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 Q2 report for 2021. Saila and myself will present the results. And after that, we'll open up for questions. Throughout the presentation, you can e-mail your questions by clicking on the envelope icon next to the presentation. With that, let's move to Page 3, and I will tell you a bit about Eltel's second quarter. Eltel is a Nordic market leader in Infranets founded in 2001. We are the leading Nordic field service provider within Communication and Power, and we operate throughout the Nordics, Poland, Germany and Lithuania. For Eltel, sustainability is about building a strong profitable company for the future and delivering lasting financial, social and environmental value for our stakeholders. In 2020, Eltel had net sales of EUR 938 million, and we currently have about 5,200 employees. Let's move to Page 4 and look at the highlights of the second quarter. For the sixth consecutive quarter, we improved our operative EBITDA compared to corresponding period the year before, which is a result of staying true to our Operational Excellence strategy. Main contributors to the positive results were Finland, Norway and Denmark, where in all markets, we also have a good market position and overall, a good market situation. We maintained our healthy levels regarding net working capital and net debt and improved return on capital employed. COVID-19 continues to impact our customers' business, basically our customers' customers' business, and we can see some postponements and delays in projects, for example, in Norway in fiber. But overall, we are now 90% of the business in Nordics, and Nordics is a good place to be even in COVID-19 times. Being the market leader, we also took the next step in our climate work by committing to the science-based target initiative, SBTi. Let's move to Page 5 and walk -- talk about how COVID-19 impacted Eltel's business. All in all, we see -- also in the second quarter, we see some reduced customer investments. Here, I could use Norway as an example. Norway had almost a lockdown situation during the spring, and that impacted our customers' customer business. For example, 20,000 stores and all the malls were closed. So we can see some impact of that now in our volumes. That said, we think that by the end of the year, this will change, and the volume is picking up month by month. Some projects have been postponed. We can see that mainly in Poland. And some delays in our projects, partly because we are maybe lacking material. For example, in Power business, there is a lack of steel and the price of steel has gone up. And we can see some increased sick leaves, and that doesn't mean that our technicians are sick on a large scale, but on the other hand, we have a quarantine situation that the impacts our sick-leave rates. Let's move on to Page 6 and talk about us taking the next step in our sustainability work. Since many years, we are committed to a number of sustainability frameworks and reporting tools that help us meet the expectations of our internal and external stakeholders. During the quarter, we committed to another one, SBTi. Together with stakeholder dialogue and the relevant topics that is used to shape our strategic decision-making, this provides the road map to remain relevant as a partner, employer and investment opportunity. Being the market leader, we have taken the next step in our climate work by committing to Science Based Target initiative, SBTi. Committing to SBTi shows our sustainability ambition is on a high level. We are working towards setting concrete and measurable goals. And we set sustainability as a business-critical part of Eltel. I'm convinced that the third-party verified goals in line with the Paris agreement will soon become a clear customer expectation. And last but not least, committing to SBTi is, at the same time, building internal pride. With this, we are now moving to Page 7, while I hand over to Saila, who will take us through the financials of the second quarter.

Thank you, Casimir. Starting by noting that, as Casimir already mentioned, we have now seen our profitability improved for 6 consecutive quarters compared to the respective period the year before, which is, of course, good news for us. And this, we have accomplished despite the reduction in net sales, which also has happened. And the net sales for Q2 2021 came to EUR 210 million compared to EUR 245 million last year. For the first 6 months of the year, our net sales amounted to EUR 392 million, which is then down from EUR 482 million the year before. The reduction in net sales primarily came as a result of divestments, which we made in Q2 2020, those being German communication and Aviation & Security in Sweden. But as also mentioned by Casimir, COVID has had an impact through decreasing customer investments and relating to project postponements. And in Sweden, as one of the key segments, we lost a large service agreement, mainly relating to corporate networks, which are being ramped down, and this, of course, had an impact comparing to last year. This offset. Whilst the overall net sales came down, we are very pleased to note that growth in Finland has continued. On our operative EBITA, the second quarter again showed clear progress in our transformation. And for the quarter, our EBITA amounted to EUR 4.4 million with a margin of 2.1%. For the first 6 months of the year, the operative EBITA came to EUR 3.7 million, representing a margin of 1.2%. The biggest contributors to the positive results were segments Norway, Denmark and Finland. And on the negative side, last year's divestments had an impact of minus EUR 1.2 million. Then if you look at the lower graph on this side, you can see that our operative EBITA on a rolling 12-month basis has now continuously increased since Q4 2019. And we're, of course, working hard to maintain this trend also going forward. Let's now move to Page 8 and look at segment Finland. Sorry, apologies, my mouse is lost. I'm awfully sorry. This is a bit of a technical problem for me at this end.

Maybe I can go to Finland, Sweden, and Norway for you.

No. Sorry, it was due to the sedation on a different scale. Again, very sorry about this delay. But in terms of Finland, as said, the segment showed improved net sales, and second quarter was 2% up to EUR 79.8 million. And for the first half year, we were 2.5% up to EUR 140.6 million. This growth came from a strong market position in Communication, where we are very happy to see good demand, both in fiber and 5G. Operative EBITA in Finland improved substantially compared to last year, almost EUR 3.1 million for Q2 and EUR 3.8 million for the first 6 months. And here, as more or less across the board in the Nordic countries, we're seeing the work on Operational Excellence paying off. And we can see that good productivity, improved project management and cost control are all significant drivers for the better results. For Finland, in addition, we had a write-down relating to some certain power projects, which, of course, then impacted last year's comparative results. Let's now move on to Page 9 and look at segment Sweden. In Sweden, our net sales in Q2 amounted to EUR 44.6 million and for January-June to EUR 85.7 million. This shows that the decline in net sales continued, which reflects partly the loss of a large service agreement that was already mentioned. And on the other hand, the divestments of the Aviation & Security business area. On operative EBITDA, we came to minus EUR 1.6 million in Sweden for Q2 and minus EUR 2.4 million for the first 6 months. The negative result partly came from a write-down of an older power project. And the decline compared to last year was further enlarged by a positive one-off of EUR 0.9 million that we recorded in Q2 2020. All in all, we have to say that Sweden is still in a restructuring phase and, as such, shows decline in sales and is as we see also still impacted by some old unprofitable projects. All this said, we can also say that the risk level in Sweden has already been reduced, and we're starting to see positive signs in cash flow and net working capital. And with this, we're also accelerating our work on efficiency and profitability, which we then hope to see impacts of in the future quarters. Relating to Sweden, perhaps a note on the risk side relating to the fact that there may be a risk of goodwill impairments in the latter half of the year. Goodwill was first allocated to countries in 2018. And since then, we have seen a substantial marketplace development for the negative in Sweden relating to the reduction in maintenance of copper networks and slowdown in building fiber. As we have previously noted in our annual reports, the goodwill in Sweden has procurements. We're currently assessing the situation and we'll then come to positions later parts of the year. Let's now move to Page 10 for segment Norway. In Norway, our net sales for the quarter amounted to EUR 42.1 million and for January-June to EUR 76 million. The development compared to last year was negative largely due to decrease in delays in customer investments, and those, as Casimir already mentioned, are largely due to COVID-19. And now in midst of summer, it may be hard to remember, but we also were impacted by quite a harsh winter in the early months of the year and also the ramp-up of the new Telenor frame agreement had some impact. For operative EBITA, Norway remains on very healthy levels despite the decrease in net sales. And EBITA for the second quarter was EUR 2.7 million with a margin of 6.4%. And in January-June, this came to EUR 3.9 million with a 5.1% margins. And again, reasons for the stable margins do include sort of good work on operational efficiency and also successful rightsizing to match the net sales. With this, let's now move on to Page 11 for Denmark. For Denmark, net sales amounted to EUR 24.6 million for the second quarter and EUR 50.8 million for the first 6 months. The decline compared to last year comes primarily from the completion of a large communication project as well as somewhat lower fiber volumes overall, with the fiber volumes last year having been on quite a high level. In terms of profitability, the second quarter was indeed somewhat exceptionally good for Denmark. The operative EBITA amounted to EUR 2.6 million with a margin of 10.5%. And for January-June, the corresponding figures were EUR 3.9 million and 7.7%. And whilst we see that Denmark has successfully worked on its project management and also has a better project portfolio at the moment, we also need to note that the second quarter results also was positively impacted by EUR 0.8 million with what could be called sort of a one-off relating to a partially sourcing of business by a major customer and indeed events relating to the ending of this relationship. Going forward, the insourcing, unfortunately, will then have somewhat of an impact relating to net sales. And with this, let's go to Page 12 and look at Other business. Before commenting Other business as such, I would like to point out, as actually came across already from Casimir, that our country segments, Finland, Sweden, Norway and Denmark already contributed to more than 90% of the net sales in the first half of 2021, 91% to be exact. And this again shows the continued progress of our strategy and the Nordic focus. So this leaves for Other business, 9% of net sales, which for the first half year amounted to EUR 43 million. And in this, we saw positive development, particularly in Smart Grids Germany. But unfortunately, High Voltage and especially in Poland continue to have challenges. And the divestment of the German Communication business in Q2 2020 also, of course, had somewhat an impact in comparison to the year before. Operative EBITA for the first half year was minus EUR 1.4 million. And in this, Smart Grids Germany and Power Transmission International had positive contributions, whereas the continued difficulties in High Voltage Poland brought the results, unfortunately, still to the negative side. If you look at our bubble picture to the right, you can now see that we have reached operational completion of 4 major projects, those what's in gray. However, all this said, several of the Polish High Voltage projects still have been pushed somewhat forward. We do, however, anticipate that we will be able to complete the majority of them still during the course of this year and thus, then further reducing the risks related to them. Then finally, let's take a look at some of our development trends on the following page. The leverage, which now is around the level of 2 to 3, has come down substantially. And we're, of course, happy about that. And if you look at the minor increase between Q1 and Q2, that primarily reflects seasonal variation in our business. On net debt, we have reached a good level at EUR 88 million, excluding the licenses -- our sort of leasing liabilities. And then on the ROCE or the return on operative capital employed, we can see a continuous trend upwards, reflecting partly, of course, the improving results, but also the low levels of capital that we use. And at the end of Q2, we landed at 16.8% with ROCE. This completes the financial part of the presentation. And with this, I then hand the word back to Casimir.

Thank you, Saila. We can move directly to Page 15 and have a look at our financial targets. So these are our financial targets. We are making constant progress towards the 5% operative EBITA, and we are fulfilling the leverage target. During the turnaround, we are focused on improving our profitability and control environment as well as getting our balance sheet on a healthy level, and we have been successful doing this. With this on track, the next step is to reverse the downturn in net sales and reach our long-term financial target of 2% to 4% annual growth in the Nordics from 2022 onwards. We are pursuing different organic growth opportunities in the different Nordic countries and expanding our portfolio by shaping our offering to the market. While doing so, we are also preparing for potential future acquisitions. And we clearly see a potential regarding consolidation of this industry in the Nordics. Having said that, we're still on our transformation journey, focusing on here and now and deliver what we are supposed to delivering in 2021. We can move to Page 16 to look at our deliverables. We are halfway or even more than halfway through the journey. And everything that we have gone through today supports the fact that the Operational Excellence focus and the Nordic focus has been a success, and we are delivering better and better results. So that's all good. Maybe one point that we haven't talked about today is basically how we have managed in COVID-19 times regarding customer and customer base. We have focused a lot around our quality. We have improved that a lot during the last couple of years. And we have focused around our main frame agreements and customers because it has been a bit challenging in COVID-19 times to gain new customers and approach new customer segments. But hopefully, that changes now when we're going to the next phase and, of course, supported by potential M&As going forward and from 2022 onwards. We can now move to the next page. The focus areas are the same. We have added special attention around our tendering process. And as we can see, the control environment has improved, but also the tendering process as such has improved, and we have been selective in that. The organizational changes have taken place during the last couple of years. As mentioned before, all in all, I think we have changed roughly 30% of district managers and more than 30% of day managers. And that changes a part of changing processes, changing partly culture, but also part, of course, of the fact that we have been decreasing in net sales. A lot of focus on implementation and execution of both frame agreements and contracts and that has paid off. The production planning has improved. Still potential is there. But I think we saw it this year also in Q1 that the winter planning was executed in a very good way. We have invested more and more in training. Also part of implementation of frame agreements is training. And again, upselling to the existing customer base and making sure that we deliver what we have promised on a day-to-day basis has been very important during the last 3 years. Then going forward, we are the #1 player in this industry. We want to strengthen that position even further. And we are, as mentioned before, here, more than 90% of the volume is now in the Nordics, but we still have less than 10% outside, and then we're focusing there and closing those operations down in a professional way and also looking at potential divestments in those businesses outside the Nordics, but that also -- that program has come quite far compared to where we were a couple of years ago. And a lot of special attention to the Polish High Voltage business, so that we can turn that around going forward. And again, I mean, Operational Excellence is on the agenda every day. So that is something that we'll continue to focus on. So those are the focus areas. And the targets are clear: improve still the profitability, the quality, customer satisfaction and employee engagement as well and, of course, at the end of the day, cash generation. So we are improving in all these areas, but still work to be done to get to the next level. With that said, we can move to the next page. So we have come quite a long way on our turnaround, and much has happened within Eltel over the past years. We have improved the control of the business, and we are continuing our good market position and especially driven on the communication side by fiber and 5G. And that gives us confidence to say that we will further strengthen our performance going forward. And the financial guidance for the year remains the same. We foresee our operative EBITA margin for 2021 to improve from 2020. And with that conclusion, we'll move to Page 19 and open up for any questions that you might have.

Thank you, Casimir and Saila for this presentation. As Casimir said in the beginning, you can e-mail questions by clicking on the mail icon next to the presentation. We have indeed already received some questions. So I will start with a few from Robin Nyberg at Carnegie. When do you start -- or when do you expect to reverse the negative trend in net sales?

As mentioned today, we are preparing different initiatives and also conducting some initiatives already regarding organic growth for Nordic countries. So that is one way of doing it. The other part is potential M&As. And we have said from 2022 onwards, M&As is a possible part of our operations. And there is activity in the market already today. And we are preparing for that next step. But more likely to happen in 2022 and onwards.

Okay. You mentioned some older unprofitable contracts in Sweden. When are these projects ending?

We have a few -- less than a handful of those projects left, both on Power and Communication. The Power ones, a few larger ones there ending during the first half of next year. So we are moving towards the end of that work with the old projects. And then looking forward, we are not entering into similar projects in the future. So in -- let's say, in 3, 4 quarters, those projects are ending.

Okay. Another one on Sweden from Robin. Could you please repeat what you said about the potential goodwill write-down in Sweden? I think that's for you, Saila.

Yes. What I mentioned was that, indeed, the goodwill that we have in the group has been allocated to country units in 2018 based on the situation of the time. And since then, what has happened in Sweden is that the marketplace relating to volumes, whether relating to maintenance of copper work networks or the building of new fiber networks has decreased. And along with that, of course, that has impacted our business. And because of that situation, we have already in the annual reports of 2019 and 2020 said that the goodwill that has, like I said, already in 2018 allocated to Sweden, is somewhat sensitive to impairment. And now we're assessing our, say, business expectations going forward and also what we then potentially foresee in terms of developments in the marketplace for the coming years and then take further decisions on the potential impairment of goodwill. But as said, that will be further assessed over the next few months, and we will come back to that latest in Q4.

Thank you. Casimir for you, maybe. We mentioned a partial insourcing of business by a major customer in Denmark. Could you elaborate on this? And do you see more deals being insourced?

Yes. So this happened in Denmark, it's less than 10% or roughly 10% of our business in Denmark. I haven't seen any insourcing in this business, in this industry for the last 10 to 15 years. So we were as surprised as you are now. I think it happened for political reasons on the customer side. And that is something quite unique. And again, I haven't seen it for 10 to 15 years. On the contrary, I mean, this business and the industry was started through outsourcing. And at the same time, we have seen a handful of outsourcing where we have been taking part in smaller outsourcing. So a, I would say, quite unique situation and local one in Denmark that happened during the spring.

Thank you. Now we have a question from Joonas Ilvonen at Evli. Any particular Nordic market where you have lately seen an increase in M&A candidates available for sale?

I think we have seen activity in all Nordic markets during the last 18 months on different levels. And I think that will continue. Then of course, we have to take into consideration the potential and the fact that we are market leader in communication in all 4 countries and in Power in Finland, that we need to also evaluate if these potential targets are valid for us or not being the market leader. But all in all, quite high activity in all Nordic markets. I will say, especially in Finland, Sweden and also Denmark, but especially Finland and Sweden.

Thank you. Another question from Karl-Johan Bonnevier from DNB Market. When targeting returning to organic growth, which submarket do you see as the most promising? And then in countries? And do you have any signs of that in the order backlog already?

I think for growth now with the existing business that we have, then 5G is one good example, where we see that both Finland and Norway and Denmark are increasing the 5G volumes. Sweden a bit behind. So that is one example where we see more potential for volume going forward for the next couple of years at least. Then we are looking at indoor solutions, for example, traffic lighting and so forth where we see potential as well. Regarding the market as such, I would say that both Finland and Norway and Denmark are in a good place because they are supported by 5G and fiber. And then on the other hand, Sweden has already gone through the fiber peak, as we have discussed before. And on top of that, 5G is a bit delayed in Sweden. So that's the status right now. When we look at potential M&A opportunities, it is quite clear that we have to look at our portfolio regarding Communication and Power in the respective countries and what kind of position we want to take going forward. So that is one element to it. And then, of course, we have to look at the local organization, that the local organization is ready for M&A and that we are as a company as well. So that work is ongoing. And we are getting more and more active internally regarding potential M&As for the future. So it's more a question of looking at the right opportunities and picking the right objects to look at closer. And then as always, with M&As, they don't happen every week or every month, but clear activity in the market.

Okay. I think we have reached the final question now from Mr. [ Jussi Koskinen ]. How would you estimate COVID-19 total EBIT impact during half year -- the first half year?

I guess that's the most difficult question we have received today. I would say -- let's use a couple of examples. I think one way of looking at it is if you compare our Norwegian net sales figures from last year and in Q1 and Q2, and then you compare it to this year, there are 3 elements into that. One is, of course, there was a harsh winter this year, and there was not that last year. Then we have -- that's maybe 1/3 and 1/3 is the fact that we're implementing a large frame agreement. And always when you do that, you have a start-up phase, that is a bit slower than the running phase. And then the third element, maybe 1/3 could be COVID-19, in that sense that we have seen postponed investments. So that is one way of looking at it. Then looking at pure financials. We can see that we have -- during COVID-19, our sick-leave rate has gone up a percentage or 2. And that is, of course, money for us and lost time and lost money for us. On the other hand, the normal sick leave has decreased a couple of percentage as well. And that means that with these lockdown situations and the cautious way of working the normal sick leave is lower and then the quarantine and COVID sick leave is higher. So that's, I think, the most -- if we stay on a high level, that's the way we look at it, and that's how we have analyzed it internally. So the main impact is, I would say, if we take out the normal sick leave and then increase COVID-19 sick leave, that's plus/minus 0, then the main impact is the postponed projects and investments. But the good part is that we are quite comfortable that they are coming, but they are coming a bit late. That was the most academic answer I could find on a short notice.

All right. We did get another question during your answer. And it's from Max Bacco at ABG. Norway was down 18% organically, but positive development in June. The main reason for decline was reduced customers or volume from customers largely due to COVID-19. What should we expect from Norway in Q3?

I think like we said earlier, we see that the volumes are picking up and the slow start in Q1 and Q2 was these 3 elements that I just referred to. So then it's a question of do they pick up -- how fast will they pick up and then the penetration. I mean we can't control that. It's about the penetration of sales rate from our customers towards the end customers that is really the factor here that when does the volume come. But hopefully, it picks up when we are getting closer to the year-end.

Good. All right. Now there are no further questions. I'll hand it over back to you, Casimir.

Okay. Then thanks a lot for listening, and thanks a lot for good questions and a good dialogue again. And hopefully, we see and meet each other in this forum also regarding Q3 or before that and, hopefully, physically, sooner or later. Thanks a lot.

Thank you.