Eltel AB

STO:ELTEL

Earnings Call Transcript

[Elin Otter, executive]

Hello, everyone, and welcome to this webcast. Today, we will present Eltel's results for the first quarter 2023. My name is Elin Otter, and I'm Head of Investor Relations here at Eltel. With me today, I have our President and CEO, Hakan Dahlstrom; and our CFO, Saila Miettinen-Lahde. Hakan and Saila will present the results and we will open up for questions after that and you can either post questions via the link or during the phone conference. With that, I'm handing over to Hakan as we move on to Page 3.

[Hakan Dahlstrom, executive]

Thank you, Elin. Good morning, all. Looking at the first quarter of 2023, I see a mixed bag. The year started very strong in terms of organic growth and the new contracts signed. And that is, of course, really encouraging and we see organic growth in the segment above 7% and 2.4% for the group. And I think this proves our ability to translate the contract that we won during last year into volumes -- produced volume this year. So that I'm really happy with.We also signed new contracts worth EUR 244 million and that is looking at the year before. This is double the volume compared to '22. So that's also a good thing, of course. But as you know, we had a difficult end of last year and the last quarter was really a disappointment. And we, of course, could see that that will also continue into the beginning or the first part, I would say, of 2023. However, that and the fact that the first quarter is usually our weakest quarter, we are still disappointed when we look at our adjusted EBITA margin, where we land at minus 1.2% for the segment and 2.9% for the group. And this is, of course, not what we would like to see.Talking a little bit about this mixed bag. We see that Denmark that we -- during third quarter and fourth quarter, talked about the bouncing back in Denmark. We see that that is actually happening. And Denmark had a good first quarter, both top line-wise and margin-wise, it's really great to see that so many things go in the right direction in Denmark. Also Sweden continue to improve the result and contributed positively in the first quarter. That is the third quarter that we see black numbers from Sweden. And I would claim due to the seasonality that we have in our business, it's the first quarter Sweden have black numbers for a very, very long time. So that is very encouraging for the future.We will, of course, continue to work on the underlying issues to drive the profitability in the coming quarters. And we have the cost-saving program executed and we will talk a little bit more in a second about that. But that is, of course, focus for us going forward, particularly for Norway and Finland, where we have had the challenges during last quarter last year. And as I said, they continued into the first half of this year.So the cost-saving program that was executed during first quarter will have a EUR 10 million cost savings in a yearly run rate. We will not -- we have not had any benefit of that during the first quarter. We will see that coming later on. We also, in the first quarter, we were able to issue a hybrid bond on EUR 25 million to strengthen our liquidity and I think that was well done. With that said, just look into a little bit more about this new contract that I mentioned.And of course, the size of them is encouraging by itself, but also that we are having success in this new area. The new area of green energy or renewable energy in the power segment, also public infrastructure. We are broadening our customer base. So all of this that we have had as an ambition and will have ambition in focus going forward. So that's -- I think that is really good to see.We will, of course, have sales and pricing high up on our agenda going forward because that's where I see that we have a major contribution to an improved result going forward. In this new area, new business -- renewable business -- renewable energy, we're also happy to see now that we have been able to sign the first large-scale solar park contract with energy company in Finland called Helen, and this is a solar park of the size of 10 megawatts and that is a sizable solar park, I can tell you. So that's really good to see.And then a few words about that cost-saving program that we have talked about before. We have now executed all activities in this, but of course we are still carrying the cost as an example the downsizing of our organization. We have reduced the organization with 150 full-time employees and that has mainly been done in Norway and Finland. Of course, we are carrying the cost of that also with us into the second quarter and some even after second quarter, but I expect to see the first benefit of the cost saving program during the second quarter and then have full effect of the cost-saving program during the later part of third quarter.With that, I think we need to go into the numbers and Saila, could you please guide us through the numbers?

[Saila Miettinen-Lähde, executive]

Thank you, Hakan. Let's indeed take a little bit closer look at the numbers for the total group first. And as Hakan already mentioned, we saw a positive development in our net sales. And for the group, they increased 2.4% to EUR 188.4 million. And for our Nordic segments, the growth actually was yet stronger and we saw a 7.2% increase there adjusted for the currency effects. And as already mentioned, it was largely driven by very good and promising development in Sweden, Denmark and also Finland.Regarding profitability, I think that we should first note that we have made a little bit of a change in our terminology. Starting now in Q1 this year, we will refer to adjusted EBITA instead of operative EBITA, which was the term -- a measure that we used previously. As is typical, the adjusted EBITA does not include items that would affect comparability. And in our case now in Q1, that means the EUR 6.1 million restructuring charge that we took as a result of the savings and restructuring program that Hakan already described.Following this little terminology intro, we can note that our adjusted EBITA for the group has, for the first quarter, unfortunately, decreased to negative EUR 5.5 million, which indeed gives a margin of minus 2.9%. Similarly to net sales, the figure for the adjusted EBITA for the segment was slightly better at minus 1.2%. And the decline in the profitability primarily came from the difficulties that we saw in Finland and Norway. But as already noted, performances in Sweden and Denmark certainly moved in the right direction.Let's now move to the following Page 7 and look at the segments, and we will start with Finland. In Finland, the good thing was that, indeed, we were able to increase the net sales quite comfortably by 9.4% to EUR 64.3 million. The growth primarily came from communication, where the fiber market continues to be strong and is driving our volumes and therefore, also the top line.The adjusted EBITA, however, was a disappointing figure of minus EUR 2.3 million. And it did -- reflected both increased costs and the inflation as well as then some unfavorable contracts that we have in Power Services. Communication, on the other hand, similarly to the top line also performed quite steadily and well in terms of EBITA.All in all, the difficulties that we already saw in the last quarter last year, which continued into the early part of this year, gave rise to the restructuring program, which, like Hakan mentioned, was carried out in the first quarter. In Finland, that resulted in the reduction of 47 full-time employees as well as the termination of certain programs. Our contracts closing of some offices as well as then reducing the number of our vehicle fleet to meet the current needs.With that, let's move to segment Sweden on Page 8. For Sweden, we are indeed very pleased to note that Sweden has continued on the growth track and it is now for the sixth consecutive quarter, which is quite a track already. For this quarter, it resulted in EUR 48.8 million in net sales, which is 11.3% more than last year.The organic growth in local currency was even stronger at 19.2% and basically showing what difference it makes when the currency effects actually had a negative EUR 3.5 million impact on the net sales when reported in euros. The growth basically came from increased volumes, both in fiber and also in Smart Grids. The adjusted EBITA improved to a clearly positive figure of EUR 0.5 million, which is quite a bit more than the negative EUR 1.8 million we saw last year. And the positive trend is indeed coming partly from the increased volumes, but it also comes from the operational improvements, which we can at least to a large extent, thank our 1 LTL program, which we carried out last year.Let's then move on to Page 9 for Norway. Performance in Norway largely suffered from the decrease and also partly delayed investments our key customers. And with this, the net sales came down quite substantially by 22.5% to EUR 32.2 million. In local currency, the decline was smaller, minus 14.6%, which again then excludes the impact of negative EUR 3.3 million from the currency effect.Again, largely related to the drop in the volumes. Norway also experienced quite significant overcapacity in parts of the organization and related inefficiencies. As a result of this and partly also a different business mix, the adjusted EBITA dropped to a negative EUR 1.6 million or a margin of minus 4.9%. We have, of course, taken actions to improve this. And this means both increased activity on sales, broadening the customer base, but also, as already mentioned, the restructuring program. And this in Norway actually meant the reduction by the organization by 100 full-time employees as well as then facilities and fleet as was the case also in Finland.On a positive note, I think in Norway still needs to be reiterated that we have signed recently good contracts, meaning that Viken Fiber, which was a new customer signed in January and then, of course, an important extension with Telenor also now in April.With that, moving on to Page 10 and Denmark. As Hakan noted Denmark is on a very good path right now. In Q2 last year we noted that we do believe that Denmark has bottomed out. And I think we're very pleased now to be able to really confirm that.In the first quarter, we saw net sales of EUR 21.8 million, which is a 20.5% increase compared to the previous year. Whilst Denmark is very active in its sales activities by and large, the growth at this stage primarily came from successful ramping up and higher volumes in some existing key contracts.For the adjusted EBITA, Denmark came to EUR 1.3 million, which also gives a significantly improved margin of 6.1%. And the main features or things behind this profitability is both increased volumes, also continued efforts on operational improvements and then importantly also higher pricing.Now let's move on to other business on Page 11. In other business, we saw a slight decline in sales to EUR 22.7 million. And the main reason for this is the shift of smaller -- 2 smaller projects and services in High Voltage Poland. Adjusted EBITA in our business came to minus EUR 1.0 million and this largely reflects the continuing challenges that we see in High Voltage Poland, both relating to inflation as well as the war in the neighboring Ukraine. Smart Grids Germany, on the other hand, continue to produce good, nice margins.Let's still take a brief look at the balance sheet items on Page 12. And there, you can see that unfortunately, our leverage did take a hike up to a bit more than 6, largely due to the more disappointing profitability that we saw in Q1 than we would have hoped for. Net debt ended up at EUR 158 million, slightly up from previous year. Net working capital, on the other hand, remained negative. Of course, an important point that we take some pride on and continue to work on heavily.The above figures actually do not yet include the impact of the hybrid bond, which formally was issued at the beginning of April -- on the 6th of April. And with this, let's still take a brief look at the hybrid in itself and what it was all about. We indeed issued the instruments of EUR 25 million in -- on the 6th of April. And as it happens, it is the first sustainability-linked hybrid bond in the Nordics. And this highlights our commitment to sustainability, both in terms of our operations as well as our willingness to link it to our financing instruments.The hybrid, of course, improves our financial position and also supports our efforts to expand our business to the renewable energy infrastructure. And the key features of the hybrid as is typical for the instrument is that indeed, it is subordinated to all other debt and it is treated as equity under IFRS. In our case, the so-called non-call period is 3.25 years and the initial fixed interest rate is 13.5%.And indeed, the sustainability is built in so that should we not meet our sustainability targets, which are defined as part of the instrument, we would then pay an up to 1.2% premium when redeeming [ watt ].This completes the financial part of the presentation, and I will then hand it back to Hakan.

[Hakan Dahlstrom, executive]

Thank you, Saila. Thank you. We would just like to confirm the target and that we stick to them. We are currently hitting on our growth target here in the first quarter for the group. So I think that's a step in the right direction. But as you know, to reach our adjusted EBITA target, we will continue to broaden our customer base and grow in new and adjacent markets.We also need to work with prices and our operational excellence. So that is a work that we continue doing. And the strategy or the agenda going ahead, we have formulated like this and is very much about this improved efficiency and profitability of the current business, including the price as a tool to increase our margin, of course. But then also, we need to broaden the customer base. And this is to do things that we do today with maybe some, not so many, but very large customers to do more or less the same services for more customers, but most likely not of the size as those we have today to broaden the customer base in the existing scope and then go outside the existing scope and grow in new and adjacent market as renewable energy and also public infrastructure.And here is this first really large solar park together with the energy company Helen in Finland. It's an important milestone for us to take this journey. We also see that more and more customers are asking for an integrated sustainability in everything we do. And we believe this is also important. So feels very good to see our progress in that domain also.Then to develop us as a company, we need to put even more effort in our business concept and our commercial capabilities. And this is something that we see the first steps in the right direction, but we have more to do. But I'm quite happy to see the development of our business development unit. This also include, of course, that we will look at the business model and different position -- to take a different position in some of the value chain that we are active in. And I hope to get back to this in another quarterly presentation quite soon.But to give you an understanding about the progress we have in this new and adjacent market, we have summarized it as it's developing according to plan. And if we then look into the different areas like wind, we have ongoing project with really important customers here that makes us a possibility to develop in this area and we see that the growth that we have predicted in this area is there and we are today, sort of happy for that development, but more to be done. The cost development and the change of interest rates have put some challenges for the business case for those that are building wind parks. So -- but I think we see more and more interest, nevertheless, in all countries.The e-mobility is happening a lot. And we -- in the last fourth quarter of last year, when we presented that, we made a little bit of a deep dive into that and we continue on that journey. There's a lot of things happening here and we try to be a forerunner and be a part of this. The solar, as I mentioned, the first contract has now been signed and we look very much forward to this. We see that there is a lot of interest and it has increased significantly only in the last 3, 6 months, so much more interest and much more investment coming into this area. Of the same reason, there is a little bit hesitation on the wind.So in the solar domain, we see that the market can be divided into 3 segments, the residential, the commercial/public and utility. And when we looked at this, we have drawn the conclusion that the Nordic countries as such are quite different in this and we will have different approach in the different countries. But we don't today see any country where we will be active in the residential segment. This is a segment that we don't really see fit Eltel.So commercial and public and utilities are those 2 segments that we will address. And when we look at the value chain, we see that our offer today fits quite well the full value chain from design and plan out to commissioning. And this is things that we are active in now and we believe that this is something that's going to increase also going forward.Sometimes, the solar modules, the panel as such is included in the scope that we are looking at and sometimes it's not. But nevertheless, this -- to take this as a turnkey project is something that we have built the capability of and are doing today. So in those 2 segments, we will be active in the Nordic countries. And we believe that this is an attractive market segment and will be attractive for many years going forward.We also see that regulation are pushing more and more towards investment in the solar. We see the energy prices is supporting this investment, but also, of course, the green transition. So all of this would sum up to a much more -- a larger market and that we have competence and an organization that would fit those 2 segments quite well. So going forward, we have for ourselves put an ambition to have a net sales target this year just below EUR 5 million. But being able to accelerate this for the next year to EUR 30 million and in the neighborhood of EUR 50 million for 2025.And we believe that it will be a different scenario for the different countries, but particularly the utility segment, we believe would be attractive for the market in Sweden and Finland and most likely also for Denmark, while the business and public segment would be most likely more for the Norwegian market.With that, I'm handing back to you, Elin, and I think we are ready for some questions.

[Elin Otter, executive]

Thank you, Hakan, and thank you, Saila, for the presentation. As said in the beginning of the presentation, you can post questions through the webcast or you can call in through the phone line. And we have received some questions already on the line, so we will start with that.

[Operator]

The next question comes from Sandra Nordlow from ABG Sundal Collier.

[Sandra Nordlow, analyst]

This is Sandra calling in from ABG. I'm standing in for Adrian today. Firstly, can we please look at your new revenue streams? You have just signed your first large solar contract, that is very interesting. Can you specify how these new streams from renewables and electric vehicles could possibly drive higher margins looking forward? Will these be able to increase your profitability, please?

[Hakan Dahlstrom, executive]

Okay. If I understand right, how these new areas can drive profitability. Well, we see that the market on EV or solar, even wind, in relationship to those segments where we are traditionally doing our business, this new and adjacent market, as I call them, they are less mature, they are less standardized, meaning that there is a larger possibility to have a higher margin when we are doing tendering in those areas. And I would claim that what we have done during the last 6 months also proves that, but we have a higher ambition on margin and also that market accept that.

[Sandra Nordlow, analyst]

Okay. Perfect. And when you are signing new orders or order extensions at this point, do you only find them if they are in line with your EBITA margin target? Or could there be a possibility of new contracts with a lower profitability, too? And then that question relates to all segments.

[Hakan Dahlstrom, executive]

Okay. First, we have a contract that we have today that includes an option to prolong them and then sort of the price mechanism is already set there from the beginning. So the prolongation, for example, the contract with Telenor that we did here in April, very important contract. The pricing mechanism for that is set for, I think, 4 years ago. So there is one case.Then, of course, all new contracts that we do now, we have a higher ambition on EBITA than what we have had in the past, but it's not so that one size fits all. It's different in different market segment. It also depends on how they are sort of fitting into our production planning. Is this a task that we need to have to have a reasonable utilization? Then we have a higher appetite and maybe not so high ambition on margin. And then we have other cases where we have a really strong order book and we say that, yes, if we get a nice price, we will be happy to have this contract.So it's, of course, from case to case, but overall, the average that we are following monthly to see market and market segment, how it's developing. We see that we have a very good trend in those margins that we are tendering on. So I will say that what I said in the autumn that the demand is higher than the supply, I think that still is valid overall and it supports a higher margin ambition from us.

[Sandra Nordlow, analyst]

Okay. Perfect. If we have time, I have another question on price and cost indexation. During the first quarter, how large of an effect did you see from -- on earnings from annual price indexations to customers? And then indexations on input costs and more importantly, has the effect been net positive or not for the margins?

[Hakan Dahlstrom, executive]

Okay. I would say that the indexes have given us price increases of the same size as our salary increases have been. So now with agreement with unions in all Nordic countries, I think we have a good situation going forward that we know what it will be and it is on a reasonable level, I would say and also the indexes and those price increases that we have negotiated with our customers, they are in the same size. So I think this is neutral for us.

[Sandra Nordlow, analyst]

Okay. Very good. And just a final question then on the labor costs. And we know that there have been widespread workers' strikes in the Nordics, first in Finland during the first quarter and then in Norway during April. Were your operations in any way affected by these? And then you did now mention that you were able to offset any increased costs due to wage inflation, but have you seen a significant impact here?

[Hakan Dahlstrom, executive]

We have had no people of our own staff included in a strike like that, but we have had partners and subcontractors that have been impacted. And by that, they have been late to do some task for us. But this has been only minor size. I'm not aware about any larger case of this. So I wouldn't say that we are impacted or have been impacted. No.

[Elin Otter, executive]

Thank you. And I don't believe there's any further questions on the phone. So let's go to the web where we have received a few questions from Markku Moilanen at Nordea. Can you give a bit more color on those unfavorable agreements in Power Services in Finland that you highlighted in the report? What do you mean by unfavorable? And what's the root cause for those unfavorable agreements? And how big impact did they have on the Q1 result? And how long will they continue to burden the results?

[Hakan Dahlstrom, executive]

Okay. If I start, you help me out. Those 2 contracts that we are thinking or talking about has price levels and structuring those contract that when we deliver on those, we can't get a reasonable gross margin. So it takes more resources to perform the task than what we have calculated with. So they are in -- yes, they are unfavorable in the meaning that we are not getting a decent gross margin on them, we're actually in some part of them.There's many different things that we should deliver. And it's not the same on all of them. But if you think that there is 10 to 12 things that we should do and then a few of them are loss-making, a few of them have a reasonable gross margin and a few of them has a very weak, weak gross margin. The mixed total sum of that give us a gross margin that is not good at all. And of course, I'm really disappointed on that situation.What we do is, of course, to try to see how can we change the way that we are delivering on this and how can we come to an agreement with the customer on a different settlement here. But we have not a solution to it yet.

[Saila Miettinen-Lähde, executive]

Yes, I'd say that the first thing is that we're indeed looking at our own performance, optimizing that further. And then, yes, it is also a fact that, yes, we're discussing with the customers to hopefully amend the situation and the agreements to meet both parties' needs in a sort of reasonable manner.

[Elin Otter, executive]

Good. Second question, regarding the profitability development in Norway, you highlighted that the result decreased as a consequence of reduced volumes, which led to overcapacity and inefficiencies. Are those cost savings like workforce reduction and facility closures, et cetera, enough to compensate for the lower volumes? Or should we expect weaker results to continue in the near future?

[Hakan Dahlstrom, executive]

Those reductions are enough if we are successful in our sales and our commercial activity to generate business for us in the future. Of course, the order book in Norway is not forever. We have a certain size of that order book. And that, together with what we believe is a reasonable development in sales and generating new business, this should be enough.But if we are able to generate new business as we have expected, then of course, we will have to come back to this. But in Norway, it's sort of quite clear what type of project that are stopped and by that, also what type of redundancy we have had in the organization. And the good thing is that that is executed on. But we need, of course, as in any business, we need to be able to generate new contracts and new business for us going forward. But the judgment we do today is that this should be enough.

[Elin Otter, executive]

Thank you, Hakan. And the final question is from Markku Moilanen. You have covenants related to leverage. Were you still compliant with those covenants, although leverage increased to above 6x?

[Saila Miettinen-Lähde, executive]

Yes. We were compliant with our covenants. In Q1, of course, had we reached them, then we would have been obliged to report that bridge.

[Elin Otter, executive]

Good. Thank you. That concludes then -- there are no further questions, so I guess that concludes today's presentation. Thank you so much, Hakan and Saila. We will present our Q2 report July 27. Looking forward to meet you again then. And if you have any further questions until then, please feel free to reach out to me and we will talk more going forward. Thank you so much.

[Hakan Dahlstrom, executive]

Thank you, Elin.

[Saila Miettinen-Lähde, executive]

Thank you.