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

Ladies and gentlemen, welcome to the Eltel Q4 teleconference 2020. Today, I am 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. I'm the President and CEO of Eltel. With me, I have our CFO, Saila Miettinen-Lähde. We will today present Eltel's full year and Q4 report. I will start by going through the highlights for the fourth quarter on Page 3. Our operational performance continued to improve during the fourth quarter, leading to a positive operative EBITDA for the full year 2020. This is the proof that we are on track with our transformation journey. Furthermore, our net working capital at year-end was at a historical low, and we were able to further reduce our net debt. We signed 5 large and important frame agreements, which confirms our position as the leading Nordic field service company. And of course, this provides a strong platform to build on in 2021 and beyond. The divestments of Communication, Germany and the Swedish business area Aviation & Security represents half of decline in net sales for the period. COVID-19 also impacted net sales, I will talk more about that in a few minutes. And in December, we extended our bank agreement until mid-Q1 2023. We now turn to Page 4 and look at the agreements we signed. During the fourth quarter, we signed 5 major frame agreements. They all confirm our position as the leading Nordic field service company and gives us a strong platform for the years to come. We can see some trends in these frame agreements, as we have seen in the previous months as well, that we are successful in larger contracts with private customers. More and more of the volume is focused to the largest cities. And then on top of that, we have growth in the coming years in 5G. The good part of frame agreements, of course, is that it's repertory business. We do this over and over again from day-to-day, from month-to-month or year-to-year. So it's, in that sense, predictable order intake and also the work we are doing is easier to plan. We are, for a large part, in a stable Nordic market going now into 2021, we have almost 90% of the net sales in the Nordic countries. And also these frame agreements are good in the sense that it's a low net working capital business, and that is, of course, helpful for the cash flow in the coming years as well. Let's turn to Slide 5 and look at how COVID-19 impact our business in 2020. Partly, we could see lower investment levels by certain customers. We could see postponed project in areas where COVID-19 had a larger impact in the society. We could also see some delays in our project execution, either due to the fact that we will not allow them to end customer premises or if we ourselves experience COVID-19 among our own staff, then of course, we have to stop and [indiscernible] and so forth. There were also local restrictions on different levels. I would say we were hardest hit during 2020 in Poland and Germany in this aspect. Partly also impacted in the fact that we can move our Lithuanian workforce cross-border as smoothly as we have been used to. So in that sense, negative impact on mainly then the EBITA side. On the other side, we've got favorable payment terms and releases from governments in our respective countries. So that impacted cash flow and equity capital in a positive way. We can then move to Page 5, and that is the bubble picture explaining where we are in the large projects in High Voltage. We are looking to finalize 10 large capital-intensive projects in High Voltage and Power Transmission International in 2021. These bubbles have moved a bit to the right, mostly due to COVID-19. The biggest bubble, the black one is Reisadalen, and that's a large project in north of Norway. That's 1 we have operationally finished, and that was the biggest project. And in that sense, also the largest risk we have had in the project portfolio. So all in all, we will see in 2021 that we can close most of these projects and the 4 last ones will be then continuous business in our Poland -- Polish High Voltage business. So we are coming closer to the end of closing both in financially and legally, both in Norway, the High Voltage project there, and then also the projects in Africa and in Georgia. So in that sense, the exposure is going down month by month. Let's move to Page 6, Sustainability. First of all, safety is always the #1 priority in a company like Eltel. And we have been working systematically with a group-wide program to reduce work-related injuries. The lost-time injury frequency rate decreased significantly from previous year to 4.9 and I'm pretty sure that we are in a market-leading position with that number. It's an all-time low number for Eltel Group, but of course, we'll continue to strive for fewer, going forward. We have also been successful in reducing our carbon footprint, much thanks to improved route planning, which is, of course, is good for efficiency overall. So it's, in that sense, a win-win situation. However, we are not yet satisfied, and we have created a new sustainability plan for 2021 to 2023, which will take our sustainability work to the next level. With that, I now hand over to Saila to turn to Page...

8.

8, sorry.

Yes. Thank you, Casimir. So trying to look at the numbers. As Casimir already mentioned, we showed a very substantial nearly EUR 20 million improvement in profitability in the fourth quarter despite the fact that our net sales did, again, decline. In the last quarter of 2019, the results that we had was quite heavily impacted by overcapacity and restructuring costs in Sweden as well as write-downs, both in Sweden and High Voltage relating to some of our older projects. In contrast, in 2020, our fourth quarter demonstrated clear stabilization of our business and thereby also a positive operative EBITA. In terms of numbers, our net sales for the quarter amounted to EUR 229 million, which is 17.8% down from the EUR 279 million the year before. And clearly, the biggest impact came from the divestments of German and Polish Communication businesses as well as the Aviation & Security business from Sweden. The remainder of the decline came mainly from the already mentioned COVID-19-related postponements, particularly in High Voltage Poland as well as in investment costs, which hit primarily Norway, but also partly Sweden. Our operative EBITA for the quarter improved to EUR 4 million from minus EUR 14.9 million the year before, and the operative EBITA margin thereby amounted to 1.7%. The operating result, i.e. EBIT, was negative EUR 1.9 million. And although this was still negative, this shows an improvement of nearly EUR 2 million from the year before. Cash flow from operating activities amounted to EUR 51.2 million, which reflects the seasonal production build-up pattern. And also then the strong year-end cash collection. In part, COVID-19 actually had a positive impact here through better payment terms that we have received from certain customers. The change in net working capital also had a positive impact on cash flow. And as already mentioned by Casimir, the net working capital was at a historic low level at the year-end, and that was minus EUR 25.1 million. With that, let's move on to Slide 9 to look at the net sales by segment for October, December. In segment Power, our net sales for the fourth quarter were EUR 84.9 million, which is 9.2% less than the year before. Organically, the decline was minus 8.7%. Again, the decrease is largely due to lower activity and the COVID-19-related delays, primarily in High Voltage and particularly in Poland. And then we also saw the decline due to the ramp down of projects and service operations in Sweden. Finland, by and large, has had a good development in terms of contract expansions. However, showed a slight decline due to the completion of certain large projects during the period. Moving on to Communications. The net sales amounted to EUR 143.5 million, which shows a decrease of 21.5%. Organically, the decline was 12.5%, which again shows that the major part of the decline came from the divestments. Other factors, again, included COVID-19 and the loss of a large service agreement in Sweden. Also, there was a contribution by certain sizable projects in Denmark coming to an end. On a clearly positive note, we can say that we saw good volumes, both in fiber and 5G in Finland. The Other segments, we saw net sales amounting to EUR 1.3 million. And of course, as it has been told before, these relate to the remaining projects in Power Transmission International. Let's move now to Page 10 and look at the EBITA for the segment in this Q4. Segment Power had an operative EBITA of minus EUR 2.4 million, which, although still negative, is more than EUR 9 million better than the year before. And with this, the operative EBITA margin was minus 2.8%. As we already noted in connection with our third quarter reports, Sweden and High Voltage are gradually recovering, and the risks in these units are reducing. They said -- clearly, looking at the numbers, their performance still remains unsatisfactory and we need to keep on working. In Smart Grids, we saw quite good performance, but as we already expected, the volumes are still quite low. And Finland performed in line with previous year, despite the trailing cost that we saw following the completion of 2 big build projects. In Communication, the fourth quarter operative EBITA amounted to EUR 6.4 million, which is more than EUR 4 million above the number the year before. And in that also, we had a negative EUR 1.7 million impact from the divestment. The operative EBITA margin was 4.5%, which clearly also exceeds the 1.1% that we saw the year before. And looking at the countries in Norway, the absolute level of EBITA came down a bit due to the investment costs that we saw in the country. However, their margins remained at a good level. And in Finland, as said, we saw good improvements in net sales and also improved margins due to the production efficiency. And well, all is said, the biggest improvement actually came for Sweden, although at the same time, it has to be said that Sweden is still in the early stages of this improvement, and the result of such in the country is still far from our targeted levels. In Other, the operative EBITA was EUR 1.7 million, which is up from minus EUR 0.6 million in 2019 and it has to be said that rather than this improvement coming from the business itself, the increase relates to releasing these provisions after EBIT frame payments relating to the remaining projects. This concludes the summary of the fourth quarter, and we move on to Page 11 to look at the full year figures. To start with, I think, overall, it has to be said that the underlying trends in our full year figures are quite similar to those already reported for the fourth quarter. This said, our top line for 2020 was EUR 938 million and showed a decline of 13.8%. Our operative EBITA improved significantly, I want to say, to EUR 11.4 million, which is almost EUR 23 million better than the minus EUR 11.3 million that we saw in 2019. And with this, the operative EBITA margin came to 1.2%. The operating profit for the year was EUR 24.8 million, and this included a EUR 20.4 million gain from the divestment of the German Communication and Aviation & Security. Our cash flow from operating activities was EUR 49.4 million, and this included a change in net working capital of almost EUR 17 million. And as already noted, the net working capital at year-end was at minus $25 million. Finally, one of our key targets in our financial transition clearly has been to improve our balance sheet. And at year-end, our net debt was at EUR 67.4 million, which is down by EUR 56 million from EUR 124 million the year before. I think we can say that we're quite proud of this development, which clearly shows that we have now reached healthy levels in our debt. I will now move on to Slide 12 to look at net sales by segments. In segment Power, our net sales for the year were EUR 329.8 million, which is 12.7 million (sic) [ 12.7% ] less than the year before. And in line with our strategy, part of the decrease clearly comes from the reducing exposure to big capital-intensive projects. As Casimir already mentioned, for -- an example of this is the big Norwegian Reisadalen project being completed operationally in November, and remaining or other big projects are coming to an end during the course of this year. Other key factors, again, repeating myself, relate to COVID-19 and ramp down in Sweden. In Smart Grids, again, volumes were still low, as expected, with certain old projects coming to an end. And the new project in Sweden still remains in its early stages, meaning that it didn't really yet impact the net sales. In Finland, we continue to be the market leader, and so saw net sales increased, thanks to both growth in build projects as well as then contract expansions. In Communication, net sales amounted to EUR 549.9 million, showing a decrease of 14.8%. Organically, the decline was 4.5%, which again shows that the divestments play a big part, impacting EUR 59.6 million on the negative side. The full year net sales in Sweden and Norway was clearly driven by similar factors as in the fourth quarter, with Sweden suffering from low orders, partly due to loss of the service frame agreement and both countries being actually impacted by reduced customer investments. And on top of that, in Norway, the foreign exchange rates gave a negative EUR 17 million impact. And then the decline that we saw was likely partly offset by the high fiber and 5G volumes in Finland and also increased volumes in Denmark. In Other, the net sale amounted to EUR 13.3 million and again, related to the remaining Power Transmission International projects. Let's now move on to Page 13 and look at our EBITA development by segment. In 2020, our operative EBITA in Power was negative EUR 9.5 million, which is, however, EUR 8 million better than last year or the year before, and the operative EBITA margin came to minus 2.9%. Through the year, we can say that our focus has been on risk reduction and improved control. And we are seeing those actions now impacting positively both Sweden and High Voltage. But as said, the results still remain negative, which shows that we still have a long way to go. And while Finland still also had its fair share of challenges during the year, it never really showed positive productivity development along with a reduced risk level. In Communication, operating EBITA for the year amounted to EUR 24.4 million, showing a EUR 6.3 million increase from 2019. The effects of the investments in this figure was minus EUR 4.7 million, and the operative EBITA margin was 4.1%. As in Q4, Norway continued to deliver good margins for the full year also, but we already mentioned the decreased volume due to COVID-related cuts by -- in the -- investment cuts by customers. And then, yes, the FX effect also impacted the actual operative EBITA. On a positive note, Finland did improve its profitability through volume growth and better production efficiency, and Denmark was largely in line with 2019. However, slightly fallen behind in the second half of the year, partly due to a write-down that we already reported in the third quarter. Year-on-year, the biggest improvement, again, in operative EBITA came from Sweden, which as already noted, still is far from being at the targeted levels and need to keep on working to improve the profitability. In Other, the remaining Power Transmission International projects showed an operative EBITA of EUR 4.5 million versus minus EUR 0.8 million the year before. And as already noted, we target to ramp down the remainder of the PTI projects during the course of 2021. This concludes the summary of our financial performance in the year. And this, as it happens, is the very last time that we reported Power and Communications as segments. And we will, from now on, as we already reported in late 2020, report a new segment structure based on the 4 Nordic countries. So let's take a look at the restructure on Page 14. As already mentioned, the new segments will be the 4 Nordic countries of Finland, Sweden, Norway and Denmark, with the remainder of the business being reported outside segments in Other business. More precisely, in each of the country segments, we will report all Power and Communication business in the respective countries, while Other business includes operations in High Voltage, Smart Grid Germany, Lithuania and whatever is left of Power Transmission International and rail operations. All in all, this Other business has less than 15% of the operations at present. And the volume of these will also continue declining as we move forward with our Nordic strategy. The divested Polish and German Communication businesses are in Other business until their divestment in Q4 2019 and Q2 2020, respectively. Let's now move on to Page 15 to take a look at the new segment splits in net sales. As you can see from these graphs, on the left side, the current reporting structure, and on the right side, the new reporting structure. You will notice that the new country segments will be reporting a more evenly split between the segments and the new segment also do reflect the Eltel organizational structure better than the previous ones. And with this, we do believe that the change reduces complexity. It is also a more balanced way of reporting and also more transparent in terms of our operations throughout the group. And with this, we do believe that while, as said, it follows more closely our operational setup, but we do believe that this also benefits the shareholders and other invested or interested stakeholders. And on the following Page 16, we will briefly show the graphs, how the net sales and EBITA graphs look like with the old and new structures. Again, as already noted for net sales, these graphs clearly paint a picture what are the segment sizes, respectively, and compared to each other are much more evenly split. And also with this, this gives a more transparent picture of the operations at large. These graphs basically sort of summarize real data with the new structures, both from 2019 and 2020. And let's still take a brief look at Page 17, where we show a glimpse of how the segment reporting page will look like in Q1 2021 and onwards. On the right-hand side, like I said, there are some little picture snapshots of the reporting pages for each segment. In this case, the examples come from Finland and Sweden. And the information that we will cover on these pages going forward will include the net sales growth, percentage operative EBITA, operative EBITA margins, number of employees, also net sales split between Power and Communication, i.e., the old segments, and commentary on deviations from the comparative period. Obviously, this is still something that is pending, and you will see the results of this change more thoroughly in -- after the Q1. But this is just to show -- to start with where we are headed in our reporting. And this concludes the financial part of our presentation. And with this, I will now give the word back to, Casimir.