Netel Holding AB (publ) (NETEL) Earnings Call Transcript & Summary

Welcome to the Netel Group Q4 conference call. [Operator Instructions] Now I will hand the conference over to the speakers: CEO, Ove Bergkvist; and CFO, Peter Andersson.

Welcome to our Q4 presentation. We are in critical infrastructure, and we have a long-term ambition to stay in critical infrastructure parts where investments are going, short and long term. We are growing organically in the quarter. We are growing through M&A. And for the record, since 2010 now, when we did the MBO from Peab, we have an average growth rate of 25.6% with a strong profit growth. We have a fairly asset-light business model. We buy most of the services. We have a little bit machinery ourselves, but most of the services are bought. We have a cash conversion for 2022 of 94%. Last 3 years, the average is 92%. We have an ambition to grow. We had growth during the year. We had 29.9%. We did 7.5% organically. In the quarter alone we had 37.2% growth, of which 12.6% was organic. We have a good financial position, which means that we can continue to do what we do. We divide our business, or we report our business in 3 business units. During the quarter, we had okay or strong demand in most countries and segments. There are only a few exceptions. If we take Fixed first and if we take the fiber part, the Fixed telecom networks part first, there is strong demand in fiber rollout, or there was strong demand in fiber rollout in the quarter. In U.K., slow penetration, lack of suppliers. Same in Germany, high demand, lack of suppliers. Finland has finally opened up for the big push for fiber rollout. We have a great backlog. And as promised, now we are in the sort of build-out phase in Finland in the fiber network world. Demand is flat in Norway for rollout on the fiber side, and we are past the peak in Sweden. Service -- telecom services in the Fixed networks, fairly flat. Some telcos are cutting down a little bit due to high cost. Other are ramping up. So I would consider it quite flat. Infrastructure within Fixed where we do water and sewage, central heating, related groundwork, strong on the municipality side, Strong on the infrastructure side. Of course, there is a weakening where the property developers are holding back due to interest rates and other things. We have some exposure, but the major part is still towards municipalities and government and so on. But of course, there is less demand for new developments, and we do power lines, and we do water and sewage in connection to new development as well. Power in the quarter, good demand, good turnover, especially in Sweden. We had several new projects in the backlog, especially for transforming stations, especially for Sweden. We have, generally speaking, good demand in Norway as well. There are -- of course, there are different demand from different network owners. We do Elvia. Maybe a little bit weaker temporarily because they're holding back others where we do regional networks for e high demands. So it's a little bit of a mix in Norway. Finland, we have a backlog. We're working with the backlog. There's not so many new projects, but it doesn't matter so much for us. We do think, well, the change in network regulation this year, and the network owners are holding back, but we think towards end of next year, tenders will be out again because, of course, the demand to expand the power network is big in all countries. So there can be temporarily shifts, but the overall long-term demand is very, very high. Mobile, good quarter, strong demand, especially in Sweden. There is a mix between the different telcos. We have a good mix in our portfolio. So demand is going up. Some telcos are a little bit holding back on 5-year rollout. Others are really pushing for it, and overall, it's good. Norway, we are switching and closing down the Telenor rollout, and we are now starting up the Ice rollout, and Ice is building a new network in Norway and we are one of the suppliers. So we are in transformation from, in this case, Telenor to Ice. So a good situation ahead. Trends, yes, we say the trends are strong. They are not less strong now, probably even stronger. There is, of course, electrification. It's everywhere. And yes, we need more power, but we also need more power distribution. So there's going to be more lines built. There's going to be more cables and more transforming station. Right now, there's a big push for transformer stations, as we can see in the backlog, especially in Sweden. Digitalization, of course -- and for us, that means 5G, it will happen, and it is happening with fiber rollout, especially in the large countries now. Germany and U.K., very low penetration and they're really trying to catch up. Difficult, of course, but it will go on for many, many years, and we are in Germany, and we are in the U.K., and we are building momentum. Other infrastructure also old, needs to modernize. That needs to be expanded. We are in water and sewage, central heating. Very interesting, especially in Sweden since this is where we started. We are trying to expand these to other countries as well. And just recently, as a sub-segment, the railway, the underground and defense, of course, there will be big investments now, and there are big investments. And we have done one acquisition. So we have a little bit started those sub-segments as well, and that's Elektrotjanst i Katrineholm. And numbers from the quarter. We had growth, 37.2%. It's, of course, due to acquisitions, but there were also good organic growth in the segments -- in all segments in the quarter. Acquisitions in Sweden and U.K. contributed, but Finland, Norway, Sweden, U.K. and Germany, all had organic growth. We had good overall -- we had very good order intake. So backlog was growing to SEK 3.7 billion, SEK 350 million roughly increase of the backlog. And we saw a strong push for -- within the Power segment. We had a few good stations out of many stations in Sweden that we're going to build this year. We had, as promised, the fiber market -- the fiber rollout in Finland is taking off. We did, or we've done a deal with Valoo, EUR 40 million. It's going to be built in 4 years, and there is more business to be made. We had a deal with Ice. We're going to help them to build 5G in Norway. And in the U.K., we have some reshuffling in the customer portfolio to get it little bit more customers. So -- and one of the deals we announced was GoFibre, GBP 10 million in Scotland. Very promising. So good order backlog. Yes. We increased EBITA with 13.6% to SEK 75 million. Margins were down from 9.2% to 7.6%. We had strong development in Sweden. We also had contribution from Germany. We had -- the drop is due to Finland and Norway, and I will return to that when we get to Finland and Norway. Earnings per share were up to SEK 1.00 compared to SEK 0.20 over last year. So if I start with the segment -- and we can look a little bit at the development here. If I start with Sweden, Sweden was very strong, strong Q4. Revenue up 53% to SEK 481 million. [ There ] was organic growth within Mobile, lots of work within 5-year rollout, good work. Some telcos are actually expanding, others are holding back, but overall, it's very strong. Good performance within water and sewage, central heating from the acquired companies. Very strong quarter. We did one acquisition of Elektrotjanst. They are in power installation, but its power installation within the railway, within underground and within defense. So we think that's very interesting, and it gives us a position, better standing, which we can develop further within those sub-segments. Fixed. Yes, we have water and sewage and there is -- there was very good development, or there is very good development within municipalities and so on. Of course, new builds of private property developers are weakening. But overall, there's okay demand still. And we have -- the bigger part is towards municipalities, the smaller part is toward private property developers. Power, good quarter, but I think the most -- the best part with Power in the quarter was actually building up a backlog. Lots of power stations or transformer stations, good orders. Mobile, high -- overall high level of 5G rollout, which continues, and EBITA increased with 57.6%. So we kept our 10% -- high 10.8% in Sweden. So yes, couldn't wish for more in Sweden from Q4. Norway, mixed situation, I would say. We -- yes, we are growing to SEK 327 million, 12.2%. And we had growth within Fixed and we had growth within Power. Fixed network is mainly growing because we are building a service business in Norway. We are doing FTTH rollout, but we -- looking ahead, we want to expand our service business in Fixed telecom, and we are. We also then -- within the FTTH rollout, we signed a deal with Telenor. So we're now part of their rollout contract. We haven't been there before. And Telenor is one of the network owners that are pushing FTTH in Norway. We also announced a contract with Viken Fiber on service. We have Viken Fiber, but this is a little bit more than we had before, and it's a long contract, and we're happy to keep it. And I think it's a sign that we're actually doing good service in Norway. Power was growing. We did some interesting projects. Mobile, lower volume. We are in transition. We are closing down the Telenor project, and we are starting up the Ice rollout, and Ice is a complete new network in Norway. We had a low EBITA, SEK 12 million compared to SEK 47 million last year, and this is impacted by Power. A few projects that didn't close as good as they should, so we had lower margin on the Power side partly because of the project itself, partly because of high material costs and partly because of delays. We are also a little bit transforming because we are pushing for more service in Norway. We have now big volumes. They have been ramping up during the year. We are in a start-up phase and here, we work to get a few more percentage out of them to get to profit level we want to be, and we are not at that situation right now. So the EBITA margin was 3.7% against a very high 16.2% last year. So it should definitely be somewhere in between there. Finland, we have talked about throughout the year. Revenue was up in the quarter. This is a catch-up effect. We had a very slow start, very long winter, very hard ground conditions. So the year has been a catch-up, especially within fiber rollout and Power, which means that the services we should have bought in Q2, we had to buy in Q4. And of course, those are much more expensive now and a catch-up in itself is much more inefficient. So a poor year, a rush year in Finland. However, the good part was the end of the year because the market of fiber rollout is taking off, and we do consider that as a good market, a profitable market, and we decided to go for Valoo, and we signed a contract for EUR 40 million. So we are really looking forward now to see what we can do in 2023 and onwards. So yes, the quarter was influenced by Finland, minus 6% compared to 2%, but still the big effect was Norway than in the quarter. Germany. Revenue up 25.5%, which we consider a low number. The market is growing. There's a lack of suppliers. There's a low penetration on the fiber side. And we are building momentum, which also could be said as we are a little bit in transition. We have our [ Yadis ] customer. Very strong, big volumes, good way of working together because we have been working for a long time. We are now closing the first projects, and we are starting out the second phase of the big projects. And of course, the old one is running at high speed and the new one at a little bit lower speed. So we're building momentum in those. It can be a little bit lower for some months, some quarters. Our other big customers have problems. We have frame agreements, but the projects are not ready to be issued. So we have decided to actually bring in another big customer. So we just signed a deal with [indiscernible], which is Telefonica, and Allianz, the insurance company who has a joint venture to build fiber for EUR 5 billion in Germany. We have started with them southwest of Berlin. And of course, it will take some time to ramp up, but we think this is an excellent opportunity. So we are in transition, and we are building momentum, and we are sure that we will be back with good growth numbers and good profit. Profit is 12% in the quarter, which is a high number. But yes, for Germany, we -- this is where we should be. A little bit of same story in the U.K. We are just new in the U.K. We did 2 small acquisitions. So the revenue number is now small in the quarter. And -- yes, it's SEK 1 million, and it's 4.4%. Would it have been SEK 2 million, it would have been 9%. So 1 quarter, not too much to comment. There is a very good momentum in U.K. We are internally merging the 2 companies. We are renaming to Netel. We are reshuffling a little bit in the customer portfolio. So we go from basically one customer to 4 customers. GoFibre is new. It has started. So we are generating good volumes and good profits. We are also ramping up in Scotland with BT through [ SE ASIA ]. It takes a little bit of time, but there is a big, big lack of supplier. So we are confident that we will do big volumes throughout the year. So a little bit the same situation. We are in transition, and the momentum is really building up. Very much looking forward to the year in the U.K. Then I leave for you, Peter, to comment the financial situation.

Thank you. During 2022, we had a record high turnover of SEK 3.1 billion, which we are happy about. We also had a very strong growth, 29.9%, of which 7.5% was organic and 22.4% through acquisitions and some FX effects. So we are very happy about that. So we continue the strong growth. Our financial position is also solid, and we are under the target of 2.5 in relation net debt R12M adjusted EBITDA [ excluding ] leasing. We end at 2.4. So we're under that, which we're also happy about. We have a lot of available cash and facilities. At the end of the year we had SEK 664 million, which means that we can do a lot of things going forward, which is also according to our plan. Regarding our cash flow, we ended in a negative of SEK 72 million for the year, which is lower than expected. We are working with several measures to release cash in our businesses, especially in Germany, where we are strengthening our back office as well as working with the clients for more efficient invoicing processes there, and also looking at payment solutions. Also in Norway, we –- like Ove has said, we are working in these frame agreements also to do a more efficient way to work with invoicing and to get the release of cash there. We also have an settlement with big clients there for the [ one ] frame agreement that should have been done before the end of the year. It didn't materialize, but it will be soon. So that is also things that will be better for our cash flow. So we are doing a lot of things, and we are looking quite positive to have improvements here. Also, the backlog, as Ove said, is record high, which is also good, which -- we are looking positive for 2023 and forward. Nothing more.

Okay. Thank you, Peter. Just a few words on acquisitions. And we continue the same strategy. We do acquisition to build positions in countries and segments and sub-segments where we want to be. We invite strong companies, strong management, profitable companies that have something we don't have, a position, customer, knowledge. So they should really add strength to Netel. We have done one acquisition this year, and this is Elektrotjanst i Katrineholm. Here we get the foothold into -- well, it is Power. This is the railway. This is the underground, and this is defense and these are sub-segments we are not in. So this would be very interesting to see where we can take it, because investments are going into these segments and the investments will go into these segments. The work itself is quite similar to what we do, but it's a different segment. So that we are -- yes, we are excited about this. And we're excited that they decided to go [ themselves ] because this is an attractive company that many of our competitors would like to invite as well. But they decided to come to us. We're happy about that. We did 7 acquisitions with a turnover of roughly SEK 500 million, similar to 2021, 2 in the U.K., which we're very happy, and we are building a position and momentum is building up. We will continue to push for more turnover and more profit in the U.K., of course, and then the rest are in Sweden. To sum up the quarter and the year-end, long-term demand in Power, in telecoms, in water and sewage. Other infrastructure is strong. Investments will go in critical infrastructure. They are flowing in now, and they will continue to flow into these segments. Long term, of course, there are ups and downs, but the trend is strong. We have good demand in most -- not all, but in most segments where we are. We had a strong growth during the year, 29.9%, of which 7.5% was organic. We have a good and strong backlog of SEK 3.7 billion with roughly SEK 400 million increase in Q4, and it was quite -- we have announced quite strategically important new projects like Fibre in Finland, like Ice in Norway, and like transformer stations in Sweden, quite a few of them. We have a strong financial position, and we have measured, as Peter told About -- We have measures ongoing to make it even stronger and to release more cash according to our targets. We have an M&A strategy. It's supported by financing. We have a pipeline and there are strong candidates. So that was it for this presentation.

[Operator Instructions] The next question comes from [ Gustav Berneblad ] from Nordea.

Just a couple of questions here. Starting off with Finland. When do you think you will have worked through sort of this cost overrun and are coming out on the other side, would you say?

I think the catch-up phase should be over. So the negative effect from a catch-up, which means that you have to do a lot in a short time, and you get less efficient, it should be over. I think the overall profitability, we -- is not strong in this project, but will go up, and then we will have additional profit from the fiber project. That's our strategy because they should be better. And now these are in planning phase. When winter is over, we should actually start to generate the big turnover, because turnover is generated when you start to dig and install. So Power will be better, not super good, but we think -- the aim is actually to have a sort of decent profit within fiber. That's our strategy this year.

And then on the Fibre there in Finland, is it possible to assume similar levels as in Germany? Or should we assume sort of lower margins?

I would assume lower, but I would assume decent. I think the push in Germany and U.K. -- I mean the push in Finland is high, but it's twice as high in Germany and U.K. because they're even further behind in penetration.

And then, if we sort of ask the same question in Norway, I see some struggles there on especially some cost pressure. This -- sort of expect this to reach through?

I expect us to have a little bit of a journey on the service side because it's a big service organization now and you need to move it and you need to sort of take percentage by percentage. So I actually would expect us to have good work to be done throughout the year to get to the margins we want to be. I mean, we have margins, but not the margins we would like to have. On the Power side, it was a very special year. This is Nett-Tjenester. Always very profitable, but not this year, and its cost increases. It's a few poor projects. And there, I would expect them to be better. I expect them, or maybe I hope, but I actually expect them to be better this year. So I should see some improvements from Nett-Tjenester this year, just by not having a bad year because it's a very good company, it's very competent. And if customers -- with order, then it should be better.

But should we expect sort of a gradual increase then throughout the year or…?

I think that would be the best. Absolutely.

And then sorry, it feels like the activity level has really picked up in the last months. You have released several new contracts, et cetera. Are there any markets you're really seeing a material sort of shift in demand? Or is the wind more just blowing in your direction now?

I think transformer stations in Sweden were a bit weak 1.5 year ago. There was very few tenders and the price level went down. We didn't win much, and the ones we won was actually 2%, 3% lower. And those transformer stations are delivered this year. So you see a good margin here. You don't see it, but we see it's a good margin this year, but not super good. Now there is many, many more tenders. Prices are going up, and we are winning much more. So that's really changing. When we come to U.K. and Germany, I think it's -- we are new. The market has been there for some time, but there is a big push to really do more. The telecoms, I think maybe -- well, you guys, you know more about telecom companies that we -- but it's a mixed picture. Some of them are actually holding back. Some of them really want to build. And I think you know who they are, is we read about it in the papers. And I think they're sort of damaged by high costs for different things like Power and so on. But it's overall okay, because we have more than one telco customer to do 5G with.

And then sort of moving to Germany here and the new fiber contract with Allianz, how big is this sort of contract? And then also, do you expect this -- your relationship to expand and maybe you can get additional contracts? Or how do you view it?

Yes or no, all of those. But -- we haven't released it, but it's like -- the first phase is like SEK 70 million, SEK 80 million, something like that. But then you start to build and then, I mean, they have enormous volumes. So if you perform, there's going to be more. But the tricky thing with fiber is always that you have to build it very quick, much faster than in the Power networks. The customer isn't really ready. We are not really ready. So there's -- well, you want it to be a very short start-up phase, but normally, it's very long startup phase with all the permits and so on. So we are in that phase. And therefore, I sort of call it building momentum. We are preparing to sort of -- for these projects, we can get up speed. With the old -- with the [ Yadis ] and the old projects, speed isn’t very, very high, but we have worked together for a few years now. Very frustrating, but this is -- we have to get through this. This is what we have to do. We just fight to get speed up in these projects. But I don't know. They've been for EUR 5 billion in Germany. So of course, this is volume.

And just the last one here on Germany. We've talked a little bit about bottlenecks that subsidies are there and everyone wants to build, but it's taking additional time. So are you seeing an improvement from Q3 now starting 2023?

Not with the other big customer, not at all, because you get the project and then you start and then you realize, okay, well, you said that all permits are here, but they're not. So all of a sudden, you are standing still, and this is very damaging. But when you work some time with the customer and all of a sudden, all the permits are there, and you can just produce them, then the speed is very high and profits are very, very high. Where you can miss out on profit is this, but the project isn't prepared. So there is a stop all the time. But we are fighting to get into those situations where speed is very high and the money is flowing in. And we know we can get there, but it can take some time and you can get a slightly weaker quarter what have you -- but momentum is building up. And we will push and we will continue, and we will get there.

The next question comes from Karl Bonnevier from DNB.

Yes. Peter, a lot of good answers already. But if you sum up everything that we -- you talked about here earlier, when you look at 2023, do you see your financial targets being well within reach to get back to those?

They are -- yes, they are within reach, but there are things we need to do. Things needs to happen. It's not -- it will not happen by itself. We need to push for these, well, very strong growth opportunities, and they are not only growth opportunities. They are sort of profit opportunities. And we also have some issues when we talked about Norway and we need to -- percentage-by-percentage, we need to improve that as well. So we have work. Work needs to be done, and we need to fix it, but we can absolutely manage. Absolutely.

And in Finland, it definitely sounds like you believe that you're going to be back to profit in 2023, if nothing strange happens.

I should...

Or at least neutralize the loss also if you look at 2022?

I should deliver first and talk then. I shouldn't talk because we have failed so many years in Finland. But if you just ask me and what my feeling is, is that I'm positive about it, but I know -- I know its Finland, and I know that we have to deliver before we talk.

So cautiously optimistic, that seems to be a good phrase for everybody these days. So that's what I should interpreted. Then Peter, just to understand the working capital release because, obviously, we want to see you to have as much acquisition firepower as possible. How do you see that playing out during 2023, the release? Is that front-end loaded or back-end loaded?

We have some work to do, it's in Germany -- so to strengthen the back office there because it's more complicated to get an invoice to the client approved and send it. And we also need to find efficient -- more efficient processes there with the client. So there is a big possibility in Germany, but it will take some time to release it. We have also some more certain positions, for example, a settlement with the big clients in telecom, for which we are agreed about. I just -- we have to get it in on the final agreement. So that will, of course, affect something quite quickly when that happens. We have also an arbitration that will be settled in April. That could also generate, hopefully, quite a lot of cash in. So of course, we should be -- we should see a quite good improvement during 2023. Otherwise, it's very disappointing if we should not do it because '22 was not good, cash flow-wise. So we should have a good year.

So mix. Some things will show up early on the year. But then I think gradually, in Germany -- and we have growth as well. We have to think about that. And we have new customers. And we have to take on those challenges and we have to sort it out. But if we say, okay, we can't have a new customer, we can't have a new project because we don't exactly know how we're going to sort out, that's wrong.

And yes, we rearrange, and we even are setting up our own back office in Serbia now with very skilled telecom people that can really offload our project managers. So we -- I mean, there's solid initiatives going, but it takes some time, and we're building up a structure that we work a long time -- so it's more than words. We're actually doing things to improve it.

And when you look at how you manage the -- say, the delivery and work with subcontractors during 2022, is there some new markets where you found, say, an opportunity to source good subcontractors compared to before? Or is it basically the same base that you continue to work with?

We have worked to find more suppliers for 5G installation in Sweden, and we have a few new sources from different countries. We have traditionally worked with a Czech supplier, and we still do, but we need more because we can do more if we had more. Like [ Tele ] too wants to build a lot. And this -- I think we are sort of the biggest there now. So there we find a few new ones, and then you need to bring them in, you need to work with them to sort of make sure that they deliver quality, you spend time with them. And when you've done that, so you can let them go. So we are in that process. In Germany, we have enough, actually, because we sort of expected more growth and we have lined up enough suppliers in Germany. U.K., we are bringing in -- you maybe not believe this, but we are bringing in Fibre people from Norway and Sweden, and they can make money in U.K. So we have a person that's been working with us in Sweden for 20 -- I mean as many years. So he's been through the complete fiber boom in Sweden, and we are using these people actually in the U.K. So we add some value or quite a lot of value in the U.K. So the company we bought were sort of not a full turnkey supplier, but now we are a full turnkey supplier almost because we are bringing new resources. So we are building something there.

And when you look at all the areas you've managed to add to your portfolio through acquisitions during 2022, where do you see the best kind of opportunities in 2023?

I see -- I mean there will be a fight, and there will be a struggle and there will be mistakes, but I will really -- I'm really looking forward to U.K. And I will be fighting Finland, but I wish them some success. I'm really looking forward to fiber in Finland, maybe not the biggest opportunity, but mentally it's a big opportunity. And then we have the whole transformer station side in Sweden, which is -- I mean, is much stronger than we would have just a year ago. Because I think you're soon going to see that [indiscernible] on EON, and they're going to have 1 or 2 bidders on their stations, not more than that.

And when you look at the -- say, the new areas that you get into Elektrotjanst i Katrineholm and I guess, Bredbyns and the other ones in the sewage area, is that a more stable business in local arenas that you would be capturing there?

It's a mix. If you work on the railway, this is a national business. So you have to be prepared to travel, because projects are moving around and they are. And maybe that's the challenge because you need to find that type of staff that wants to move around. There are a few such companies. But can be much more. We have to learn. I've seen the sector before, and I know there our companies out there making good money in exactly that sector. While you have NDBS, for instance, a rotors company, which I used to be on the Board. So I know it's a profitable business. And they also work in the defense. You also have to move around very sticky projects. And [ Telenor ], of course, you don't have to move around because it's in Stockholm. But water and sewage is a local business where we have our local companies, and they are strong. Almost all of them are strong now, and they had a super year 2022. Then one of them had changed to property development. And of course, that needs to be replaced with something else.

Was that a large chunk of their business?

This is [ here ] in Stockholm. It's roughly half of it, and they have a turnover of a little bit more than SEK 200 million.

And if you look at, say, the infrastructure they represent in equipment and personnel, is that pretty flexible as you see it? Or is it -- is there a limitation on what you can use the skill set for?

No, they're quite flexible, but they still have overhead because they are management and they have project management and they have rents and so on. So it's going to hurt the margin if they can't get the volume, but it's not going to be a catastrophe. We're looking further to all projects, but maybe I have to travel a little bit more and maybe have to do a little bit. And of course, competition is higher in those other projects now.

And when you look at yearly -- you alluded to that you might be encouraged to try to widen the base in Germany with the new clients coming in on the fiber side. Is that enough? Or are you still contemplating getting into the other segments as well in Germany?

We are. So watch out for our press release.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions.

Thank you all. Thank you for your questions. I think we've gone through it all and also with all the questions and the answers. I think we covered it, and we have nothing more to add. So thank you for listening and see you again after Q1. Thank you.

Thank you.