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

Welcome to Netel Q4 Report for 2023. [Operator Instructions] Now I will hand the conference over to CEO and President, Jeanette Reuterskiöld; and CFO, Fredrik Helenius. Please go ahead.

Good morning, everybody, and welcome to our presentation of our fourth quarter and year-end report. My name is Jeanette Reuterskiöld, and I'm CEO and President for Netel. With me today, I have Fredrik Helenius who was appointed as CFO in January. He has an extensive experience of Netel and been with us for 4 years as Head of Group Accounting. A warm welcome to you, Fredrik.

Thank you.

So a short summary of quarter 4. Fourth quarter, we see an expected an improved profitability in the second half year and we have strengthened our financial position. Our performance is in line with our indication we made in the second quarter 2023. Our order backlog is robust of SEK 4 billion, and we show, also as expected, a strong cash flow in the quarter. We end up with our net debt in line with our targets. Before we go down to our numbers for the group performance. This is a picture from the expansion of the new subway in Stockholm. Stockholm is growing, and in order to be able to build the housing and new workplaces, the subway must be expanded. We are very proud to be part of this gigantic infrastructure project where we install feeder stations and power lines. But now, the numbers. In the fourth quarter, we see growth mainly driven by the strong development we have had in Sweden. We increased our revenue with 4.2% and it's mainly driven by the strong organic development in Sweden within Power. We had an organic growth of 1%, and excluding our phasing out of fiber rollout in Sweden, it ends in 2.1%. Our FX effects affects negatively for us with 1.6% and our acquisitions is positively affected with 3.2%. And in the right corner, you see our biggest market and most important are Sweden and Norway. And then we have Finland and Germany and U.K. and I will get back to that further on. Our profitability for the fourth quarter, we see a continued sequential improvement. Our adjusted EBITA was SEK 63 million and a margin of 6.2%. We improved the profitability the second half year. We started with low margin and result in the first half year 2023 and it was driven by our margin-enhancing measures we've done in Norway and Finland as well as high activity levels, mainly in Sweden. This quarter, we had a negative impact from the early winter season and we also have started our preparations for the large frame agreements we have announced for the Swedish Defence Materiel Administration. Earnings per share, SEK 0.75. We performanced in line with our indication, as I said earlier, that we made in the second quarter. Our financial target for revenue is to grow with 10%, including acquisitions. We indicated that, that would be -- to be reached, and the performance was 10.1%. Our adjusted EBITA margin should be above 7% on medium term, and we indicated that we would have between 4.5% and 5.5%. We ended up for the full year with 4.8% and the second half year with 6% in adjusted EBITA. Our capital structure said that we should be below 2.5 and that would be reached, and we ended up net debt on 2.2. Yes. And Fredrik will go through more further about that further on. On the right, you can see the development of our adjusted EBITA margin every 6 months. So you can see -- also see the seasonality and the improvement we made for the second half. So Fredrik, let's go through the cash flow.

Yes. And thank you. As said, the cash flow in the fourth quarter is fairly strong. And let us just recall the discussion during our previous call for the third quarter when we said that the seasonality effects are quite present for Netel as a company and that our expectations for cash release in the fourth quarter were high. Now we are able to visualize that effect, as you can see, as we closed the fourth quarter with more than SEK 200 million in cash flow from the operating activities, and we improved strongly then from last year. In addition, we managed to report positive cash flows in every quarter this year. The cash flow in the quarter is, of course, positively affected by the seasonality with project finalizations and increased invoicing processes. But we do also see that effect from the cash improvement measures taken across the group adds to the overall outcome. Those measures then include working with the improved payment terms and better payment solutions. But the effect year-on-year from those actions is merely SEK 20 million, SEK 25 million and the effects from the last quarter is fairly small since we saw the same levels in Q3. And therefore, a substantial amount in Q4 is also explained by the cash-generating actions within the organization and that entails improved invoicing processes. And it's good to see that we see contributions from several of our segments. We see it from Germany, we see it from Sweden and from Norway. The organization has been working with a good determination throughout the quarter and we will, of course, continue to push for improved processes internally. If we move on to the next slide and talk about net debt. We, of course, recognize a significant improvement in the last quarter given the cash release of SEK 200 million. We have strengthened our financial position and improved the capital structure to be aligned with our medium-term targets. The reported ratio of the net debt, excluding lease liabilities, over adjusted EBITA is 2.2 compared then with the target of 2.5 -- below 2.5. In addition, we can say that the net working capital in relation to sales is around 10%, which is a good improvement as well in comparison to the last quarter. So yes, surely, we do enter '24 with this strengthened financial position, but we will realize earnouts throughout this year. And we will continue to work to create a solid financial baseline, enabling the development and the profitable growth for Netel going forward. And as such, the Board proposes that we do not pay any dividend for the year 2023 and that is to further strengthen the financial position of Netel.

Thank you, Fredrik. Let us now move into our business segments and their respective performance. In Sweden, we see even further strong growth and high profitability. Our net sales this quarter is positively affected with 15%, mainly driven by organic growth and acquisitions in Power, Elektrotjänst that we acquired in February last year. Our adjusted EBITA margin, 8.1%. And in Infraservices, we had good demand from our public and state clients. Also still in Power, we have high demand for our services and especially for power stations as we were able to announce several new projects in December. In Telecom, we were impacted by the ongoing phasing out of fiber rollout and also the preparation we are making for the large frame agreements with the Swedish Defence Materiel Administration. And it is due to that kind of projects with high security level takes a lot of time and effort to start up that -- those projects. And here is one example of how our business is driven by the megatrend of electrification. This picture is from the grand opening early February of E.ON Drive infrastructure, Sweden charging station for EVs only. It's located in Åby just outside Norrköping in the southern part of Sweden. And it has 18 charging points up to 400 kilowatts. And Netel has been the general contractor. We were responsible for the construction of the charging station and the [ surrounding ] across the 6,400-square meter area. In Norway, we have seen in the fourth quarter, good demand and improved profitability. And we see -- also see increased volumes, both in Power and in Telecom, driven mostly of the fiber rollout. We have an expanded cooperation with Elvia for Nett-Tjenester. And as I said, Telecom, especially good volumes in fiber. Our EBITA margin improved from earlier in the year to 7.6% and mainly driven by high activity and our enhancing activities. And in Finland, we, as expected, could see increasing volume in our fiber projects. Also expected that our revenue was decreased by planned lower volume in Power. Even in Finland, we had an early winter season and it has a certain amount of negative impact in December for the Finland results. We are still focusing on improved profitability and expect to keep on the good work to get Finland on black figures this year. Germany, together with the U.K., has a good underlying demand. These countries have still one of the lowest fiber penetrations in Europe and very ambitious plans to change that. These markets -- these are markets that we want to be on the long term and we have a competitive advantage with our long experience from fiber rollout in the Nordics. Performance has decreased in Germany during '23 due to the fact that we are finalizing projects with one large customer, while we are starting up new, bigger projects with other customers. And due to relatively small operations still in Germany, we know that the revenue and also the profitability might fluctuate between the quarters. But we have a strong pace both in Germany and in U.K. markets, and we intend to continue to focus on building a bigger business here. And as I said earlier, it's quite the same situation in U.K. We are -- it's a quickly growing market. We are in a building phase of building up the organization and broaden our customer base in U.K. We are starting up projects and continue to -- with a new fiber customer. And we hope to see during '24 the synergies for the two of our companies merging into one company. And the same as in Germany, the underlying fiber market is strong still in U.K. So one of our success factors is our ability to balance our resources and create synergies. However, we see that we can get more out of our organization by effectively sharing experiences, skills and our resources within the group. We also see more opportunities to meet our customers to a greater extent in the common geographic markets within each business area. Therefore, we have decided on a new organizational structure as of today. The change means that we have created 3 divisions: Infraservices, Power and Telecom. And each division will have a group-wide responsibility for each business area. Fredrik Land has been appointed Head of Division for Infraservices, Klas Eldebrandt for Power and Edward Olastuen for Telecom. Our new segments will be reported for the first time in the first quarter of 2024 this year report, but you can already find the numbers for the quarters and full year 2023 indicated in this report for quarter 4. So a quick outlook for 2025. We're going with 2025 with an order backlog of SEK 4 billion. Approximately our backlog for this year is SEK 2.5 billion and for -- SEK 1.5 billion for '25 million and '26. We have a conservative approach to our frame agreements in the order backlog. First quarter is normally impacted by strong seasonality and -- because we have a lot of start of new projects the first quarter. And also, we are -- could and would be affected for a long and severe winter in the first quarter. We will continue to work with our margin-enhancing activities in Norway and in Finland because we are not satisfied yet with our margins there. So it will continue under this year. We have started up digitalization project for Netel Group. And for example, we are implanting a new business system for our service business in the group to be more efficient and effective and in order naturally to increase our margin in these businesses. And as Fredrik said before, we will continue to focus, of course, with our cash flow and net debt. Under '23, we have worked intensely with our preparation to be able to report especially in CSRD for 2025, and that work will naturally continue this year. But also this year, we will work to finalize our goals to the program with Science Based Target initiative, and we will get back to you with that and looking forward to do that. And with that said, we are now open for questions.

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

It's Gustav here from Nordea. Just maybe to start off, I mean, quite impressive growth within Power in Sweden, both actually in terms of year-over-year, but also sequentially quarter-over-quarter. You continued to announce orders here. Are you seeing a trend shift in the market, would you say? And is this demand situation going to continue increasing from here, would you say?

No, we would say that it's -- especially in Sweden, it will still increase during this year. So it's a good market for Sweden and Norway as well. We see a bit of maybe negative impact for Power in Finland due to new regulation and new ways how they can value their assets that will probably impact the investment for the power net owners in Finland.

Okay. But would you say that the -- I mean, these long-term themes of the energy situation, both in Sweden and for example, Norway, I mean, we hear Statnett, for example, comment on these major investments becoming 10 years, similar in Sweden. Are these the volumes that is coming through or...

Well, I think they expected -- or the volumes that is needed is going to take more time, but it will increase. But it's going to take more time due to their own organization, and of course, the ability for companies like us to find the right competence and the resources. So it's a long term of increasing volume in these megatrends for electrification, I would say. But it won't be a boom, I would say.

Yes. Okay. Perfect. And then maybe if we move to Norway, I mean, the last 4 quarters have seen a solid sequential margin improvement. I mean, in terms of the levels you are now in Q4, would you -- above 7%, would you say that this is a fair level going forward or is this extraordinary high? I mean, you also commented about enhancing activities, which sort of sounds more structural in my sense.

Yes. I would say we are still focusing on our enhancing activities to the margin. And as I said earlier, we are implanting now a new business system for the service business because we still have problems to be as efficient that we need to keep up with the good margin there.

Excellent. And then, I mean, in regards to Germany, how should we think -- I mean, you continue to write that demand is good and so on and I know that you are broadening the customer base, but we are continuing to see a sequential weaker sales. So just how should we think for when are these volumes actually coming through?

Yes. It's -- as we have said earlier, it's long term for us and it takes longer time than maybe expected to reach the new clients. But it's in full speed and high activity on that. And the combination of ending the projects with starting new projects with customers, as we do, that will make us a bit hard to maybe see because it will be fluctuation both in margin and profitability until we can see a more stable increasing in volume there. But it will come during this year, we expect.

Yes. Okay. Great. Can you say anything about the timing? Is it more tilted towards H2 or...

Yes. Fredrik, you can...

Yes. Well, I think that you shouldn't expect too much of growth for Germany in June '24. We are continuously working with the new orders and our expectation is that we will get that throughout the year. But as always, it takes a bit of time to start off the new projects. So it's going to be the second half of the year and then going on with '25 and onwards.

That's perfect. And then maybe the last one here. I mean, Sweden looks to be growing very strongly, but you also commented about the increased competition. Is this mainly within Infraservices? And then also how should we think going forward, are you expecting price pressure on the projects or...

Yes. We have talked about it even in the third quarter. We see increased competition in Infraservices, but we had a good half year with our tenders. And we haven't been -- needed to decrease our margins for new projects, but it's higher competition and we have to work harder. But we -- and go with projects that we have good references to the customers and knowledge competence in. So it's -- we expect that 2024 will have -- it will be a high competition for the projects still. As long as the production and construction of housing and buildings in Sweden doesn't increase, there are more construction firms on the market.

So is it fair to assume then that the margin in Sweden from here, I mean, Infraservices, is quite a significant part could sort of pressure the segment for 2024?

I wouldn't say that, and we still expect to increase in volume as well and keep our margin this year from last year.

Yes. And we can -- I can just add to that regarding the margin. I think that it's important to understand that we operate very locally in our markets. So we are not exposed towards the competition, as you would believe, for instance, the bigger contractors in all segments. But what we see now is that they are moving into our segments from the nearby segments being the housing market, given the interest rates at the moment and the downturn in investments in those activities. So I believe that we will see -- we will, of course, see added competition. We will see additional actors on our markets, but not necessarily with great margin pressure.

And we go in, in '24 with a good order backlog for Infraservices.

The next question comes from Karl-Johan Bonnevier from DNB Markets.

Just continuing on the previous kind of questions. Looking at the strong growth you see in Power, is it difficult for you to start up to really go after all the contracts you want to go for? Or is it something you can cater for within the organization as it looks?

Yes. You're right about that, Karl-Johan. It is increasing volume in the home market, and of course, there's a competition about the resources and the competence. But we are -- as we are -- said in the fourth quarter report, we are working intensely to grow organic now in that segment to be able to increase volumes and take more projects for that. And so far, it's been successful.

Sorry. What you see, you can leverage the organization to cater for maybe 15%, 20% growth or something like that.

Yes. We -- our goal is -- financial target is to grow with 10% in the group, but the market is there. So it's going to be our ability to, of course, win the projects, but also to increase our resources and competencies in Sweden. But we are -- we know what to do and we are making all activities to be able to do that.

When you look at the turnaround projects in Finland, and to some extent, Norway, it feels like Norway might be slightly ahead of your plans whereas Finland is maybe slightly lagging behind. Is that a fair assumption at this stage or...

I think in Norway has shown increased margin due to the second half year. But I would say that Finland is doing all that we made plan for. And we have increased our volumes in the fiber rollout and our volume in the power project that we have very low profitability and is decreasing. So, so far, the plan is going accordingly even for Finland. And we are looking in tenders to find new projects in fiber rollout with new customers as well.

Sounds promising. And when we look at '24, how do you see your potential delivery towards the financial targets? And how would you see it at this early stage of the year?

Well, we haven't said that we have removed the financial targets in any way. But I think that we have to be fair and say that this turnaround is going to take a lot of work and it's going to take some time for us to do so. So we expect to improve, but we don't expect to reach our targets this year in that sense that we will reach all the way to our financial targets. So we will have a bit of a journey going forward. And I think that we will work hard for it, and we will keep our financial targets in the midterm as we say.

Sounds realistic. Looking at the order backlog, that still looks good. How much of that is supposed to be for delivery in 2024, so we can maybe get a grasp for how close you can get to the growth targets you have?

Yes. Approximately now for 2024 is SEK 2.5 billion and SEK 1.5 billion divided in '25 and '26.

A very good base to work from, no doubt.

It is.

Then looking at new structure, the new reporting section, I guess it's maybe an enhancement on how you have done it before. Will you start to also detail the new segments earnings breakdown and how -- what part they have on the order backlog?

No, we are planning to keep the reported way for our order backlog as we are handling it right now. But we will -- with the new organization that leads to new reporting, we will be able to better give you how our business is divided and how the market in those different areas is trending.

Good. No, I need to come back then and discuss that more so I understand the implications of it then. So -- and looking at Q1, obviously Q1 is normally a seasonal weak quarter. But if you compare what you see now for Q1 this year compared to last year, how -- is it a similar kind of quarter? Is it worse kind of conditions out there or similar kind of conditions?

I'm not sure if I got that correctly, Karl-Johan. But Q1, as we said, have the seasonality that we often been talking about, which implies that we have a lot of new projects that has to start basically. And if the winter is going to be long, then we will, of course, see effects from a long winter meaning that we won't start the excavation works that we expect, et cetera. So I'm not sure if I answered your question on Q1 but...

No. I just want to get a feel for how it looks in a year-on-year comparison because you obviously saw those kind of similar kind of seasonal kind of headwinds in Q1 last year and maybe more so to be fair, so...

Yes. I think that Q1, in general, the expectations for Q1 for Netel shouldn't be too high. I think that the Q1 that we had last year was, of course, affected a lot by the situation in Finland and all the discussion of the development that we have there. But I think that in general terms, looking at the -- I think that we had around 1.6% in adjusted EBITA last Q1 and I think that, that's not going to be sort of very bad for Netel. I think that we will, in general, have Q1 results that are fairly low given the seasonality effects that we see in our business.

Sounds very realistic. And then one final, looking at the working capital, good release in Q4. How do you see that kind of swings going through to 2024? Will we see lower swings in it this year, you think? Or is this going to be the same kind of seasonal pattern that it is really a Q4 relief that we should expect and not much before that?

Well, yes. I mean we are pushing the organization really hard on these issues. And we are happy to see that we went down all the way to 10% now in the fourth quarter of '23. And I think that, of course, we're going to see, again, the seasonality in our working capital as well. But we will work to try to normalize our swings, not to increase too much and try to find sort of lower [ top ] notices of the working capital throughout the year. So we have said in the past that we will try to be around 9% to 12% in relation to sales of the working capital. Being at 10% now is satisfying, of course. But we will see some increases throughout the year, but our expectation is that we can try to hold that down.

Excellent. And just one final on that one. There is no major changes in overdue kind of receivables or anything like that?

Sorry, Johan, can you take that one again? Didn't hear.

Yes. No. If you're looking at the receivables part, the payments are coming in as they should. There is no increase in overdue receivables or anything like that?

No, not what we see. We had a good cash release in the fourth quarter. Nothing else has come to our attention during the first part of '24 as well. So we feel comfortable on the situation with our receivables.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you, everyone, for listening in and for all the questions that I hope we could make some clarification. And we hope to see you all back in the 26th of April when we present our first quarter. Thank you.

Thank you.