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

Hello, everyone, and welcome to this live webcast. My name is Casimir Lindholm, I'm the President and CEO of Eltel. With me, I have our CFO, Saila Miettinen-Lahde. We will today present Eltel's Q1 report for 2021. For those of you who have been following us can see that we are doing today's presentation in a bit new format. However, the structure is the same. Saila and myself will present the result. And after that, we will open up for any questions that you might have. [Operator Instructions] With that, let's move on to the actual presentation and start on Page 3. Eltel was founded in 2001, and we are celebrating our 20th anniversary this year. We are the leading Nordic field service provider within communication and power. And we operate throughout the Nordics, Poland, Germany and Lithuania. We are roughly 5,500 employees in 2020 and net sales was EUR 938 million. Let's move to Page 4 and look at the highlights of the first quarter. For the fifth consecutive quarter, we improved our results year-on-year despite a harsh winter. The Nordic countries delivered according to plan by focusing on operational excellence. The winter was different for Communication and for Power. And Saila will show you later on how it affected the Communication business. And mainly, net sales postponement was one part. Due to the winter conditions, we were not able to escalate and dig in the ground. And on the other side, on Power, which you can see then, especially in the finished numbers, we actually had some positive effects of the winter regarding overhead lines and also in dismantling of networks. We have, all in all, successfully adjusted the organization to meet both the expected lower volumes and also had a good cost control regarding winter and production planning. The other good drivers behind the result is that we have had good project management in the operations in the Nordics. The return on operative capital employed continued to improve as a result of our transformation journey and our focus on the Nordic markets. In March, we signed an agreement to divest our German High Voltage business to ENACO, a German service provider in the energy sector. We expect the transaction to close during the second quarter. COVID-19 had an impact on Eltel during the first quarter. And I will, in a minute, come back to why and how that affected our operations. And with that, we can turn to Page 5 and look in more detail on COVID-19 and the effects on our business. Well, first of all, it has shown, on the negative side, in reduced investments from our customers. One example of that is, in Norway during the first quarter, more than 20,000 shops were closed down. And that, of course, has an effect on our customers' business. And in that, it also affects the operators and telcos. And that has then an effect on our net sales. We could see some postponed projects, mainly in Poland, due to COVID-19 and then delays in execution in a situation where our teams and technicians were affected directly or indirectly by COVID-19. And we could see also local restrictions limiting our availability to move between municipalities, for example, in some countries where restrictions were tighter. We can also see a slight increase in the sick leave of our employees during the first quarter, a couple of percentage. And roughly half of that is due to quarantine situations in our Nordic countries but also in Germany and Poland. So last year, we said that COVID-19 didn't have a large effect on our operations, but that has changed during the first quarter. On the other hand, now vaccine programs are coming, and we see that the situation will improve going forward. With that, I will give the word to Saila, and we move to Page #6.

Thank you, Casimir. Now looking at the group figures for the first quarter. I think I'll start by noting that indeed, as is typical, the first quarter was impacted by the normal seasonality in our business, and this year, as Casimir already noted, also by the harshest winter in several years. Despite this and also the COVID-19 impacts that you just heard about, our Nordic countries indeed delivered what they were expected to. And I think that we can say that we were pleased about that. With that, our net sales for the quarter amounted to EUR 182 million, which is down from EUR 237 million the previous year. The biggest impacts on the net sales came from the divestments of both the German communication business and the business area, Aviation & Security, in Sweden. Furthermore, the impact also came from the loss of a large copper network-focused service agreement in Sweden similarly in Q2 last year and therefore also impacted the comparative figures. The COVID-19 impact indeed was largest in Poland, where the whole economy has been impacted, And therefore, also our customers are feeling the effects. And we're seeing then quite severe postponements to some of the projects and pushing those revenues further into the future. With that, moving on to the profitability. The operative EBITA for the first quarter came to minus EUR 0.7 million, which is actually EUR 3.1 million better than last year. I would say the biggest contributor to the improvement is our continuing work on operational excellence, which we can now see bearing fruit through good resource and production planning, which is especially important in the wintertime, overall, better project planning as well as then, all in all, increased efficiency. And this we can see throughout our countries. Further, now if you look at the lower graph on operative EBITA development through some time, you can see clearly the seasonality in our business quarter-on-quarter. But you can also see that from Q4 2019 onwards, there's a continuing increase in margin. With that, let's now turn on to Page 7 and start looking at the segments. Firstly, starting from the East. In Finland, our net sales increased from last year by 3.2% to nearly EUR 61 million. The good development that we see in Finland stems actually from our leading market position both in Communication and Power and also the growth in new frame agreements awarded in 2020 also both in Communication and Power. As already mentioned by Casimir, the winter conditions in Finland did have an impact, particularly in Communication, negatively. So whereas in Power, we also saw some positive impacts from the frozen ground, for example, and ability to work in some areas, where in summertime, it is more difficult. All in all, in Finland, the operative EBITA came to EUR 0.7 million, which is up by EUR 1.5 million from minus EUR 0.8 million in 2020. And again here, we see the common theme of improved operational excellence and resource planning taking effect and improving the results. And to an extent, yes, the high volumes also came through to the EBITA level. Now let's move to Page 8 and to take a look at Sweden. In Sweden, we did see a large decline in net sales to EUR 41.1 million from EUR 63 million last year. And this is due to a combination of factors. One, already mentioned, was, of course, the divestment of the Aviation & Security business in Q2 2020 and also, as already mentioned, the loss of the large copper network-focused service agreement occurred in Q2 last year, meaning that it still shows in the comparative figures. The common themes of cold winter and COVID-19, of course, also had an impact and showed in the decline as said. In operative EBITA, the result was minus EUR 0.8 million compared to a positive EUR 0.5 million last year. There's a big single factor explaining this difference. And that was a EUR 0.9 million positive one-off that we recorded last year from a release of an old provision. The lower volumes, of course, and the divestment also carried into the EBITA numbers. But it has to be said that also for Sweden, the positive impacts on the work on operational excellence have started to take effect also in the Swedish markets and hopefully will start showing in continuous improvement in the figures going forward. But with that, let's move on to Page 9 and to segment, Norway. In Norway, our net sales amounted to EUR 33.9 million versus EUR 47 million the year before. In this case, the decline was very much expected, reflecting, to a large extent, a temporary slowdown in the business due to the ramp-up of the renewed Telenor frame agreement that was awarded to us late last year. Also, of the Nordic countries, Norway has been hardest hit by COVID and, similarly to Finland, Sweden, also saw a very harsh winter this year. On operative EBITA, Norway continued its solid performance with EUR 1.2 million EBITA. This is down from EUR 2.1 million in 2020. However, of course, a large proportion of the decline came from the lower net sales that already were explained. Beyond that, we saw Norway doing rightsizing of the organization, and that partly offset the decline. And the EBITA margin on a rolling 12-month basis remained good at 8%. Let's now move to Page 10 and Denmark. Net sales in Denmark were EUR 26.2 million, showing a somewhat 23% decline from EUR 33.7 million the year before. A significant factor to this change was the completion of a large communication projects since the comparative period. And also, fiber activity in Denmark was lower than in 2020, which turned out to be a very high activity level for that business in Denmark. Operative EBITA was EUR 1.3 million in Denmark, which in the first quarter actually was the highest among our country segments in the Nordics. The EBITA margin was also on a very good level at 5.1%. With this, let's move to Page 11 and have a look at Other business. In Other business, our net sales amounted to EUR 21.4 million, showing a decline on EUR 36.5 million from the year before. Of this, the impact of the divestment of the German communication was a bit more than EUR 8 million, well, EUR 8.1 million to be exact. And in Other business overall, High Voltage projects clearly form a major part of this remaining business. And here, unfortunately, we have seen indeed the biggest impacts of COVID-19. I'll now refer to the graph on the right side of the page. And you may recall this bubble picture already from previous quarters and demonstrating our declining exposure to large High Voltage projects. The majority of the remaining projects shown in here are actually in Poland, where COVID has indeed caused substantial delays, such that many of the projects that we were expecting to close during the first quarter have unfortunately been pushed to later quarters this year. We do, nevertheless, expect to close the majority of these projects during the course of 2021. On a positive note, relating to this same graph, we can note that since the previous reporting period, we have closed 2 African projects and removed the respective bubbles from the picture. And also the large Reisadalen project in Norway has been operationally closed already in Q4 last year. And we do foresee the financial close of the project also in the near future. The opportunity -- EBITA for the Other business improved by EUR 1.3 million since last year to negative EUR 0.9 million. And whereas we unfortunately saw the negative impacts from the High Voltage business, we also saw a very positive performance from Smart Grids Germany, which improved their performance clearly, thanks to both good operational performance but also a favorable market situation in Germany. With this, let's now move to Page 12 and still take a look at leverage and net debt and return on operative capital employed. I will finish up my section of the presentation with a couple of additional notes on our financial trends. Firstly, we have announced our leverage target for 2023 to be 1.5 to 2.5. Now as you can see, the graph on the left shows not only a clear declining trend in leverage since Q1 2019, but also the fact that we have now already reached our leverage targets and, of course, we look forward to maintaining it on a good level also going forward. Then secondly, we have already previously been reporting our declining net debt. But along with that, we now also want to note the increasing trends in our return on operative capital employed. This reflects partly the release of capital from those large projects but also shows that with our present framework and service-focused business model, we tie up relatively little capital and are already starting to create reasonable returns on it. With this, I hand it back over to Casimir, and we move to Slide 13.

Thank you, Saila. We can move directly to Page 14 and have a look at group financial targets. Like we stated at the Q4 report and year-end report, we have updated our financial targets by end 2023. And we are encouraged by progress we have made. We have updated all financial indicators and aim to achieve them by the end of 2023. Having said that, of course, now short term, we are focusing on bringing up the margins step-by-step and also focusing on closing down and selling the assets that we have announced previously outside the Nordics. So 2021 is still a year of improved margins and especially taking care of the history outside the Nordics. We can move to Page 15 and look where we are on our transformation journey. Again, we are focusing operational excellence. We are focusing on profitability. And in COVID-19 times, we are also focusing on up-selling to existing customers because, of course, it is more challenging now to go into new contracts and enter into new customers and interfaces in COVID-19 times. A lot of focus is on improving the nonperforming businesses. We are focused a lot around Poland, the High Voltage business we have there, to improve that and also locally in the Nordics, both on team and district level to bring up the average margins. There's a lot of focus in areas where we still have teams that are not on the right level. Then strengthen the financial position, as Saila referred to earlier, is on a very good level now. And we'll continue to focus on that also going forward to have a healthy balance sheet. And that is also key when we enter into the next phase in '22 and '23 so that we are ready for both organic growth but also growth through M&As. So 2021, a lot of focus to have the right platform in place for the next phase of our journey. With that, let's move to Page 16 and look at the focus areas in 2021. Already, 2.5 years ago, when I started and rejoined Eltel, we set a few priorities and we have continued to follow those. And one very important one is the tendering process and to make sure that we are on the right margin levels, make sure that we have the right risk reservations in tenders, in projects where we enter. And that is key and that is what we're still focusing on. We have also had a lot of work and effort around the organizations, both in rightsizing them but also making sure that we have the right people in the right place. A lot of focus on implementation and execution of our frame agreements and projects. And now we can see that, that work is giving results and improved margins step-by-step. The same goes regarding production planning, we could see that in Q1 as well, we were able to cope with quite difficult conditions and have a good production planning and resource planning in place and good cost control. So all these efforts are still very much valid. And a lot of focus on these areas and, of course, training both regarding certificates but also regarding training on what's in our contract than what's outside our contracts. And that has also given clearly better quality towards our customers and where we are in a good position over the Nordic countries. Then going forward, of course, strengthening our position in the Nordics has been a key strategy target for us. And I think we have done a good job both -- I mean, profitability is improving. The balance sheet is now healthy. The net debt is on a clearly lower level. And again, the quality has been improving every quarter. So we are in a good, good path here. And again, focus on restructuring nonperforming business and selling and closing down that outside the Nordics is still very much valid, and a special attention to the Polish High Voltage business, where we really need to turn that around. So all in all, if you look at the right side of the slide, we are moving in the right direction in all these critical areas. The profitability is improving. The quality is improving. The customer satisfaction is improving. And our employee satisfaction survey last year also gave clear indications of the internal KPIs are improving. And also, as you have seen, cash and net working capital improving as well. With that, we can move to Page 17. We have come quite a long way on our journey. And as we communicated as part of the Q4 report, we have a financial guidance in place. And we -- I think we started the year in Q1 in a good way. And the financial guidance remains the same, which is that we foresee our operative EBITA margin for 2021 to improve compared to 2020. And if you look back 10, 15 years, Eltel results in Q1, there won't be a few occasions where the result has been on a plus/minus 0 level. So a small loss in Q1 is actually a good start to the year. And we are ahead of our internal plans entering then into the second quarter. And that is the conclusion. And we can move now to Page 18 and open up for any questions that you might have.

Great. Thank you, Casimir and Saila for this presentation. [Operator Instructions] We have received some questions already. So I will start with one from Teemu Reiman. Can delayed work be expected to continue during Q2? Or have cancellations been seen?

We have seen postponements. But if we, for example, look at Finland and Norway, the order backlog is very good. So now when the season has started, we -- yes, we can see a delay. And then we can see that there is an upward trend towards the end of Q2. But especially Q3 and Q4 will be busy times for us. So in that sense, we can see a hockey stick towards the end of the year, partly due to the strong winter that orders were postponed and partly then in Norway, as referred to earlier, that we have implemented a totally new contract and frame agreement that has impacted and a bit slowed down orders. Basically, in a normal sequence, the orders in fiber would now be in production. And some of them are still in the design phase due to the postponements and implementing the new frame agreement with Telenor as an example.

Continue on, could you tell us more about order backlog situation overall and between the country segments?

Well, as mentioned before, we start from the East. I mean, we have a good order backlog and a good market situation both in Power and Communication in Finland. Sweden has started off in a slow pace. And there, of course, winter conditions like these are not that common during the last years in Sweden. So I think it was a bit of a surprise to both our customers and to partly to us as well to adjust, but we were able to adjust the cost structure. So also in Sweden, we can see that forecast from our customers is now positive. And especially towards Q3 and Q4, I think we'll have a catch-up effect despite a slow start. And again, Norway, like Finland, very strong order backlog. And the situation also in Denmark, I think, is stable. And again, Denmark wasn't that much affected in Q1 regarding the winter. There was only winter for a couple of weeks in Denmark in Q1, which, as such, is quite rare. But I think it's a good and stable situation in Denmark as well.

We have another question here regarding our targets. Has there been delays with the original EBITA margin target?

Regarding the guidance, as mentioned before, the guidance for 2021 is intact. I think we started off Q1 in a good way. So that is intact. And regarding 2023, we have and we stick to those targets that we have for the mid-term that we announced as part of Q4.

Okay, we'll continue here. Net sales decrease and there's a downward trend. When can we expect net sales to stabilize? And when will you start to grow?

That is basically twofold. We will -- when we sell assets like we did now in Q1 in High Voltage Germany, that, of course, will affect the net sales. And the net sales in that sense will still drop if you look at the overall group level. In the Nordics, we have said that we will start entering to a growth phase in '22 and onwards. And we have said that we're going to grow 2% to 4% in the Nordics from 2022 onwards. But overall, as said, I mean, we are still closing down some projects in remote areas. And that will have an effect on the net sales also for this year.

Okay. The projects in the bubble chart picture in Other business, what's the status in them?

The big bubble there, Reisadalen project in Norway, is now operationally closed. It was done in Q4. We are still in financial closure of that project and legal closure of that project here in Q2. And regarding the Polish projects, there we have seen postponements mainly due to COVID-19 and then finalizing negotiations with local customers. So we have now then 10 projects left in the project portfolio and, to a large extent though, will be closed according to plan according to what we have communicated earlier basically during 2021. And then we have -- we'll have 4 projects that we have in High Voltage Poland that we'll then continue for a couple more years. And that's also according to plan. But we have seen postponements. Now this is the second quarter where we see postponements due to COVID-19 mainly in those -- finalizing those big projects.

Okay. Thank you. That was the final question.

Okay. Thank you. If there are no further questions, we will conclude this call. And please continue to follow us and feel free to reach out to Elin if you have any further question. We will present our Q2 report on the 27th of July. Hopefully, you will join that presentation as well. Until then, stay healthy, and thanks for watching, and thanks for the questions.