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

Good morning, and welcome to this teleconference or web conference where we will present Eltel's first quarter results. My name is Alexandra Karnlund, I am the Communications Director at Eltel. And here with me today to present the results is our CEO, Hakan Dahlstrom; and our CFO, Tarja Leikas. Warm welcome. After the presentation, we will open up for questions. [Operator Instructions] With that, I'd like to hand over first to you, Hakan.

Thank you, Alexandra. Also welcome from my side to this presentation from Eltel. Eltel, the leading provider of services in the Nordic in the critical infrastructure, areas as communication and power. And it means that Eltel enables the digitalization and electrification of our society in many areas. This includes mobile communication, fiber network, private network, but also on the power side, high-voltage overhead lines, substations, distribution network, but also things like street lighting. We also have become active in green energy production, including solar parks and wind parks. It doesn't end with that. We also are active in energy storage, electrification of transport and other areas like smart metering. During the first quarter, we see that many of these areas are active. However, we see lower activity levels in Communication than in Power. And we have talked about this before. The exception, I would claim is the Swedish market. So, first quarter leaves us with improved profit. Organically, we have a net sales that is some growth, 0.6%, and this is mainly driven by our Swedish operation. The gross profit, as we are very focused at here in Eltel increased with 20% during the quarter. And we see that this trend that we have had continues. So during the last 12 months, the profit improvement has now become significant, and we see also the result on the adjusted EBITA. And year-over-year, we see an improvement of EUR 4.9 million. So in absolute terms, maybe the adjusted EBITA is not so impressive with EUR 900,000 in the first quarter. But with that seasonality that we have in our industry, it is a relatively strong first quarter and is the strongest first quarter for Eltel in many, many years. So with this, we have 7 consecutive quarters with improved adjusted EBITA, and we want, of course, to continue this trend. We also see that our financial position in general is improved. And here, we have an improvement of net working capital and cash flow. This is, of course, extremely important, and we are really happy to see the improvement of cash flow being EUR 22 million better this quarter than a year ago. This, of course, as you understand, help us also on net debt and leverage and a leverage of 2.1, I would say -- I have to say that I'm pleased with now in the end of the first quarter. But if we then look a little bit inside operations, and see what has happened during the first quarter, we can see here that the first solar park that we have been active in Sweden are now in production, and that is, of course, great. We also have finalized our delivery and our contribution to a solar park in Denmark during the quarter. And the new really large project for us to establish a new solar park in Finland of the size of 129 megawatts in peak power is according to plan. So very important project, helping us also a good reason for the improvement of net working capital and cash flow in the first quarter where Finland contributed mainly due to this project. An area that is very active is the energy storage. And here, we can see that we, during the quarter, have finalized our delivery of some of our first systems, both in Finland and in Denmark. So that's really nice to see. And also in e-mobility or electrification of transport, we see high level of activities. And during the quarter, we had success winning a frame agreement in Sweden that I believe will be important for us going forward. But we are very active in many of these type of discussions to electrify the transport of the Nordics. Data center, a relatively new area for us, but is now starting to become visible in the order book here in the first quarter. So really nice for us to see that. And the very important broadening of our customer base, particularly towards the public infra, have gained some significant result here in the beginning of the year. So I would claim that really good start of the year, also winning contract in what I call classic business, in Power, but also within Communication, where we see that we have both new customers, improved margin and secured classic customer. As you are aware of, we have issues in our operation in Norway, and we have now been able to speed up the change of our Norwegian operation under the leadership of our new MD, Ingrid. And I'm really happy to see the start of this, and we are not out of this yet, but I'm convinced that we are on the right track to a much better and solid performance also in Norway. With that highlights, I would like to hand over to you, Tarja, to give us the numbers.

Yes. Thank you, Hakan. And yes, I am delighted to report on Eltel's first quarter results for January-March, marking the seventh, like you said, seventh consecutive quarter of year-over-year profitability improvement. Our net sales declined by almost 4%, mainly due to the impact of last year's divestment of High Voltage Poland. However, organic growth was 0.6% with notable growth in Sweden. The growth rate was 6.5%. Regarding profitability, our adjusted EBITA improved by nearly EUR 5 million, reaching a positive EUR 0.9 million. And Norway was the only unit to experience a decline in profitability. I would say that overall, our first quarter was strong. Profitability improvement remains the cornerstone of our strategy and the progress in strategy execution is evident. Given the strong seasonality of our business, we are satisfied with the first quarter's positive result. And in fact, it has been a decade since Eltel achieved this outcome. The next slide is something new that we haven't shown you before, and it illustrates our profitability development during the new strategy execution period. And the implementation of our current strategy began in the first quarter of '23. These graphs illustrate the development over the time. Retrospectively, the turning point was the second quarter of '23. As expected, gross profit reacted more rapidly, while EBITA improvement took a bit longer. During past year, we have seen more than EUR 8 million improvement in LTM, last 12 months gross profit and more than EUR 12 million increase in latest 12 months adjusted EBITA. I would say, quite nice graphs, yes. Next, we will take a closer look at our segments. And I think we should go to Finland first. Finland accounts 37% of our operations. Our net sales here declined a bit, EUR 300,000. We experienced strong growth in Power, driven by green energy investment, but faced lower volumes in Communication compared to previous year. Adjusted EBITA improved by EUR 2 million, reaching EUR 1.7 million. Both business areas in Finland contributed to this enhanced profitability. And then second largest, Sweden is 31% of Eltel operations after the first quarter. And we are pleased to report that Sweden has continued in its growth path. Public infrastructure-driven growth in Communication has been particularly welcome. Solar investments have driven power growth and compensating for lower smart grids volumes compared to last year. We did record over EUR 50 million in net sales, reflecting a strong 6.5% growth compared to last year. And adjusted EBITA tripled now to EUR 1.5 million, and this is the 12th consecutive quarter for Sweden to have a year-over-year profitability improvement. Then we have our new segment, Denmark and Germany, which accounts 18% of Eltel operations. Here, we see modest growth in net sales totaling to EUR 30.5 million. Communication in Denmark declined, whereas Power grew in both Germany, but especially in Denmark, I have to say. In this newly established segment, we report significant profitability improvement. Adjusted EBITA nearly doubled, reaching 7.9%. This is the highest in the entire Eltel Group. And this is an excellent result for our newly established segment. And then we have Norway, which now represents 14% of our operations. Net sales decline in Norway has continued, now negative 7.4% in local currency. And this development is in line with our expectation, and it's reflecting the further reduced investments in traditional telecommunication customers. Our operations remained unprofitable with adjusted EBITA at negative EUR 1.8 million. Towards the end of the quarter, we did see some improvement. But our performance improvement actions will continue in Norway. And then we have our balance sheet items. And here, we have taken a bit longer perspective as well. We illustrate the new strategy execution period again. And this 2025 marks the third year on our new strategy execution. All balance sheet items show significant improvement, reflecting our strengthened financial position. We report major improvement in leverage from 6.3 in first quarter '23 to 3.5 in '24, and now a healthy 2.1. Net debt was close to EUR 160 million first quarter '23, EUR 115 million last year, and now we are reporting EUR 104 million in net debt. Notably, cash flow from operations increased by more than EUR 22 million. The net working capital development is equally positive. In first quarter '23, it was negative EUR 5 million; last year, negative EUR 59 million and now negative EUR 76 million. We are very pleased to see our strategy materializing and results steadily becoming visible. And then it's time to remind us about our financial targets, which we keep unchanged growth or group adjusted -- first, profitability. Group adjusted EBITA margin, 5% growth between 2% and 4% and leverage 1.5 to 2.5 and dividend payout subject to leverage target. As I mentioned, leverage resulted in a 2.1 outcome this quarter. And just like previous quarter, we have successfully reached our leverage target. And now Hakan will continue with the strategy theme.

Thank you, Tarja. Yes, our strategy in short, as we say, first priority for us is, of course, to improve efficiency and profitability in our core business, and that is what we also see a good result of here in the quarter, I would claim. And the good thing is that we see this in both business areas, Tarja is mentioning. So both in Communication and Power, we see good improvement. And of course, we have the exception of Norway, yes. We also see that the customer base, we have a need of broadening our customer base to be able to deal better with the seasonality in our industry, but also to improve the utilization overall. And this is something that I can say, we are doing quite well and public infra is the area that we have gained the most success within and we will continue exploring that customer segment. In new and adjacent markets as renewable energy, here, we have the solar park. Here, we have the energy storage. We have new things like electrification of transport, private network and so on. Also data center starts to become an area for us in this year. We see that in our revenue, and you will see that on the next slide. So this strategy have now been for us for 2 years, and I would claim that we see the impact in our business. On gross profit level, as mentioned before, we are now at EUR 22.2 million in the first quarter, 20% up. Last 12 months, we have improved our adjusted EBITA with more than EUR 12 million. That in combination with the improved cash flow and net working capital, I will claim -- show that we are on the way. The customer base, public Infra, as I mentioned, and for the seasonality, a decent total contract value in the quarter with EUR 145.7 million, and I will also claim that the content of those contracts are as we have in our strategy. So we are doing those services with those customers that we have selected. And this leave us with a solid order book of EUR 1.3 billion. The growth in new and adjacent market is visible here on the right side, where you could see that during the quarter, 6% of our net sales come from these new areas. And we see that we have reason to believe that this will increase in the future, since 17% of the contract that we signed during the quarter came from this new and adjacent. And also our pipeline have a solid portion of these new areas. And when we now look at where we are in the first quarter '25, compare that to the first quarter '24, meaning 1 year into the strategy compared to 2 years into the strategy, we see that the revenue now is 6% versus 2% for a year ago and also the TCV is now the 17% in relationship to the 6% that we had a year ago. So to me, this proves that we are gaining more and more value out of the new strategy. So with that, I would say that I think we are taking an important step towards a solid financial performance with this first quarter. We are not yet where we want to be, but this is one milestone on that path. With that, I would say that we have concluded our presentation. And over to you, Alexandra.

Yes. Let's open up for questions. But first, of course, thank you, Hakan and Tarja. Must have been quite a nice first quarter to present.

Yes.

Good. So let's see if we have any questions on the telephone conference. [Operator Instructions]

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

A couple of questions from my end. I'd like to start off with just to clarify, were there any impacts during the first quarter from the widespread worker strikes in Finland? And if so, are you able to sort of quantify that effect?

Were you asking about strikes?

Yes, the Finnish strikes that we saw in Q1, did they impact you in any way in your operations?

Not.

No.

No impact that was visible in operations, no.

Okay. Perfect. And then on the Norwegian business, the one sort of still lagging behind, are there still extra costs to take for resizing there? And what kind of sort of OpEx savings are also left to realize in coming quarters?

We have EUR 600,000 in restructuring cost in the first quarter. We don't foresee more of that ahead of us. We believe we have now during April, taken all the actions that we need to adjust the organization towards the situation we see in the market ahead of us. So we are not out of the woods yet, absolutely not. But I think we don't expect any significant cost from that rightsizing.

Yes, I would say so that like you said, in April, we have finalized. So there might be some slippage from March to April, but nothing major.

And then on the savings side, how much is left to realize in Q2 and beyond?

I don't have such a number for you.

Okay. Understood. Then just a question on the decision to merge the Danish and German segments. Can you just walk us through the rationale? Is that mainly just a reporting thing? Or will it have big impacts on the actual operational side of the business?

For us, it is a simplification. We have now the same management for Denmark and Germany. The scope of our German business is smart metering. We have the same business in Denmark. And we believe that by combining Denmark and Germany, we could have sort of more leverage on our Danish management, and we could see some operational synergies between the two.

Okay. That's clear. And then I mean, we've seen, you showed us the clear lift in profitability. And part of that, of course, is divesting the Polish High Voltage business. Are there any remaining units in the current operations that are sort of clearly underperforming where you perhaps don't see a quick fix to the profitability levels and where a divestment might be the best solution?

No. We don't see any such unit.

Okay. Perfect. And then a final one for me. I mean, on capital allocation, we've not seen dividends for quite some time. But now as you showed, the leverage is trending down quite significantly, and we might be nearing a point where dividends become more relevant. So I guess the question becomes how low does leverage have to go for you to feel comfortable starting to pay out dividends again?

We have no such level or number for you today. But when we have -- when we have we will...

Just some general reflections on are you -- do you feel like you are nearing a point where dividends could be relevant?

It's, of course, a target we have to provide dividend, of course, shareholder value is our first priority, of course.

Absolutely.

So of course. But as you know, the situation in Norway is not clear or sorted out to a satisfying level. We have more work to do in all our segments, I would claim. We are seeing a very positive development. Yes, absolutely. The strategy works for us. Yes, I'm happy to see that all business areas is contributing to the improvement. But you also see that the absolute level is still lower than what we want to be. So we believe that we have a bit more to do by operational excellence, commercial excellence, gaining new contract in new areas and with that improved margin in our operation. But of course, it is with great pleasure that we see that we are at 2.1. Yes.

Yes.

Do we have anyone else calling in? No. All right. Then we have actually quite a few questions coming in online. We have Olli Eloranta from Danske Bank. Could you please elaborate what were the drivers behind the strong operating cash flow and working capital releases in Q1? Operating cash flow has typically been negative in the first quarter. Was there some positive one-off impacts?

No, we don't see any -- like, of course, there are like major projects starting. They might be -- have some impact. But overall, we are talking about the general profitability improvement and enhanced processes and because net working capital is a reflect of the processes. So it is the whole organization working towards the profitability improvement. Would you like to add something?

Yes. If we sort of try to find one-offs, I think we can mention the Taaleri project with advanced payment helping us a bit in the situation. But overall, I would say like you, Tarja, that this is something that we talk a lot about in the organization, a lot of focus on this. And I would claim that the understanding and awareness of the importance of this area have increased during the last 2 years. So I think that's well done by the organization.

Yes. And I would say that when we have some projects kind of contributing, then we have some projects that are like -- so I wouldn't pinpoint any of our operations.

Okay. Great. Christoffer Jennel from Inderes has a few questions. Q1 2025 marked the seventh quarter in a row where Eltel improved its profitability on a year-on-year basis. What do you view as the biggest risk for Eltel to lose this momentum? And conversely, what could, in your view, accelerate this momentum even further going forward?

Yes. A very, very big portion of our business is based on frame agreement with, yes, the most well-known companies in communication and in power. If they feel that their businesses is becoming soft, they normally react by reducing the investment and activity level in things like what we are doing. Even though most part of our business is services and more ticket-oriented, the top of that, there is a portion that is more project oriented. And those type of investments can be postponed if our customers feel that their business starts to become soft. So of course, if the hesitation in the market becomes even worse, I believe that we will also see effect of that, even if we are not sort of directly impacted by the turmoil in the world of today, I think we are not totally independent either. We have to realize that when customer becomes hesitant, the decision-makings take longer time. So -- but we haven't seen much of that yet, and we hope that we're going to be able to continue keeping up the volume as we have today. And then one activity that we have to improve our resistant against this is, of course, the focus at public infra.

Yes. And along those lines and on the topic of risks, Christoffer further asks, over 90% of your revenue comes from the Nordic region and the majority of your suppliers are based in Europe. But could you just comment on the impact that you have seen or expect on Eltel's operations due to current economic turmoil and escalating tariff trade barrier events? How has it affected the demand picture?

I think there is a bit longer time for our customers to take big investment decision. That's one part of it. We also see that the price level of material. And there is in green energy production, if we try to describe it like that, but it's things like transformers, solar panels, that sort of equipment. The pricing of that can, of course, be impacted in the future if this continues. And also the supply chain, what is happening in the world, we are dependent on import of this sort of equipment, even though, as I said, most of it is from Europe and our business is to a very large extent in the Nordic. There is part of the material that is used in this type of project and also in our service activity that is imported, for example, for Asia or China. So, yes. I think we missed to answer the second part of his first question, what can actually accelerate this.

Yes.

Yes.

And I think a part of this is, of course, if we see that this -- if there will be an increase in the green energy, I think that is something that would benefit us a lot, but we also see if it is about electrification, about transport or if it is production of green energy like solar or wind, all of this can, of course, help us. So that might accelerate the improvement.

And I would also add that I think our customers and in our market, we are more and more aware of the meaning of the critical infrastructure in general.

Yes, absolutely.

Yes, very much needed today. Another question from Christoffer. The fiber-to-the-home business was a strong driver of revenue growth in Finland during 2024. Is the lower demand in Q1 just a bump in the overall growth trajectory or the beginning of a demand shift in this area?

We are prepared for that it is a reduction in general terms of the demand. The fiber rollout in Finland came a bit later than the rest of the Nordic, but I would claim that the peak was most likely during '24. We have decent volume this year, absolutely. It will be volume ahead of us. But just now, I would say that the penetration rate of fiber-to-the-home in Finland have reached such a point that we have reason to believe that the peak of that rollout has been.

Okay. A final question from Christoffer. The profitability and cash flow were particularly strong for a first quarter. Could you first elaborate on the very strong profitability improvement this quarter year-on-year and then touch on the favorable working capital development, which combined with the profitability improvement, significantly improved cash flow in the quarter year-on-year. And then as a follow-up, could we expect this kind of profitability and cash flows for a first quarter going forward?

Okay. The underlying things that is driving this is that operational excellence, commercial excellence in both business area in 3 out of our 4 segments have delivered during this quarter. We are still expecting Norway to catch up. But I would say, happy with this activity in Finland, Sweden, Denmark, Germany, and we see EUR 2 million improved contribution from Finland, EUR 1 million from Sweden and EUR 1 million from Denmark, Germany, and that is done by operational excellence, commercial excellence. So I think I'm happy for that. Yes, we need to get Norway on track also.

Yes. We have been working on winter scoping. So -- but we cannot escape the seasonality. We have the winter, 4 seasons. It doesn't change. But we have been working on it.

Yes. And that marks the last question. So all-in-all, good first quarter. We present our Q2 report, second quarter report on July 24. And hopefully, you'll be able to join us then as well. And feel free, of course, to reach out to us. Meanwhile, if you have any further questions, all the material from this presentation, the webcast and the presentation will be available on our website shortly. Thank you, Hakan. Thank you, Tarja.

Thank you so much.

Thank you, Alexandra. Thank you all.

And thank you all for watching.