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

Hello, and welcome to the Second Quarterly Report for Eltel where we'll go through the results. My name is Elin Otter, Head of Investor Relations here at Eltel. With me today, I have our President and CEO, Hakan Dahlstrom; and our CFO, Saila Miettinen-Lahde. Saila and Hakan will go through the presentation, and we will open up for questions after that. And throughout the presentation, you will be able to ask questions either through the webcast or via the phone conference. With that, I'm handing over to you, Hakan, as we turn to Slide 3.

Thank you, Elin, and good morning, and welcome. Yes, the highlight from the second quarter of 2023 is that we had a net sales that in reported currency is flat towards comparable quarter previous year. However, it's a great development in the local currency in the segment, and we have a growth above 8% and 5% for the group. So that is, of course, something that we are really happy about, and we see that this is driven by a strong telecom market in Finland, but also in power transition, Denmark and Sweden. Here, these are very troublesome development in Norway with a significant drop in net sales. We also see that our sales efforts are paying off and that we are able to sign more contract or higher value in contract this year than before. So also happy with the outcome of total contract value signed during the quarter with EUR 164 million. The disappointment during the second quarter was very much about EBITA margin, where we landed at a negative 0.7% and that is weaker than the year before. However, a minor improvement from first quarter and adjusted EBITA in our segment landed at 1.1% so that a weaker than quarter before. The root course of this is the challenge that we got in the fourth quarter of last year that we talked about in the previous report and the cost saving program has been completed in the end of Q1 we see gradual improvement from this program, but for the second quarter, we are carrying significant costs from those challenges that we have in Power Services, Finland and Norway. This is very much about a mismatch between the capacity we have and day-by-day demand in our frame agreement, particularly in Norway. The good thing here is that we see a strong performance in Denmark and really happy to see how during the last 12 months have really come out of the issues that was for 1.5 years ago in Denmark, but now showing strong performance in Denmark, but also Sweden had a good development and also the progress in the improvement are good to see. As you are aware of, we have been hurt quite significantly by inflation during the last 12 to 18 months, and we now start to see some positive effect of this index. It's, of course, all that we still have inflation, meaning cost increases in everything we need, but it doesn't get worse sort of the index is covering a main part of this now. And that is good, of course. We also see that the volume is part, maybe even larger part than the index in driving top line. So thinking of this, the margin is, of course, a disappointment. But overall, I'm quite optimistic about the development, midterm and long term in Eltel, I see that we do great staff activities we have, and we have started with in our new strategy. That is actually working for us. And I look forward to see more concrete result of this. As you know, the turnaround and the better situation starts, of course, with sales. And we see that we have been able to increase the value of the contract signed, EUR 164 million, as I mentioned, in the second quarter to be compared with EUR 65 million for a year ago. And even better, I would claim is that when we look at the last 12 months, we have been able to sign new contract to an estimated value of EUR 1 billion. That would give us -- if we look at a book-to-bill number for this, that will give us a little bit more than 1.2 book-to-bill. So this is, of course, something that underline and is the reason why I'm positive midterm and long term about the development. With this said, as you know, we have frame agreement to a very, very large extent in our contract portfolio. And the expected value of a contract is something that is just an estimate. There is no volume commitment. So we are very dependent on the actually call-offs from this frame agreement. And here, I would say that the most uncertain areas that we have here is to what extent the telecom operators will, during the later part of this year, use those frame agreements for those investments. So it's not obvious to what volume we will be able to deliver during the second half year. What we can do is, of course, to develop ourselves and improve our capability. And this is something that we have a lot of focus on, particularly on the commercial development, how we sell, what type of opportunity we are going for, how we qualify and how we calculate and how we do pricing. I would like to underline just pricing here, very important today and going forward that we are generating prerequisite in our contract for a higher gross margin going forward. On the lower part, you see some contract, we'll not talk about them today that we have during the second quarter, one and also one very important contract for us with Fingrid in Finland just after the quarter. So really nice to see how that contract portfolio is developing. But as you know, sales and then we have to deliver and we have more to do when it comes to the margin. With that, I would like to hand over to Saila to go through the numbers and the development in each unit. Please, Saila.

Thank you, Hakan. Yes. Let's go back to some of the numbers that Hakan already for the group highlighted and indeed, we were reasonably happy with the top line development and the sales efforts bearing fruit with the net sales for the first half year, increasing by 1% to EUR 396.5 million. And as we were quite substantially hurt by the currency exchange movements, particularly in Sweden and Norway, that means that in local currencies, the growth actually was quite healthy at 5.6%. And even more so in our Nordic segments, our key markets, the organic growth was actually closer to 8% -- at 7.8% to be exact. In other business, which represents some 10% of our overall revenues. The net sales declined slightly by EUR 6.2 million. And that is in line with the development particularly in Poland, where we have changed the scope to smaller projects and also increasingly services. Then as Hakan already mentioned, the profitability was not something that we can be very proud of as of yet. With that, the first half year adjusted EBITA came to minus EUR 7 million and decreased by EUR 5 million from last year. And the margin for the group at that number was minus 1.8%. However, again, the segments did fare better with the first half year margin being 0 and actually separate in the second quarter alone, it was actually positive at slightly over 1%. With that, let's then take a look at indeed, our key markets and segments. For Finland, as you can also see from the top right-hand corner graph, the net sales on a rolling 12-month basis have been increasing quite nicely. And the net sales increase for the first half year at 14.4% is very satisfying indeed. And we can thank that number for a very active fiber market improvement and increase in volume came from there, but also Power Transmission generating good volumes. The adjusted EBITA, however, has taken a turn for the worse as we did already note half a year ago. For the time being, with the adjusted EBITA for the first 6 months coming to minus EUR 1.5 million. That basically contains very stable and profitable operations in Communication. However, as we have already noted, we have had challenges in Power Services with certain unfavorable contracts as well as then cost increases. We have been taking mitigating actions for those. And as Hakan noted, we do expect to see gradual improvement, although we cannot promise any sudden overnight changes here. Moving on to Sweden. Indeed, Sweden has in the past been more challenging, but now already for some 1.5 years, almost 2, we have certainly seen much more positive development. In fact, net sales in Sweden actually have been increasing for 7 consecutive quarters year-on-year. and profitability has shown positive black figures for adjusted EBITA for 4 quarters in a row. And that we are, of course, very happy about. And to be more exact, net sales increased by 6.8% in the first 6 months and in local currency, again, the growth was even more substantial at more than 16%. And with that, net sales in euros came to more or less exactly EUR 100 million. And out of that, then the currency effect indeed was nearly negative EUR 9 million. The growth, as we already have indicated previously, comes both from Communication and Smart Grids and we're particularly happy to say that Communication at large, which is the majority of Swedish business has grown even more strongly in the first half year in 2023. Adjusted EBITA for the first 6 months came to EUR 1.4 million, and that's quite an increase from minus EUR 2.2 million last year. And that is also very visible from the graph on the lower right-hand corner where the steepness of the curve is indeed satisfying to us. And apart from the volume increases bringing out the profitability increases as well, we also note that operational improvements are bearing fruit as well. We were telling about the 1 Eltel program last year, and now we are starting to see the benefits from that. Going to Norway. Indeed, as already noted by Hakan, we unfortunately have seen quite substantial net sales drop in Norway due to lack of investments by our key customers. And with that, we saw the net sales for the first 6 months come to EUR 64.7 million, down from EUR 88 million last year. There too, however, the currency effect was quite strong at more than negative EUR 9 million. So percentage-wise, yes, negative numbers, but far less than the 30% that you would see in euros. Adjusted EBITA decreased to minus EUR 2.4 million for the first 6 months and shows the overcapacity and reduced efficiency that comes from the decreased volumes. We already did a fairly sizable restructuring effort in Q1 in Norway, reducing personnel by 100 people, reducing number of vehicles, premises and so on. But given the current situation and seeing the volume development, we do see that further actions indeed will be needed during the second half of this year. Moving on to Denmark. Denmark, indeed, still last year, was suffering from the loss of a key account previously, but now we are very, very happy to see that indeed that hole has been climbed out of and net sales have been increasing very strongly by 21.4% over last year's first 6 months to EUR 43.3 million, and that comes primarily from large volumes in ongoing contracts. However, sales efforts in Denmark also are very strong, and we are gaining new contracts and new customers there alike. Adjusted EBITA, also a very strong performance and reaching EUR 2.5 million for the first 6 months and indeed quite healthy margin at 5.7% also. And what I think we can be particularly happy about is that the good performance does not come from 1 factor only, but rather a sort of overall good performance involving not only increased volumes, but also operational improvements as well as then indeed successful higher pricing. Then moving on to other business, which, indeed, like I said, represents roughly 10% of our net sales and came down to EUR 43 million for the first 6 months. And primarily the decrease came from High Voltage Poland, where we, as said, are focusing on smaller projects and services these days and reducing risk, thereby. Adjusted EBITA actually improved but was still negative at minus EUR 1.9 million. And in High Voltage Poland also the losses did reduce to minus EUR 3.2 million. In Smart Grids Germany, we continue to see healthy margins. However, I do have to note that they were reduced from previous years. Very high margins due to primarily cost increases in personnel and also we need to note that there will be some changes in the marketplace in the fourth quarter of this year, meaning that the authorities have induced a stop in certain gas adjustment works, which will unfortunately mean that the margins in Germany during the last 6 months of the year will not be able to improve substantially. Then looking briefly at our balance sheet. You may recall that we actually improved the position by issuing a EUR 25 million hybrid bond in April. And that, of course, being classified as equity in IFRS, does not show in net debt. Net debt, as such is, as you can see from the graph, moving seasonally but then this year, at the end of June, we ended up at EUR 142 million, which is some EUR 10 million higher than last year at the same time. Leverage unfortunately, has been rising over the last year, reflecting the issues we have had in profitability. In Q2, we ended up slightly over 6%, which is roughly in line with Q1, but actually ever so slightly lower than what we saw at the end of March. Net working capital is something that we pay a lot of attention to, to optimize the cash flow and are happy to note that we maintain a negative number in net working capital at minus EUR 2.4 million at the end of June. With this, I will hand it back to Hakan.

Thank you, Saila. So these describe our group financial targets, and we have had them for some years, and we will just today like to confirm that they are still our targets, and we see improvement in areas like particularly growth as you saw today. So between 2% and 4% annual growth and we are above that in local currency, we should just get that also in reported currency. So I believe that we have that within reach. On adjusted EBITA, we have more to do, as you see. And also on the leverage that Saila just showed. So this is our target. We confirm them again, and we are working towards them with our strategy -- that's our new strategy that we set in the beginning of this year. And we are seeing progress. We are doing the right things on all of this, I would claim. There is, of course, much more to be done. And we expect the outcome of this to be visible in midterm going forward. But there are still our solution to the weak profitability, as you see but I'm convinced that we do the right things within Eltel and we have the skills to be an important player in this shift in the society when it comes to digitalization and electrification and increased new use of renewable energy. We see that so many wants to discuss this type of solutions with Eltel. And I'm hoping that we're going to do our part of this shift of society. So more to be done, more to be delivered, particularly on profit, but quite happy for the development so far, even though the situation here and today, our profit is challenging, of course. By that, I think we are ready for taking some questions.

Thank you, Hakan and Saila, for your presentations. As said in the beginning of this call, you can either post questions through the webcast or through the phone line, but let's start with the phone conference.

[Operator Instructions]

Okay. Let's start with a few questions from the webcast. And this question comes from Mr. Jose Koskinen. Eltel's financial targets by end of '25, group adjusted EBITA margin, the annual growth leverage and net debt. Are these financial targets still valid? I know you touched upon that, but how realistic do you feel they are? Is it a probability to achieve those targets?

I would say that they are challenged -- challenging. But yes, they are reachable. Yes, they are still valid.

Clear. And the next question comes from Marco Moilanen at Nordea, and he actually has 4 different questions. So let's start with the first one. Regarding Norway, you highlighted that you will initiate further capacity adjustment actions. Can you discuss about this a bit more? And can we expect to see some one-off costs as a result.

I would say it's a little bit too early for us to describe that change in detail. It's just that, as you all can see, there is a need, an action will be taken. But we don't have anything more than that to communicate today.

Can you discuss about the profitability level of your current order backlog? When can we expect to see positive adjusted EBITA for the whole group?