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

A warm welcome to this presentation of the second quarter results by Eltel. My name is Alexandra Karnlund. I am Communications Director at Eltel, but you won't see so much of me because the presentations will be held by our President and CFO -- CEO, Hakan Dahlstrom, as well as our CFO, Tarja Leikas. And after their presentation, we will open up for questions. And you are most welcome to post these questions throughout the webcast either online via the webcast or by dialing in. [Operator Instructions] With that, I think it's time to hand over to Hakan.

Thank you, Alexandra. Good morning, and very welcome, everybody. I will go through shortly our highlights from the second quarter, and I would like to start with the net sales. I think we have a solid growth, happy to see 5.3% organic growth in the segment and, for the whole group, 3.8%, so in line with our targets and really nice to see. What is also very satisfying for me is that we have been able to secure a very important contract during the quarter, and this to a total value of EUR 317 million to be compared with second quarter last year of EUR 164 million. By this, we have been able to increase our -- the value in our order book to EUR 1.3 billion. And this is, as you understand, an estimate since we have so many frame agreements. But it's a bit larger than what we had before with EUR 1.2 billion, so really nice to see the development there. What is not so good is the decline in volume that we are having in Norway. And this is, of course, burdening both the top line and the bottom line, even though the reduction in the second quarter was less than previously experienced. We also see in all the Nordic market, particularly Sweden and Denmark, a shift of volume from Communication to Power. And I will elaborate a little bit on this in a moment. But first, a few words about our profit and financial position. So during the second quarter, we were able to improve by EUR 2 million. And this is, of course, very important for us, and our main task is in the company to strengthen our profitability, of course. So with the EUR 0.5 million profit in the second quarter, we have taken a step, another step, in the right direction, but we are not where we want to be. Also good to see that the cash flow year-to-date has improved in all segments and the liquidity situation is significantly better now than a year ago. So a few really important proof points here. One of them is the net working capital that has been improved now to minus EUR 54 million. All different parts of the organization have contributed to this. So that's also nice to see. Our commercial terms are paying off. Looking at the strategy, I will, [ at the end of ] this presentation today, elaborate a little bit on the progress we have in our strategy. And the short version here is that the gross profit year-to-date has increased with 40%, meaning from roughly EUR 29 million to a bit more than EUR 40 million year-to-date. And I think that is one important milestone towards a more healthy financial result. Also great to see the quality in our strong pipeline. When we now have the ambition to broaden our customer base and address new and adjacent business, we see that this is something that many, many customers and potential customers are happy to discuss with Eltel. So this is a really nice development we have here. And one proof point of this is that, during the quarter, we were able to sign a new contract in the area of new business for EUR 14.6 million, and that to be compared with EUR 4 million a year ago. And this is sort of one of the main results of the strategy that we launched early 2023. We also have finalized the divestment of High Voltage Poland during the quarter, and I will mention a few words about that. But first, a little bit more about this, what is happening in the market as we see it. It's 2 things happening at the same time in the market where the traditional telecom operators, in most of the cases in Nordic, they are reducing the investment in infrastructure like 5G fiber network. At the same time, there is much more initiative in the Power sector, and it's about transition to green energy, renewable energy, but also strengthen the critical infrastructure as we have in all other society when it comes to power transmission and power distribution. Here, there is one exception, and that is Finland. We see that the Communication business based on the traditional operator demand is still increasing in Finland, and that is due to the ongoing fiber rollout. On the other side, on the Power side, we see an updated regulation that is sort of creating a bit of hesitation and reduced investment from the distributor of the Power segment in Finland. So Finland has sort of a development a little bit by itself, more Communication, a little bit hesitation in Power versus the other part of the Nordic where it is a lot of new initiatives, idea, investment in Power, and the traditional operators are a bit reducing their investment and a bit hesitant. But we see also new players coming into Communication, asking for the same type of services that we traditionally have sold to the operators. And this is, to a large extent, public sector. An example of this is the agreement that we have signed with the Swedish Defence Materiel Administration, FMV, about the air bases in Sweden. We have another example in Norway with the contract with Equinor. So this -- when the operators are reducing their investment, we're broadening the customer base and find new customers for the same type of services as we have done traditionally for the operators. We also see that there is a lot of new initiatives when it comes to renewable energy, particularly solar. The wind industry has been more hesitant and we have not seen any significant initiatives in the Nordic when it comes to wind, a lot of planning, a lot of projects, a lot of discussions, but it is within the solar that we expect the most activity going forward short term. Also a few words then about High Voltage Poland. As we communicated the second week of April, we have signed an agreement to divest this, and now 6th of June, communicated the 7th of June. We have finalized that process and the divestment is done. This has been done to reduce the risk for Eltel and our shareholders, and I can see already now that this is a bit of a relief for us that we are now able to have stronger focus on our core market and develop our margin and the business in the Nordics. There is a lot of complexity in the Polish market when it comes to this type of project that we have run. And as you could see on the right side, this has been a business that has had significant losses over a couple of years, 5, 6 years. And we have, during 2023, been able to improve the business to a level where it was possible to divest it. The financial impact of this for Eltel is as we have said during the first quarter report and earlier communicated, but we could just confirm that this is now finalized to the financial impact, as we have said before. So I think that is a chapter that we are happy to leave behind us. And with that, I would like to ask Tarja to join me here to tell you more about the group numbers.

Yes. And really nice numbers. Nice to be reporting the second quarter result. Our group net sales increased, like Hakan said, 3.8%. And in the segments, the growth was 5.3%. The growth engines here were Denmark, Finland and Sweden, and that's the order of the magnitude. In June, we completed, like Hakan mentioned, High Voltage Poland divestment and the Polish business is no longer part of Eltel. When we exclude Poland from our numbers, the growth is slightly more rapid. Regarding profitability, we note that our adjusted EBITDA has improved by EUR 2 million. The majority of Eltel's second quarter result is in line with our expectations, the only exception being slower-than-anticipated Communication market in Norway. We do report positive development in return on capital employed, which has turned from the negative 11.7% to positive 14.3%. This is a result from profitability improvement and the lower operating capital we have employed. Our result includes negative EUR 23.1 million from the divestment of Poland. This number will be shown in items affecting comparability going forward. The transaction had a negative cash flow impact of EUR 4 million in the second quarter. Then we have the segment results. And first, we have Finland. Finland's share of our operations is 43%. The second quarter, Finland, they turned to growth. Net sales increased 8.7% compared to previous year, and the first half was 3.6% higher than the previous year. The market demand has remained strong in Communication and the volumes in power transmission have increased. The power distribution has declined, and this is due to the updated market regulation, although the impact has not been as significant as we initially anticipated. Adjusted EBITA improved by EUR 1.5 million and came to EUR 2.4 million. The Communication's good volumes, Smart Grids and improved outcome from the earlier reported unfavorable power service contracts were the main items behind the improvement. The positive momentum Finland has built has really held on. Then we move on to Sweden, which share of Eltel is 24%. In Sweden, net sales has remained stable compared to previous year. The decline in communication volumes, like Hakan presented earlier, have slowed us down, but the sharp increase in Power volumes has been enough to secure the stable development. Adjusted EBITDA of the quarter was slightly higher than previous year and came to EUR 1 million. Then we go to Norway, which share of Eltel is 15%. We have been suffering from the declined communications market for the past 2 years in Norway. Our second quarter net sales declined by 2.5% compared to the previous year. And first half, we are more than 11% lower than previous year. New strategy execution is progressing in Norway, but this has not been enough to compensate the decrease in traditional communications volumes. Profitability-wise, the volume decline mitigating actions have prevented us from major profitability decline. Second quarter EBITA came still to negative EUR 1 million, being EUR 200,000 lower than previous year. The continued volume decline in Communication will lead to adjustments in our Norwegian operations. This will happen during the second half. The planning is ongoing. Then we go to Denmark. Denmark's share of our operation is 12%. And after the first quiet quarter, Denmark is growing again. The growth now 17.9% compared to previous year -- previous year second quarter. The profitability is equal, bouncing back to 4.6%. Cumulative first half's EBITA is lower than previous year, as we did expect. This is being due to less favorable business mix. We have a very good reason to be pleased and confident about our Danish operations. And then we go to other business where High Voltage Poland was included until its divestment in June. Business-wise, second quarter net sales declined from previous year and came to EUR 18.1 million. Poland's share of this was EUR 6.3 million. Here, we report a profitability improvement. EBITA loss has more than halved and came to negative EUR 0.4 million. And then we look at the balance sheet items. In all here presented balance sheet items, we report major improvement compared to previous year. Our financial position is stronger. Cash flows from remaining Eltel business entities were stronger than previous year. Our leverage has improved from last year's slightly over 6%, now to 3.6%. Net debt has decreased from EUR 141.6 million to EUR 127.9 million. Interest-bearing debt from EUR 161.8 million to EUR 141.6 million. Net working capital development has been positive as well. From negative EUR 2.4 billion, we go down to negative EUR 54.3 million. And with these balance sheet items, we complete the second quarter and the first half year's financial report. And as usual, we take a look at Eltel's financial target setting by the end of '25. And these we have kept unchanged. And the targets by end of '25, EBITA margin, 5% growth, between 2% and 4% leverage, between 1.5x and 2.5x, and dividend payout subject to leverage target. Thank you for the attention and handing over to Hak.

Thank you, Tarja. I would like to take a moment to remind you of our strategy. And first, I would like to point out this improved efficiency and profitability in the current business. This is, of course, very much about operational excellence, but also about price increases. And here, it's great to see that 3 out of our 4 segments have improved profitability during this quarter. Then, as we have talked about, what is happening in the market with the traditional operators is reducing the investment, and we see a need to search for other customers, both in Power and Communication. We have as a part of the strategy to broaden the customer base. But it's also so that we see what is happening in the society, and a fantastic trend, a very strong trend, about digitalization and electrification of society together with the sustainability that is pushing a lot of initiatives in the Power segment. All of this is, of course, a possibility for us. And due to this, we are addressing this, what we call a new and adjacent market. And this is, of course, also great to see. And I will mention a few examples next here about what we have been able to achieve. Sustainability is something that is higher and higher up on the agenda in all our discussions with customers, and I will shortly come back to this. But this is, of course, a more and more relevant point or part of our strategy. And within Eltel, we continuously need to develop our commercial skills and capabilities when we now are becoming more and more proactive in our sales and put more and more effort to go out and catch a market that we have selected instead of doing what customers actually are asking from us. So with this said, what is the progress? And here, I would like to start with this profitability, and again, repeating gross profit year-to-date improvement with 40%. That is, of course, a very important milestone, not where we want to be, but one step more on our journey towards a decent financial result. We see that the EBITDA is improved in all segments except Norway. And this is, of course, due to the large reduction of volume and our cost of adjusting the organization in Norway. And I have to say that we have not seen the end of this yet. There will be more of this as I see it going forward. But it's also very encouraging to see that the last 12 months' cash flow has improved in all segments. The broadening of the customer base I have talked about have now resulted that our order book is larger than ever, and we have EUR 1.3 billion in the order book. Part of this, a big part of this, is frame agreement, of course. And due to that, it's really hard to exactly predict what type of revenue this will generate in the future, but our best estimate of today is that we have EUR 1.3 billion of value in our order book. The mix in the order book is also started to be seen, this -- that we have more power, more new initiative than what we had in the past and a little bit lower on Communication side even though we, during this quarter, have been able to renegotiate and secure contracts with both Telia, Telenor and Elisa, all 3 with a significant value. But on the new business side, we can see that the new contract has a value of more than EUR 14 million during the second quarter. And this is, of course, nice to see that we [ reach as a ] contract. It's not only a pipeline. It's mature and it gets to contract. We also see an increase during the second quarter in the revenue from this segment or this business area of us. And it's great to see now that all countries had revenue in the second quarter from areas like solar PV. E-mobility, we have had revenue for quite long. And mobile indoor and the type of private network solutions have generated revenue for at least 2, 3 years and, in some countries, even longer. But now we have revenue streams in all areas and also soon in the battery energy storage system, where we have the first significant contract during the second quarter, followed by also a good contract in Finland. This is an area that is moving quite fast, so I expect more to happen soon. So the net sales during the second quarter for this area came up to EUR 8.5 million, to be compared to EUR 3.5 million in the first quarter, so nice development here. Happy for this. And then on the other part of the strategies that we see, as I mentioned, the sustainability to become more and more important in the discussions with customers, and it's two-sided here. One part is the offering side, where we, as many times as we have a possibility, we could offer an alternative to the solution that the customers have asked for. So we try to propose a green version and add-on sales activity to reduce the emission of the operation of our customers or what we are doing for them. But then we also have our own operation. And in our own operation, the most -- the largest part of the [ emission ] that we are contributing with is our fleet. And here, we transformed the traditional fleet where we have [ gasoline ] gas-driven cars into electrical vehicles. And as we speak, we have a bit more than 400 electrical vehicles now in our fleet, and this is roughly around 11% of all the cars we have. I talked -- I mentioned before a little bit of commercial skills and capabilities. And here, I see that we have increased our ambition when it comes to commercial terms, when it comes to pricing, invoicing conditions and payment conditions. In all of this, we see improvement in the numbers of the second quarter. And we expect also this to continue going forward. But one proof point, as you could see here a minute ago, was the net working capital. So I think that's a very nice level we have reached, and we expect the commercial terms to come in in a larger and larger extent that you can see on the right side here, a picture we have shown many times now. But we see that the actual numbers is also following this estimate that we have on the right side, so nice to see. With the strong pipeline and the TCV in the order book, I expect further positive development in both our activities to broaden the customer base but also our adjacent and new businesses. With that, we have finalized the presentation. It's time for questions. Please, Alexandra?

Yes. [Operator Instructions] And we actually have one caller. It's Adrian Gilani from ABG Sundal Collier. Good morning, Adrian. How are you?

Yes, all good, a couple of questions from my end. I'd like to start off on the Communications business. Just in general, in terms of the outlook, do you expect any improvement in the Communications business towards the end of the year? Because it seems we are hearing some optimism from both telecom operators and equipment providers that investments will sort of gradually start increasing. So what's your view on that?

Yes. We believe that the swap of 5G, if you start on the mobile side, the swap of -- into 5G from 3G and 4G have been done very much based on the existing footprint. Now we see that they need to build more greenfield sites. That means more work for players like us. So I believe that is one contributor that have a potential to increase the investment, but also that we hear from some of the operators that they need to increase the investment also on fiber side. But I think that another is this new segment that we talk about, like public infra. It can be a private 5G network for a hospital like we had, during the second quarter. won a contract with [ Riveria Shipping ]. It can be the defense. It can be other part of the public sector like [ road ] [indiscernible] or railway or so. So we see that the public infra is growing quite rapidly. If this will compensate for the decline from the classic telecom operators is not yet proven, but at least there is some indication that this will compensate. But I don't think that we will see the same significant investment as it was for 2 years ago from the operators.

Okay. I understand. And when you talk about this sort of shift in demand from Communications instead into Power, are there any mix effects we should be taking into account? So do you have sort of similar gross margins from Power and Communication contracts, or do they differ materially?

It's -- every time we have a shift in volume, there is also a bit of a cost to adjust because, in reality, it is a reduction in Communication and an increase in Power. And I think you can see that. For -- let's take Denmark as an example here, that there is a little bit softer margin in Denmark in the second quarter. It's driven by this, that Communication is going down, Power is going up, and the shift, as such, costs a bit. And I think that's what we have. Then going forward, I don't see any reason why we would have weaker margin in Power than what we have had in Communication. And particularly in the new business areas, we see potential of higher margin.

Understood. And then, on Norway specifically, you're right that you will need to scale back operations further given that that market specifically is quite weak right now. How much in cost savings would this lead to? And can you give some sort of indication on the time line in quantifiable terms?

No, I don't have a number for you today, but we believe that -- so we will see more of this during late this year and early next year. It's due to the general investment level, but also that we -- in the new contract with Telenor, we have a smaller footprint, even though we are the largest provider to Telenor also going forward. And to, I would claim all the Nordic operators, we are the largest one. But there is a reduction that we see in the future in Norway, absolutely.

And then a final one from my end. Maybe you mentioned it in the presentation, but are you able to share what the EBITDA contribution was in Q2 from the divested High Voltage business in Poland specifically, just so we can get a clearer picture of the underlying profitability in the quarter?

When comparing the quarters, last year, HV Poland was quite strong. So in that sense, we don't see margin improvement. And then, again, Poland was included until the end of May, so there's only 1 month without Poland now.

Yes. What I'm wondering is, Tarja, if you can say the number that Poland contributed to the earnings in this quarter, just so we can sort of know what -- given that that's now gone, so that we can see what the underlying profitability is if we exclude that from the numbers.

We have not got...

No.

We don't have that in the [indiscernible].

In that case, that was all for me. Thank you for taking my questions.

Thank you, Adrian. Bye. Then we have a few questions coming in through the -- through the web conference. And first one -- or there are 2 questions from Nordea, Nordea, [ Marco ]. Hello. You mentioned this. We have touched upon this, but I will -- let's still take this question. You mentioned this volume shift from Communication to Power. Can you discuss what the impact of this shift has on Eltel? Do you have the capacity to do more Power projects? And does this shift have an impact on your profitability?

It's -- I think this is something we want to do. We see that the fiber rollout, with the exception of Finland, the fiber rollout is mainly done. But what is still to be done in the Nordic when it comes to fiber is densification, but that will not have significant volume going forward. So we see that the skills we have and the people we have will very much be able to contribute in the Power segment, even though they had traditionally worked on the telco side. So this is something that has a cost when we sort of change. We will train and we help our people to get skilled in the new areas, but it is not so big difference. It depends a little bit on the task, of course, but for many roles, we can quite smooth transform ourselves from telco to power. So we see that as something that is good. And we believe that the increased demand in the Power segment will be here for many, many years. So I think this is something that we will see coming next and the year after that also. It has -- when it happened, it has, of course, some impact on our cost side, but not any significant...

But profitability-wise?

Yes, due to that we have a bit higher cost when we do the shift, it will also...

Ramping, yes.