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

Welcome to Netel Q2 Report for 2024. [Operator Instructions] Now I will hand the conference over to CEO and President, Jeanette Reuterskiöld; and CFO, Fredrik Helenius. Please go ahead.

Welcome to our presentation of quarter 2. My name is Jeanette Reuterskiöld, and I'm President and CEO of Netel. And with me today, I have Fredrik Helenius, our CFO. As part of our drive for renewable and innovation, I'm proud to present our brand facelift, which also includes a new logo. The change is not just a visual update but a strategic move that clarifies our role in society and our ambition for the future. With the new visual identity, we want to convey how Netel connects the world. By building and modernizing critical infrastructure in Northern Europe, we are a driving force in creating a more connected and sustainable future. The brand lift is the one important piece of the puzzle in the overall picture of Netel. It is a strategic initiative to develop Netel as a stronger and more sustainable company. In the beginning of the year, we changed our organization from country wise to division, Infraservices, power and telecom. It has already given us synergy effect, for example, in resource planning and how we approach our global customers. We see that we easier than before, learn and develop from each other between the countries and in the divisions. We also see that the we easier can communicate what we can offer and deliver. And now our Q2 highlights. We have a good organic growth in all divisions of 7.7%, 13% increase from Infraservices, 4% from Power and 7% from telecom. We are especially -- we especially see strong development in Infraservices and power in Sweden and from telecom in Norway and Finland. Adjusted EBITA has been impacted from low volumes for telecom in U.K., Germany and Sweden. Overall, we had a large proportion of projects in start-up phase which is normal for the season and that normally has effects on our margin and cash flow. We continue to grow our order backlog of SEK 4.2 billion within all divisions. With a growth of nearly 8% organically and adjusted EBITA of 4.8% and a growing order backlog of SEK 4.2 billion provides us positive signs for our ongoing initiatives to improve our financial performance. We also see that we now have a good split between our divisions and that we are focused in Northern Europe, where we have telecom in all our countries and power in Sweden, Norway and Finland and Infraservices in Sweden. And now I will give you 3 examples of projects from our divisions, Infraservices, Power and Telecom in order to present and elaborate our products and daily operations. As part of Karlskoga municipality's sustainability commitment, the quality of water and sewage supply is now being insured. Netel's contract is to build water and sewage systems for 60 properties where we are laying pipes through the lake and in the soil to reach all the 60 properties. Our customer is Karlskoga Energi & Miljö, and we are happy to continue our cooperation together. Production is ongoing, and our work should be finished in the spring of 2025. The work is being done by our company KMAB, Karlskoga Mark, a company within Netel with a strong local position in Infraservices. Nett-Tjenester, our company in Norway focusing on power services is delivering on its biggest product ever. Nett-Tjenester is constructing the switching station that will supply Google's new data center in Telemark with electricity. Lede is the client and one of Norway's largest network owners, and we appreciate the opportunity for Nett-Tjenester to carry out the work as a turnkey contractor and be responsible for planning, board construction, assembly, project management, testing and commissioning. Planning for the project started immediately after the contract was signed in April '23. The switching station is scheduled to be ready for operation in October 2024 and the data center will be operational in 2026. All relay boards are designed, built and tested in our premises in Fredrikstad. Nett-Tjenester has also chosen to process about 150 tonnes of steel in Norway, in this way, we contribute to local and national value creation, while at the same time, it gives us a unique opportunity to follow up on deliveries and quickly make changes if necessary. Netel in Norway has signed a new 3-year frame agreement with Telenor, covering operations, maintenance and expansion of fiber networks. This agreement is larger than the current we had for 4 years in terms of geography and areas of operation. Our first framework agreement with Telenor in Norway was signed 2021 and the new agreement will start 2025. Netel has built up a local organization that now can take advantage of the larger volumes that we see for 2025 in this new agreement. We're happy that Telenor, such a large and important player in telecom, yet again, chooses Netel as a supplier. It is proof that we stand for quality, competence and reliability. And now it's time to hand over to you, Fredrik, to go through our financial performance in more detail.

Perfect. Thank you, Jeanette, and good morning, everyone. Looking at our sales and the development within our divisions. We were actually off to a fairly slow start in the beginning of the quarter, but we started to pick up speed with both new and ongoing projects from May and onwards. And we generated a total growth of 7.7% in Q2 and reached SEK 927 million in sales or over SEK 1.6 billion for the first 6 months. We, of course, value the development with 7.7% organic growth, and we are pleased to see that we show growth across all of the 3 divisions. Our division Infraservices has a good momentum with ongoing projects, and they are now operating within the high production season. Power continues too with a good performance, especially in Sweden, and telecom managed to produce growth with contributions from the increasingly growing service business in Norway. The fiber rollout in Finland is ongoing and even if our volumes are quite modest at the moment, our projects and Fiber works continues to add growth to the telecom business as such. A few relatively big won contracts were released during the quarter, and that resulted in an order backlog of SEK 4.2 billion end of June. And as we have said many times before, we continue to be cautious when we evaluate the value and duration of our backlog. But we believe that we currently have a fairly good position, and that's roughly SEK 1.5 billion out of those SEK 4.2 billion refers to the second half year this year or '24. Profitability wise, then we recorded an adjusted EBITA of SEK 44 million or 4.8% in the quarter. And in line with the overall performance in Q2, we continue to improve on the group level and increase both in absolute and in relative terms. For the first half year or the first 6 months, we recorded an adjusted EBITA of SEK 58 million or 3.6%, and that's then compared to the SEK 51 million last year or 3.3% then. The momentum in Infraservices, as described, is our highest margin division at the moment and the continued development within Power contributed to us, while we see that there's still room for improvements within telecom, in line with the aforementioned enhancing activities that we are working with. The second quarter for Netel's business is always affected by seasonality and the timing for when we can ramp up our projects to full speed. But nevertheless, we continue to focus on improvements and work with our activities for increased digitalization and efficiency processes as well as an improved client mix. Bottom line then, we improved our earnings per share to SEK 0.22 from the low SEK 0.07 last year. If we turn to the cash flow, we see that in line with the performance of sales and profitability, we improved the cash flow from operating activities to SEK 38 million in the quarter from SEK 29 million last year. And as we went on about during our last quarter, the seasonality is, of course, evident in our business, but the progress of the invoicing capacity and our efforts on improving our project liquidity continues to show positive signs. And we are happy to see the outcome of this SEK 38 million in this second quarter. And speaking of the seasonality and just to quickly recap on that for those of you who may not know our business in detail or Netel in detail. A second quarter where we often ramp up our production and we start new projects and use capital to grow and to get the work done, we usually see the corresponding effects on our cash flow. Our cash flow and the capital is needed in the operations when we ramp up. And very often, we are not entitled to invoice until we have produced, for instance, vis-à-vis x number of meters or completed certain milestones within the projects. And yes, as such, we tend to see the majority of our cash flows coming at the end of the project life and especially in the fourth quarter of the year where projects tend to finalize. Alternative Solutions and ways of improving are still ongoing key initiatives and we continuously evaluate our positions. In Q1, we amortized SEK 50 million of our debt and paid SEK 30 million in contingent considerations or earnouts. And now in the second quarter, we have paid an additional SEK 35 million. Our access to capital remains stable above the SEK 500 million level, but the leverage ratio in accordance with our medium-term capital structure targets amounted to 2.8x, which is slightly above the target level which is below 2.5. We still have remaining earnouts and those will be in general then paid during the second half year '24. And we will continue to focus on improving our debt position and work with our cash management structure in order to add headroom to the capital targets going forward. By doing so and in combination with the expectations for lower market rates, we will, of course, over time, also be able to improve our financial net items in the P&L. A quick comment then on the working capital. In relation to LTM sales, we are around 11% end of June which is down from 12% in Q1. If we then take a closer look at the performance across our divisions, we have Infraservices, and they delivered a strong quarter with organic growth of 12.8% to SEK 223 million and then a EBITA margin of 7.6% or SEK 17 million. We are fairly well positioned in our local markets and as described by Jeanette with the example project for KMAB for instance, and despite the market conditions and increased competitions, we have a good order situation for the division as such. Infraservices continues to add to our group performance and that's visualized by the 8.7% margin last 12 months. So once again, a good performance for Infraservices and from our Infraservices team. Moving over to Division Power, we note additional growth and slight improvements from last year. Sweden delivered double-digit growth organically. And together with Norway, our power business provided a contribution to the quarter. The year-on-year comparison within power is, of course, still affected by Finland, but despite the lower volumes in that region, Power produced SEK 301 million sales in total in the quarter with a growth of 4.2%. And again, that's organically just as for the other divisions in this quarter. Margin or profitability wise, we saw a total EBITA of SEK 14 million or 4.6%. That's an increase from the merely SEK 7 million last year. Norway continues to improve, and Finland then, again, is running at a lower pace. Power as a market remains as a very interesting one. And the trends or megatrends, if you will, continues to drive the demand. We have the electrification and digitalization trends and there is an immense need to increase both the access and capacity across our power systems. We now in Q2, got back from the top line from Q1, and we improved the margin performance for the division once again. But going forward, we will continue to focus on the ongoing initiatives and navigate in the market to find our way to utilize on the increased demand out there. Our third and biggest division, Telecom delivered almost SEK 400 million in sales in the quarter and grew organically by 6.7%. The continued better volumes from our service agreements in Norway and the fiber rollout in Finland resulted in a good growth for Telecom as a division. But the production start with Swedish FMV have been moved to the H2 '24 and thus, Sweden closed on the low side, together with the lower volumes then from U.K. and Germany as we talked about before. The EBITA of 2.2% or SEK 9 million in the quarter brought telecom back to breakeven for the 6-month period. Profitability, just as our top line was slightly impacted then by removed and lower volumes in the mentioned regions. All in all, I think that we managed to improve from last year. We now have visibility as well on the new volumes in Germany and the envisaged production start towards Swedish FMV going forward here during the second half year. Again, our focus on initiatives with our margin-enhancing activities continue, especially then in Norway, where we see the possibilities to increase production capacity with the new agreements and where we should be able to adopt and utilize on the bigger service volumes going forward. And I believe on that topic, Jeanette, initiatives that you will share a few key takeaways.

Yes. Thank you, Fredrik. We have 3 ongoing strategic initiatives that we are working with to be able to reach our financial targets on midterm. First initiative is to continue to grow on the markets we are established in to further strengthen our position as a leader in critical infrastructure in Northern Europe. We are focused on new segments and to broaden our customer base in all divisions. We focus on our internal and external sustainability footprint and we have submitted our application for SBTI targets 1 week ago. That will push our own commitment and activities. To reach our targets with SBTI, we need to work much closer than today with our customers and with our suppliers to be able to reach the goals we have set up for Netel. We look forward to do this journey together. Our second initiative is operational excellence. We are still working with margin-enhancing activities where it's needed. These activities can be organizational changes, where you are producing and how we're performing product management, for example. We have started several digitalization projects across the group to be able to deliver higher quality and be able to scale up our services. We keep our focus on working capital and cash flow that starts already in our tender processes to the completion of the project. It involves the whole organization and everybody has an important role in this work. And finally, our most important initiative, our talent. To be able to keep on growing, we need to work even harder as an employer to keep our talent, and we need to strengthen our employee engagement to keep on attracting new talent. So with that said, Fredrik, we are now done with our presentation of quarter 2, and we are now ready for questions.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. The next question comes from Karl-Johan Bonnevier from DNB Markets.

First, congratulations to a solid start to the year for you and even as, I guess, it's the second half that is the delivery, as you pointed out a couple of times during the call. Just on that, looking at the backlog that you have for the moment, how much of that do you see is going to be for delivery in this year as it looks for the moment?

Yes. As Fredrik said earlier, we are around SEK 1.5 billion for this year in the order backlog of SEK 4.2 billion.

And with that as a base, what kind of -- do you see 2024 being a growth year for you?

As always, we don't give any estimate for the full year. But we are working with our strategic initiatives to improve our financial performance, and we can see a good development the first half year here. So we will keep on working with our activities. And step-by-step, we will improve our financial performance.

And Fredrik, on the cash flow, looking at releasing working capital, what kind -- do you see you making any progress on, on getting a full release during the second half of the year?

We -- as you say, we are continuing to work with our cash flow and the working capital, especially. So we have our seasonality in the business. It's valid to assume that we will see a cash flow in the fourth quarter this year as well. And we are working hard to make sure that we maintain our focus on receiving the money that we are entitled to.

And when you look at -- you highlighted quite a good market outlook for cost out there for basically all the segments. You're seeing good growth in all segments as it is. Where do you see your own limitation in-house? And when you're talking about your final kind of comments, Jeanette, on looking at talent needs and then the operational excellence needs, where can you find the biggest growth opportunities for the moment that you can execute on?

Yes. Of course, it's for us, one thing is to keep our talent and attract new ones, but it's also that we are -- have a good collaboration with our suppliers and subcontractors that we have in our projects because we are not only running -- a lot of our projects is -- of course, we have the project management, but we are working with subcontractors. So we have to build up even more collaboration with the subcontractors and keep on recruiting good, new talents, of course. That's the easiest way for us to keep on growing this good progress we have with organic growth.

And when you look at the different segments, would you say it would be easier for you the traditional telecom segment to build it up further than maybe in the infra and power segment at this stage?