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

Welcome to Netel Q3 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 our Q3 results. My name is Jeanette Reuterskiöld, and I'm President and CEO of Netel. With me today, I have, as usually, Fredrik Helenius, our CFO. Let me start with some highlights from the report. Net sales increased by 0.3%, driven by strong growth in Infraservices and Telecom in Norway and Finland. Infraservices grew 8.4% and Telecom 9.1%. Power decreased top line by over 17%, which is reflecting to the project-driven nature of the business. In Power, comparative figures were impacted by the higher volume of projects completed in the third quarter of '23. Since the projects in Power are often major, sales can vary between the quarters depending on which projects are completed or big deliveries of material during each period. This also has an impact on the adjusted EBITA margin which decreased somewhat to 5.3% from 5.7% compared to the third quarter last year. However, the adjusted EBITA margin increased from the previous quarter with 0.5 percentage points from 4.8%. Our order backlog continued to develop well and amounts to SEK 4 billion. The stronger order backlog is reflecting our strong position in the market and the fact that our markets are driven by the strong megatrends of electrification and digitalization as well as the need to modernize the water and sewage infrastructure. For the first 9 months, year-to-date, we have increased sales with 4.1% with an organic growth of 3.9%. And we have an increased adjusted EBITA margin of 4.2% compared with 4.1% last year for the same period. During the year and the previous quarters, we have said that we have several strategic activities ongoing to improve our business and build a stronger Netel. Some of our activities, for instance, increasing operational excellence and the digitalization in our projects takes time. But we are on track with the step-by-step improvements towards our goal to reach our financial targets on midterm. Last year, Q3 and Q4 closed with relatively good performance and to fully align our own expectations in relation to all our ongoing strategic processes, we provide an indication for full year '24, saying that we will expect adjusted EBITA margin to be in line with last year, and we see low year-on-year growth due to lower volumes we have in Division Telecom in Germany, the U.K. and Sweden. In order to continue towards our financial targets in the meantime, we focus as planned on our main strategic initiatives. During the past year, we have implemented a series of strategic initiatives that are crucial for our future development. Among other things, we have changed business systems and run important digitalization projects, and we have intensified our sustainability work. In addition, we have implemented organizational changes that strengthen our ability to meet the future demands and enables continued growth. These measures have been necessary to build a stronger and more sustainable business. We will grow in the markets we are established in to further strengthen our position as a leader in critical infrastructures in Northern Europe. We focus on new segments and -- to broaden our customer base in all divisions. It is promising to see that this strategic decision has resulted in the contract with Green Mountain Data Centers within our power company in Norway. A good example how we grow with existing customers is the extended framework agreements we have signed with among all Telenor and Elvia this year. We focus on our internal and external sustainability footprint and are waiting for a science-based target initiative to finalize their validation of our climate targets. To reach our climate targets, we will have to work much closer than today with both customers and our suppliers. The next step in our sustainability journey is to initiate those discussions. On operational excellence, we continue our work with margin-enhancing activities where it's needed. These activities can, for example, include organizational changes, ways of producing or how we execute project management. We have several digitalization projects ongoing across the group to improve our quality and to increase our capability to scale up our services. During this year, we are successfully implementing new business system, which enable us to improve and speed up our monitoring analysis of our performance. We keep on focusing on working capital and cash flow, a work throughout all projects. It starts already in the tender process up to the completion of the project. This strategic initiative involves the whole organization and everybody must understand his or her role in the chain to make sure that we can execute on the initiative successfully. And then to our most important asset, our employees. To be able to keep on growing, we need to work even harder to be an attractive employer to keep our talents, and we need to strengthen our employee engagement to keep attracting new talents. Just before summer, as of this initiative, we presented our brand revamp for Netel, which also includes a new logo. The change is not only a visual update, but a strategic shift that clarifies our role in the society and our vision for Netel. As usually, I would like to highlight a few projects from our 3 divisions to shed some light on our operations. Our colleagues at JR Markteknik has supported the municipality of Uppsala, north of Stockholm with climate adaptations. When Fålhagen’'s sports field was upgraded, it got a completely new function. It should be able to flood if heavy downpours occur. Most football pitches have an arch shape so that rainwater will run off them. In Uppsala, they did the opposite. The surface was lowered by 0.5 meter so that it could be a flood surface in the event of heavy downpours. In the surrounding area of the sports ground, there are approximately 150 buildings and the railway area, which are in the risk zone in the event of sudden skyfalls which are now protected. Nett-Tjenester, our company in Norway focusing on power services. Earlier this week, we announced a contract with Green Mountain Data Centers for the design and installation of power systems at the data center in Enebakk, near Oslo. We have been commissioned to install high-voltage systems, cable routing and control systems. The project includes the entire system from 132 kilovolts line, the substations and terminations in the data center. The project has already started and will be completed in 2026. This is a key win to us. Since we made the strategic decision in the spring to expand our customer base in Norway, to include industrial customers. And this is the first result of our intention to expand our customer base. On behalf of our customers in Telecom, we upgrade and build new masts and towers in our Swedish mountains, everything to strengthen and secure the mobile networks in these geographies. Due to the difficult terrain, we need the help of a helicopter to get to the sites, both with materials, machines and our employees who will carry out the work. During these works, we carry out major safety measures to ensure that no unauthorized persons in the terrain can be injured. These works are, of course, weather-dependent as we use very long strides for the material to be able to fly above masts and towers' height to get as close as possible. So now Fredrik, it's time to go over the figures in more detail.

Perfect. Thank you, Jeanette. And looking at our financial performance in the third quarter, starting with the top line then, we grew by 0.3%, driven by continued strong development within Infraservices in Sweden and by the Telecom business in Norway with the growing service business we have there, together with Finland, actually, with the fiber rollout and the ongoing projects within that sector. Adjusted for the FX effects in the quarter, our growth was organically 2.8%. Power came in on the lower side in the quarter, showcasing the project-driven nature of our business, as Jeanette mentioned, with variations between quarters depending on project starts and completions, production timing, material deliveries and other project drivers in our business. This was exemplified by the Power business in Norway in the third quarter where we closed July and August a bit lower than we -- as we saw fewer projects coming to an end and a slight shift in volumes given adjustments to project timetables and material deliveries. In general, however, we consider this to be moved volumes rather than lost ones. Nevertheless, we managed to get just above SEK 890 million in the quarter or SEK 2.5 billion with 4% growth for the first 9 months. The order backlog as end of September continues to be above SEK 4 billion, and we continue to be cautious when evaluating the value and duration of our order backlog, but we believe that we do have a good position and a healthy order backlog for the coming quarters. And we continue to focus on the market trends and the underlying demand for the electrification, digitalization, modernized grids and overall, the improved infrastructure. Profitability-wise, we recorded an adjusted EBITA of SEK 47 million or 5.3% in the quarter. So that's overall in line with the expected seasonality we often refer to. And for the first 9 months, we recorded an adjusted EBITA of SEK 106 million or 4.2%, and that's compared with 4.1% last year. The relatively lower profitability in the quarter was evidently affected by the lower pace of volume from the Power division. But we have also ended some less profitable projects within the Infraservices division. Telecom on the other hand, improved its profitability, and we continue to work for new and additional volumes in the U.K. and in Germany, and we are still looking forward to the full start in the Swedish Defense Material Administration contract. For the 9-month period, we reported an adjusted EBITA of 4.2%, as we said, and as also stated in the report, we expect to close '24 in line with the previous year margin-wise. As said during our previous quarters this year, we are determined and focused on our step-by-step improvements across our business. We are working with a broadened customer base, we're working with new strategic initiatives, a new organizational structure and restructurings within our units and across the group to increase the financial control and our project management. To some extent, this implies a few investments and the adjustments in the quarter refer to costs related to these restructurings within financial control and organizational changes. But we still believe in our process, and we expect to improve towards the financial targets in the midterm. If we turn and look at the cash flow, we saw that we continue to improve the cash flow from operating activities. And in the quarter, we report SEK 47 million as operating cash flow for the group. Again, and as we went on about during our last quarter, the seasonality is evident in our business, but the efforts on improving project liquidity and the working capital continues to show positive outcomes, and we are happy with the SEK 47 million in this quarter. The net working capital in relation to LTM sales is around 10% now end of September. That's down from approximately 11% when we closed the second quarter. In addition, the -- or during the third quarter, continued considerations or earnouts were confirmed and paid, and we have now paid almost SEK 100 million during this year. We expect to pay approximately SEK 40 million during the rest of '24 in relation to the remaining earnouts on the balance sheet. And as a result, we remain above our capital structure target on net leverage, but the access to capital also remained stable over SEK 500 million. We will continue to focus on our financial position and continue our work with the relevant measures and work together with our stakeholders to improve the current debt position and our cash management structure. If we take a closer look at the performance across our divisions, Infraservices continues to add organic growth and delivered 8.4% growth in the quarter, reaching SEK 220 million. We noticed added competition within several areas, but we're still fairly well positioned in our local markets. And as previously mentioned, the profitability within Infraservices was negatively impacted by the closing of some less profitable projects in the quarter, resulting in an EBITA of SEK 14 million or 6.5% compared to 9% last year. Infraservices continues though to add to our group performance given the LTM margins and the current order backlog. And we continue to follow the market developments and noticed that we saw good market conditions the last year during this time. Within Power, we produced SEK 236 million in the quarter, which is down from SEK 286 million last year. We noticed negative growth in Norway as we saw fewer projects coming to an end and in comparison to last year, a slight shift in volumes given adjustments to project timetables and material deliveries. As said before, this is mainly considered to be moved volumes and not lost ones, and Power remains as a very interesting market with key drivers being the digitalization trends and the need to increase access and capacity across the energy sector. And we were, as Jeanette said, really happy to release the newly won contract in Norway as a new strategic initiative towards industries. Margin or profitability wise for Power, we saw a total EBITA of SEK 8 million or 3.5% compared to the SEK 25 million last year, and that's impacted by the lower volume, especially in Norway and the Finnish power business, which is continuing with a lower pace as expected and was still loss making. Telecom delivered SEK 437 million in sales in the quarter and grew organically by 9%. The continued better volumes from our service agreements in Norway and the fiber rollouts in Finland resulted in good growth for Telecom as a division. But even though we are on the move with our works within the Swedish defense industry and new projects in Germany, we continue to look forward to increase our production within these areas, together with the forthcoming development in the U.K. In the beginning of the year, we expected to see increased volumes from U.K. and Germany during H2, but we are yet to fully start the production in our new agreements in Germany and still need to improve the order backlog within both these regions. The improved EBITA margin was 3% or SEK 13 million in the quarter for Telecom and our focus on increased margin remains as we continue with the digitalization project in Norway, where we see possible improvements as the production capacity can increase and where we should be able to continue to adopt and utilize on the bigger service volumes. And I noticed just now that it seems to be a small typo in the -- on the slide, given that Germany and U.K. seems to have switched places for the 12-month figures. So we will make sure to keep an updated report on the website, if that also holds for the report. All right. Before we open up for any potential questions. I think that we will again refer to a few key takeaways. So I hand over back to you the, Jeanette.

Yes. Thank you. Our strategic plan and activities to build a stronger Netel is on track. We are improving our customer base, and we are at full speed till the end of the year to complete most of our digitalization projects. Increasing our operational excellence within project management will always be a key process to develop and ensure that we have the right systems to work with continuous improvements of how we run our projects. Many of our current activities takes time, and I'm proud of the progress we have made so far, especially in attracting new customers and strengthening the relationship with our existing partners. This progress is the result of the expertise and the commitment of our employees whose daily work strengthens Netel's capabilities and creates long-term value on a step-by-step basis. So with that said, Fredrik, we have come to the end of our Q3 presentation and are now ready to take questions.

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

Yes. It's Gustav here from Nordea. Maybe just to start off here in the Power division. Is it possible to give some indication of how much of the lower margin of 510 basis points here year-over-year, that is driven by sort of volumes and how much is driven by the weakness in Finland, would you say?

Yes, as we say for the Power division, I don't think that we will go into details in terms of the splits down towards the segments being countries. But we are, of course, affected by the lower volume. We come down quite a bit, almost 20% in volume for power, and that doesn't give us the coverage for our cost as we were to expect. So both those items are key drivers for the lower margin for Power this quarter.

Yes, okay. That's fair. But then, I mean, you have previously commented on sort of if we go into geographies, Finland returning to black numbers for the full year. And I don't know if I interpret you wrong, but are we seeing a step backwards? Are you taking a step backwards from that statement or...?

No. We are still going for black figures for Finland as a whole but we still see profit loss in the power projects in Finland. But as we announced earlier this year, we now see that our organization in Finland within Power are ready to go for new projects. So we have recruited a new business unit manager in Finland for the Power segment to be able to increase our volumes now further on in the Power segment. But for the whole for Finland, we are going for black figures.

Yes, okay. Perfect. And then I mean looking at the working capital here in the quarter, I mean, is this basically driven by the initiatives you have taken or sort of implemented? Or is it something else that is driving this?

We always have variations between quarters and with -- or in relation to the seasonality that we have. But we do see the start off of these initiatives. We do see that we work closely together within our projects, in tender processes and focusing on these items a lot more. So I would say that we are now starting to see slight effects from this, and this is something that we will, of course, continue to do going forward.

Perfect. And then should we expect this to sort of impact the seasonally strong Q4? Or should we still expect the working capital release as we usually do or see in Q4 here?

Yes. I don't think that we can comment on sort of the expectations in terms of the improvements with regards to the working capital initiatives that we are working with. Those are ongoing, and we will continue with that. Then again, as you say, we will, of course, expect a cash flow given the seasonality that we have now when we enter the fourth quarter.

Yes, okay. Perfect. And then just the last one here. Could you give a little bit more I mean your color on -- I mean, your comment on lower profitable projects in Infraservices. And I think you have said before that you're seeing increased competition. Is that still the case? And is it that is driving lower prices? Or what is impacting this, would you say?

We won't comment on all the details in this specific project, but it mainly refers this 2 additional that we had to take additional resources in the projects that we ended now after the summer to be able to deliver on the projects on time. And we see a higher competition, as we have said earlier from last year, but we still align our business in Infraservices with our financial targets on midterm. And we see that Infraservices will contribute to reach them.

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

On the indication for 2024 that you're now giving, how well covered is that in the order backlog if you try to bridge that for us?

Yes. I mean we have not provided the indication for the year, and we say that we have a fairly healthy order backlog for the coming quarters. So I think that, that adds up to the answer to your question, Karl-Johan.

And when you look at the quarterly development, when you are looking at, say, less profitable projects you closed in Infra, if you look at the order backlog, do you feel secure about the margin that you have in that? Or does the delays that you now seeing projects also put maybe the project margins into some doubt in some cases?

Yes. As we said earlier, we see a higher competition in the Infraservices market. But we are -- we still go for our own business in line with our financial targets and Infraservices will contribute and there could always be a risk in our projects, of course. And during the summer, we ended some projects that we needed to have additional resources that the effect was that we had to decrease the margin in those projects.

And if you look at the overall backlog, the SEK 4 billion, so to say, then that you feel still supports your 7% ambition on the margin side when you look at it, the normal kind of delivery considerations and so on?

Yes, Johan. I mean we have added comments before on the fact that we aim to get and to tender for projects that can add to our financial performance towards the financial targets of midterm. And then considering the order backlog as a whole, we're still , as you are fully aware of, using the cautious approach for future periods in the valuation of the order backlog.

And when you now look at the project delays that you described or production start-up basically coming later, you feel you are secure, so to say, from an inflation point of view with those delays as well. So you are not taking on a risk giving guaranteed prices that then project slides and you have cost overruns from that perspective?

We don't see that this shift in volumes has any major impact on the risk perspective within these projects.

Good to hear. And how do you see, say, phasing of maybe Swedish Telecom and the German side when it comes to when? Is that more of a 2025 question now than 2024 or...?

Yes, more '25 than '24. But as we said during the presentation, we have started the projects for the Swedish Defense industry. We have started projects in Germany with our new clients. And so I mean, we are in the progress, but we did expect a bit more when we entered '24 than in comparison to what we see today. So we expect to continue to ramp up the production and increase those volumes going forward.