Earnings Call: Q3 2020

Nov 5, 2020

Hello, everyone, and welcome to this audio cast. My name is Kasumi Lindholm. I am the President and CEO of ELCA. With me, I have our CFO, Sayla Mietvin Aland. We will now present Eltek's Q3 report. I will start by going through the highlights of the Q3 on Page 3. We saw gradual improvements in our operational performance despite that our net sales is coming down. The main reason for the net sales drop is the divestments that we have made in order to strengthen our financial position and, of course, deliver on the Nordic strategy. We also saw some currency effects, mainly coming from Norway that had a strong impact on net sales on the net sales drop as well. Due to the cash releases that we have made and due to the divestments that were made, we have been able to improve the balance sheet. And now we have a stable balance sheet situation, reduced net working capital and reduced net debt. During the quarter, we saw some impact of COVID-nineteen in our operations, and I will come back to that shortly in more detail. Also, as you might have noticed this morning, we released the fact that we launched a new segment structure in the financial report starting with the January March 2021 interim report. Without getting into all the details at this stage, I can say that the current Power and Communications segments will be replaced by 4 country segments, that is Finland, Sweden, Norway and Denmark. The change has the intention to reduce the complexity and in a more balanced and transparent way reflect the group's performance and organizational setup. We will come back to this topic as part of the full year report in February and explain the details then. We now turn to Page 4 and look how COVID-nineteen impacted Eyalpil during Q3. We have seen some project postponements and delays mainly in our high voltage business in Poland and in Germany. We have also seen some local effects. If, for example, we have a technician that has tested positive for COVID-nineteen, then of course, we end up in a quarantine situation for that whole team. So all in all, still moderate impact. It's here and there some postponements and here and there some quarantine situations. But overall, as in Q2, moderate impact regarding COVID-nineteen for our business. On top of this, we have seen some reduced and delayed investments, mainly from one of our largest customers within communication in Norway. And that started in Q3, maybe not on us such a high level as we anticipated to strike it, but still clear impact on the net sales. Then during Q3, we also saw an increase in short term sick leaves. That has to do with quarantine situation I was referring to earlier. And of course, we have had some personnel who have tested positive to COVID-nineteen as well. But still, all in all, a good and stable situation despite the second wave of COVID-nineteen. We now turn to Page 5 and look at our large high voltage and power transmission projects. The strategy around the Nordics was defined and communicated early 2019. As you can now see from the picture with the bubbles, we are coming closer and closer to delivering on that strategy. Most of these big projects, roughly 10 of them, will be finished during this year or early 2021. This means that we will have only 4 projects, and they are all in Poland then from the Q3 2021 and onwards. Everything else is done and finished by then. This means that in 2 years, we have gone from a mix of being a service company and a project company to more and more look like a service company with roughly 90% of the volume in the Nordics starting January 2021. This has, of course, reduced the risk of the company and the need for cash as such. The last four projects that we have then in Poland are midsized projects. They are not the big ones that we have seen before. And we will not enter to similar projects going forward. So basically, the 120 projects that we have in the portfolio 2 years ago will be in 9 months, it will be only 4 left. With that, I now hand over to Seyla, and we turn to Page 6 to look at the group's overall numbers. Thank you, Casimir. As Casimir already mentioned, we discontinued to show improving profitability in the past quarter and this is despite the decline that we saw in our net sales. Our net sales figure came to €200 and 26,700,000 which is down by €19,600,000 or percentage points from €281,800,000 last year. As was also mentioned, the divestments of German Communications and the Swedish business area Aviation and Security was clearly the biggest contributor to this decline. And the rest was largely then attributed to COVID-nineteen related performance, particularly in high voltage Poland and the mentioned investment cuts in Norway. Our operative EBITA for the quarter improved to €6,700,000 from €4,100,000 in 2019. And with this, we achieved an operating EBITA margin of 2.9%. Our operating results, I. E, EBIT amounted to €5,800,000 which shows an improvement of almost €2,000,000 from €3,900,000 a year before. Cash flow from operating activities amounted to minus €16,200,000 which reflects the seasonal working capital buildup during the business months of construction work in the summer and the early fall. You may notice that the comparative figure from the previous year is a positive $6,700,000 that reflects a somewhat atypical release of working capital from certain high voltage projects that were completed during that period. With that, I now move on to Slide 7, and we will look at the figures for the 1st 9 months of the year. In January September, our top line amounted to €708,800,000 which showed a decline of 12.4% from €809,000,000 last year. As Jose mentioned, some 40% of the decline was due to the SIT divestment. Accordingly then, organic net sales in power and communication declined less, which is by 3.2%. This development stems largely from COVID-nineteen related impact since the springtime, especially in the voltage and lately also in Norway. In Sweden, the investment cuts that we've seen already previously by key customers discontinue. But then on the other hand, we have actually seen net sales growth both in Finland and Denmark. Our operative EBITA continues on a clearly positive track, demonstrating the progress that we're making in our transition. The operative EBITA amounted to €7,500,000 which more than doubles the figures from last year, which was €3,600,000 at the time. The operating EBITDA margin for the 1st 9 months was 1.1%. Our operating profit, I. E. EBIT for January September was €26,700,000 and that of course then included the €20,400,000 gain that we got from the divestment. Cash flow from operating activities improved from minus €13,600,000 to minus €1,700,000 but still remain negative, which largely reflects the seasonal pattern of our operations. As Kazimier mentioned, one of the key achievements that we have made in recent times is the reduction in our net debt. In September 2019, that figure still amounted to €191,000,000 where at the end of Q3 this year, the figure was 109,000,000 and that shows then a clear decrease of 82,500,000 dollars I will now move to Slide 8 to look at the net sales by segment. In segment Power, our net sales for the 3rd quarter were €84,900,000 which is 17.6% less than last year. The decrease is primarily due to our strategy whereby we reduced the exposure to big capital intensive projects. And as you already saw in the bubble charts shown by Casimir, portfolio of large projects is being run down and only have a handful of projects left extending to 2021 or beyond. And one example of this ramping down or taking down of big projects is our large high voltage project at Rasta Vellend, which is right now nearing its completion in Northern Norway. To an extent, the decline also reflects log2 billion delays caused by COVID-nineteen and this particularly is prevalent in high voltage Poland. But then it's good to mention that against the challenges mentioned before, we also have good news in that in Finland. We continue to be the market leader in power and we are actually seeing increasing net sales in segment. In segment communication, net sales amounted to €138,500,000 which shows a decrease of €21,400,000 And again, the decline was largely due to the divestments of the Polish and German communication businesses as well as in the aviation and security in Sweden. Organic net sales came down also, but by less 8.9% and that relates primarily to reduced customer investment in Sweden and lately also during Q3 in Norway, where the earlier indicated COVID related costs were to an extent realized. But then again on a more positive note, we can state that the decrease was partly offset by contract expressions and payments and then we also saw increased volumes in Denmark. In other, our net sales amounted to €3,300,000 and related to the remaining projects that we have in the power transmission international. The PTI portfolio is being ramped up and there the remaining projects are estimated to close in 2021 after some delays that we have over the recent months due to COVID-nineteen. Let's now move to Page 9 and look at our EBITDA development by segment. In the Q3, our operating EBITA in segment Power was €900,000 which is a full €4,500,000 better than last year. And with this, the operating EBITA margin was 1.0%. The improved results primarily came from the gradual recovery of Sweden in high voltage, which we have been very hard working on. And clearly, also the reducing risk level in the big power projects is reflected here. Finland as a country unit improved its performance despite the negative effects that we have seen from the build projects in Finland. And with that, it is good to note that 2 of the projects where we have seen challenges relating to subcontractor management were operationally closed now in September. In segment communication, the 3rd quarter operative EBITA amounted to €6,400,000 which is down from €9,400,000 in 20 19. The operative EBITA margin was 4.6%. Euros 2,000,000 I. E. 2 thirds of the decline in EBITA came as a result of the divestment and then a remaining big factor was a one off, a write down in one Danish project. Again, on the positive side, Finland and Sweden both improved their performance and Norway did continue to produce healthy margins despite the decline on the top line, which resulted in the actual EBITDA figures coming slightly down. In other, the operative EBITDA was €500,000 with an operative EBITDA margin of 14%. And this overall, of course, results or reflects the ongoing ramp down of the TCI project portfolio, primarily in Africa. With this, I conclude the summary of the financial performance for the Q3. And with this, we also move to Page 10. I turn it back to Kavir. Thank you, Saeva. We can then move directly to Page 11 and have a look at what they will focus on going forward. There are no major changes here. We have worked a lot with the tendering process. We have made the major changes regarding the organization in respective countries, and we are focused on implementation and execution regarding our frame agreements and project. We can see clear improvements in the Nordic countries regarding this work done in operational excellence, And we have then in as part of COVID-nineteen times now started to focus even more on upselling to our existing customer base because entering to new customers is maybe a bit more tricky in these days compared to pre COVID-nineteen. So a lot of focus now on selling more to the existing customer base. Regarding the strategy, of course, we are strengthening day by day our position as the number one player in the Nordics, both regarding our position in the market. We have increased our market share towards our biggest customers. And we are the quality player in the Nordics, and we are strengthening our financial position as well step by step here. And now we can see also gradual improvement of our operational performance. So we are strengthening our market leading position. We will focus also on Poland and Germany to turn those businesses around, and that might include divestment as well. So all in all, according to the plan and gradually improving both the profitability, the quality and the customer satisfaction. And also, we received the employee engagement survey results, and we see positive development on that side almost in all countries. So all in all, according to the plan, step by step. Then we move to Page 12. We are in the middle of our long term plan. No mean major changes here either, except for, again, I mean, focus on upselling to existing customer base is important in these early 2019 times. And then going forward, we start to prepare ourselves for possible M and A activities, but that is not due until early 2022. But of course, any process like that needs preparation and that kind of preparation we are doing. But the main focus is on the operations in the Nordics and the other things around it in Poland and Germany and continue with possible divestment. That concludes the presentation. And now we open up for any questions that you might have. We have a question from the line of Stefan Lundblatt from Ambrigade Invest. Please go ahead. Your line is open. Good morning, Kasimir. Just it would be interesting to get your sense on what you see the potential is with 5 gs in Sweden. The licenses will be sort of allocated here pretty soon. What kind of market potential do you see for you in that business? Thank you, Stefan. I mean this is relevant for all Nordic countries for the next 3 to 4 years. 5 gs will be a major thing in the market. It has, as mentioned before, been postponed due to various reasons. And now things start to move in all countries. We are doing pilots in Finland and Norway. And as you said, things are starting to move in Sweden as well. So of course, this is a growth opportunity for us going forward, no doubt. And at the same time, we need to be professional and a bit cautious regarding terms and conditions in this business to make sure that we also get up to the margins that we are aiming for. I my personal view on this is that there will be lack of resources in the Nordics regarding 5 gs rollouts. And we need to, of course, handle that situation in a good way and hopefully take advantage of that regarding the profitability. So yes, it is on the agenda for sure, both in a sales perspective and an SCL growth perspective and operationally to make sure that we do the rollouts in a very good manner so that we get the margins that we are aiming for. And it will come in different waves, and it will come with different vendors. And it will have different setups in all four countries dependent on is it the turnkey projects from the vendors or are the telcos running the projects and implementations themselves with us and the vendors side by side? Yes. But I guess your visibility must be quite high, even though I know you can't tell us what it is. But you have most plans for it, as you say, because there are lack of resources, all the telecoms must be teamed to sort of sign up partners to sort of roll this out because from society, there's a huge pressure to do this quite as quickly as possible. Yes, yes, absolutely. And then we just need to play the game the right way. Yes, yes, yes. Okay. Okay. And when do you have a sense for without sort of saying anything about your share, etcetera, how big do you think this is in the Nordics for the segments that you do for the whole market? What is sort of the size of the pie for you to sort of you think for the whole market in the Nordics, the 5 gs? Let's say that it's thousands of sites per country without going into any details because as you say here, we, of course, have information that is a bit well, it's part of information that the telcos provide to the market. So we can't reveal those plans. But all in all, it's thousands of sites in all Nordic countries during next 3 to 4 years. So it's a substantial amount. And yes, then the rollout speed will differ from country to country and operator to operator. So and that is not clear yet the speed. And does the you know the issue with Huawei and that they're not allowed to use that equipment, is that an additional potential for you to change that equipment? Or is that sort of not really anything for you to be involved in? I think regarding Huawei, that also differs from country to country. I mean, Huawei is, for example, in Finland, will be part of 5 gs. So it's that different country to country. But I mean, again, for us, it's more important to make sure that we work with the right partners and in the right setups and with the right contracts. That is the most important thing for us. Okay. All right. But I think I mean, there will not to my knowledge, yes, there will be swaps. But in the early stages, it will be on existing towers and masts and then later on to meet the totally new sites. Yes. And just last question. You have had historically a benefit by you had sort of access to resources from outside the Nordics because of your sort of geographic scope historically. Is that something you can use when it comes to 5 gs, you think? Because as you say that there are lack of resources? Yes. I mean, 5 gs is not doable with only local resources in the Nordics for the next years, for sure. So we will use our resource base outside the Nordics, yes. Okay, excellent. Okay, thank you very much. Thank you. And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead. Okay. Thank you all for listening to our Q3 report, and thank you for the questions. And as always, we are available if you have any questions further on during the day or during the week. Thank you all for calling in.