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

Hello, everyone, and welcome to this live webcast. Today, we will present Eltel's results for the fourth quarter and the full year of 2021. My name is Elin Otter, and I'm the Head of Investor Relations at Eltel. With me, I have our President and CEO, Casimir Lindholm; and our CFO, Saila Miettinen-Lahde. Casimir and Saila will present the results. And after that, we will open up for questions. [Operator Instructions] With that, let's move to Page 3, and I will hand over the word to you, Casimir.

Thank you, Elin. So we will go through the Q4 results as normally. And we'll start with a bit of background for viewers and investors that might be new for Eltel. So Eltel was founded roughly 20 years ago with the Nordic leader in our industry within Communication and Power, and mainly, Communication in the Nordics and Power primarily market leader in Finland. Net sales last year, more than EUR 800 million, and we have more than 5,000 people working at Eltel. We can go to the next slide. So highlights for the fourth quarter. Our net sales stabilized, and now we have a new baseline for growth in the Nordics. That means that looking at our last year's net sales, if you take out the Nordics, Finland, Sweden, Norway and Denmark, that will be the baseline for growth going forward. We improved the profitability for the second year in a row, and Q4 was a good quarter for us from a profitability perspective. Throughout the year, we maintained a healthy balance sheet. Our net working capital was on a good level, and we improved return on capital employed. So all in all, we are continuing on the path that we started in 2020 regarding the balance sheet. Then to some challenges that we are facing, and then we're not the only ones facing these challenges, and that is primarily COVID-19. That had a negative impact on us late in Q4. The new Omicron virus is a challenge for us because it's really taking out people from production. And that, of course, has continued throughout the Nordics in Q1 as well. Early winter was a bit of a surprise for us. It came maybe a month earlier than normally. So some of the works that we're supposed to do and complete in Q4 were postponed due to the winter. And of course, the winter has continued. So that will be a slight challenge for us also in Q1. High Voltage Poland has been a challenge for us and continued so in Q4 and for the full year last year. We are looking at ways to turn that business around and also looking for strategic options for our business in Poland. The new topic for us that really had an effect last year is, of course, inflation. That goes primarily towards material prices, raw material prices, of course, salary increases, and that will be then a topic for us also going forward. And of course, we need to work with operational efficiency to then keep that inflation, the negative aspect of it and then have the positive one from operational excellence and productivity improvements. With that, we can go to the next slide. We signed several major agreements during the quarter. OX2 is a wind park in Finland, and we are responsible for overhead lines towards that wind park. So a big contract, EUR 22 million primarily produced then in '22 and '23, but a really important win for us. Then secondly, Banedanmark, that's a frame agreement that we have had before, and we were able to protect that and win it, and that is an important part of our operations in Denmark. The other frame agreement then towards Banedanmark was one that we won after the period, and that's an installation part towards Banedanmark. That is also a contract that we had previously, and now we can continue to produce quality services towards Banedanmark in that part as well. And last not least, VALOREM, and again, a high-voltage overhead lines project again, towards a wind power project, where we are producing the power towards that wind park. So all in all, a good quarter, and again, good projects and frame agreements that we have won after the period. We can then move on to the next slide. So back a bit to COVID-19, what does it mean for us? And how has that impacted and is impacting our business? Well, one part is reduced customer investments or postponed projects and that has mainly to do with the fact that our biggest customers are in their business and in their income statement seeing effects, negative ones out of COVID-19. For example, roaming in other countries outside Europe, outside Nordics that impacts the overall performance of our main customers, as an example, and then they are reducing investments and postponing projects. The other part is, of course, our own challenges with having our workforce healthy and in place to produce and that has had an effect to then increase sick leaves. So normally, our sick leave rates are between 2% and 4% in the Nordics. And at this stage, we are on a double effect somewhere between 7% and 8%. So it has an impact on our profitability for sure. We can then move to the next slide. Regarding sustainability, I'm really proud of performance regarding safety. You can see that we have been developing the safety side of our business in a very, very good way, and we are in the 3.8 level regarding LTIF last year. And I think we will challenge everybody in this industry with that low number and very good performance. We have continued our communication and training in this area, and that has given a great effect. So that is great to see. And then on sustainability, as such, we have also committed ourselves towards SBTi, and that work is ongoing. We'll come back later on this year regarding targets and goals and measurable targets in this area. And last but not least, we also improved our score in the climate, CDP climate change, and we're taking action in that area as well. With that said, I will give the word to Saila and hand over to the financial part of our presentation.

Thank you, Casimir. All right. Looking first at the total group figures for the quarter and the year. And for 2021, our net sales, which actually was already mentioned as well, came to EUR 813 million. This is down some 13.4% from EUR 938 million in 2020. And as could already be gathered from Casimir's measures, the impact that came on the net sales came from lower customer investments in part due to COVID-19. We did lose some previously -- or some agreements for previous times as already announced earlier. And then we also, as part of the transformation, had some divestments in 2020 and also in 2021, that had an impact on the net sales. However, in Q4, we clearly saw the leveling out of the net sales and achieved EUR 226 million, which is more or less in line with the previous year. And with that, indeed, as mentioned, we see this as the baseline for the Nordic growth going forward. For profitability. We are certainly happy to note that indeed the operative EBITA, that is our key measure on that front, and the respective margin improved both for the quarter and the full year. And respectively, the fourth quarter EBITA amounted to EUR 7 million versus EUR 4 million the year before. And for the full year, we achieved EUR 14.8 million or 1.8% in the margin versus EUR 11.4 million in 2020 and the respective margin of 1.2%. And whilst we did continue to improve our results overall, we did, as already was mentioned by Casimir, suffer from the challenges that we have seen in High Voltage. And that is primarily Poland. And overall, the negative EBITA impact that we suffered from that part of the business was EUR 8.8 million on the negative side for the full year. This said, I think on a positive note, you can see from the lower right-hand corner graph, that indeed, the operative EBITA has been steadily climbing. The rate of climb may have been a bit slower than we would have hoped for. And a big part of that rate clearly has been the pandemic that has impacted our operations throughout 2021. Let's now move on to the next page and look at our performance in the segments. Okay. Finland. I think Finland continues on the same path that we already saw in the previous quarter, meaning that Finland continued to perform very steadily. And net sales both for the quarter and for the full year, basically very much in line with the previous year. And the numbers, respectively, were EUR 81.2 million for the quarter and EUR 299.6 million for the full year. The performance largely came and was backed by growth in communication. We have a very strong position in that market. And we also see very good demand for both fiber and 5G. Power, on the other hand, we had somewhat lower net sales there due to certain project completions that took place in 2020. On the other hand, the frame agreements that we have in that segment of the business or that sector of the business proportionally grew, and they also partly offset the decline that we saw in the projects. On operative EBITA, Finland improved both for the quarter and the year. And the fourth quarter EBITA increased by some EUR 0.5 million to EUR 4.0 million overall. And for the full year, we saw EUR 12.7 million or 4.2% in the margin versus EUR 7.2 million the year before. And for the improved result, we can certainly thank the improved project management and cost control in the country. But also, we do have to note that in 2020, we had somewhat sizable write-downs or cost increases in certain projects, which certainly then helped 2021 to improve over that. Then let's move to Page 10 and look at Sweden. In Sweden, we clearly started seeing improvement in the latter half of the year. And there, I think we were very happy to see that finally, the decline in the net sales is coming to an end. In Q4, the net sales amounted to EUR 56.3 million, which shows a 10.9% growth over a bit less than EUR 51 million the year before. And the increase is primarily coming from growth in Communication as well as then some newly started smart-metering projects. For the full year, we still saw a decline in the net sales by some 18.8% to EUR 182 million and [Technical Difficulty] see the turnaround taking effect now. And especially in Q4, we achieved sales of EUR 56.3 million, which is almost 10 -- or actually almost 11% more than in the previous year. And this is thanks to growth in Communication as well as then some newly started smart-metering projects. For the full year, we still saw a decline in the net sales down by some 18.8% to EUR 182 million. And this does reflect the loss of a large service agreement, which we have told about before as well as then the deviation of -- the divestment of Aviation & Security business in 2020, and then some of the lower levels of investments by key customers, which as we have seen, is at least partly attributed to the COVID pandemic. On the profitability side, we are very happy to note that Q4 for Sweden was the first quarter since Q1 2020 that was positive at the operative EBITA of EUR 0.8 million. And all in all, we could see that the improvement was taking effect in the second half of the year, where both Q3 and Q4 clearly beat the previous year's figures. And then for the full year, the operative EBITA also improved from last year or actually 2020, but unfortunately, it still was negative at minus EUR 1.8 million. And basically, if we look at the turnaround happening in the latter half of the year, we can see that the positive development on the EBITA came from increasing volumes but also from the fact that we are very hard working on the operational excellence. And that work was particularly accelerated actually in 2021, and will now continue in 2022. On the other hand, the first half of the year suffered from the negative aspects that already were mentioned. Let's now move to Page 11 for segment Norway. Starting with positive. In Norway, the net sales in the fourth quarter grew by 10.8% to EUR 46.2 million. And we can attribute this to increased demand in 5G and mobile solutions overall. But you have to note that a sizable part of the increase also came from positive foreign exchange rate development. For the full year, Norway unfortunately had a bit of a difficult time, meaning that the net sales decreased by almost 10% to EUR 160.5 million. First, in the early part of the year, that was due to, well, harsh winter conditions, which is seasonality but also the ramp-up of the renewed Telenor frame agreement that we entered into. Then throughout the year, out of the Nordic countries, Norway for us has been hardest hit by the COVID-19 pandemic and that clearly, like I said, had an impact all through the year. And then as Casimir mentioned, winter came early also in Norway. Profitability in Norway did suffer from the lower volumes. And with that, for the quarter, operative EBITA amounted to EUR 2.4 million or 5.1% in margin, and for the full year to EUR 9.2 million or 5.7%. Besides the volume, other factors that contributed to this result were the production mix that we had in Norway in 2021. And clearly, lower efficiency due to, for example, very high sick leave rates due to the COVID, quarantines and other sort of COVID-related impacts. Then let's look at Denmark on Page 12. In Denmark, we did see a sizable decline in net sales, both for the quarter and for the full year. And as we have previously announced, this is largely due to the partial insourcing of business by a large customer, and this happened in the second quarter of the year. For the fourth quarter, net sales in Denmark came to EUR 19.3 million, which is some 35% down from 2020; and for the full year, the figure was EUR 87.9 million versus EUR 118 million in the previous year. Whilst the decline is, of course, not something that we want to see, I think we're happy to know that the market activity in Denmark is on a good level. And as Casimir already mentioned, we had 2 very significant wins with Banedanmark, one in December and one early this year, which will certainly play their parts in helping Denmark to reenter their growth path. Operative EBITA in Denmark for the quarter was EUR 0.1 million, and this is down largely due to the low volumes. And for the full year, the number came to EUR 4.2 million versus EUR 5 million in the year before. And I think we need to note that despite the loss in volume and the lower absolute EBITA figures, we're happy to note that the EBITA margin actually for the full year improved to 4.8%, and that is very much thanks to the work that we have done on operational excellence and efficiency in Denmark. Let's now move on to Page 13 and the other business. In other business, as you I'm sure already know, the big parts -- active parts are High Voltage as well as then Smart Grids Germany. And other than that, we have the ramping down businesses in PTI, or Power Transmission International, as well as some remnants of the rail business. And of the parts in this basket, we can note that Smart Grids Germany certainly continued on a good path and good performance in a positive market sentiment, whereas as has been noted several times, we did continue to have challenges in High Voltage, primarily in Poland. When we consider the challenges in High Voltage, I think we should, however, on the positive side note that we did manage to close a number of big projects in the country. And those you can see in our bubble picture, that's to the right of the picture, where the closed projects now are painted gray. And clearly, from this, you can see at several of the older Polish projects are now operationally closed, leaving only 2 of the older portfolio still to be completed this year and next. And we're also now at a stage where all our big Power Transmission International projects are indeed operationally closed. And with this, of course, we have decreased the size of the business but also being able to reduce the risk level that is associated with this business. On profitability, other business had an operative EBITA of EUR 1.7 million in Q4 and minus EUR 1.8 million for the full year. And within this, we have the negative EUR 8.8 million impact from High Voltage. And on a positive note, then of course, we can note that Smart Grids Germany has continued its strong performance. Then finally, let's take a look at some of the balance sheet metrics on the following Page 14. The left-hand side picture basically shows leverage. And as we have seen over some time already, we have been able to improve and reasonably stabilize the development. And on the leverage, we landed the year at 2.6, which is a bit short of our longer-term target, but certainly starts to be on a healthy level, clearly so. And on the net debt, excluding leasing liabilities, we came to EUR 69.2 million at year-end, which is essentially at previous year's level. And if we look at the figure that includes the leasing liabilities, the net debt figure was EUR 122.6 million, which is some EUR 3 million less than the previous year, primarily, of course, then reflecting the decrease in the leasing liabilities. One thing that we're very happy about is, of course, the ROCE, the return on operative capital employed, which came to 23.6% and clearly increased from 13% in the previous year. And then finally, again, relating to the balance sheet, we are pleased to note that slightly after the year-end, we entered into a new financing agreement with our banks, comprising a EUR 35 million term loan and a EUR 90 million revolving credit facility. Both facilities are unsecured, which again, we're happy to note points to the fact that our transformation clearly has progressed. This completes the financial section, and I will hand it back to Casimir.

Thank you, Saila. So let's look at our then targets going forward. And in this part, we don't have any changes. We are looking at an EBITA target of 5% and annual growth in the Nordics 2% to 4%. And that, again, should be the starting point from last year's net sales in the Nordics. And staying on a healthy level regarding leverage, as we have done now for 2 years. So those targets are unchanged. We can then look at the next slide regarding our deliverables. So we are now in the last phase of our transformation journey, starting to look at growth, starting to look at different initiatives where we can replicate successful business from one country to another. And of course, innovation and new market development in areas that are close to our core business. Pursuing M&As in the Nordics has been on the agenda for some time. And it is, of course, also an area where we're looking into. And again, industry sustainability leadership, leadership in health and safety and leadership in quality is key also going forward. And that said, we will, of course, not forget about operational excellence. We'll continue to work with efficiency and productivity going forward as well. We can then look at the next slide. So for 2022, we are again regarding the guidance, continuing on the path that we had last year, that Eltel expects the full year 2022 operative EBITA margin to increase compared to 2021. And that is the guidance we are going with for this year. And then we can go to conclusion. So we'll move to Page 20 and open up for any questions that you might have.

Thank you, Casimir and Saila, for this presentation. [Operator Instructions] And we have received some questions already to start with, and we can start with the fact of the announcement that was made last night of change in the President and CEO-ship. Do you have any comments on the new CEO, Casimir?

Thank you for the question. I mean like in the press release last night, Håkan Dahlström will join Eltel 1st of September. And until then, I will stay in my role as CEO and President of Eltel. As you have seen in the press release, of course, Håkan has a strong background in communication and in growing business. So I think that is explained in the press release. And then, of course, Håkan will present himself and his thoughts and ideas around Eltel when he starts on the 1st of September.

Thank you. And we have questions here from Max Bacco at ABG. In the report regarding other businesses, operative EBITA increased to EUR 1.7 million, mainly as a result of real estate in Poland. How much did sales of the real estate contribute to the operative EBITA?

It was EUR 2.5 million in Q4, a positive one-off. So that was the Polish real estate.

And regarding growth, should we expect 2% to 4% organic growth in core markets during 2022?

Yes, that's the target. And again, then looking at the baseline for the 4 Nordic countries. So from that baseline, the growth is targeted at 2% to 4%.

And the final one from Max. Operative EBITA margin was up 6 percentage points, 2021 versus 2020. Do you expect a similar increase during 2022? Or will the margin improvement accelerate for some reason?

Well, that close, we are not guiding, but we are guiding that we are improving our EBITA in 2022 compared to 2021.

Thank you. We have questions from Joonas Ilvonen from Evli. Can you confirm that of the Nordics inflation mainly affects Finland? And if so, have you have seen any signs of it abating?

I think inflation for us is in a handful of areas. First, of course, diesel or gas that varies from country to country, but it has been around 20% to 30% in Finland, for example, the increase. On top of that, we have salary increases 2%, 3% roughly in the Nordics, depending on country. Then we have material prices that are increasing. But to a large extent, we can avoid that in Communication because a lot of the materials are supplied by our customers or suppliers, so we don't have the material risk in our communication business. That said, in Power, we have that exposure. And that is then mainly in Finland and Poland, where we have seen raw material prices like steel, cables and so forth, increase in prices over the last 12 months. Again, we are affected like all companies that are somehow involved in global supply chains and logistics flows, where prices and cost has increased over the last 12 months. So it's part -- now part of our daily operations and try to cope with that as well as possible. And of course, in areas also have discussions with our customers regarding price increases and see to what extent we can get support from our customers on the pricing of those services and products.

Have you seen private M&A targets valuations turn more attractive in the past 3 to 6 months? And if so, what -- which country could offer the most interesting targets?

Well, what we have seen is, of course, that the multiples in the stock market are extremely high. Then transactions that have actually happened in our industry, there, the multiples are clearly lower. Then we don't see a huge difference from country to country. I think we more look at potential M&As in the future from -- more from the aspects that where do we need growth. And as stated before, we are mainly looked at the markets in Denmark and Sweden regarding potential M&A targets.

Okay. It seems like we have reached the final question, and it comes from Stefan Lindblad at Ambergate Invest. How much capital is still tied up in Poland? And when will that be released?

We have uninvoiced of Poland, we had around EUR 20 million, and that's roughly the level where we are at the moment as well.

It has decreased somewhat.

Yes.

Probably, uninvoiced has come down to closer to EUR 10 million.

Yes. Yes. But then now we are starting new projects, so that's the level I think we were between EUR 10 million and EUR 20 million then going forward, depending on what we are winning in the market. The good news around Poland is that we were able to close 2 big projects that were from the history, and that released almost EUR 10 million then from the uninvoiced at year-end. So that's the positive note regarding Poland.

Great. That was the final question. So that means we conclude the call. Please continue to follow us and feel free to reach out to me if you have any further questions. We will present our Q1 report on the 4th of May. Hopefully, you will join that presentation as well. Until then, stay healthy, and thanks for joining us during this presentation.