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

A warm welcome to this presentation of Eltel's second quarter results. My name is Alexandra Karnlund, I am the Communications Director at Eltel. To present the results, we have Hakan Dahlstrom, CEO and President of Eltel; and Tarja Leikas, CFO of Eltel. After their presentations, we will open up for your questions. And you can either post your questions via the web conference in the form or dial in via the phone conference. And with that, I want to hand over to you, Hakan.

Thank you, Alexandra. Good morning, and welcome also from my behalf. I would like to start saying a few words about Eltel as a reminder and also for the benefit of newcomers. We divide our business in what we call Classic Services where Eltel have 25 years of history. But during the last 3 years, we have expanded our ambition in the market with Emerging Services. That means in the customer dimension, as we traditionally have worked more or less only with network owners and grid owners within power and telecommunication, we, during the last 3 years, also addressed enterprise customers and public sector. In the middle of this, you see the business model where we have the base in service and maintenance. But as you know, also technology infrastructure needs upgrades. And those are the 2 main parts, meaning 72% of our net sales during 2025. On top of this, we, of course, help our customers to establish new infrastructure with our installations. Altogether, we are very happy to play a significant role in the Nordic when it comes to technical services for critical infrastructure. And I'm really happy here today to be able to come to you with a report that is the best second quarter in a decade. So 10 years ago, Eltel was something else than what we are today. So really good to see here now that we have been able to generate EUR 5.5 million at the level of adjusted EBITA, a bit more than twice as much as a year ago. And this means that we now have 12 consecutive quarters where we have year-over-year improved our adjusted EBITA. And this is, for us, priority #1. I said it so many times, and I will stick to this. This is our priority. We need to improve the adjusted EBITA. And by that, everything else is also going to be much better. In this second quarter, Norway was the one that improved the result most, followed by Finland and Sweden. So it's good to see that 3 out of 4 segments contributed to this improvement. And I will have to say a few words about Norway here. I think it's really great to see the fifth quarter in a row, and we are coming close to 5% on adjusted EBITA level in the Norwegian business. So team Norway, really well done. Happy to see this turnaround actually delivering. Finland and Sweden also doing really good. And of course, I would love to have seen a top line increase also in the second quarter. But it's for us more important with EBITA. So below more or less flat net sales, it looks like everything would be stable, but it's actually quite big movements within each segment. If I take Finland as an example, I think team Finland makes it really good, managing lower volume in Communications. As you remember, the fiber-to-the-home rollout peaked in '24. It was half of that size in '25, and even less now during '26. With higher volume, more activity in Power, Finland is balancing this and improving margin, both in Communication and in Power. So really good, well done. Also Sweden, where the business mix is very different. A very big portion of everything is about Communication services. Also telco operators are a big portion of that business, of course. And here, Sweden are able to improve in all different parts of the business on the profitability. So even though flat on net sales, I would say that we are really happy about the result. Denmark, Germany, combined segment, Germany did it really well during second quarter and Denmark not. I must say that either net sales or profitability came up to my expectation in Denmark during the second quarter. We have taken actions during April to get the organization and the capacity more in balance with the backlog and order book. We hope to see effect of this later during the year. But normally, in this type of situation, it takes a bit of time, because in our business, it's so important that we have a good balance between the capacity and skills we have and the order book we have. And here, I would say that this is not really in balance in Denmark just now. We have to improve the sales. But I'm really happy for the activities that we have done during the second quarter. Also on the positive note, I will have to mention the cash flow. So it's great to see that we have improved cash flow in the second quarter. As you know, we have a big seasonality in our business. So having a positive cash flow here in the first half is good to see. Emerging Services, as mentioned, during the 3 years of the new strategy, we have focused on building new business in Emerging Services. And during this quarter, it was 14% of the net sales. Those of you who remember first quarter know that we had a significant larger portion of Emerging Services, mainly solar in the first quarter. Here in the second quarter, it's data center. So it's very visible in Norway, Finland, the data center business in the second quarter. The solar park, Hallanvahti Solar Park that we have talked about is up now in full production, and you see that on the right side here. Really happy to see the progress in this project and was a big contributor to the net sales in the first quarter, also a contribution in the second quarter, but not to the same extent due to that this project came to finalization. On the commercial side, meaning here capability to sign contract, I think that we are really happy to see the EUR 217 million signed during the second quarter. It's not only the level, it's actually also what it consists of that is really good and makes me optimistic about the future. So there is a mix in the contract portfolio that has been really good. And a lot of this have sort of been in the core business, meaning that the Classic Service customer like Elisa, Fingrid, GlobalConnect is a major part here. And that is building the stability in service and maintenance and upgrade. So really, really important. And you also have seen that we have continued during the beginning of July to also sign contract that is not included in this EUR 217 million. But Emerging Services, great progress, 2 grid connection contracts towards data center, important for us. Well done, team Finland. And then a really good development in Sweden when it comes to Power sector, and we have got a decision by Vattenfall. They want to give us the contract to do service and maintenance in 2 regions. This decision is appealed. I have looked at it. I'm not really worried. It's, of course, always connected to a risk and a delay. So for me, it's more about the delay here. I think we still will manage to sign this contract in the soon future, but it will be a delay. Is it 2 months? Is it 6 months? I can't say. But still very optimistic about the case as such. So taking all of this into consideration, I think that we have a really good position and the contract portfolio is in a good shape. So not really worried that the top line in the second quarter is flattish. I tend to focus at the adjusted EBITA improvement, great, cash flow, great. But Tarja, what does the number tells you more about this?

Thank you, Hakan. Really, really happy to report the second quarter results. And like Hakan mentioned, we are pleased that our top priority, we continue to improve profitability. Group adjusted EBITA more than doubled to EUR 5.5 million, marking 3 full years of year-on-year profitability improvement. And like mentioned, Norway was the largest contributor to the profitability improvement. Finland brought solid results and Sweden continued improving the financial performance. Net sales were EUR 200 million, slightly below last year. However, our total contract value, like Hakan mentioned earlier, the total contract value of signed new contracts was strong, reaching EUR 217 million during the quarter. On top of this, we were awarded of EUR 275 million contract with Vattenfall in Sweden. This is the largest contract award to date. And due to the appeal process, we do not include this into our total contract value. Headcount is now down by 250 employees, reflecting effective scaling, portfolio adjustments and extended partner engagement. The journey towards our 5% EBITA continued. Overall, the first half of '26 strengthened the confidence in our ability to achieve our long-term profitability target of 5%. While we still have work ahead of us, our consistent execution and focus on operational efficiency and margin discipline continue to deliver results. And then we have the segments. And first, we have Finland. Now Finland, in the second quarter, Finland was 42% of Eltel Group. Finland delivered a strong operational performance and margin management. Profitability increased significantly despite slightly lower net sales and changed business mix. During second quarter, Finland signed large contracts, both in Classic Power and Communication as well as in Emerging Services. Adjusted EBITA margin reached 6.2%. It is clearly above previous year's 4.1%. Finland demonstrated solid operational improvement and profitability focus. Then Sweden. Sweden was now 29% of Eltel's operations. Net sales were in line with last year. Sweden continued good development in Communication Service volumes. Power declined following the project closings. And as mentioned earlier, to our delight, Sweden Power was awarded with a record volume contract by Vattenfall. Sweden continued delivering stable operational performance and improved profitability despite Power project closings. And then Denmark. Denmark, Germany's share of Eltel operations was now 15% and Denmark, Germany was impacted by the continued volume decline in Communication as well as Power grid connection bottlenecks in Denmark. Net sales and profitability remained below expectations and -- both below our expectations and the previous year level despite a strong performance of German operations. As mentioned along previous quarter reporting, we have taken actions to improve efficiency and adapt the cost base to safeguard the future profitability. And then to Norway, which was group's strongest contributor to the profitability development. Norway's share of Eltel is now 14%, and Norway outperformed both commercially and operationally. EBITA reached 4.9% compared with previous year's negative 1.6%. Team Norway has successfully improved utilization, efficiency and commercial performance, while building a more diversified customer base. The year-on-year improvement has now been sustained for a full year. Actually, you mentioned, Hakan, that it's 5 quarters, it's more than full year. This is demonstrating the effectiveness of the turnaround effects. And then a brief look to our balance sheet. Net working capital remained at a healthy level. This is reflecting our disciplined payment patterns. Net working capital was negative EUR 32 million compared with negative EUR 59 million last year. The year-on-year change includes approximately EUR 16 million of repayment related to COVID-19 tax deferrals, which is, of course, impacting the comparability. Net debt landed to EUR 170 million, comparability adjusted and here, hybrid bond and the tax deferral repayments, the net debt amounted to EUR 129 million, and this represents an improvement from last year's EUR 145 million. And this is reflecting the positive impact of the last year's refinancing and the continued focus on cash and working capital management. Leverage was 3.1x at the end of the period, comparability adjusted leverage was 2.7x, and that is compared with the previous year's 2.9x. That is an improvement as well. All in all, cash flow and working capital remained healthy, reflecting continued financial discipline. And I will close with a reminder of the long-term financial targets, which we keep unchanged. Profitability, 5%. And here, we have the rolling 12 months result. Now we are on the level of 3.1%, growth between 2% and 4%. Latest 12 months result here is 3.8%, and leverage between 1.5x and 2.5x and latest 12 months, like I mentioned earlier, 3.1x. And now Hakan will continue with the strategy execution.

Thank you, Tarja. Thank you. I just want to come back to you to talk a little bit about the mega trend that we see is creating a very positive future, not short term, midterm, but also long term. And when it comes to digitalization, here, we see the area of data center, that is the area that is most active just now. So when it comes to digitalization, I would say that top of the activity list is data center and also transport fiber. When it comes to electrification, there is some hesitation in expansion of the grid. It's a lot of discussion and talks, but we see maybe the beginning of a more positive market in that area with the exception of Denmark, where there is a hold on new connection to the grid. This is, of course, making it difficult for our Danish operation. We hope that this will be solved soon, so that the work with the grid can go back to more normal situation in Denmark. In Finland, we had an impact of the investment in the grid with the new regulation that came into place in January '24 that made it really hard for us during '24, beginning of '25. We have seen step by step that these have come back to normal. And I would say that the investment in the grid started to be normalized. And hopefully, during next year, we will be back to the level as we saw during 2023. So positive signs there, and you have seen that also in the contract award that we have been able to receive from Fingrid and other enterprises in Finland. So a bit better outlook in that area. When it comes to renewable energy, I would say that this is still an area that is quite soft or slow. Still difficulties for our customers to make the business case. So not so much contract, and we don't see the same amount of opportunity in this area now as we saw for 1.5 and 1 year ago. However, during second quarter, a few small indications that this might be a change of this in the coming quarters, but not really any proof in the pudding yet, so to say. Of course, that resilience is the main question for everyone that owns critical infrastructure. So here is also a lot of discussion and activities. So when we look at what progress we have in the strategy execution, we normally divide it in these 3 steps. And I'm happy to say here now, as we have said now a couple of times during this meeting, that the profit here, we talk about gross profit, has improved year-over-year and also the adjusted EBITA. So more than twice as much than a year ago. We have, of course, more to do. It's not so that we are settled on this level. We have to do better than this. And our structural work with improvement and optimization, both on the production side, but also on the commercial side, will continue in all our segments. One part that we have extra focus on is, of course, broadening the customer base. And here, it is the Classic Service portfolio where we look for new customers in the Enterprise segment and in the Public Infra. Defense is one such area where we have seen great result, also in the second quarter here. When it comes to Emerging Services, we see that they come up to 14% in the second quarter, of course, but it's lower than what we had in the first quarter when we had significant contribution from the solar park in Finland. In this now second quarter, we see data center coming up. And this is, of course, really good to see that, that is happening, particularly in Norway, Finland. So great to see. And then if we compare the situation now after second quarter '26 with the situation a year ago, as I normally do here, we see that the pipeline is still very healthy, half and half, so to say, Classic and Emerging Services. And we have more signed contracts than we had the same quarter a year ago, and net sales is up. So even though the portion of net sales from Emerging Services is not at the very high level we had in the first quarter, I think some of you might remember that I indicated that also in that presentation that this is what we could expect. But overall, I'm happy with the development. We have more to do, but there is not anything new that we have to invent. We just have to do more of what we are doing, and we have to be consistent in our execution. With that said, we would like to talk more to you about how we see the different parts of the business and give you a better insight in what is sort of inside the company. So we would like to welcome you to a Capital Markets Day in the mid of November. But more about that later, but please save the date. With that, I would like to open up for questions.

Thank you. [Operator Instructions] And we have some questions coming in via the phone conference. Let's begin with those.

The next question comes from Albin Barnevik from ABG Sundal Collier.

If we start off on the solid margin in Norway, what has been the main reason behind the quick margin recovery here after the region has struggled for a while?

First, we have made heavy adjustment on the organization during the last year and also started before that. So I would say that organization are now very much in balance. We get great utilization. So what we have to do is in line with our capacity. But we also see the beginning of effect of a more firm agenda on digitalization and automation. So I would say those 2 together with a broader customer base. We have had a lot of activities sort of in Emerging Services that starts to pay off in the data center sector. So that combined, I would say, give a good outcome here in the second quarter.

All right. And on the flip side then, what drove the decline in profitability in Denmark and Germany more specifically perhaps? And will this segment require more restructuring measures ahead to lift profitability?

I would like to divide it then to the Denmark and Germany. In Germany, I would say that we had a good quarter, strong performance in the second quarter. In country Denmark, we saw lower demand in both Communication and Power. And I would say that that's partly us and partly the market. So with this problem that the authorities have when they should allow people to connect to the grid, when they put that on hold, it's, of course, very difficult to have activities, because that's what we do. We connect things to the grid on the Power side. So when they sort of close down that function, yes, we are struggling. And on Communications side, there is less activity, particularly on the mobile. We see some light on the fiber side. And here, the contract with the GlobalConnect is, of course, extremely, extremely important for us. So that was really welcomed that we were able to sign that here in July.

But still, I would focus that the challenges to come more or less to Communications.

Yes. Okay. That's clear. And when you talk about profitability in Finland improving despite a significant shift in the business mix, can you elaborate more on what drove this specifically? And whether it's part of normal quarterly fluctuations or if you're talking about more of a structural mix shift taking place here?

I think we see in Finland that the majority of the fiber rollout, fiber-to-the-home, has been done. It's done a bit different in the Finnish market than what we saw earlier years in Sweden, Norway, Denmark. So we perceive that the situation is so that it has to be more densification of that fiber-to-the-home infrastructure going forward. If you look at the penetration in Finland, it's much higher now, but it's not at all on the level where we see Norway, Sweden, Denmark. So it will be more fiber in the future in Finland also on the last mile side. But as it has been during '25 and '26 so far, it has not been volume. In '24, we had massive volume in fiber-to-the-home visible in the penetration. But those volumes have been much lower in '25, have also had very low volume in the beginning of '26. Some indications that there will be more interest going forward to invest in this. But I think we should actually more look at it as we are on the normalized level now. It might be some increase in the future, yes, but not at all what we saw during '24.

I would like to continue that a key element in Eltel's success is the adaptability to the volume changes. And Finland is demonstrating in a really excellent way the ability to adapt. So from 4.1% to 6.2% this year, I think it's very, very good performance.

Yes.

Yes. Yes, I agree with that. And looking across the different regions, what is the current demand picture for the legacy Communications business?

It's -- I would say, Swedish market is a bit more active than Finland, Norway, Denmark. But no one expects the classic telco market to increase a lot going forward. I think we are at a level where we most likely will see the future also.

Yes. All right. And regarding your 2% to 4% growth target, even though this quarter saw weaker growth, do you think there might be upside over time to the target considering the positive development within Emerging Services? Or was this factored in when the target was set, if you understand what I mean?

When -- there were no sort of Emerging Services in the strategy at the time when the Board took the decision about the target. So that decision was taken during 2021. We set a new strategy during 2023, and we are executing on that. I would claim that we show that we can execute on that strategy and that it will give positive result. Would we like it to go faster? Yes, of course. But the most important part is that we consistently improve quarter-by-quarter. Is there a possibility to grow faster? Yes, we have the ambition to do that. But priority one is the adjusted EBITA. So it's so important for us that the organization is in balance with the order book and that just have to be taken care of. And it's a never-ending task for us.

Okay. I think that concludes the questions we have via the phone conference. So let's switch to the web questions. I just want to add that we have a lot of questions, which is lovely. But we have talked a lot about Denmark and Norway, and there are a lot of questions resembling what we've already talked about. So if you feel that your question has not been responded to, please put your questions and we will complete. But otherwise, we will focus on some other questions here. Let's begin with Christoffer Jennel from Inderes. Main target, you've put an explicit 12- to 18-month time line on reaching the 5% adjusted EBITA target from negative 3.1% on a rolling basis today?

No, no, that was the growth actually. 3.1% is where we are on the EBITA-wise.

EBITA-wise. Yes. All right. What has to go right for that time line to hold? And just as importantly, what would make you formally revisit either the target or the timing?