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

Hello everyone, and welcome to this presentation where we will go through the Eltel's results for the fourth quarter and year-to-date of '23. My name is Elin Otter and with me today, I have our President and CEO, Hakan Dahlstrom; and our CFO, Tarja Leikas. After the presentation there will be opportunities for questions, and you can post questions either via the webcast or through the telephone conference. But with that, I'm handing over to you Hakan.

Thank you, Elin. Good morning. I would like to talk a bit about the highlights during the fourth quarter. And I'm really happy to say that we have a strong development on top-line. So we reach a net sales of EUR 240 million and a growth of 7%. And in local currency we are close to 11% in the segment. So this is a very good and strong development that we are really happy for. And as the Group, we reach 10% local currency growth. So I think that is a good thing here. We see a fantastic development in Denmark, almost 35% growth in the last quarter of '23. Finland also stepping up in the end of the year, reaching 22% growth. And Sweden a little bit losing the speed during the year, but reached close to 6% growth in local currency in the last quarter. The very troublesome and negative development of top-line in Norway continued in the fourth quarter and that is of course a major thing for us. That also visible on the profitability side. Here we reach an adjusted EBITA of EUR 2.8 million, and in the segment 2.3%. So as you understand, a good step in the right direction, but more to come. Year-on-year, we have an improvement here of EUR 6.8 million in the segment and I think that is for me, one of the best take away from this quarter, that we had better profitability in the segment, and a good development on top-line in 3 of the 4 segments. This have led to that our financial position is strengthened with a reasonable good cash flow I would claim and an all-time low net debt of EUR 100 million. So with this, I think we have ended the year in a much better way than what it started. We also in our strategy have identified the customer base, and I will talk a little bit later about the volume and impact of volume. So to mitigate the effect of those, it's important for us that we are able to broaden the customer base and I see great progress in that. But also, in the new area, our adjacent market that we have chosen to call new businesses. So both the content of the business and the number of the business ended in a good way of 2023. If we then look at the full year '23, it was as I indicated and as I believe you know, we had a very rough start of the year. The good recovery during second half gave us this full year result. Mainly driven by volume, if we think about top-line the restructuring cost and the -- restructuring and the cost saving program have of course helped us reducing the cost here. Pricing and indexing renegotiation of existing contract with customers have also contributed in a very good way. So on top-line, we reach our target on the net sales when we talk about yearly growth, but also in the segment we see strong 8% growth, so really happy about that. And as I mentioned, the improved financial position is very good for us, of course, with a cash flow of EUR 34 million full year. And looking then at the year, I think we could see that our strategy is good for us. We are doing progress and it also gives us the result we expect. So with a yearly growth in Denmark of 25% with a margin above 5%, I think we could now recognize that from the very troublesome year of '21 and '22 in Denmark, we have now Denmark in a very good position. Also Finland, here you see we did close to 19% growth in Finland. You have to remember that during '22, Finland had a decline on top-line. So this is a significant step forward, but also that the profitability was improved during the second half of '23. In Sweden, where we have had profitability issues and red numbers for many years, we now can see that we have a positive adjusted EBITA in Sweden for the first time since 2017. So really happy for that and the 2 years of growth now in Sweden. When we talk about the new businesses, I'm really happy to see that we have been able to win a contract of a utility scale solar park in Finland. The production in that park is our -- meaning our installation and establishment of that park is going according to plan. So really happy for this, and I see great potential in this area going forward. Also, the e-Mobility had great progress during the year, and we have now a structure and organization that are very capable. We have our winning contract and doing great delivery in this area also. Also in the customer dialogue, we now see that the sustainability that has been on the agenda for some years, but now it has another meaning. I would say that the expectation from our customers when it come to sustainability become more and more clear. It's more fact based and they want to have more information. They also want to see opportunity to reduce the CO2 footprint for them. So I think this is a potential competitive edge of us that we are as a forerunner in this area, so look very much forward to see what that can give us in the future. Just elaborating a little bit on the margin improvement. And we have talked about this activity before here. But I would like to show you a little bit about what is behind the Q4 result here. Very important, when we got hit by the inflation, and as we have said before, we were not really properly prepared for inflation, just to admit. But I think we now have recovered, and we have been able to renegotiate in [ principle ] all existing contracts. It might be 2 or 3 that still are a bit difficult for us, but the rest is dealt with, and we have indexes that work for us. We have also other price increases in the existing contract, but also better commercial terms that now help us going forward. The cost savings program and then we talk about Norway and Finland that we have talked earlier about. They are now giving us full effect from the end of '23. So that will also help us during next year. The commercial terms and pricing and invoicing conditions and payment terms and all of this that I have mentioned earlier in this type of reports are now coming in. And on this slide here, you could see to what extent they impact the business. And when we look at our project and what we are doing in our work orders, we could see that the 16% impact of everything we do meaning net sales in '23 is there on the new terms. So that's very good. But also, that we expect it to be above 40% during the year '24. We also see that the demand of our services is strong. And one [ proved ] point of this is our hard order book, where we see that we today have a hard order book, meaning hard commitment from customers that is close to 14% higher than it was just 1 year ago. So I think that's a really good thing and good development. So by us continuing focusing on our commercial terms and developing our new businesses in the adjacent market, broadening the customer base, I think we are on a very good track. With that, I would like to hand over to Tarja, and tell us the group numbers.

Thank you, Hakan. Eltel's fourth quarter continued in positive terms. Net sales growth accelerated to 7.2% in reporting currency, and was double-digit, 10.3% in local currencies. Organic growth in segments, which are Finland, Sweden, Norway, and Denmark combined equally strong growth, double-digit, 10.9%. Our full year '23 growth in reporting currency was 3.2%, where we are meeting our long-term growth target. Profitability-wise, our positive development continued. Although we are not on the level, the satisfying level yet, the tone of the voice in our conversations has been moderately optimistic. This development gives us confidence that strategy execution is progressing and the taken actions are starting to bearing fruit. In the same time and in this context, we need to remember that Eltel is impacted by seasonality. This winter has been and is continuing to be exceptionally harsh in Norway. It has started really early in Finland and in Sweden, and we have seen winter storms in Denmark. Our first quarter won't be a walk in the park. Then we move on to see our segments. And first we have Finland. Finnish operations represent 41% of total Eltel Group net sales. Fourth quarter net sales growth in Finland was very strong, 22.4%, and full year 18.7%. Our Communication business delivered a strong growth. The market was favorable. Additionally, Finland is a forerunner in our strategy execution. The renewable energy transition projects are adding to the growth in Finland. Our fourth quarter year-on-year profitability improvement was EUR 4.4 million. The margin improved to 3.3% when comparable was negative 1.2%. EBITA was positively impacted by larger production volumes. Especially in Communication and Power Transmission business. The 2 frame agreements in Power Services have continued having negative impact on our profitability, but less than previously. Despite the positive development during the second half of the year, it was not enough to bring us to the same profitability level as we were last year. Our full year EBITA was EUR 1.7 million behind the previous year's result. Then we move on to Sweden, which represents 23% of Eltel Group net sales. As mentioned earlier, currency rates continue having a major impact in Sweden. Net sales in reporting currency grew 0.3%, when in local currency growth was 5.8%. Our Power business Smart Grids -- smart grid projects, they continued their strong development, but towards the end of the year, we saw declining telco customer investment levels, which were slowing us down. The profitability improvement in Sweden continued now for the fourth quarter in a row, and we are delighted for the first positive full year result in recent times. This profitability improvement was driven by Smart Grids volumes and operational improvements. And then we move on to Norway. Norway's share of Eltel operations is 15%. 23% was very heavy on our Norwegian operations. We have seen positive development during the year. Still, the fourth quarter net sales decreased in reporting currency by 23.8%. And 14.6% in local currency when we compared to previous year. This net sales decline reflects the reduced telco customer investments, mainly in fiber. We report negative EUR 0.8 million adjusted EBITA for the fourth quarter. Despite being negative, result is an improvement to previous year. The improvement is a consequence of the measures we took to adapt to the changed market situation. 2 major restructuring rounds and cost savings. Very heavy year for our Norwegian operations. I'm sure that we are all happy to leave '23 behind us. And then we move to Denmark, where the year was very different from the sister entity. Denmark represents 11% of Eltel Group net sales. We are pleased to report that fourth quarter and full year '23 was very positive for our Danish operations. The net sales growth was the strongest of the whole Eltel Group. Fourth quarter, we report 34.9% growth and full year, 25.2% growth. This growth is coming from higher volumes from our existing customers. The profitability improvement in Denmark is equally strong. Fourth quarter adjusted EBITA is 4.6% and the full year 5.2%. In Denmark, multiple factors contribute to the profitability. Volume increase, operational excellence, and price increases. And last of our entities, we have other business, which includes High Voltage Poland, Smart Grids Germany, Power Transmission International and our Lithuanian operations. Other business delivered moderate growth in fourth quarter compared to previous year. And delightfully, the second positive EBITA quarter. A major element behind the profitability improvements is our scope change in Poland. Also, Smart Grids margins remained healthy despite the gas adjustment stop. And additionally, we have progressed in Power Transmission International project closings. I will finalize my report with a look into our balance sheet. And to our satisfaction, we report positive development in all main areas. Firstly, net debt. Net debt has continued to decline. We are now on our all-time lowest level, EUR 100.6 million, when comparable last year was EUR 125.5 million. And this is a result of positive development, both in the interest-bearing debt and in our cash position. During 2023, we made an additional amortization of our term loan, totaling EUR 11 million. And our strong cash position was favorable, and we utilized less available credit facilities. Then, leverage. The positive development in net debt combined with our profitability improvement led to favorable development in this area. Leverage resulting on 3.2, when it was a comparable point last year at 4.5. We are moving here towards the right direction, towards our long-term targeted 1.5x to 2.5x. And in net working capital area, which is a major topic for us, because we are a service company, net working capital management is a major focus area in our financial management. And negative working capital in our area is the key. Now reported negative, EUR 49.8 million is the lowest ever Eltel has reached. So all in all, all these positive balance sheet news, I complete our fourth quarter and full year '23 financials and show you our financial targets, which have been kept unchanged. So profitability, Group adjusted EBITA margin, we keep 5%. And growth, annual growth, 2% to 4%. And leverage, 1.5x to 2.5x. Thank you for your attention.

Thank you, Tarja. Then I would like to talk a few words about our strategy. I made references to our strategy a few times now in this presentation. And in short, our strategy is very much about improving the efficiency, and by that profitability in the current business, meaning the classic business as Eltel have done for more than 20 years. And here, of course, price and commercial terms is a very important part. We also see that we are very exposed for volume changes created by changes in our customers' investment plans. And just to reflect on that, we see that now this year, '23, Finland and Denmark have significant growth. But during '22, both Denmark and Finland had a decline on the top-line. Sweden and Norway had increased top-line in '22. And Sweden are able to keep that for '23, whereas Norway have a significant decline on top-line. And this is, of course, a situation that can be improved by having a broader customer base from more diverse customer base from different industries. So this is the reason that we would love to see a broader customer base. But you also see that there is a lot of things happening in this society when it comes to critical infrastructure. And we believe that Eltel can play an important role in developing the society towards electrification and digitalization in a broader size. So this is a main area for growth for us to go into this new business in renewable energy and public infrastructure. I mentioned earlier that sustainability is higher up and have a more rich content in the discussion we have with our customers now. So here we see that this is something that we work on to integrate in all our offerings and all our operations so that this is a natural part already from the beginning and nothing that has to be added on later on in the discussion with our customers. And we say and I claim that we get great feedback from our customers in this type of discussions. Then we are not done with our development of our concept and commercial capabilities. That's an important cornerstone in our strategy. And after 1 year in this strategy period, I could see clearly a progress, but we have more to do. Also, in new business models and taking opportunity to expand in the value chain will be very good for us going forward. And we have no major progress in this area during 2023. But I am optimistic looking at the future ahead of us also in this area. Then give you a little bit insight on the number of scenarios here. So it is mainly the electrification and the digitalization that we see drive these new businesses within green transition. And this is, of course, as everyone knows, a very large mega trends in the society. We see that we have a strong position here and can be very competitive in this. So that's really good to see. And we have been able to accelerate the development and implementation of our offerings. And in those offerings that we see as new businesses, we have solar and e-Mobility that just now have been those that have had the best development. And we expect most in those areas during '24. But we are also, to preparing ourselves in areas like wind. But it's obvious when we look in the pipeline and talk to customers. So there is very few wind project that's going to go into construction phase in the coming year, 1 or 2 years. So we don't expect so much from that area. And then we have energy storage and indoors. That is also identified areas that we prepare, and we develop offering for. But solar and e-Mobility is what we expect most business from during '24 and '25. We have been able to build a pipeline in this, what we call the new businesses. And as you can see on the right side, that 39% of everything we had in the pipeline in the end of '23 was within the area of new businesses. And this is, of course, good for us because new businesses in more or less all cases means also that there is a new customer. And when it come to new customers and broadening the customer base, I'm really happy to see that we have 150 new customers in the end of '23 that we didn't had in the beginning of 2023. And they are both in classic and in new businesses. And the value of the contract that we have been able to sign one with them during '23 is EUR 110 million. That is sort of a significant part when you put that in the relationship to all TCV that we were able to gain during '23 as is EUR 740 million. So not a significant revenue in this area yet, but a very good start of the strategy. In the strategy, we also talk about doing more cross-border within Eltel and use the scale of economy and use our footprint. A prerequisite for this is that we get closer to each other. And one way to do that is to have common values within Eltel. So in the strategy that we launched for a year ago, we said that we early in the strategy period would develop common values for the company. And all people in Eltel have had the opportunity to contribute to this development of new values. And we have now developed those, and we have launched those for the whole organization. And I'm really excited to see how this would also bring us closer together. So I think we have 4 great values that will guide us in our behavior and decision making going forward. So with that, I've done the last part of my presentation and it's time for questions.

Yes, it's time for questions, but thank you Hakan, thank you Tarja, very well presented. As I said earlier today, you can post questions either through the website or via the phone conference. And I believe we have a first caller on the line. So let's go to the phone conference.

[Operator Instructions] The next question comes from Adrian Gilani from Carnegie (sic) [ ABG ].

Yes, it's Adrian at ABG, just to be clear. First, a couple of questions from my end. I appreciated the chart showing the forward-looking split between the contracts with the new and old commercial terms. But just to follow-up on that, can you give some rough approximation on how much the margin actually differs between those new and old contracts, so that we can get a better understanding of the tailwind on margins that that conversion is going to have?

Yes. I don't want to give a number, but it's a significant contribution. It's a significant difference between the traditional way of tendering and what we have done since September '22.

Okay. Can we go as far as assuming that the old ones are barely even profitable? Are they like at the 0 margin?

Maybe not 0, but a very low single digit, yes.

Okay. That's very helpful. And then in Finland specifically, I mean, here you have a few larger frame agreements that have been difficult for you to renegotiate for some time. Can you say something about how much they are still affecting the margins in Finland? Because they have come up quite a bit, but presumably there's still some ground to gain there.

Yes, we have -- as we have mentioned, we have 2 frame agreements amongst quite many. But this is business in the area of Power Services, and they are troublesome for us. We have been able to do operational improvement in those areas, but I don't see that we are out of the problem. We have improved the situation. Now there is a new regulation in Finland when it come to distribution network and power grid. That will not help us due to the new regulation. We expect investors in that area to have more difficulties to get the business case together. And that means that we will be under pressure in the balance of how much new project we can do and how much service work we have. And the balance between project and service work orders is important for us to keep high utilization in an organization that is doing this type of work. So I am not so convinced that we see the end of the struggle in those 2 areas. What I see is that we have a Finnish operation that is doing great in all other areas, and we are then burdened by these 2. And yes, I think we will struggle with those 2 also during '24.

Okay. That's very clear. And then also, you have had 2 quarters now with positive EBITA contribution from the non-Nordic businesses. I guess, can you provide some color on what is driving that effect? And if you expect further improvements ahead there as well?

As we say, we have adjusted, changed narrow the scope of our operation in Poland, and that has helped us. We have also been very successful in the Polish operation to deliver projects during the second half of last year project that we have had for many years. And have had problems to get those accepted by the customer. Now we have got accepted and we have been able to invoice the full value of those contracts. So that has been a contribution both to the P&L, but even more on the cash side. Then we have a positive contribution from our PTI operation where we have been able to close all projects with historical operation. We have no technical work outside our footprint today, but we have a few legal units since project for 7 years, 8 years ago. And those have been also successful. If some of those have also been successfully closed during the [ later ] part of the year.

Okay. So it sounds to me like, part of that improvement is structural that you scaled down the business and then part of it is more to do with timing of invoices. So maybe some of that improvement is a more temporary factor. Is that reasonable?

Yes, I believe you are right. And when I talk about renegotiation of existing contract with customers, I think we should also recognize that we also in the other business have been successful with that. Meaning that we have been able to do contract improvement with our customer base.

Okay. And then just on the ongoing cost savings programs. Maybe I missed it in the presentation, but did you quantify how much of an effect we saw in Q4? And how much is going to be or how much is still yet to come I'd say from those?

Yes. I would say that we have the full effect in the later part of Q4. There is a handful people that will retire during the first quarter that has been a part of that program. But they don't have any real impact on the numbers for the first quarter. So I would say that since mid-fourth quarter we have full effect at the end of fourth quarter.

Okay. And then a final one from me. Presumably now around sort of the turn of the year is when you are negotiating with the labor unions on wages. And have you agreed anything in terms of a wage increase for 2024? Or if not, can you say roughly what you expect in terms of wage inflation for the year?

Yes, in most country we are done. There is 1 or 2 countries still to be done. But roughly 3% salary increase is what we expect in Finland. And 4% something in Sweden. And above 4% in Norway and Denmark.

I believe that was the last caller of the day as well. And we don't have any questions from the webcast. So that will conclude the call Hakan and Tarja. We will be back here on April 26 to present Eltel's first quarter of '24. And in the meantime, you can always reach out to me, and let's chat. But have a nice Valentine's Day.

Thank you.

Thank you.