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

Hello, everyone, and welcome to this live webcast. Today we will present the result for the fourth quarter for Eltel 2022. My name is Elin Otter. I'm Head of Investor Relations here at the Eltel. With me today, I have our President and CEO, Hakan Dahlstrom; and our CFO, Saila Miettinen-Lahde. During the presentation, you will have the opportunity to answer or ask questions through the webcast and also dial in on the phone conference. Yes, with that, I'm handing over to you, Hakan.

Thank you, Elin, and welcome to this session. I will start with a few highlights of the quarter of '22 -- the last quarter of '22. And I'm particularly pleased with the significant increase we have in the value of contracts signed. So during the last quarter, we achieved a bit more than EUR 200 million. That is significant more than what we did the year before, but also looking at the full year of '22, we had EUR 825 million in new contract. So that's, of course -- so I think we are really happy about. Looking at the net sales in the last quarter, we did in line with the previous year and in the local currency in the segment, we had a minor growth of 2.5%. What was not satisfying more or less -- I will say, a big disappointment for me and the management team is the operative EBIT margin-wise, came out on minus 1.8%. And this is, of course, the main problem we have today in the numbers. This is caused by the inflation that we have talked about before, but it's now -- so that was clear for us that the development of the inflation during the year started out early with fuel, asphalt, that sort of thing. Later on it came into material and all different things we need like tools and cars. And over the years, it has become an increased problem for us. So we see increased cost in many areas, and this is something that we are fighting, of course, but this has not been reaching the reasonable level of cost compensation in our dialogue with our customers. So we see a weak result here. We also have some operational challenges. And with this, together with production -- change in production mix, it means that we have a mismatch between the capacity we have out in the field and the workflow of work orders that we are addressing. And when these are not in perfect balance, it hurts us badly on the cost by low utilization and more internal hours. And this is then visible in the EBIT margin, as you see here. What has been good in the end of the year and reflecting the seasonality is a very strong cash flow in the last part of the year. So that's really good to see. But with the situation we have on the EBITDA, we have taken the action to launch a saving program and we believe that, that is something that will give us benefit mid-term and long-term. We then open up a little bit about this new contract. As I said, EUR 212 million in the fourth quarter, really good. This is also so that when we now are tendering new contract, we also have used the possibility to increase our prices. And we have done that in early autumn and looking at the outcome of this and the value that you could see on new contract in fourth quarter, our conclusion is that this works well for us, and we had -- have not had any negative impact on our hit rate. So this is something we will also continue going forward. We also have been able to go into adjacent market and also broaden our customer base. And both of these 2 is very important so that we have a more mixed portfolio of business going forward. If you look at the contract that we have mentioned on the lower part of the slide here, you could see that 5 of this 7 is a frame agreement. That means that there is no volume commitment in this agreement, but the value that we have here is the value that we have estimated together with the customer contract by contract. But with the uncertainty we have in the world, we could also expect that there will be a fluctuation on this in relation to unexpected level here. The savings program. So due to the weak result and the shift we have experienced and our view that some of this will continue also into this year, we have taken initiative to adjust our organization to this situation. We estimate that the savings will be more than EUR 10 million in a running yearly operation. That will, of course, not come from day 1, but I'm convinced that we -- during the first quarter here, we'll be able to finalize all of those activities that will give us this cost decrease. But the effect of this cost decrease will gradually grow during second quarter and then somewhere in the third quarter will be at full speed. So what will this impact then? Yes. Unfortunately, this will impact more than 200 roles or position in our organization of yesterday, and this will also impact our subcontractors. We will, for sure, reduce the amount of subcontractors that we're using. This is mainly in Norway and in Finland. We have a cost to do this shift, to adjust our organization, and we judge that cost to be in the neighborhood of EUR 5 million. So we take a restructuring cost of EUR 5 million in the first quarter of '23. I'm convinced that this program will help us to adapt the organization and get a better balance between the need of the customer of tomorrow and our organization's capacity. So a long-term benefit from this program is something that we are looking forward to here. With that said, I would like to hand over to Saila to let us know more about the numbers.

Thank you, Hakan. So let's go and take a look at the whole group first. And basically, I would draw the attention actually to one positive fact, which is that for the full year, we did manage to increase the net sales, not by a mile, but somewhat from EUR 813 million to EUR 824 million, by 1.4%. For the quarter, as already mentioned, the net sales were more or less in line with previous year at EUR 224 million. However, we do want to note that for the Nordic segments, we saw, adjusted for the currency effect, an increase of 2.5%. And the net sales development for the full year basically reflects a very high demand that we saw for our services through the first 3 quarters. However, then the quarter 4 does reflect reduced customer investments and thereby orders that we saw over the last few months of the year. In terms of operative EBITA, as Hakan already mentioned, we, of course, cannot be happy about the outcome of minus EUR 1.9 million for the full year. And for the quarter, the EUR 4 million on the negative side that we saw. And as already also mentioned, a major factor impacting the result was inflation across the board, across the cost base. And not to forget, also the fact that COVID still played an important part in sick leave rates in the beginning of the year. But then thereafter, the sick leave rates unfortunately kept being on a very high level due to other common colds and other viruses spreading around. And that, thereby, did actually impact basically the full year. Also a high employee turnover rate, particularly in Sweden, was a factor that affected the EBITA negatively. With that, moving on to the segments. And firstly, Finland. Finland has, for some time, been our steady performer. For last year as well, the Q4 net sales were more or less in line with last year at EUR 80.3 million. For the full year, we saw a slight decline by 3.2% to EUR 290.1 million. Again, we saw some lower investment levels from our customers, particularly in Power Services, impacted some regulation changes in Finland. And also Finland had a 6-week long ICT strike in the springtime, which actually then turned out to have an impact in the -- for the full year even and some project postponements from the fall into actually this year just as well. All this said, we continue to see throughout the year quite strong demand, especially in fiber and also healthy markets in 5G and also in power transmission, which do carry on into this year as well. And as Hakan already mentioned, we had very good sort of amounts in signed contracts, and that holds true also for Finland, where the number came into more than EUR 400 million, at EUR 412 million versus EUR 90 million the year before. On operative EBITA, Finland is still firmly positive for the full year at EUR 8.2 million. However, quarter 4 turned out negative at minus EUR 1.2 million. And there the main reason is indeed increased material, fuel and subcontracting costs, i.e., inflation, and also the sick leave is playing a role. And as I said, even the full year was actually impacted also by the strike in the springtime as well as the long winter conditions that continued well into April. But moving on to Sweden. Sweden has been suffering a long, several years period of a -- some docker times. But I think we're extremely happy to note that those are seemingly coming to an end. And for full year 2022, Sweden in local currency actually saw a very healthy growth rate of 11.6%. And even in Q4 alone, that was 8.3%. The currency effects played a fairly major role in net sales, meaning that, that impact was EUR 9.5 million for the full year and EUR 4.5 million for quarter 4, meaning that in euros, the growth percentages were not quite as impressive, but nevertheless, worth noting. Where this growth came from, we have a very good portfolio and ongoing Smart Grids projects, which have been ramping up and are performing quite nicely at the moment. But it's also worth noting that communication, our main core business, also saw growth in the year. For operative EBITA, the full year number came to minus EUR 1 million, meaning that it was still negative. However, again, substantially better than minus EUR 1.8 million the year before. And we are also very happy to note that the second half of the year, all in all, was positive, with quarter 4 alone on the plus side by EUR 1.2 million. And the positive impacts are coming from the increase in volumes, all in all, and as I said, strong performance in these Smart Grids projects. And the improvement, again, comes despite the negative impacts that are common to all our markets, meaning inflation, employee turnover and the sick leave rates. And also noteworthy is that during the course of the year, we spent a fair bit of money on increased cost due to the One Eltel efficiency program, but are happy to note that during the last quarter, we are also starting to see the positive impacts of that program. Moving on to Norway. On the good note, for the full year, Norway actually saw net sales growth in local currency by EUR 9.4 million to EUR 177 million for the quarter 4, reflecting actually developments in the year. Net sales were largely in line with a very slight decline of minus 0.8%. And there, the developments through the year basically showed a very good demand for fiber and 5G all the way through the third quarter. However, as Hakan already did mention, we saw reduced purchase volumes from main customers compared to their forecasted volumes especially in quarter 4, which then, on one hand, reduced volumes, but also impacted utilization rates and thereby also the result. And with that, the operative EBITA for the full year still remains positive at EUR 2.1 million. However, quarter 4 saw these aforementioned impacts and ended up at minus EUR 2.2 million. And along with the mismatch of sort of operational capacity, we also, of course, saw the common denominators of inflation and high sick leave rates in Norway. And on top of that, yes, some change also came from the business mix, cost overruns, both due to inflation as well as then the capacity mismatch and also some operational challenges in certain projects. Moving on to Denmark. Denmark in quarter 4, particularly showed a nice growth of 8.4%. For the full year, we still saw a significant decline of 15.5% to EUR 74.3 million, and this is due to the insourcing by a major customer, which happened already in quarter 2 2021. This year, of course, that comparison is out of the way, and we look forward to continuing or sort of seeing the continuing good performance from Denmark, which they have basically demonstrated ever since last summer. And that is coming with the progressing ramp-ups of certain quite new, but already existing customer contracts as well as then price increases that are being implemented. On the profitability side, operative EBITA for the full year came to EUR 0.4 million and in quarter 4, particularly, to 1.9%, meaning -- well, actually EUR 0.4 million for the quarter and 1.9% and EUR 0.6 million for the full year or 0.9%. And where we are seeing the promising signs indeed are that the rolling 12 months profitability is really starting to show an increase in trend despite, like I said, the drop that we have been fighting our way from, that we saw from the insourcing in Q2 2021. So with that, moving on to other business. There the quarter 4 net sales showed a slight decline from previous years at EUR 25.6 million. However, full year net sales actually showed a slight growth, up to EUR 99.4 million, resulting from the realization of certain postponed projects in Poland. So while Poland contributed with -- for that increase, the net sales in Smart Grids, Germany, were more or less steady and in line with the previous year. Operative EBITA for other business for the full year came to minus EUR 4 million. And the biggest contribution there, again, being high-voltage Poland with minus EUR 7.6 million impacted very heavily by inflation on the local market as well as then the impacts of the war in the neighboring Ukraine. Smart Grids, again, continued on a very good level in terms of profitability and also in favorable market conditions. With that, just ending up with some trends on the balance sheet side. And of course, leverage, reflecting the rather difficult year that we saw profitability wise, meaning that, that shows in the increase in leverage rates. However, net debt actually came to EUR 125.5 million last -- at the end of last year, which is more or less in line with EUR 123 million the year before, reflecting the strong and good seasonal cash flow that we got in at the end of the year. And with the same note, I would actually end with a very positive thing, noting that net working capital, again, with this strong cash flow at the year-end ended up at minus EUR 21 million, which indeed is a very healthy level and a good start for 2023. And with that, I will hand it back to Hakan.

Thank you, Saila. Thank you. And I would like to start by just confirming that we have the target as before. So by the end of '25, we will have EBIT margin of 5% on group level and we will have an annual growth between 2% and 4%. So this is our target, and we will stick to them. We will now talk a little bit about our journey forward to reach this target. And during '23 and the coming years, we see a need of improving the efficiency and the profitability in the current business, so what we see as a core business in the segment today. And here is, of course, price increases and working with the price tool, a very important part of this. We also see that what we have started recently to go into adjacent market, a new market close to what we do and have done for many years so that we could use the same competence and the same skills we have, but use them in adjacent areas, partly in renewable energy and partly in public infrastructure. That is something that we have good experience of up to now, and we will increase our effort to go in this direction. We also see that sustainability becomes more and more important for us, for people that consider starting working in Eltel, but also our customers and investors. So I'm really happy to have been able to appoint a head of sustainability and that we have this work integrated in our function of business development. So this is a part of our ambition to strengthen our capability when it comes to develop new business, but also commercial concept and skills. So with our new established business development function, with the sustainability part integrated, we see that we have much better possibility today to implement new business model. With this, we also can have ambition to expand out our traditional role in the value chain. And the first indication and first feedback sort of our initiatives here is very positive. So then looking at in one of these areas, the e-Mobility, I would like to open up how we see that area. And then on the upper part here, you can see the value chain and what part you could contribute to in that business. And during this year, we will have active e-Mobility teams in all Nordic countries. In Finland, Norway and Denmark, we have dedicated resources that [indiscernible] doing this. And in Sweden, we are -- Sweden, we are more in an establishing phase. Today, we offer turn-key projects, and that includes both the planning and the build. And then going forward, we are looking at possibility to expand our role in this value chain. And that is something we do together with our partners and something that I believe will be very good for us going forward. But here and today, we are in the later part of the planning and the build phase. The market of e-Mobility and how we see that is described on this slide here. And what you can see is that there is a significant growth in this market in all Nordic countries and at estimate of the fleet of electronic vehicle or electrical vehicle, we see that in the traffic of 2027, we expect it to be 4.5 million. It mean 1 out of 3 cars would be of this kind. So what we see is that infrastructure is very much behind and it came new numbers yesterday for the Swedish market stating that we have 450,000 EV cars in Sweden today. And with that, you would expect it to be 10% of that as a number of charging points, meaning that we in Sweden should today have 45,000 charging point in the public domain, but that's not the case. We are very much behind. So Sweden have today 18,000 charging point in the public domain. On the lower right side, you could see how we have divided this market and how we will address them, meaning that we will start with the area 1 and 2. And then later on we will also address 3, 4 and 5. We will not address area 6, meaning consumer market. We have experience from that market since before, and we have made a choice to not be active in that market segment going forward. So Eltel is addressing the enterprises and the professional segment now. So our ambition in numbers then. We believe that the addressable market in 2025 in our areas is 3.2 billion, and we believe that it's reasonable for us to have a 3% market share at that time, meaning that we expect to have a net sales of EUR 50 million. And this is mainly driven by our great partnership we have today with Siemens and Kempower. We also see that the expansion in value chain will support this market share. So to reach this, we are increasing, as we speak, our cross-border activity, building across Nordic sort of vehicle for building this business concept and building the capability to deliver. So with that said, I would also like to come back to other areas that we have talked about before, namely wind. As you might remember, last quarter, I opened up a bit about wind. And we can now see that since then we have been able to sign 2 large agreements during November to build power lines and substation within the Finnish market. So great progress in that area, and we are today active in 5 other projects in the wind sector. So that is developing according to plan. And now in e-Mobility, we have our cooperation with Siemens and Kempower. And then what can we expect next? Yes, next quarter, our intention is to talk more about solar PV. So with that, I think we have said what we wanted to say today. So now time for questions. And over to you, Elin.

Thank you, Hakan. As said in the beginning of the conference, you can post your questions through the webcast, but I know that we already have questions on the phone conference. So we'll start with that.

The next question comes from Adrian Gilani from ABG Sundal Collier.

Hello, it's Adrian here at ABG. Just a few questions from my end. First of all, on some of the new contracts that you were talking about. You were pretty clear on the value of the contracts. But can you talk a bit about sort of the margins on the -- specifically on the new contracts that you're signing? Are they more in line with your long-term margin target? Or are they similar to the kind of margins we're seeing at the moment?

We have, in all our new contract, improved margin, and I'm convinced that this new contract that we are signing during the fourth quarter and going forward will, in a very good way, support our target that we have for 2025.

And now that we are into 2023, we're going to see some price indexation effects on the existing contracts that are still running, but also perhaps on the input side. Can you just help us how to think regarding the net effect on the EBITDA from the price indexations?

Yes, it has been proven that working with index is much more complex than we might have expected. So I would say that the index, I don't expect it to totally reduce the headwind we have from inflation. I would say that the indexes will help us to reduce that headwind, but I don't expect it to give any tailwind. So if we have an inflation like in Sweden, just now 10%, the indexes will not compensate us fully for that. We need to do that with other means and working with prices and efficiency improvement and try to find more attractive areas to do business. So indexes is a part of the solution, but not fully the solution. That's my view. Then it also take time until they actually help us, meaning that, first, you measure some like a year, and then you get that into the price list and then it impact prices after that date. So when the cost increases are significant and it goes fast upwards, it's a delay in the effect before we get the benefit. So we have -- we cannot sort of settle just by having index. We need to work with more pricing questions than indexes.

And also, what's sort of the general status right now, when you say on cost inflation? Are you seeing costs at least stabilize even if they're still at a high level? Or are you still seeing sort of increasing costs?

Yes. It's very different in different areas. If you look at fuel, I'm sure you have noticed that the fuel prices is coming down. So it's also been some part of the metal prices, but then cabling is still high and so asphalt is. So it's very different from areas to areas. So I don't have a good sort of number for you, but we still experience cost increases. Yes, we do.

Okay. And then just a question on the cost savings program as well. You reiterated your long-term margin target of 5%. But the -- I mean, the cost savings program, it's a fairly significant sort of scaling down of the operations. Do you see any risk that, that smaller scale could impact your ability to reach the long-term margin target?

No. I see that this saving program will support our ambition to reach that long-term target. There is an adjustment of the organization from areas where we don't see so great demand into areas where we believe there will be great demand in the future. But in this shift and adaptation to the situation of today and what we believe is the situation of tomorrow, some of our people, we don't have work for them now. So unfortunately, we have to let them go. That is, of course, a sad thing, but that's the situation.

And then a question on the slide that you showed on sort of targeting the e-Mobility sector.

Yes.

Could you just be a bit specific? You were talking about broadening your position in the value chain? What kind of new revenue streams does that entail?

Yes. Yes. It -- I foresee a scenario down the road where we take a larger portion of the planning phase, but also a portion of the operation. And that's things that we don't do today. Also see a possibility to represent some of the equipment provider, meaning that we will work as a distributor or reseller of the equipment and by that, take a larger responsibility for a solution, but that will also give us the possibility to deliver a managed services on an SLA basis. So by that, exploring a new business model where we could have a monthly fee and delivering customer value based on a service level agreement.

And just a follow-up. When you say parts of the operation, does that also include things like payment services?

Well…

For charging that is -- yes.

That we will have to see down the road. I hope I could be able to come back to you in 1 quarter per year to give you an update on the EV mobility part. So we are not there yet. We don't do any payment or that type of solution today, but might be a part of the scope in the future.

And one final question from my end, a bit more on the financials. We saw a significant step-up from the previous run rate of around EUR 2 million in financial expenses to EUR 4 million in Q4. Is -- was there anything abnormal here? Or is sort of EUR 4 million the rough run rate that we should expect going forward?

Nothing very abnormal in that sense. It does reflect the increase in interest rates across the board from commercial paper to our other financing instruments that we have in play.

All right. There are no further questions. So that concludes today's call. Feel free to contact me if you have any further questions after this. If not, I hope to see you on May 4 when we present the first quarter. Thank you.

Thank you.