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

Hi, and good morning, and welcome to this call where we will go through Eltel's results for the first quarter. My name is Elin Otter, and I'm Head of Investor Relations here at Eltel until the rest of the day. With me today, I have our President and CEO, Hakan Dahlstrom; and our CFO, Tarja Leikas. Hakan and Tarja will start by going through the presentation, and we will open up for questions after that. You are welcome to submit your questions either through our website or through the phone conference. But with that, I'm handing over the word to you, Hakan.

Thank you, and good morning all. So during the first quarter of 2024, we see a net sales development, where we have EUR 176 million in net sales, and that is down with EUR 12 million, where 8 of those are within the segment. Happy to see that the order book continues to increase, and we estimate it to be EUR 1.2 billion has now. That is an increase from EUR 1.1 billion a quarter ago. During the quarter, we have been able to sign new contracts to a value of EUR 112 million. And of this, the share of that is new businesses, as we call it, is 6%. So the new strategy we launched a little bit more than a year ago is starting to deliver new commitments from customers. I think that is really great. However, what is not so great during the first quarter is the net sales development in Norway. So of this EUR 8 million lower net sales in the first quarter that we have in the segment, 6% to 6.5% is from the Norwegian business. And that is, of course, a problem for us, and that's also visible in the result. And the result then is negative EUR 4 million, an improvement from last year with EUR 1.5 million, but nevertheless, not on the level we sort of expected to be. So what is then good in this first quarter is that this part of the year, the seasonality effect is very rough on us. And normally, we build up network capital and the cash flow is quite demanding during this time of the year, also for the second quarter. But this year, I would claim that we have a relative very strong development in the financial position. We have improved liquidity. We have been able to reduce the net working capital. And of course, a part of this reduction with EUR 54 million in less net working capital is due to the divestment that we have been able to sign an agreement about for high-voltage Poland. But the part of that is roughly EUR 14 million of this EUR 54 million. Also, the cash flow is a bit better than last year. And with this, we see a return of capital employed of 9.7%. So to me, this is a good step forward in the right direction when it comes to our financial strength. As I mentioned and most likely you have seen, we had during the quarter, we also agreed with Mutares that they will take over our high-voltage business in Poland, and I will open up a little bit more about this on the next slide. And then after that, we will also talk a little bit about the progress we have in executing of our strategy. But on the right side, I would also like to point to you an example in this strategy that is the solar. Solar PV and here is a picture from a park outside Helsinki, Lohja, it's a 10-megawatt solar park, meaning that it is utility scale. It's our first utility-scale solar installation, and we are ahead of schedule in this. We started to work on the solar park last year in the later part of last year, and we see great progress. And this is a really important proof point for us that we can deliver these sort of things and also that our IT support process and everything has been developed in the right way. So really good to see that the team that is doing this is ahead of plan. With that said, I come back to high Voltage Poland and the agreement about the divestment here. High Voltage Poland in short is a business that have a minor part services, it services on substations, but a larger part of the business, a very large part of the business is project. And those projects can be to build a substation or an overhead line. They are quite a long project. They are quite complex. And in this market that we now are talking about, the condition in that market is very customer-friendly. When you have this type of complex project, long lead time, complex situation, we right away and other type of permission. It is frequently so at least in our experience, that unexpected things is happening. And when the market conditions are so customer-friendly, it's very difficult to find a common solution on those issues. So our business in Poland with 410 employees will be transferred to Mutares somewhere here during the second quarter. To be able to take this step, we have prepared this for some time. We have reshaped the scope of the business. We have reduced our net working capital, also improve the cash flow from this business significantly. This has made this portion of our business sellable, I would claim. On the right side, you can see the net sales and adjusted EBITA for this part of our business during the last 4 years. And of course, this -- if we now can leave this behind and new half, this will improve our possibility in Eltel to have an operation going forward with a stronger growth and a lower net working capital but also a possibility to reach a higher EBITA margin. So reduced risk, less complexity, also a possibility for me and other people in the management team to focus on our core market. All of these have then a financial impact, of course. So the cash flow effect of this is EUR 3.75 million, and that is the whole cash flow effect of this. Then, of course, there is a one-off on the EBITA with EUR 23 million in effect. With that said, I would like to come back to the demand in the market and the same picture that we have shown for some time. So we see here a good development in the committed order backlog, meaning that this is purchase order received from frame agreements and projects. And here, we see that we have a double-digit improvement year-over-year. So I'm really happy with that. We also see that these new commercial terms that we have talked about, that the portion of them that is impacting the operation that we have at hand is growing according to plan. So we expect that this 44% of everything we do during this year will be based on these new commercial terms. So I think that is also really important for us because this is one important cornerstone in our work to improve our profitability. When we look at what is the content of sort of the market demand, we see that power is increasing faster than we have estimated it before. We also see that the intensity in the communication business is reduced and also is reduced a bit more than we have expected. So I will claim that there is an accelerated shift in volumes from communication to power. With that said, I would like to hand over to Tarja to talk us through the group numbers.

Thank you, Hakan. Eltel's first quarter result is in line with our expectations, even with the rapid reaction from our customers to the updated regulation in Finland, the material logistics hampering 4-week long political strike in Finland and the heavier than normal winter conditions in Nordics, which I pointed out when we previously met. Our net sales declined 6.4% in reporting currency and 5.9% in local currencies. In Sweden, we report positive development in net sales. And in Norway, net sales development was the most negative. Regarding profitability, we note that our adjusted EBITA has improved from to negative EUR 4 million. The positive contributors here were Finland and other business. We report positive development in return on capital employed, which has turned from negative 7.9% to positive 9.7%. This is an outcome of, of course, our result improvement and a lower amount of operating capital employed. Hakan already gave some light to our Poland divestment. The HV Poland divestment has been estimated to have EUR 23.2 million negative impact on group EBIT. The negative cash impact of the divestment is, as mentioned, EUR 3.75 million. Then we move on to the segments, starting from Finland, which share of Eltel Group is 35%. Here, net sales took small step backwards compared to previous year, declining by 3% to EUR 62.4 million. We had good winter volumes in communication and smart grids, but the 4-week long political strike had negative impact on power distributions material logistics. Additionally, we -- the updated regulation has disturbed our customers' investment plans. Adjusted EBITA improved EUR 2 million and came to negative EUR 300,000, where the main contributors were communications good volumes and stabilization of the 2 unfavorable power services contracts. Particularly welcome here is the lower hand right -- the table that we show in the lower right-hand corner, there is the positive 12-month rolling EBITA development. It reflects the energy build in the Finnish organization. In Finland, we have created a good momentum. And then I go to Sweden, which share of Eltel is 28%. We are very happy to note that Sweden has continued on that growth path. We saw a decline in Communication, but Smart Grids volumes more than compensated this. We recorded EUR 49.8 million net sales, which equals to 2.7% growth in local currency compared to previous year. Adjusted EBITA was euro-wise on the same level as previous year being 500,000. Then we go to Norway, which share of Eltel operations is 14%. Net sales declined in Norway and it has continued to decline, now minus 16.6% in local currency. This is below our expectations and reflects the further reduced cost -- reduced level of customer investments and the lasting 5G. The heavy winter conditions made the outcome even more unfavorable, leading to lower-than-expected utilization rates. As a result, profitability, adjusted EBITA remained negative, minus EUR 1.7 million. The positive side here is that despite further reduced volumes, Norway succeeded avoiding further profitability decline. But performance improving actions, including a reduction in staff, investments to growth and efforts to broaden the customer base and service offering continue. Then we move on to Denmark, which share of Eltel operations is 12%. Throughout last year, Denmark had recorded high growth as we can see in the net sales table in the right-hand corner. Last year's fourth quarter was very high in volumes. This has now impacted the first quarter volumes, and we see more typical start for the year. We also faced expected endings of 2 customer contracts and now reported net sales decline of 700,000 is in line with our expectations. The profitability reflects the short-term top line decline and came to 700,000 and to 3.4% margin. For our Danish operations, we are confident in our ability to grow as the year progresses. And then I go to other business, where we had the divestment news to share. Business-wise, net sales declined from previous year and came to EUR 18.7 million. HV Poland's share of this was EUR 7.3 million. Here, we report a profitability improvement. EBITA loss has halved and came to negative EUR 500,000. And that completes the first quarter segment financials, and I have the balance sheet items for you. In all here presented balance sheet items, we report major improvement underlying our strengthened financial position. Our leverage has improved from last year, slightly over 6% now to 3.5%. Net debt has decreased from EUR 158 million to EUR 115 million. Interest-bearing debt from EUR 130 million down to EUR 76 million. Net working capital development has been positive from negative EUR 5 million. We go down to a negative EUR 59 million. And with this balance sheet news, we complete the first quarter financial report and take a look at Eltel's financial target setting, which we keep unchanged. And these targets are by the end of '25. Profitability, group adjusted EBITA margin, 5%. Growth, Annual growth 2% to 4%; leverage between 1.5x and 2.5x and dividend payout is, of course, subject to leverage target. Thank you for your attention. And I hand over to Hakan.

Thank you, Tarja. Thank you. So with this said, we have a quick look at our strategy. And here, the cornerstone in our strategy is that we have to improve our efficiency and profitability of the current business. And here, of course, pricing in new commercial terms is a major part. We also have a need in most markets to broaden our customer base. This is a work that is ongoing, and we will keep up that going forward also. We also see this new and adjacent market to be a great opportunity for us. And here, we see a strong demand or a great interest to do more things together with Eltel. So very optimistic about this, and we see that the trend in the society is really giving us tailwind here. Sustainability, as we have said before, start to become really important for all different types of stakeholders around us, and we're very happy for that. We think we have a really good position in this, and we are continuously improving also our work inside Eltel in this area. Also an important part is the commercial capabilities and our concept around everything we do. And here, we do progress, and this is something that I see that we also will continue going forward. New business models and expanding our position in the value chain is the component in the strategy and might be that part of our strategy where we have less progress up to today. But giving you a little bit more insight on how I see the progress here. I see that we have the improved profitability and financial position here on the way and one necessary step to reach our target is this divestment of High Voltage, Poland. We also see that the customer base is developing in a good way. And here, we have 40 new customers that have bought something significantly from us during the quarter behind us. So on those EUR 112 million in new contracts, we see that more than EUR 9 million of this is signed by these new customers. So a reasonable portion, as I see it, if we can keep up 8% new customer commitment every quarter. So also, the new business, if you look at the right side, here is how we are following the progress in the new business. First, of course, we have to build capabilities and sales organization that we have done, and they have now delivered a reasonable pipeline I would claim. So the pipeline of Eltel today is larger than ever and a really good portion of that is this new business. We have been able to transform a portion of this pipeline into new contracts during this quarter and I expect, of course, this portion to increase going forward. But just now, we are at 6%. Then the revenue we have in the first quarter might not be impressive that sort of the total revenue, 2% of that is from new business, but it's 2% more than we had for a year ago, and that is also, of course, a portion of our revenue that I estimate to grow quite rapidly. So I will claim that there is a development in the right direction, and we see that we have taken really important step in this. We are not done in any way, of course, this is 1 year into the strategy, but we have taken really important first steps. So organization is there, the ramp-up is done in most markets, in most areas. We have more to be done, of course, but we see that also the market is here giving us the tailwind, as I mentioned. So there is a new contract and new commitment in all different areas with the exception of wind. We see that in the market here, there is very low interest just now for wind, and this might continue as I see it for coming 1 more year or maybe 1.5 year. But I'm convinced that somewhere there, 1.5, 2 years from now, we will also talk about wind here on this slide. So with that said, I think I hand over back to you, Elin.

Well, thank you, Hakan. Thank you, Tarja. Let's see if we have any questions starting from the phone conference.

[Operator Instructions] The next question comes from Lara Mohtadi from ABG Sundal Collier.

Lara here from ABG. I was just wondering regarding the divestment of the Polish High Voltage business, should we assume that, that was included in your 5% margin target? Or is the goal now to exceed 5% EBITA margin by year-end 2025 after making this margin deal?

Thank you for the questions. This is a necessary step to reach that target of 5%. So this doesn't mean that we increase or change the target in any way. This is a way to reach that target.

Okay. I'm also wondering if -- to what extent did the larger finished tie strikes in Q1 affect you. Are you able to quantify this the rough effect in how it impacted your earnings?

Yes. On earnings, I would claim that it did have a very minor impact. We see that some activity is a bit delayed, but not so that we could say that, that is a visible impact on the earnings. 4 weeks, and we had some material for the power business in the harbor that we couldn't get out, but no really impact that we could say.

Okay. Just one more question. How would you say your current demand is from your new revenue streams, for instance, solar, electric vehicles and such? How do you expect that will also develop during the year?

I think there is a lot of activities in solar in EV mobility but also in the best, the battery and energy storage system. The later one might be a little bit behind the EV that is I would claim, the first mover, and solar is, of course, also very active. We see that there's many projects that are now up for discussions that are really sizable. So this all that we have now done the majority of the work on, and I'm really happy of the progress and the proof point we have been able to receive there when it comes to processes and ideas. And so we are very optimistic about that domain going forward. There's a lot of interesting things happening here. And then the battery energy system, there are a little bit next time slot so to.

All right. And there are no further questions on the phone conference. So let's go to the ones that have been posted on the website. And the first one comes from Markku Moilanen, Nordea, and there are a few. So -- your gross margins improved significantly compared to Q1 '23. Was that due to pricing impact or change in sales mix? Is this a sustainable change?

I will claim that it is a mix. We see an effect. We were hit about the inflation here as we have talked about, we didn't really have the contract and the indexes in place when the inflation came. If it was an index, it might not have been the right index. And I think we have adjusted all of that. So we are reasonably protected today for everything on index and inflation. So I think that is one part of it. Then it's also when we talk about our commercial terms that we have been able to move our position when it comes to EBITA pricing, invoicing terms, payment terms, all of this, the whole package, but also, of course, the business mix. But I would claim -- yet, I will say that the business mix is the smaller part of it. So I think the commercial term index pricing is a big part of it. But also then the cost efficiency program we did during last year. We have taken significant action to reduce our cost structure last year. And I think we see that a little bit here in Q1, even though we still have more to do in Norway.

Also regarding High Voltage divestments. You mentioned that the divestment will result into a negative cash flow effect of EUR 3.75 million. What is causing this negative cash flow impact? And is this the net cash flow of the whole divestment.

It is the agreement that we agreed with Mutares and asked about EUR 3.75 million is the whole, yes, it is.

Do you have other weak-performing projects at the moment within the group outside of High Voltage Poland?

No, I don't see that we have any problem areas in the same way. We have talked about that we have 2 contracts in Power Services Finland. That is not on the expected level of profitability. Of course, we have part in the organization, teams on where contracts and where that is not where we want to be or we should be. And of course, when the net sales is dropping as fast as it has done during first quarter in Norway, that gives us profitability issues and problems. That -- but nothing that I would say could compare with what we have seen in High Voltage Poland, far from that.

What is the main pushback in Norway? Why are customers reducing their investments? And can you comment on how the order intake has developed in Norway? Is the weakness expected to continue?

I think we see that a big portion of what we have done in Norway and we also do today is, of course, fiber. A lot of that fiber deployment rollout is fiber to the home. And now the fiber penetration in Norway have come quite far. So we don't expect this to grow going forward. It will be a decline on that demand, and that is expected. What was not expected was that it would be so much during first quarter this year. That was not expected. But there is -- I would say there is no sort of bounce back here to what was during 2022 or something like that. No.

We have to remember here what is going on in the interest rates. So of course, when we are dealing with investment projects, the customers they choose when they launch their investment projects and obviously, now the high interest rate that makes the decision point a bit further. So understandable.

And final question. Yes, this is the final question that we have. Can you disclose what was the financial impact from the political strikes in Finland? And do you expect any further impact from the strike effect in Q2?

No really impact at all on Eltel, some delay in some projects, but nothing that is of the size that it's visible on the earnings. It's a minor delay in net sales, but really small.

Also in Q2.

Also in Q2.

Great. Thank you. So there are no further questions, so that concludes this call. We present our Q2 report on the 25th of July. Hopefully, you will join us then. In the meantime, feel free to reach out for questions if you have any. If not, thanks for participating in today's call.

Thank you.

Thank you.