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

Welcome to Netel Q2 Report for 2023. [Operator Instructions] Now I will hand over to acting CEO, Jeanette Reuterskiöld; and CFO, Peter Andersson. Please go ahead.

Hello and welcome to the presentation of second quarter for Netel Group. My name is Jeanette Reuterskiöld, and I'm since 2 months acting President and COO of Netel. With me today, I have Peter Andersson, CFO of Netel. We will start with a short summary of the quarter and go through the group's and the segment's financial performance. After that, we will open up for questions from you listeners on the phone or online. Let's kick off the presentation with a summary of the quarter. This quarter has been characterized by high activity level throughout the whole organization. We see strong continuous market trends and our backlog increased to a record high of SEK 4 billion. This development along with our margin enhancing measure makes us expect to deliver on our financial targets during the second half of 2023. During the second quarter, we have come a long way in our work to secure better margins for our business in Norway. We have of course also had extra focus on the situation around the specific power project in Finland and we have finalized the negotiations with that customer. This has led to an acceptable agreement, which means that we now can plan forward and adapt our organization in power. We have also settled with a large fiber customer in Sweden, which means that the customer has paid compensation totaling SEK 70 million in the quarter. The settlement also means that the dispute has come to an end and we can continue our long-standing cooperation with the customer. Now we move on to the group's performance. For quite a long time, we have had stable order backlog development and in the quarter, we reached yet another record high backlog, as I said earlier, on SEK 4 billion. This should be seen in the light that we have lower service volumes this year in telecom. Our mix of services in power, infraservice and telecom makes us strong over the time. In the second quarter, we have increased our backlog with more than SEK 1 billion. Approximately SEK 1.5 billion of our order backlog are to be performed in the second half of '23. The rest during '24 and '25. As you see, we have a strong growth of 14.5% this quarter mainly driven by strong development in Sweden and our acquisitions in the U.K. we did last year. Our organic growth is 5.3% and excluding our phasing out the fiber rollout in Sweden, we have an organic growth of 7.9%. The fiber rollout in Sweden is being phased out due to the fact that Sweden has in principle reached full nationwide coverage. We see a sequential improvement in adjusted EBITDA due to the high activity levels and our adjusted EBITDA amounted to SEK 41 million with an adjusted margin of 4.7%. This should be seen in the light that we have a margin is impacted by the lower volumes in Norway and measures to lower cost both in Norway and Finland. We increased our margin 3.1 percentage points from first quarter thanks to the high activity level across the group. Profitability has been impacted by the restructuring cost of SEK 10 million in Finland in the quarter and earnings per share amounted to SEK 0.07. We expect to reach 10% revenue growth this year and adjusted EBITDA margin of 4.5% to 5.5% for the full year 2023. We expect our adjusted EBITDA margin to approach the target in the second half of '23. This forecast is based on the existing order backlog, our market situation and the customers' request we see today. Finally, we expect to reach our net debt of below 2.5. And now I hand over to you, Peter, to go through our cash flow.

Thank you, Jeanette. One of our focus areas is of course our cash flow. We see improvements, but we still have more work to do and we have activities ongoing to secure improvements both in short and long term. This quarter, our cash flow was positively impacted by SEK 70 million from the settlement with a large fiber customer. Excluding the settlement, the operating cash flow is in line with seasonality. We expect the higher margins in the second half of the year with the improvements that we are working with to contribute with an improved cash flow for the later part of the year. So we are working very hard with this, it's very important for us. We can take the next slide. We also have a strong focus on the capital structure targets and we strive to improve it. In the end of the quarter, we had unutilized credit facilities and cash of SEK 528 million. Our leverage ratio related to our financial target was 2.8, which is above the target of 2.5 that we have in the medium term. So this is also something that needs to come down. And also this means that we will focus less on M&A until it has come down to a level that we feel comfortable with. Thank you for this.

Let now begin to the performance of our segments and first we start with Sweden. In Sweden, we saw strong growth and robust profitability in the quarter. Both Infraservice and Power grew organically in the quarter and we have now won important frame agreements with new as well as existing customers, which is good. It's especially encouraging to see how well our acquisitions in our new business area Infraservice are developing. It is with confidence I can state that these acquisitions are truly value-adding to the Netel Group. In business area Power, we see a high demand especially for power stations and we have recently announced key contracts with the big energy group, E.ON. Business area Telecom is still impacted by the ongoing phase-out of fiber rollout in Sweden. The phase-out is, as I said earlier, a consequence of the fact that Sweden has reached almost full nationwide coverage of fiber. Let's go on to Norway. In Norway, we see improved volumes in Power, but still lower service volumes in Telecom this quarter. We have been working with enhancing measures and it will contribute to improved profitability in the second half year '23. In July, we have seen significant agreements signed that will give effect this second half year '23 and in 2024. Let's move on to Finland. In Finland, of course we have focused our activities on improving profitability. In the quarter, we have finalized our negotiations with a major Power customer and we reached an acceptable outcome for both parties. We can finalize ongoing framework agreements and adapt our organization and ways of working for Power now. Thereby, we can see that Finland will become profitable in 2024. We have taken a one-off reservation in the quarter of SEK 10 million in the second quarter for the restructuring in Finland and we consider that to be sufficient. The new large fiber products we have on have started and they have a good potential to contribute to improved profitability in the second half of 2023. In Germany, we see strong underlying nationwide demand for improved fiber coverage. Germany has still a very low fiber penetration, which drives the demand. The second quarter has been impacted by fact that we are finalizing projects, at the same time starting up new products. Our focus in Germany are now to build up the local organization and competitive to meet the strong demand. We focus on gaining new customers so we can grow with further improved profitability. U.K., merger of our 2 U.K. companies is still going on in the second half. The merger will make us stronger and more competitive and will ensure continued profitable growth. We are now in the startup process with the new Scottish customer GoFibre. We have seen lower volumes this year from our customers, but underlying market demand is strong and the market is big. The U.K. like Germany has still low fiber penetration and clear goal to improve the coverage near term. We are confident about the development and we expect higher volumes next year and prepare our organization for that. We have now come to the end of our presentation and we will open for questions. Operator, we are ready to take questions.

[Operator Instructions]

As we can see now, we have no further questions about this report.

The next question comes from Gustav from Nordea.

It's Gustav here from Nordea. Maybe just to start off here in Finland. Could you just give us sort of your view on when you're interpreting Finland to be profitable in 2024? Is it the latter part or is it already in H1?

What we can see now, it's probably in the middle of 2024. It's depending on the development both in our power projects, but of course in our telecom projects, the fiber rollout.

Okay. But should we see now from Q2 and to the middle of 2024 as a gradual increase in the margin?

Yes, it's gradual.

Okay. And then if we sort of turn to the U.K., I think the margin there has been very volatile. What is your view forward there?

We are now in the merger of our 2 U.K. companies, which will be soon ready. And we see that what we do now with the organization and the cost efficiency of the administration of merging these 2 companies will make us stronger to win more projects during this year and next year.

Okay. But what is sort of a sustainable margin for the region would you say?

Sustainable margin on the long term, maybe Peter, you can help me there.

It's above our financial target, something like that. It should be more than the 7% quite a bit.

But are you expecting a recovery now in H2 then?

Yes. We are looking forward for a good second half.

And then sort of on the cash flow here. You got the SEK 70 million payment this quarter, but it looks like the working capital is still quite burdened. Are you expecting a release in H2?

Yes, we are looking for that absolutely. We're working with several different activities to take it down, to bring it down. And normally a release should be in the fourth quarter and you can see that also in the chart in the presentation normally how it looks like over the year.

Okay. Can you specify the activities a bit?