Welcome to this presentation of Eltel's third quarter results. My name is Alexandra Kärnlund. I am the Communications Director at Eltel. The results will be presented by our President and CEO, Håkan Dahlström, and our CFO, Tarja Leikas. After their presentations, we will open up for your questions. Throughout the presentation, you can submit questions either via the website or dial in via the phone conference and press pound key five. With that, let's move to the next slide as I hand over the word to you, Håkan.
Thank you, Alexandra. Really good quarter. First of all, maybe a good morning also from my side. Great to have you here. Yes, third quarter delivering according to our expectation on our strategic moves that we had taken. I will elaborate more on those in the end of this presentation today. I would like also here in the beginning to say that we are delivering on the improved profitability, especially in Finland, but also in Norway. Great to see Norway coming up on the right side of the zero. Broadening the customer base, we are doing that in all markets, but especially, of course, in the new business areas. The new and adjacent market, here we see especially great development in solar, but also data center is coming as a rapid growth area. I will elaborate a bit more on that in the end of today's presentation.
As you most likely have seen, we do have a strong development in Eltel Finland, where the growth engine is in power. The quarter has had quite high sales activity to be at this time of the year. Q3 is normally not so strong when it comes to contracts. During this third quarter, we have been able to have EUR 176 million in new contract value to be compared with EUR 136 million from last year. A step up there. What is also important to see here is that almost 24% of this TCV is actually from the new business areas. Important move taken there. We have some important large contracts that we have during the quarter announced. I will just touch base on them here with first the DayOne data center contract, important for us, of course. Together with that, we see also a new contract with Caruna.
In the press release of this, it has a value of EUR 81 million. This is including the option years. We normally don't do that, but in this case, it was sort of since we align all of this type of communication with our customers. Normally, we talk only about the committed time period. In this case, that would be roughly EUR 32 million for the first four years. That is the portion of this that we also have included in the TCV that we report here. The EUR 81 million is not included. It is EUR 32 million that are this part of the EUR 176 million in the TCV. Also an important frame agreement with E.ON. We had one in the second quarter for you who remember that. This is another one. Important step for the power part of the Swedish business.
Really great to see how power in Sweden is stepping up quarter by quarter. Not least, I would like to highlight also the great work that our colleagues have done during the autumn here to restore critical infrastructure in all Nordic countries, but maybe especially in Norway this time since the storm hit so bad Norway and the grid in Norway. A lot of our colleagues there have been out many during difficult circumstances to restore this for the society, so critical infrastructure. I am really proud of all our colleagues to do this service and maintenance work. If we continue to look a bit more on the financials, I will say that the net sales is mixed during the quarter. We have growth, somewhat growth in Sweden, very stable, if we say so, Finland, Denmark, Germany, and then a decline in Norway that is double digit.
We are not able to compensate fully for that. We are down 1% organically, meaning also local currency is 1.6% down. Overall, good growth, a lot of activity in power. In communication, we see more and more initiative in public infra. This is most visible for us in the Swedish market. Overall, communication is more stable, I would say, in the Swedish market and a bit more declined in the other markets. Mixed bag, as you hear, on the net sales. Profitability-wise, this is the ninth consecutive quarter when we improved that yesterday a bit. I am, of course, happy for that and that we can keep this. This is extremely important for us that we every quarter are beating our own track record. In absolute terms, still some way to go, absolutely.
I would claim that this quarter, the figure shows that our strategy is working and the implementation of the strategy is done in a good way. A solid quarter. By that, over to you, Tarja.
Thank you. I'm pleased to present Eltel 's results for the third quarter and for the period January-September. I would say that we are proud to present this historic, you didn't say historic, but I used the word historic, because first time in a decade we have reached this level of profitability. In regards to net sales, Sweden continues to deliver growth. Finland and Denmark, Germany remain close to last year's levels despite a slow turn in communication volumes. In Norway, we see positive signs from the new customer wins. From CFO's perspective, it is particularly encouraging to see how our organization has remained committed to improving the profitability. That is in all of our markets. Our third quarter adjusted EBITDA reached EUR 9.1 million, the highest quarterly result in a decade.
This is a milestone which reflects not only our strong performance in this quarter, but also the consistent progress we made throughout the year. The improvement is visible in all of our segments, and it underscores the strength of our operations. We have been executing our current strategy now since the beginning of 2023. The latest nine quarters, we have delivered year-on-year adjusted EBITDA improvement. At this point, we are delighted to report improvement and positive adjusted EBITDA in all of our segments, like I said. Compared to previous years, latest 12 months adjusted EBITDA, we are close to EUR 11 million in improvement. Then the segment results where we have Finland. Finland accounts now for 48% of our group operations. Here we delivered stable year-over-year performance. Beneath this stability, however, we saw a shift in dynamics. While communication volume softened, our power experienced strong growth.
Adjusted EBITDA improved significantly up to 20%, reaching now EUR 8.8 million. The result is driven by our continued focus on operational efficiency and cost discipline. This quarter, Finland is not only our largest, but also the most profitable segment. To Sweden, which represents a quarter of our operations. Sweden had a solid quarter with net sales growing by 3%. This is a strong result, especially given the high comparison base from last year's major project completions. The growth reflects the expansion of our customer base in public infra and telecommunications. Profitability, adjusted EBITDA margin declined from last year's 4.2% to 1.8%, and this is largely due to the absence of last year's exceptional project closings. These projects delivered above average margins. Denmark and Germany together are accounting for 14% of our operations. Here we saw net sales remaining flat due to, again, lower communication volumes.
However, power continued to grow. Denmark and Germany have consistently contributed to the profitability. This quarter was more demanding, and the profitability declined from last year's 4.9% to 3.9%. Nevertheless, January-September profitability improved notably. To Norway, which is contributing 12% to group operations. Here we see net sales declining by 12%. The growing revenues from the new customer wins are not yet enough to mitigate the declining volumes from traditional telecommunications. We see clear signs of improvement and turnaround efforts gaining results. Notably, Norway delivered a positive adjusted EBITDA for the first time in two years. This is a direct result of our focus on operational excellence and strict cost control. While challenges remain, the development in customer acquisition and margin recovery are really encouraging.
The balance sheet reflects the refinancing we completed in June. As a result, net debt now stands at EUR 172 million compared to last year's EUR 145 million. Leverage remains at 3.5, which is consistent with last year. It is important to note that the refinancing reclassified the hybrid bond from equity to debt. On a comparable basis, leverage would have been 3. We continue to see strong seasonal patterns in our operations, and the third quarter typically consumes working capital. Net working capital remains firmly negative, now negative EUR 31 million compared to negative EUR 33.5 million last year. Our personnel account is now down more than 500. This is demonstrating our ongoing efforts to optimize our operations.
It is time to remind us of the financial targets, which we keep unchanged: group adjusted EBITDA margin 5%, growth between 2% and 4%, leverage between 1.5 and 2.5, and a dividend payout subject to leverage target. As Håkan promised, he will now share the latest with the strategy execution.
Thank you, Tarja. Thank you. Yes, let me first remind you of our strategy. Improved efficiency and profitability of the current business is, of course, the first and most important cornerstone in our strategy. Equally important is that we get a more robust business, meaning that we need to broaden our customer base out from the classic telecom operations, out from the classic power. We do that, and I will let you see a little bit more about that in the next slide. What we have talked about as new in adjacent markets, such as renewable energy, data centers, and others, are very important for us to have more even result during the different quarters during the year. We see part of that already now, I would claim. On the first bullet here, elaborate a little bit about that. We see the gross profit improved to almost EUR 28 million.
Here, of course, it's great to see the adjusted EBITDA, as Tarja just mentioned, reaching above EUR 9 million. With the scope as we have in the company today, we have not been at that level before. We are almost 25 years old and had a completely different scope for 15, 10 years ago. During the last 10 years, this is a new level for us, and we are really happy to be there. This doesn't mean that we have reached a point where we should be or where we are happy to be. I would claim that we are taking important steps quarter by quarter. This is done by what we talk about as operation excellence.
This is the daily discipline, the daily routine to improve the way we are planning our work, how we use the resources, how we manage our fleet, and how we work together with our subcontractors. This is the core of our business to improve our profit. I would say that we have a structured way of doing in all our country. Each segment has their own program, their own way of looking at this. We learn between units and between countries in a structured process to continuously improve this operation excellence. There is also, of course, a commercial side of this, as we talk about as commercial excellence, where we also improve the way how we can invoice our customers, how we could get paid. Of course, also price is an important component.
These are things that we have a broad commitment in the whole organization to continuously look at and have high up on the agenda. To come to also a better situation and a more stable business over a longer time, we also need to broaden our customer base. We have talked about this for some time. When we look at the net sales for this year, we can see that 15% of net sales comes from what we have identified and categorized as new customers. For us, the definition is that when we launched this new strategy in January 2023, did we have revenue from this organization or not? If we didn't have revenue at that time, but we have today, then we say that this is a new customer. In this new and adjacent market, we see the most rapid growth today within the area of solar.
Here, it's almost half of everything we do in new business today that is connected to the solar PV business. What is happening as we speak is a rapid increase of the activity in the area of data centers. I would take the opportunity here in a second to elaborate a little bit more on that. Data centers are just now our fastest growing area, especially in Finland. When you look at the third quarter here, I would say that Finland is doing great during this third quarter. Yes, of course, Norway is catching up, but from a low level. When we look at all of this, how to improve the profitability, how to broaden the customer base, and how to grow in this new and adjacent market, I would say that in the third quarter here, Finland shows that they are in the lead here.
Internally, of course, we compete a bit internally and compare. Here, Finland has to be number one in the third quarter. Really well done. On the right side, you can see, and I have talked about this many times now, but to show you the development in new and adjacent business, the pipeline is a bit more than 50%. Yes, signed contract. I think it's great to see that we are able to convert the pipeline into contract, 24% in the quarter. Also, net sales in the third quarter, 14%. Here, as I say, Finland, as a forerunner here, have even done a larger portion than 14%. Compared to a year ago, we can see that the TCV, the portion of the TCV is more than twice as much. The net sales have increased from 3% to 14%, where we have almost flat top line. Yes, it was down 1%.
The 14% of net sales here in new business is, to me, a good and important milestone that we actually are able to convert this pipeline into contract and from contract to great business. Great business, I say. With that, I mean that we have higher margin in this part of our business than what we have in the classic business. That was one of the most important reasons that we, from the beginning in the strategy, said that let's address this new and adjacent market. We can grow and we could have better margin. I would like to open up a little bit about what I call now our fastest growing area, the data center. The good thing with the data center is that here we see a perfect match for the competence within Eltel. The data center needs our competence from the power business.
It needs our competence and skilled people from the communication business. They need both of them. Here we have a possibility to be a very important partner of choice for the data center owners or those who are building these types of data centers. I would just like to give you a few specific examples of how we do this. I would like to highlight that one part that we can do in this is that we can be a bridge between an international player or a local player and the DSO, where how to actually design the power part of this so that it fits that local DSO and it fits also the data center. Here is an example where we have a contract with Winthrop Technologies. They are one of Microsoft's contractors for two Finnish data centers. Here we are helping them construct the site with power.
Due to that, we have a long experience and great knowledge about how the DSO in this area, meaning Caruna, how they want to have the power solution. We have been able to help Winthrop find a solution and a more efficient power solution than what was originally planned for this project. Great contribution, great project, and this is something we are doing just now. Another case is the XTX case. Here we had also the possibility to be the bridge between an international player and local circumstances in the grid. Also here there was a possibility to also include the communication part. Great example how we as a local player can help international players to find the way to do a data center in the Nordic. The third example is a local player, so it is Hyperco, a Finnish digital structure company.
This is a turnkey delivery of a 110 kV substation, but also the cabling, meaning the grid connection from the data center to Fingrid's substation. This is a contract and a commitment with a value of EUR 16 million. We are working on this since the summer this year. We have a project that will deliver this during next year. Quite a short lead time to be a power project, but a good example of a data center power solution for the local players. A few examples from Sweden and Norway, where we work for hyperscalers on the service and installation agreement. This is a maintenance agreement, a frame agreement. In Norway, we have a similar contract, but we don't have the power competence in Norway in the same way as we have in Finland. Here we are more on the communication side.
In this example from Norway, we are able to do so-called structured cabling, meaning that we help the data center to have the connectivity, but also a reliable fiber connection. The latest example in this area is the contract we just signed with DayOne. This is a contract on the power side with a value of EUR 38 million. It's a turnkey delivery, meaning that we take responsibility from design, planning, establishment, and then service. A great example of how we can help international data center contractors to come to the Nordic. With that, it would conclude our presentation, and I would hand over to you, Alexandra.
Thank you, Håkan. Thank you, Tarja. Let's then open up for questions. Let's start with a phone conference.
The next question comes from Adrian Gilani from ABG Sundal Collier. Please go ahead.
Hello and good morning. Just a first question on the positive margin development. It looks to have been largely driven by the gross margin. You mentioned several factors behind this, including efficiency improvements, mix shifting to new areas, and some changes in the invoicing terms. Can you sort of expand on which of these has been the biggest driver of the margins so far?
Market-wise, it's Finland and Norway. If you mean sort of what within our sort of operation excellence, I will claim that it's about increasing the utilization of our resources. We optimize and adapt the organization when it comes to the amount of resources and how we plan the resources for the order book as we have at hand. This is, as you understand, always a lot of changes here. Some contract is ending. We win some new. This is an ongoing work that we try to be very, very prudent with. As we speak, we are adjusting the organization to optimize utilization, be better in the planning. I would say that is what has driven the gross profit for us.
I would actually add the kind of learning from the peers. We are quite prudently driving the learning organization from Finland to Norway, Norway to Denmark, and so forth.
Yeah, it's an important part. It's also a little bit harder to see the visibility in the numbers. I think we can see on our internal KPI, like utilization, cost of fleet, the amount of time we spend on planning. We can see that this is helping us.
If we look forward instead from where you are currently on sort of a rolling 12-month basis on the margin until your 5% target, is that doable with the current organizational size? Will you have to sort of size up again when the market improves? What's the journey to 5% from here?
I would say that the business mix is changing for us. You see that in the new and adjacent business, we have less people involved. We have, what I would say, a lighter organization. It is not so that the 500 people that we are less today than a year ago, it's not all about efficiency. It is also about the change in the business mix. I predict that we will see a further increase of the portion of new and adjacent business. That means that part of the business has less people involved, a higher portion of material, and that will have an impact on the gross margin.
Even though we are now coming into an area where the gross profit might not increase as fast as we have seen in the past, the bottom line will most likely do that due to the new and adjacent business having much less need of overhead. In the full P&L, we see that this is giving us a better profit. It will be sort of a continuous fine-tuning when we see the shift in business mix. As I see it, it will continue.
OK, that's very helpful. Thanks. On the new business areas, you mentioned the high growth rates in data centers. Can you give some absolute numbers or percent of sales number on how big of a part that is today for you?
I can say that the solar business is today roughly half of what we say is new business, and the data center is a quarter, give and take.
OK. Specifically at the segment level, can you give us a status update on Norway specifically? I mean, it's good to see them profitable again. Are there more sort of structural changes to make in Norway and more cost cutting? From here, is it mainly working with commercial terms and mix effects and things like that?
Yeah, I understood. I would say that we are having the restructuring behind us that was done in the second quarter. We, of course, always have to work with performance management. That's something else. Now it's about sale and expanding into new customer and adjacent business. It's more about the commercial side than on the cost side or operation excellence side. We have a very high attention in Norway on all different types of possibilities in the market.
OK. A final one more on the financials. You have seen quite a bit of working capital buildup so far this year and net debt coming up. Should we expect a larger release and net debt instead coming down into Q4?
I didn't quite catch that. I was explaining the refinancing impact to the net debt. Were you after something else there, Adrian?
Even accounting for the hybrid bond repurchase, you still have seen cash flow hasn't improved along with the earnings due to working capital building up. I was wondering if this is going to reverse in Q4.
I would say that the networking capital generation, that is due to the business mix that we are having. That is related to that. We have quite large ongoing projects that are consuming working capital. I don't see anything exceptional there. Our progress and good networking capital management continues. I don't see changes there.
OK. Just a quick follow-up. Am I to understand that the new business areas, given that they are more project-based, also tie up a bit more working capital?
I think that's a timing question.
Yeah.
Many of those have also advanced payment. It's a little bit, if we have many new, then this can be very good for us, meaning a lot of advanced payment. If we are in the end of the project, if you have many projects that soon will end, it would sort of tie up capital.
If I just give some light in there, when we are reviewing the tenders, we don't give any excuses to new business. The requirement for the cash flow is the same for the new. Like Håkan mentioned, then it's about the timing.
OK, understood. In that case, that's all for me. Thank you.
Thank you, Adrian.
Thank you, Adrian. Is that what we have on the phone conference? Yes. All right, let's turn to our web questions. There are quite a few. Try to be brief. OK. First one comes from Christoffer Jennel at Inderes. Looking at the committed and total order book at the end of Q3, are you satisfied with its current composition across countries, business areas, customer segments as you head into 2026?
Yes.
Yes.
The order book is somewhat larger than a year ago, not significant, but somewhat. I'm happy to see that the portion that is hard order book is somewhat larger. The soft order book is somewhat larger than a year ago. The mix, I think that is according to our strategy, so I'm happy for that. In absolute terms, I'm never happy when the top line is down. Of course, it's important for us to be able to win contracts so we also can push the top line upwards. It's not OK with a decline on top line.
Do you feel that the existing backlog and frame agreements provide a good platform for continued margin improvement?
Yes, we believe so.
Yeah, good. Sweden short. What are the main, also from Indres, what are the main reasons for the lower margins in Denmark and Germany and in Sweden during the quarter? Is it timing related due to shift in business mix or anything structural?
If we start with Sweden, a year ago, we had a very successful project ending in some smart grid project. I think we actually on this call talked about that. We expected those to be up to the end of the year or maybe even into Easter. We were able to finalize those much earlier last year, and that boosted the bottom line of the Swedish operation. Of course, it also contributed to top line. The good thing with Sweden today is to see that all parts of Sweden are contributing, and the communication part of Sweden is having growth, and they do much better on profitability. I think that's the easy part. In Denmark, Germany, we have a few contracts that have ended recently that had a very strong and good margin that we have benefited from for quite some time.
Now those are over and replaced with new contracts that are less profitable for us. We have to work with those to optimize the way we are delivering. It takes us some time to get up to the same efficiency as we had in the old contract. There is also one large contract where we have a ramp-up, I think we could say ramp-up issues that go slower than we expected. It takes a bit of time.
I would add that the same ramp-up applies to Sweden. We have some contracts that we are ramping up which are not yet generating the way the top line. In Sweden, it is also a timing issue.
OK. Tarja, we already touched upon this, but the net debt to EBITDA increased further during the quarter. It's again above your target range. Could you outline your plan and timeline for bringing leverage back within target?
Yeah. I would say we don't give the forward-looking statements, but the work continues.
OK. Cash flow. Operating cash flow was quite soft this quarter despite the seasonal pattern. When considering the stronger profitability, year-to-date cash flow and free cash flow are still below last year. Could you elaborate on the main drivers behind the higher working capital tie-up? Is this primarily project-facing customer payment timing or something else? Are you seeing any delays?
Yeah, it is like a project-facing is the key component there.
OK. We did talk about Norway, but let's have this question still from Christoffer. Norway delivered positive margins in Q3. Congratulations. How confident are you that this profitability can be sustained in the coming quarters, given that the volumes in the traditional communication business remain soft?
We are quite confident that we are out of the woods. Of course, we are not on a level where we are happy. The work also in Norway continues. Yes. I think we have what it takes, and we have now been able to move the attention and focus from restructuring and cost side now to be more to the front, meaning market, address the market, be more active on the sales. I'm really happy for all the activities that the Norwegian management team and the whole team in Norway have done. Now it's time to focus on the sales and make sure that we have the contract that we need to grow the business also in Norway.
Yes, I would add that Norway firms up. I'm really proud of the team there. They are working well.
Thank you. Markku Moilanen from Nordea has a question. Starts by saying congratulations on reaching record high profitability. Thank you. However, going forward, how will you ensure that you continue on the same path? How will you keep the profitability high?
Yeah, yeah. This is what we talk about as structured improvement of the profitability with the two-dimensional operation excellence and commercial excellence. This is, as I see it, something that we have now done for some time in a structured and good way. There is more to be done. We are not done. This is something we always will have to pay attention to. Of course, we know what we should do and we are on it. We will continue on this.
Saying that we are happy of the development, but we are not stopping. No. Christoffer threw in a last-minute question here. Net financial expenses increased to EUR 4.8 million from - EUR 3.7 million last year. Were there any one-off items this quarter in the financing? Yes. Yeah, refinancing. Most of it actually materialized on third quarter.
The cost of doing that process.
All right. The follow-up question was, is this level a good run rate to use going forward, given the new capital structure and interest environment?
I would say it's too early to say. This is something that is so fresh that I don't have the proper analytical answer to that. The third quarter, obviously, the financing expenses that way are higher than they would normally be.
All right. Thank you. That was the final question. We will conclude the call. The full report, as well as a recording of this webcast, will be available on our website shortly. We will present our Q4 report on February 13th. Hopefully, you will join us then as well. Feel free to reach out to us in the meantime if you have any further questions. Thank you, Håkan and Tarja.
Thank you, Alexandra.
Thank you all for participating in today's call.