business. On a positive note, we can say that Finland partly offset the decrease, and this is thanks to new frame agreements in Power as well as the project portfolio existent, which also contains, for example, wind power. In segment Communication, our net sales came down by 0.8% to EUR 160.1 million. As expected, we saw a substantial decrease, 19%, in volumes in Sweden. And offsetting that, we saw a very substantial growth in Denmark. In Finland, Germany and Norway, we also saw improved net sales. One negative factor was the -- compared to last year was the divestment of the Polish Communications business late last year, which now contributed to EUR 4.7 million in the Aviation. As already mentioned, all in all, the organic growth in Communication business was 5.5%, which really shows the development in our strategy. In segment Other, we saw a decrease of 23.8% in net sales, down to EUR 2.3 million. This is largely relating to the Power Transmission International, and it's very well in line with the strategy in accordance to which we're divesting and discontinuing noncore operations. And more exactly, this very much relates to the 10 large projects that we're finalizing this year, as already mentioned by Casimir. Let's now move on to Page 9 and look at the EBITA development by segment. In segment Power, our operative EBITA came to minus EUR 3.4 million, which is slightly up, again, from the minus EUR 4.2 million last year. And the operative EBITA margin was minus 4.6% compared to minus 4.8% percent last year. The key positive contributing factors to this development was improved performance in Sweden as well as lower cost levels that we saw in High Voltage Germany. However, on the negative side, we still have the lower net sales in Smart Grids, as mentioned, as well as some cost increases in Finland that we saw relating to some insufficient subcontractor management that unfortunately offset some of the positive development we saw elsewhere. In Communication, we saw operative EBITA on a positive side at EUR 4.2 million, however, slightly down from EUR 4.6 million last year. The operative EBITA margin came to 2.6% from 2.9% last year. The negative impact largely came from the lower volumes and trailing costs relating to overcapacity in Sweden that we saw late last year. However, on the positive side, we saw productivity and efficiency improvements as well as increased volumes in Finland, and the Operational Excellence worked also positively in Germany. Norway and Denmark continued their already good performance in line with what we saw last year. In segment Other, the operative EBITA was minus EUR 0.3 million, which is slightly more negative than we saw last year. And the operative EBITDA margin was minus 13.3%. This, again, is very much in line with the planned ramp-down of the projects. And the slight increase in the negative margin actually came from one of the last active projects in the PTI, which is now in its peak production phase before the planned completion later this year. This concludes the summary of our Q1 financials. And with this, I turn it back to Casimir, and we will move on to Page 10.

Thank you, Saila. So going forward, the focus in 2020 remains intact. We will operationally focus on the 5 things that we have gone through earlier, making sure that we are tendering and calculating in the right way, making sure that we are focusing on the right tenders with a healthy risk profile and healthy margins. We make sure that we have the right people in the right place. This is a process that has continued now for a couple of years. As mentioned before, we have changed roughly 30% of our district managers and roughly 30% of our field managers throughout the group. And a lot of focus on implementation and execution. We have improved the gross margin in our frame agreements in the big -- with the big customers, and that will continue. Production planning is key to different countries in the Nordics, are in different stages here but still potential in the introduction planning, and then, of course, investment in training going forward. The strategic focus has not changed either. The aim and where we are today is the #1 Nordic player. We want to strengthen that position. We are evaluating the existing portfolio outside the Nordics continuously. We have come quite a long way, which you can see that we are entering the final stages of our projects in Africa and Georgia. And we have also lowered the risk in the company by reducing the net sales in the Polish High Voltage, partly because the market is tough and partly because we're not entering the large contracts with challenging terms and conditions. So strengthening the balance sheet has definitely happened. We are bringing down the net debt rapidly to healthy levels. And then the Operational Excellence focus is there for another 2 to 3 years. And of course, in this kind of business, that is a continuous process, but a lot of focus on that going forward. At the end of the day, we are delivering already now a high customer satisfaction. We're the #1 player in the Nordics regarding quality towards our biggest customers. Engaged employees, of course, key, and that's why we are investing in having right people in the right place and investing in training. You can clearly see in the bubble picture that we are lowering the risk portfolio regarding the projects in this company. We have fewer and fewer capital-intensive projects, and most of the business is based on frame agreements and long-term relationships with our biggest customers. Cash generation is king even going forward. Net working capital has been reduced by EUR 74 million compared to Q1 last year. And of course, the lower net debt is EUR 60 million down compared to Q1 last year. And of course, with that in place now and the secured financing until Q1 2022, more and more focus goes towards improved profitability. And that's the area where we need to prove ourselves going forward. Then the last slide is Slide 12, and that's the transformation journey we are on. No changes there either. We are in the middle section here with Operational Excellence, and that's where we put all our efforts in 2020 and 2021, of course, partly then also focusing on the portfolio also going forward. But a lot of work has been done in that area already, and then it will be finalized by closing these 2 transactions that we have presented here earlier that are already signed. And then going forward, 2022 and onwards, of course, Operational Excellence will be still a vital part of this company. We are gaining market share already now in the Nordics. We are growing the Communication business by over 5% at the moment. And of course, then M&A activities might be part of the future, but that is not going to be the focus on short term. So that's where we are as a company all in all. And maybe a last comment just to put a number on the COVID-19 corona impact. We are roughly 6,400 people in the company. We estimate for March that we had -- and April, we had roughly 400 people that were somehow impacted by COVID-19, mostly because we were not able to use all our resources from Lithuania or Poland in the Nordic market, partly because we had people in quarantine in the early stages in March in Norway, where Norway closed the borders of every municipality and before we got that recognition from the authorities that we are critical for the society and we were then able to move around in Norway. That took us some days and that impacted us short-term. And then as mentioned before, we had a couple of projects in Germany and then in Poland where our customers have stopped projects or not allowed us to go into their premises. So that's the corona impact. But as mentioned before, it's minor. It's limited. And we don't see now short-term any major impact to our business. And as mentioned before, our customers are actually experiencing a very high demand in their networks in these corona times. So that was the last slide. And now we open up for any questions that you might have.

[Operator Instructions] We have a question from Stefan Lindblad from Ambergate Invest.

So I have a question. Just if you look at the pipeline now on new projects, you've done a fantastic job in getting new projects. How does the pipeline look? Is there still quite a lot of business to go for? Or do you think that we will calm down a bit now based on the fact you won so many?

Well, of course, we got 4 out of 5 frame agreements, and they are not open for tender every year. So these are between 3 -- and normally between 2- and 5-year long frame agreements. [Technical Difficulty] I think there's somebody that needs to mute, or there's some kind of disturbance in the line. But -- so they are, of course, not out for tender that frequently. But we still have continuous frame agreements up for tender, but it was an exceptional quarter and for first 4 months this year in that sense that there were many big frame agreements out for tender. Just to explain those a bit more in detail, for example, then Vattenfall smart metering, that is a rollout project in Sweden. So that is something that comes back in Sweden, let's say, every tenth year. We had those smart metering projects in Norway in '18 that we're finished in '19. It's a good business to be in. These are large projects and rollouts -- not project, they're actually rollouts. So that is a good business that comes, goes up and down from country to country. Finland is next then in smart metering. We have won also mid-sized tenders in smart metering in Sweden. And if we look at the second one, EUR 66 million frame agreement for 3 years with the largest telecom operator in Finland. We used to be the second biggest supplier for this company. Now we are the #1 because we have been able to produce quality. And of course, we are getting in a financially strong position and clearly stronger than many of our competitors. So that is, of course, also important. So we increased the market share in that towards that customer. Then the Swedish Transport Administration, EUR 23 million, a 3-year contract. That is a contract that we have today, but we see potential in growing that business with that customer. Then if you look at the fourth one, Helen Electricity, that is Helsingin Energia, EUR 90 million, 5-year contract. We used to have 40% of that business. Now we have 100% of that business. So that is a remarkable win. And then the last one, Valokuitunen. That is a company that has been just started. So CapMan, private equity company in Finland, bought a big share of Telia's fiber business in Finland. So Telia is a part-owner in that. And they will now invest a lot of money in the Finnish market to build fiber to the home to 200,000 households during the next couple of years. And we are the only supplier towards Valokuitunen, right now building on fiber in Finland for the next 3 years in this contract. So they are a bit different. But yes, big wins, healthy margins and low net working capital in these frame agreements and rollouts. So -- but still, of course, more to come, but an exceptional quarter or 4 months here with EUR 240 million in new -- in partly new business and partly protecting business that we have. I would say it's a 50-50 picture in that sense that it's a lot of new business and gaining market share, winning market share and then slightly protecting things that we already have today.

How should I look? Because it seems to me, and I don't know how these sort of go between years, et cetera, but it looks like you've signed about sort of EUR 80 million on revenues for 2020 of these new contracts. You said some are renewals, et cetera. But how should I think about that versus contracts that expire? Could we see you seeing a flat sort of revenue for 2020 as -- for the group as a whole based on all these new contracts? Could we actually see growth? How do we think about the sales for the whole group based on the success of winning these new contracts?

Well, basically, when -- I mean, now in the bubble picture, you can see the business that we are going out from and closing down, which is the Africa and Georgia and then partly High Voltage in the Nordics that we're going out from. So that -- the net sales is going down. And then at the same time, you can see a plus 5% growth in Communication. Most of that growth is happening before we have won these contracts. So the Nordics is growing, and then we are closing down the businesses that we don't strategically want to be in going forward. And at the end of the day, the EUR 1 billion business with a net debt of below EUR 100 million and the 5% EBITA, those 3 numbers are still valid. Then it depends, of course, also regarding -- we have been selling assets, so when you take that net sales out and the parts that we were closing. So it's a puzzle that we are working with all the time. And of course, when we are selling the businesses now in Communication Germany and Aviation & Security, that takes out some tens of millions of net sales as well. So -- but all in all, I think the EUR 1 billion company in Nordics plus High Voltage in Poland and Germany in 2021 and onwards is still valid. And they will update every quarter regarding what is happening with the growth in Communication, and then also, Power in Finland is growing.

Yes. Okay. Good. And how should I -- because I struggled to read that chart, that sort of slide a little bit, the large High Voltage, where you say project portfolio is EUR 43 million estimated remaining value. Is that sort of EUR 43 million of cash that you expect to get out when you close those projects? Is that the way I should look at it?

It's the net sales that is left in those remaining plus 10 projects.

The cash that you should get out from them is sales, that sort of...

Sales, yes. Sales. That is to say -- those have, of course, been -- I think the -- if you go to the starting point of those contracts, it's somewhere between EUR 200 million and EUR 300 million, the starting point. But most of those are almost finalized, 80%, 90% produced, except for the 3 last ones, 3 last bubbles that are -- projects that are ongoing in 2021 and partly 2022 in Poland. But all in all, it's roughly between EUR 250 million and EUR 300 million in project work. If you go back to the days when those projects started and you put all that net sales in one basket, then out of that, we have roughly EUR 50 million left to produce.

Fantastic. Okay. Great. Last question for me. Just on Sweden, I know there was -- as we struggled there last year with a customer sort of leaving and there's some sort of impact on that in Q1 as well. Now you've also won new contracts in Sweden. Will that sort of -- do you believe now when we have those contracts in place that you will have the right sort of level of, what do you call this, of occupancy, what would you call this? And -- or do we still have more to sort of take out in Sweden to get to the right level?

I would say, first of all, the people that we let go in Q4, out of those, roughly 40 is still left in Sweden in production. So that makes it tricky regarding the efficiency because normally, people who have not been released from their duties, the motivation is maybe not 110%, and they still need to produce this year. So that is one part of it. But we have rightsized the business in Sweden. And we have also, on top of that, won Telenor. Now we are the only supply towards Telenor in Sweden. We won that in Q4 last year. So that has helped the drop that we saw from our biggest customer in the area last year. And of course, the clear fact that, that was signed here in Q1 also, of course, secures the volume in Sweden going forward. So we are rightsized in Sweden except for the plus 40 that are still onboard and will be partly onboard going forward in Q2, Q3 and maybe a few left in Q4. But all in all, we have rightsized the business in Sweden, and Sweden is going the right direction regarding both net working capital, uninvoiced and also gross margin going in the right direction. So we are on the right track in Sweden.

[Operator Instructions]

I think we have a question here.

We have one on the e-mail, which I think we could take in between. And this comes from [indiscernible] who is asking, what kind of competitive advantages are there available in Eltel business?

The main competitive advantage that we have compared to competition is that -- is quality. So the KPIs and the SLAs that we are delivering towards our customers, we are on green towards all our main customers in the Nordics. So that is a position that we have, which is a clear differentiator towards competition. The other part is, of course, size. We are the biggest player. We get sourcing power out of that. We have, all in all, 4,500 cars, for example, scattered all around Europe, Poland and Germany. The local presence, the network that we have is unique, where we can take care of our customers' networks in all of these geographies throughout these countries. And that is, of course, nothing that you build up short term, and it's quite expensive to build it up from scratch. Then, of course, our financial position is getting stronger and stronger. So we are in a position where we can take on contracts and rollouts that maybe have more challenging, for example, terms and conditions regarding invoicing. Because all in all, in the Nordics, our uninvoiced is below 1 month net sales. So on a healthy level. So partly, in some cases, where we want to be part of a big rollout, we might accept payment terms that are higher than 30 days. And that is a part that most of our competitors can't do, especially this was the situation before corona. I don't think it will improve after corona, so to speak. So there are many areas. Then our processes, tools, of course, very experienced technicians and management who have been in this business since this business was started more than 15 years ago. That is, of course, a critical asset, the know-how we have in this company. And then last but not least, we have a resource company in Lithuania and partly in Poland, where we have and where we can move our employees to the Nordics in different rollouts and different projects when we need them. And that know-how, for example, in fiber, our employees have been working in fiber longer than anybody else in this market, starting already in 2010, 2011 in Sweden when fiber started the first time in the Nordics. So the experience and the know-how in our employees and workforce in Lithuania is on very high level. The same goes, that is, on the Communication side and same goes regarding our Polish resources in High Voltage, which is actually a scarce resource in the Nordics these days.

There are no further audio questions registered.

Okay. No further here on the e-mail side. So I think -- we thank you all for listening and for questions and discussions, and I think we are ending the audiocast now. Thank you very much.

Thank you.