Earnings Call: Q2 2021

Jul 27, 2021

Hello, everyone, and welcome to this live webcast. My name is Kasey Melindholm, and I'm the President and CEO of Airtel. With me, I have our CFO, Saila Mjentine and Lahde. We will today present Eltell's Q2 report for 2021. Sael and myself will present the result, and after that, we open up for questions. Throughout the presentation, You can e mail your questions by clicking on the envelope icon next to the presentation. With that, let's move to Page 3, and I will tell you a bit about Airtel's 2nd quarter. Airtel is the Nordic market leader in Infranets, Founded in 2,001, we are the leading Nordic field service provider within communication and power, and we operate throughout the Nordics, Poland, Germany and Lithuania. For Eltell, sustainability is about building a strong profitable company for the future and delivering blasting financial, social and environmental value for our stakeholders. In 2020, Airtel had net sales of €938,000,000 and we currently have about 5,200 employees. Let's move to Page 4 and look at the highlights of the Q2. For the 6th consecutive quarter, we improved our operative EBITDA compared to the corresponding period the year before, which is a result of staying true to our operational and excellence strategy. Main contributors to the positive result were Finland, Norway and Denmark, where in all Markets, we also have a good market position and overall, a good market situation. We maintained our healthy levels regarding net working capital net debt and improved return on capital employed. COVID-nineteen continues to impact our customers' business basically our customers' business and we can see some postponements and delays in projects, for example, in Norway in fiber. But overall, we are now 90% of the business in Nordics and Nordics It's a good place to be even in winning COVID-nineteen times. Being the market leader, We also took the next step in our climate work by committing to the science based target initiative, SPTI. Let's move to Page 5 and talk about how COVID-nineteen impacted Airtel's business. All in all, we see also in the Q2, we see some reduced customer investments. Here I could use Norway as an example. Norway had almost a lockdown situation during the spring And that impacted our customers' customer business. For example, 20,000 stores and all the malls were closed. So we can see some impact of that now in our volumes. That said, we think that by the end of the year, This will change and the volume is picking up month by month. Some projects have been postponed. We can see that mainly in Poland. And some delays in our projects, partly because we are maybe lacking material. For example, in power business, There is a lack of steel and the price of steel has gone up. And we can see some increase in our sick leaves And that doesn't mean that our technicians are sick on a large scale, but on the other hand, we have quarantine situation that impacts our sick leave rates. Let's move on to Page 6 and talk about us taking next step in our sustainability work. Since many years, we are committed to a number of sustainability frameworks and reporting tools that help us meet the expectations of our internal and external stakeholders. During the quarter, we committed to another one, SVTI. Together with stakeholder together with stakeholder dialogue and the relevant topics that It's used to shape our strategic decision making. This provides the roadmap to remain relevant as a partner, employer and investment opportunity. Being a market leader, we have taken the next step in our climate work by committing to science based target initiative, SVTI. Committing to SVT I shows our sustainability ambition is on a high level. We are working towards setting concrete and measurable goals. And we've set sustainability as a business critical part of Eltell. I convinced that the 3rd party verified goals in line with the Paris agreement will soon become a clear customer expectation. And last but not least, committing to SVTI is at the same time building internal pride. With this, we are now moving to Page 7, while I hand over to Seil, who will take us through the financials of the 2nd quarter. Thank you, Kasimir. Starting by noting that, as Kasimir already mentioned, we have now Seeing our profitability improved for 6 consecutive quarters compared to the respective period the year before, which is, of course, good news for us. And this we have accomplished despite the reduction in net sales, which also has happened. And the net sales for Q2, 2021 came to €210,000,000 compared to €245,000,000 last year. For the 1st 6 months of the year, our net sales amounted to €392,000,000 which is then down from €482,000,000 the year before. The reduction in net sales primarily came as a result of divestments, which we made in Q2 2020, those being German Communication and Aviation and Security in Sweden. But as also mentioned by Kasimir, COVID has had an impact Through decreasing customer investments and relating to project postponements. And in Sweden, as one of the key segments, we lost a large service agreement Mainly relating to copper networks, which are being ramped down. And this, of course, had an impact comparing to last year. This offset, whilst the overall net sales came down, we are very pleased to note that growth in Finland has continued. On our operative EBITA, the Q2 again showed clear progress in our transformation. And for the quarter, our EBITA amounted to €4,400,000 with a margin of 2.1%. For the 1st 6 months of the year, the operative EBITA came to €3,700,000 representing a margin of 1.2%. The biggest contributors to the positive results were segments Norway, Denmark and Finland. And on the negative side, last year's divestments had an impact of minus €1,200,000 Then if you look at the lower graph on this side, you can see that our operative EBITA on a rolling 12 months basis Has now continuously increased since Q4 2019. And we're, of course, working hard to maintain this trend also going forward. Let's now move to Page 8 and look at segment Finland. Apologies, my mouse is lost somewhere. I'm awfully sorry. This is a bit of a technical problem for Me at this end? Maybe I can go through Finland, Sweden and Norway and Denmark. Sorry. It was due to the presentation on a different scale. Again, very sorry about this delay. But in terms of Finland, as said, the segment showed improved net sales and second quarter was 2% up €79,800,000 And for the first half year, we were 2.5 percent up to 140,600,000. This growth came from a strong market position in communication, where we are very happy to see good demand both in fiber and 5 gs. Operative EBITA in Finland improved substantially compared to last year and was €3,100,000 for Q2 And €3,800,000 for the 1st 6 months. And here, as more or less across the board in the Nordic countries, we're seeing The work on operational excellence is paying off. And we can say that good productivity, improved project management and cost control are all Significant drivers for the better result. For Finland, in addition, we had a write down Relating to some certain power projects, which, of course, then impacted last year's comparative results. Let's now move on to Page 9 and look at segment Sweden. In Sweden, Our net sales in Q2 amounted to €44,600,000 and for January, June to €85,700,000 This shows that the decline in net sales continued, which reflects partly the loss of the large service agreement that was already mentioned. And on the other hand, the divestments of the Aviation Security business area. On operative EBITA, We came to minus €1,600,000 in Sweden for Q2 and minus €2,400,000 for the 1st 6 months. The negative result partly came from a write down of an older power project. And the decline Compared to last year, it was further enlarged by a positive one off of NOK900,000 that we recorded in Q2 2020. All in all, we have to say that Sweden is still in a restructuring phase and as such shows declining sales and Is, as we see, also still impacted by some old unprofitable projects. All this said, we can also say that the risk level in Sweden has already been reduced, and we're starting to see positive signs in cash flow and net working capital. And with this, we're also accelerating Our work on efficiency and profitability, which we then hope to see impacts of in the future quarters. Relating to Sweden, perhaps a note on a risk side, relating to the fact that There may be a risk of goodwill impairments in the latter half of the year. Our goodwill was first allocated to countries in 2018. And since then, we have seen a substantial market Place development for the negative in Sweden relating to the reduction in maintenance of copper networks And slowdown in building fiber. As we have previously noted in our annual reports, The goodwill in Sweden is hesitant. We're currently assessing And we'll then come to decisions later parts of the year. Let's now move to Page 10 For segments, Norway. In Norway, our net sales for the quarter amounted to EUR 42,100,000 And for January, June to SEK76,000,000. The development compared to last year was negative, largely due to Decrease and delays in customer investments. And those, as Kasimir already mentioned, are largely due to COVID-nineteen. And now in the midst of summer, it may be hard to remember, but we also were impacted by quite a harsh winter in the early months Of the year. And also the ramp up of the new Telenor frame agreement had some impact. For operative EBITA, Norway remains on very healthy levels despite the decrease in net sales. And EBITA for the 2nd quarter was €2,700,000 with a margin of 6.4%. And in January June, this came to €3,900,000 With a 5.1 percent margins. And again, reasons for the stable margins do include the Sort of good work on operational efficiency and also successful rightsizing to match the net sales. With this, let's now move on to Page 11 for Denmark. For Denmark, net sales amounted to €24,600,000 for the 2nd quarter €50,800,000 for the 1st 6 months. The decline compared to last year comes primarily from the completion of a large communication project, As well as somewhat lower fiber volumes overall, with the fiber volumes last year having been on quite a high level. In terms of profitability, the Q2 was indeed somewhat exceptionally good for Denmark. The operative EBITA amounted to €2,600,000 With a margin of 10.5%. And for January, June, the corresponding figures were $3,900,000 7.7%. And whilst we see that Denmark has successfully worked on its project management and also has a better project portfolio at the moment, We also need to note that the 2nd quarter results also was positively impacted by 800,000 With what could be called sort of a one off relating to a partially sourcing of business by a major customer And indeed, events relating to the ending of this relationship. Going forward, The in sourcing, unfortunately, will then have somewhat of an impact relating to net sales. And with this, let's go to page 12 and look at other business. Before commenting other businesses such, I would like to point out, as actually came across already from Kasimir, That's our country segments, Finland, Sweden, Norway and Denmark, already contributed to more than 90% Of the net sales in the first half of twenty twenty one, 91% to be exact. And this again shows the continued progress Our strategy and the Nordic focus. So this leaves for other business 9% of net sales, which For the first half year amounted to SEK 43,000,000. And in this, we saw positive developments, particularly in smart goods Germany. But unfortunately, high voltage and especially in Poland continue to have challenges. And the divestment of the German communication business Q2 2020 also, of course, had somewhat an impact in comparison to the year before. Operative EBITA for the first Half year was minus €1,400,000 And in this, Smart Grids Germany and Power Transmission International had positive contributions, Whereas, the continued difficulties in High Voltage Poland brought the results, unfortunately, still to the negative side. If you look at our bubble picture to the right, you can now see that we have reached operational completion of 4 major projects, those marked In gray. However, this said, several of the Polish high voltage projects still have been pushed somewhat forward. We do, however, anticipate that we will be able to complete the majority of them still during the course of this year And thus, then further reducing the risks related to them. Then finally, let's take a look Add some of our development trends on the following page. The leverage, which Now it's around the level of 2% to 3%, has come down substantially. And we're, of course, happy about that. And if you look at the minor increase between Q1 and Q2, that primarily reflects seasonal variation in our business. On net debt, we have reached a good level at 88,000,000 excluding the licensees, sort of our leasing liabilities. And then on the ROCE or the return on operative capital employed, we can see a continuous trend upwards, reflecting partly, Of course, the improving results, but also the low levels of capital that we use. And at the end of Q2, we landed at 16.8% with ROCE. This completes the financial part of the presentation. And with this, I then hand The word back to Kasimir. Thank you, Saila. We can move directly to Page 15 and have a look at our financial targets. So these are our financial targets. We are making constant progress towards the 5% operating EBITA and we are fulfilling the leverage target. During the turnaround, we are focused on improving our stability and control environment as well as getting our balance sheet on a healthy level and we have been successful doing this. With this on track, the next step is to reverse the downturn in net sales and reach our long term financial target of 2% to 4% annual growth in the Nordics from 2022 onwards. We are pursuing different organic growth Opportunities in the different Nordic countries and in expanding our portfolio and by shaping our offering to the market. While doing so, we are also preparing for potential future acquisitions And we clearly see a potential regarding consolidation of this industry in the Nordics. Having said that, we're still on our transformation journey, focusing on here and now and deliver what we're supposed to deliver in 2021. We can move to Page 16 to look at our deliverables. We are halfway or even more than halfway through the journey and Everything that we have gone through today supports the fact that the operational excellence focus and the Nordic focus has been and Success and we are delivering better and better results. So that's all good. Maybe one Point that we haven't talked about today is basically how we have managed in COVID-nineteen times regarding customer base. We have focused a lot around our quality. We have improved that a lot during the last couple of years and we have focused around our main Frame Agreements and Customers because it has been a bit challenging in COVID-nineteen times to gain new customers and approach new customer segments. But hopefully, that changes now when we go to the next phase and of course, supported by potential M and As going forward and from 2022 onwards. We can now move to the next page. The focus areas are the same. We have had a special attention around our tendering process. And as we can see, the control environment has improved, but also the tendering process as such has improved, and we have been selective in that. The organizational changes have taken place during the last couple of years. As mentioned before, all in all, I think we have changed roughly 30% of district managers and more than 30% of team managers and that change has been part of changing processes, changing partly culture, but also part, of course, of the fact that we have been decreasing in net sales. A lot of focus on implementation, execution of both frame agreements and contracts and that has paid off. The production planning has improved. Still potential there, but I think we saw it this year also Q1, the winter planning was executed in a very good way. We have invested more and more in training. Also part of implementation of frame agreements is training. And again, upselling to the existing customer base and making sure that we deliver what we have promised on a day to day basis has been very important during the last 2, 3 years. Then going forward, We are the number one player in this industry. We want to strengthen that position even further. And we are, as mentioned before, here, more than 90% of the volume is now in the Nordics, but we still have I have less than 10 outside and then we're focusing there on closing those operations down in a professional way and also looking at potential divestments in those businesses outside the Nordics, but that also that program has come quite far compared to where we were a couple of years ago. And a lot of special attention to the Polish high voltage business so that we can turn that around going forward. And again, I mean, operational excellence is on the agenda every day. So that is something that we'll continue to focus on. So those are the focus areas and the targets are clear, improve still the profitability, the quality, customer satisfaction and employee engagement as well and, of course, at the end of their cash Generation. So we are improving in all these areas, but still work to be done to get to the next level. With that said, we can move to the next page. So we have come quite a long way On our turnaround, much has happened within Aeltel over the past years. We have improved the control of the business and we have continued Our good market position and especially driven on the communication side by fiber and 5 gs. And that gives us confidence to say that we will further strengthen our performance going forward and the financial guidance for the year remains the Same, we foresee our operating to beat the margin for 2021 to improve from 2020. And with that Lucian, we'll move to Page 19 and open up for any questions that you might have. Thank you, Kasimir and Seyla for this presentation. As Kasimir said in the beginning, You can email questions by clicking on the mail icon next to the presentation. We have indeed already received some questions. So I will start with a few from Robin Nilberg at Carnegie. When do you start Or when do you expect to reverse the negative trend in net sales? As mentioned today, we are preparing Different initiatives and also conducting some initiatives already regarding organic growth in 4 Nordic countries. So that is one way of doing it. The other part is potential M and As. And we have said from 2022 onwards, M and A is a possible part of our operations. And there is activity in the market already today And we are preparing for that next step, but more likely to happen in 2022 and onwards. Okay. You mentioned some older unprofitable contracts in Sweden. When are these projects ending? We have a few less than a handful of those projects left, both on power and communication, the power ones, A few larger ones there ending during the first half of next year. So we are moving towards the end of that work with the old projects. And Then looking forward, we are not entering into similar projects in the future. So in, let's say, in 3, 4 quarters, Those projects are ending. Okay. Another one on Sweden from Robin. Could you please repeat what you said about Potential goodwill write down in Sweden. I think that's for you, Saila. Yes. What I mentioned was that Indeed. The goodwill that we have in the group has been allocated to country units In 2018, based on the situation of the time. And since then, what has happened in Sweden is that The marketplace relating to volumes, whether relating to maintenance of cover networks or The building of new fiber networks has decreased. And along with that, of course, that has impacted our business. And because of that situation, we have already in the annual reports of 2019 2020 said that The goodwill that has, like I said already in 2018, allocated to Sweden is somewhat sensitive to impairment. And now, we're assessing our, so to say, business expectations going forward And also what we then potentially foresee in terms of developments in the marketplace for the coming years and then Take further decisions on the potential impairment of goodwill. But as said, that will be further assessed over the next few months, and we will come back to that Latest in Q4. Thank you. Kasimir, for you, Maybe we mentioned partial in sourcing of business by a major customer in Denmark. Could you elaborate on this? And do you see more deals being in sourced? Yes. So, this happened in Denmark. It's less than 10% of or roughly 10% of our business in Denmark. I haven't seen an in sourcing in this business, in this industry for the last 10 to 15 years. So we were as surprised as you are now. I think it happened for political reasons on the customer side and that is something quite unique and again, I haven't seen it for 10 to 15 years. On the contrary, I mean, this business and the industry was started through outsourcings. And at the same time, we have seen a handful of outsourcing where we have been taking part in smaller outsourcing. So, I would say quite unique situation and a local one in Denmark that happened during the spring. Thank you. Now we have a question from Jonas Ilvonen at Evli. And in particular, Nordic market where you have lately seen an increase in M and A candidates available for sale? I think we have seen activity in all Nordic markets during the last 18 months on different levels. And I think that will continue. Then, of course, we have to take into consideration the potential And the fact that we are a market leader in communication in all four countries and in power in Finland that we need to also evaluate if these potential targets are valid for us or not being the market leader. But all in all, quite high activity in all Nordic markets, I would say especially in Finland, Sweden and also Denmark, but especially Finland and Sweden. Thank you. Another question from Karl Johan Bonnivir from Dembe Markets. When targeting returning to organic growth, Which submarket do you see as the most promising? And then women countries? And do you have any signs That's in the order backlog already. I think for growth now With the existing business that we have, then 5 gs is one good example where we see that both Finland and Norway and Denmark for increasing the 5 gs volumes. Sweden a bit behind. So that is one example where we See more potential for volume going forward for the next couple of years at least. Then we are looking at indoor solutions, for example, Traffic lightning and so forth where we see potential as well. Regarding the market as such, I would say that both Finland and Norway and Denmark are in a good place because They are supported by 5 gs and fiber. And then on the other hand, Sweden has already gone through the fiber peak as we have discussed before. And on top of that, 5 gs is a bit delayed in Sweden. So that's the status right now. When we look at potential M and A opportunities, it is quite clear that We have to look at our portfolio regarding communication and power in the respective countries and what kind of position we want to take going forward. So that is one element to it. And then, of course, we have to look at the local organization that the localization is ready for M and A and that we are as a company as well. So, That work is ongoing and we are getting more and more active internally regarding potential M and As for the future. So It's more a question of looking at the right opportunities and picking the right objects to look at closer. And then as always with M and As, they don't happen every week or every month, but clear activity in the market. Okay. I think we have reached the final question now from Mr. Jussi Koskinen. How would you estimate COVID-nineteen total EBIT impact during half year, the first half year? I guess that's the most difficult question we have received today. I would say, Let's use a couple of examples. I think one way of looking at it is, if you compare our Norwegian net sales figures from last year and in Q1 and Q2 and then you compare it to this year. There are 3 elements into that. One is, of course, there was a harsh winter this year and there was not back last year. Then we have that's maybe 1 third and 1 third is the fact that we're implementing a large Frame Agreement. And always, when you do that, you have a start up phase that is a bit slower than the running phase. And then the 3rd element, maybe onethree, could be COVID-nineteen in that sense that we have seen postponed investments. So that is one way of looking at it. Then looking at pure financials, We can see that we have during COVID-nineteen, our sick leave rate has gone up a percentage or 2. And that is, of course, money for us and lost time and lost money for us. On the other hand, the normal sick leave has decreased a couple of percentage as well. And that means that with these lockdown situations and the cautious Way of working, the normal sick leave is lower and then the quarantine and COVID sick leave is higher. So that's, I think, the most if we stay on a high level, that's the way we look at it and that's how we have analyzed it internally. So the main impact is, I would say, if we take out the normal sick leave and the increased COVID-nineteen sick leave, that is plusminus0. The main impact is the postponed projects and investments. But the good part is that we are quite comfortable that they are coming, but they are coming a bit later. That was the most academic answer I could find on a short notice. All right. We did get another question during your answer. And it's from Max Bakko at ABG. Norway was down 18% organically, but positive development in June. The main reason for decline was Our volumes from customers largely due to COVID-nineteen. What should we expect from Norway in Q3? I think, like we said earlier, we see that the volumes are picking up And the slow start in Q1 and Q2 was these three elements that I just referred to. So then it's a question of do they pick up, how fast will they pick up and then the penetration. I mean, we can't control that. It's about the penetration of sales rate from our customers towards the end customers that is really The factor here that when does the volume come, but hopefully, it picks up when we're getting closer to the year end. Good. All right. Now there are no further questions. So handing over back to you, Kasimir. Okay. Then thanks a lot for listening and thanks a lot For good questions and a good dialogue again. And hopefully, we See and meet each other in this forum also regarding Q3 or before that and hopefully, physically, sooner or later. Thanks a lot. Thank you.