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

Ladies and gentlemen, welcome to the Eltel Audiocast with Teleconference Q2 2020. Today, I'm pleased to present CEO, Casimir Lindholm; and CFO, Saila Miettinen-Lähde. [Operator Instructions] Speakers, please begin.

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 Q2 report. I will start by going through the highlights of the third -- of the second quarter on Page 3. We delivered a solid second quarter for Eltel despite the exceptional circumstances amidst the COVID-19 pandemic. We improved our operative EBITA even with declining net sales, and we continued to make significant improvements to our balance sheet. We reduced our net working capital by EUR 79 million year-on-year. During the past year, we have reduced our net debt by EUR 103 million to EUR 86 million. Main drivers are divestments, reduction in capital tied up in High Voltage Poland, our focus on improving internal processes and operational excellence. On top of this, we continue to close down nonprofitable and nonstrategic operations outside the Nordics in a responsible manner. This has required intense efforts from the organization, and we see the hard work has paid off. As a consequence, Eltel has now a healthy balance sheet. In line with our Nordic strategy announced a year ago, we closed the divestment of the German communication business and the Swedish business area Aviation & Security at the end of April. We won 3 major frame agreements as well as several small and midsized contracts during the period. We now turn to Page 4 and look at how COVID-19 impacted Eltel. So far, COVID-19 has only had a moderate impact on Eltel's operations. Having said that, we have received indications on reduced and delayed investments from a large customer in the Communication segment in Norway. COVID-19 will thus impact Eltel's business going forward and during the second half of 2020. To adapt to this new situation, especially in Norway, we are [ removing ] our cost structure in the local market. We now turn to Page 5 and look at the divestments we finalized in the quarter. At the end of April, the divestments of our German communication business and our Swedish business area Aviation & Security were completed. The divestments have strengthened our balance sheet. The divestments resulted in EUR 38 million in cash proceeds and a positive result of EUR 20 million group EBIT. Let's turn to Slide 6 and look at the order intake. In the quarter, we signed 3 major frame agreements, one in the Power segment and 2 in the Communication segment. We also won several small and midsized projects. We see a trend in the market that points to larger contracts with larger customers centered to larger cities. Because we are the market leader, our strength lies in these big frame agreements. In more remote areas, we meet local [ smaller ] competitors, and in these geographies, the market is different. The advantage with the larger frame agreements is that it's mostly a repetitive business with a predictable order intake and low net working capital. And we are working mainly now in the stable Nordic market. Let's turn to Slide 7 and look at the termination of 3 service agreements. In the quarter, we lost 3 [ larger ] service agreements for Telia in Sweden, which led to reduced future net sales. However, it can be noted that these service agreements relate to the declining copper market, and we have had difficulties making these contracts profitable. We have good cooperation with Telia regarding how the handover of the contracts will be handled, and we do not see any major cost occurring due to the loss of these contracts now in the short term. In all, it's a good opportunity for Eltel in Sweden to reorganize and streamline the operations and business to create an even more competitive offering for the future. Let's turn to Page 8 and take a look at our large High Voltage and Power Transmission International projects. Here, the strategy defines that we are focused on the Nordics, where we have a market-leading position. We are focusing on reducing our net working capital and, as you might remember, in 2019, we significantly reduced our net working capital in Poland by approximately EUR 30 million. During this year, we are looking to finalize 10 large capital-intensive projects in High Voltage and Power Transmission International. In accordance with our strategy, we are no longer entering to these types of large capital-intensive projects. With that, I now hand over to Saila as we turn to Page 9 to look at the group overall numbers.

Thank you, Casimir. And as Casimir already mentioned, we did have a solid quarter despite the quite exceptional circumstances where we have been due to the corona pandemic. This said, our net sales amounted to EUR 245.5 million, which is down by 11.1% from EUR 276 million the year before. The divestments of German Communication and the Swedish business area Aviation & Security contributed to the decline significantly, which is evident as, in Segment Power and Communication, our organic net sales actually only declined by 3%. Our operative EBITA for the quarter was EUR 2.8 million, which is slightly up from EUR 2.5 million in 2019. This resulted in the operative EBITA margin being 1.2%. Our operating results, EBIT, amounted to EUR 23.1 million and was boosted by a EUR 20.4 million gain from the above-mentioned divestments. Finally, our cash flow from operating activities improved to EUR 19.2 million from EUR 13.5 million the year before. Let's now move on to Slide 10 to look at the figures for the first half year of 2020. Our top line for January-June was EUR 482.1 million, and again, as expected, showed a decline. The decline was 8.5% from EUR 527 million last year. Our organic net sales in power and communication declined by 2.9% with the difference compared to the 5% total decline again coming from the divestments. For the first time in several years, our January-June operative EBITA was positive at EUR 0.8 million, demonstrating the progress that we're making in our transition. The operating EBITA margin for this was 0.2%. Our EBIT for the first half year was EUR 20.8 million and, similarly to the Q2 results, included the EUR 20.4 million gain from the divestments. Our cash flow from operating activities improved significantly from minus EUR 20.3 million last year to positive EUR 14.4 million this year. The key factors contributing to this increase includes our improved net working capital and overall operational efficiency, including, for example, our more disciplined invoicing these days. One of the improvements that we're most proud of is the substantial reduction in net debt, which we have achieved over the past year. In June 2019, the net debt amounted to EUR 189 million, whereas at the end of June this year, the figure was a full EUR 103 million lower at EUR 86.4 million. I will now move on to Slide 11 to look at our net sales for the quarter by segment. In the second quarter, in segment Power, our net sales for -- amounted to EUR 86.3 million, which is 8.9% less than last year. On the positive side, we can note that in Finland, the power market has improved, which shows for us as a strong order backlog. The sales in Denmark also have gone up and improved. On the other hand, unfortunately, the COVID-19 pandemic has resulted in delays and low volumes, particularly in High Voltage projects, both in Poland and Norway. In Smart Grids, the low volumes were more or less expected due to the ongoing ramp-downs in several projects. In Sweden, the reduced sales were the result of continued project ramp-downs as well as discontinuation of the Service business and lowered order backlog. In Communication segment, the net sales decreased by 14.1% to EUR 152.8 million. Again, the decline was primarily due to the divestments of the Polish and German communication businesses and the Aviation & Security business area in Sweden. The organic net sales thereby only came down by 0.4%. The organic decline came as a result of the reduced customer investments in Sweden, whereas on the positive side we can note that in Finland, Norway and Denmark, we saw somewhat higher business activities overall. In segment Other, net sales amounted EUR 6.4 million and related almost entirely to the Power Transmission International projects. The PTI portfolio is being ramped down. However, the net sales temporarily increased by almost 66% year-on-year due to a claim compensation received for a project completed in Africa in 2019. Let's now move to Page 12 and look at our EBITA development by segment. In the second quarter, the operative EBITA in segment Power was minus EUR 4.5 million, down from EUR 2.4 million a year ago. The operative EBITA margin was thereby minus 5.3%. The key contributing factors for the negative results were the COVID-19 impact and related cost overruns, which we saw primarily in High Voltage Poland and the Norwegian Reisadalen project. The overall market activity in Poland was also at a very low level. In addition, unfortunately, 2 build projects in Finland suffered some significant additional work that we had to carry out following unsatisfactory performance by a subcontractor. This was partly seen already in the first quarter, lots of problems further escalated during the second quarter. Given these recent challenges, we're looking forward to the work in the above-mentioned Finnish and Norwegian projects being completed later this year. In Communication, second quarter operative EBITA amounted to EUR 7.3 million, showing a substantial increase from EUR 2.1 million a year ago. The operative EBITA margin thereby was 4.8%. It's very good to note that performance improved in all markets, mainly driven by Sweden, Finland and Norway. This is largely the result of our work on operational excellence and the corresponding improvements within project planning and execution and overall more efficient production. In segment Other, the operative EBITA was EUR 2.6 million, largely thanks to the claim compensation from the completed African projects, which then impacted the results positively all the way from the net sales down. This concludes the summary of our financial performance in the second quarter and the first half year. And with this, we move on to Page 13, and I will turn the word back to Casimir.

Thank you, Saila. We can move directly to Page 14 and have a look at what Eltel is focused on going forward. So there's no major changes in what we'll focus on. We will focus on implementing the Nordic strategy, improve productivity. And of course, these are key elements to complete the turnaround and thereby ensure a long-term sustainable value creation for Eltel and its shareholders. We will continue to focus on the operational side and improve our margins step by step. As mentioned many times before, a focus on tendering, a focus on risk management in that process, and focus on what kind of projects we are tendering for is key. Continuing to have the right people in the right place. We have done a lot of changes during the last couple of years. As mentioned before, we have changed the group structure, and we have moved to country organizations. We have been bringing down the overall cost structure on group level. We have changed roughly 30% of district managers and team managers in the company, and we have strengthened the local organizations in the important areas of finance and HR on country level, and that work continues. But most of the organizational changes are already part of history. Implementation and execution is very important factors in this kind of business, make sure that we implement the context that we are winning in the right way. Production planning, we can see clear improvements in this area, especially within Communication and in Power in Finland as well, where we have improved our productivity within our countries. Training continues to be key in this kind of business. And of course, the focus then on the strategic level going forward is to strengthen our position as the #1 Nordic player. We have done so by winning many long-term frame agreements this year. And of course, we will continue to look at the portfolio outside Nordics. As you saw in the bubble picture, the way we call it, you can see clearly that our operations and business in Africa, Georgia and the large project in Norway, they were all -- operationally, they closed this year. Some of them will financially be closed in Q1 next year. And then we are closer to reaching the Nordic strategy that we are aiming for. We are continuing to work with our Polish High Voltage business. The market is a bit soft there, so we have done a lot of organizational changes, and that work continues. Of course, now we have a good position on the balance sheet side, but we'll continue to work on that side as well and further bring down the net debt going forward. Operational excellence is, of course, key for the next couple of years as well. And at the end of the day, what we want to reach is the high customer satisfaction, engaged employees, lower risk and fewer capital-intensive projects, and I think we are on a good track there. We are also on a good track regarding higher customer satisfaction. We are the market leader in that area in the Nordics as well. Cash generation, I think we have reached a good level in the Nordics. We have [ uninvoiced ] outstanding between 15 and 30 days in our Nordic operations. We still tie up a bit of capital in the -- on the project side, mainly in Poland, but the Nordics are now on a good level. And the lower net debt and improved profitability, I think we have reached the targets already now regarding the lower net debt, but we'll continue working on that and then improved profitability is the key here going forward, so we can improve that step by step. Let's move on to Page 15 and look at where we are in our transformation journey. I think I touched upon most of these areas already in the previous slide. We have entered the second phase, and we are working a lot with operational excellence. We are still, partly in some areas, in the first phase here where we're still cleaning up all projects and going out from nonprofitable and nonstrategic operations. But otherwise, all the Nordic countries are focused in operational excellence. And as mentioned before, we'll keep our eyes on the financial position and strengthen that. Improve profitability step by step. And we'll come back to when -- and if and when we have anything to announce regarding what we're doing outside the Nordics with the businesses that we have still in operational mode, mainly in Poland and Germany. With this, we'll move to Slide 16 and open up for any questions that you might have.

[Operator Instructions] We have a question from [ Alexander ].

Congratulations on a great result today. I just -- I wasn't participating in the first part of the call, so when you look at significant -- continuing to significantly divest from countries where you don't want to operate apparently based on your commentary here, what about on the acquisitive side in your core own markets? Do you see things that you can pick up maybe now more cheaply with this very strengthened balance sheet?

Thank you, Alexander, for the question. Yes, it's a valid question. We have seen some, let's say, possible targets that have been out there. So far, we haven't been active on that side due to the transformation that we are going through. Now when we have our financial position in -- much stronger and the balance sheet is much, much stronger, we might look at possible outsourcings or possible midsized or smaller companies that might be for sale. Looking at the history in this industry, I think it has gone through a period where there was a lot of private equity companies involved, all focused on fast growth, maybe too fast and maybe too broad. And now this industry is consolidating itself, partly through the fact that there are companies that have left this industry and not being competitive. And partly, because there is consolidation ongoing on different levels in this industry and in the Nordics. At the end of the day, I think it's key to have a strong financial position. I think it's key to have a strong network in the Nordics, geographical networks. Now we see that the volumes are coming more and more towards the bigger cities. And we have to respond to that. And then still our biggest customers prefer to have 2, 3 big players to work with. And that's, I think, a quite balanced position. So yes, we might look at possibilities within especially Power. We are market leader and very strong within Communication, both in Finland, Sweden, Norway and Denmark. We are very strong in Power in Finland. We are not that strong in Power in Sweden and Denmark. So that might be areas that we're looking to going forward. But now in the short term, the focus is still on closing down our businesses and operations in Africa, Georgia and the large project in Norway. And like you saw in the slide with the bubbles, we are closer and closer to reach that goal and, thus, clean out the history from those more exotic geographies. And then the Nordics as such, focuses on operational excellence and improved efficiency in our operations, we still think we have very good opportunities internally there. And partly, you can see the result of that when you look at the Communication figures for the first 6 months, and also actually Power in Finland. So yes, we will look at what comes our way and what's out there. And there will be outsourcing also happening, and we have been part of those on a smaller scale already this year and last year. But I think we are still -- it may be a bit too early to be aggressive on that side. We have a lot of internal things to fix first. But it will be on the strategic agenda, for sure.