Good morning, and welcome to the Netel Group Q2 2022 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star and zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your questions, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Ove Bergkvist, CEO. Please go ahead, sir.
Thank you. Welcome to Netel's Q2 presentation. First, on page two, we start with a short introduction before looking at the detailed Q2 numbers and the performance. We are in critical infrastructure. We do construction, we do service and maintenance. We are a growing company. We have been growing for a long time. We have had since 2010, when we did the MBO from PUP. We have had now 24% annual growth rate and an 18% annual increase in profit. We keep our business model, which means that we are asset light. We buy most of the services for production and service. We have some owned. We have therefore a high cash conversion. We are now year to date at 92%. Last three years we are at 93%.
We are growing, and we aim to grow also going forward. We have a quite ambitious growth strategy. First half year, 27% or 26.8% growth organically. Part of that, 5.7% year to date. We have made 6 acquisitions, and we have made 2 just recently, which I will come back to. We have strong finances. Our financial position is strong, and it aligns with our ambition to grow further. On page three, we are a critical infrastructure and just a clarification on how we divide our business when we report. We have 3 sectors. The biggest one is fixed. In fixed, we put fixed telecoms, and for us, that is fiber, but it's also cable TV. Fiber is strong. Fiber is strong in Germany.
Fiber is now strong in the UK for us as well due to low penetration. Fiber is strong in service, with lots of service in Norway and in Sweden, in the fiber networks that just recently been built. Cable TV is still deployed for high speed internet. Tele2, Telia, Sweden, Norway, a lot of upgrade investment, and we are part of that. Our latest focus area is what we call Infraservices, and we have been doing that for 18 months. It's water and sewage, central heating, and related civil engineering works. We have now roughly SEK 600 million-SEK 700 million in that sector, and it's doing well. That is what we put in fixed when we report. Power, we started as a focus area four to five years ago. We do cables, we do lines.
We do now quite a lot of transformer stations. We do it in Sweden, Norway, and Finland so far. It's a mix of greenfield startups and acquisitions. It's roughly now 1/3 of the turnover, and the trends are strong. I will return to that. Mobile, this is where we started. This is base stations. We build them, masts. We put them on the ground or on rooftops. We do the radio, we do the cables, the fiber cables. We do the power cables. This is a hot topic of course, because we're in the middle of the 5G roll out. In terms of countries, we have our sort of original countries, Norway, Sweden, which are the big ones, and Finland. Then a few years ago, we diversified into fiber in Germany because penetration is very low.
We are growing in Germany. Now recently we started operations in the UK by making two acquisitions into fiber and gas. I will return to that shortly. On page five, I give an update on the strong megatrends. To start with electrification and power grids and climate change, that is a hot topic, to say the least. The grids are old. There needs to go reinvestments into them. They can't cope even with today's demand. We know, for instance, in Sweden, that the prices for power varies between the different geographies, and the reason is that we can't get power from north to south, and that the reason behind that is that we don't have enough power lines, actually. Here there will be reinvestments.
There will be investments just to cope with today's demands and due to electrification going forward with cars and trucks and fossil-free steel. There will also be investments actually to expand the capacity in the grid. The trend is extremely strong within the power grids. Digitalization can't be stopped, of course. For us, this mean, for instance, in Germany and U.K. now, very low penetration in fiber nets. Lots of fiber nets need to be built. It means in Norway and Sweden that we have lots of fiber nets where we do service and upgrade. It also means that the old cable TV networks are still being upgraded and that we do lots of work there. In the last one, modernization of infrastructure, there are lots of other infrastructure that is old.
You have the railway, you have roads, you have water and sewage, you have central heating. We started 18 months ago for looking at water and sewage, central heating, related to engineering work. We have now more than half a billion SEK in turnover. It's doing well. There's more to do in other types of infrastructure. We have our focus areas now, but looking ahead, there is more old infrastructure where lots of investments could go into. On page 7, we look at the Q2 numbers. Overall, first half year, we had almost 27% growth. In Q2, we had 14.8% growth. All of it were from acquired companies done. They are performing well. Some of them are actually having their first year within the Netel.
First year is not counted as organic growth, even if they have organic growth. Total organic growth was -1%. Most of it is due to Finland. We return to Finland, but Finland had a very cold winter, very slow start of excavation, and we lost SEK 20 million in Q2 compared to last year in Finland alone. We have good order intake, especially towards the end of the quarter. It's been, of course, a question for everyone, where is this going? So far, we have good order intake, especially towards the end of the quarter. We have a good backlog, so we think we have a good ground for actually growing second half year as well. Looking at the different segments, starting with Sweden. Sorry, looking at profitability on page 8. Of course, major price increases.
We buy transformer, we buy speed, we buy different type of cables. All of them has higher prices. We also buy services, and services includes lots of diesel, so everything is more expensive. However, in most places, we have actually been able to compensate ourselves for price increases due to KPIs, due to that we place bids continuously, and there we can compensate ourselves, so on and so forth. We haven't been able to compensate in all places, and Finland is actually the place where we haven't been able to compensate ourselves. We had a margin in Q2 of 6.4%, which is not very bad. It's actually quite good. We had 7.8% last year, which is extremely good for a Q2. We lost 1.4% then.
Finland alone lost SEK 7 million compared to last year, which is 1% of the 1.4. This is the late winter and the inability to actually compensate for price increases for material going into the power grid. Look, the rest overall, the rest of the business has actually been able to compensate itself for massive price increases, which we are very pleased with. Then, of course, we have a late start in Finland. This is a risk going forward. There's lots of material that's late, and it's material that's late, you can't conclude your projects, and your projects are a little bit slower and a little bit less profitable. This is a risk going forward.
We saw some of that, and we see some of that, and we had some effect in Norway, in the power grids in Norway, also affected margins a little bit. However, I think the message is massive price increases, but most of it is actually compensated for. Our operating ratio is a little bit higher than last year. Looking at the segments on page 9, starting with Sweden. Sweden did a very strong Q2. We have done also acquisitions in Sweden, good acquisitions, performing acquisitions. We therefore had a growth of 35.6% and a profit increase of 210%, to SEK 31 million. Yeah, but margins on 8.7% in Sweden in a Q2 is extremely high. The 3.8% last year is not so strong.
We compare a very strong quarter with a weak quarter, I would say. Again, the profitability is driven by our new companies that joined the group in the last 18 months. I think we have a good situation. We have now a good solid foundation in Sweden to do good things from also second half year and the years ahead. Moving to page 10, Norway. We had an okay quarter in Norway, but I think we can do better. I actually strongly believe that we have an upside in Norway. We had a small revenue increase of 1%, and we had a drop in margin of 1%. We are a little bit slow on the power side, partly because the year started slow. Order intake is much better now and backlog is good.
We also have quite a lot of late material, like transformer to large transformer stations, which means that we can't install them, we can't record revenue, and we can't invoice. This impacts top line, but it also actually impacts profit a little bit because slower projects are less profitable projects. We're also still in a build-up phase in our very large service contract on the telecom side. We're still not at full speed. We have built the cost, so we are running on a little bit lower margins in those contracts. We are looking at, we think we will pick up speed. We are picking up speed. We think we will get where we want to get on the telecom side. We now see much improvements on the power side.
I think, yeah, a decent quarter, but I actually think we have an upside and that we can do even better in Norway. Looking at page 11, Finland. Finland had a weak quarter, and much of the explanation to the result is coming out of Finland. We had a revenue drop of 26.6%. Almost all of it in power, very slow start, no possibility to do excavation. Also material delay, not possible to install transformer in some projects, which means that we lost SEK 20 million. We also lost SEK 7 million in profit due to these reasons, and SEK 7 million overall on a group level is roughly 1%, which explains the margin on the group level. There will be some catch-up in Finland. We have ambition to increase margin.
We are trying to push up our prices, but there's still a challenge in Finland, of course. Germany on page 12. Good growth, 76.5% in a growing margin. Very low penetration still, high demand. We had a profit increase of 125%. We do 15% margin, so it's actually the highest in the group. I will come to that. It will soon be challenged by the UK, we hope, on profit margins. There is a little bit ups and downs in Germany. Demand is extremely high. We have big frame agreements, and customer wants to start a lot of projects, but it takes time to prepare the project.
The start of new projects is much slower than the customer would want them to be, which means that the potential here is actually, we think it's bigger than we showed in Q2. There might be ups and downs in Q2, Q3, and Q4, dependent on how many projects actually are started, but underlying demand is extremely strong. Over a few years, this will be much higher numbers. We continue to do acquisition. We have an ambitious growth strategy. It should be organic growth, of course, because the trends are strong, but then we also are proactive. We talk to companies. We approach them. We are in very few ordered processes. Most of them are just companies that we are seeking to meet and that want to meet with us.
What we do is we select markets and segments, and there we look for companies. We look for companies where we want to build a strong industrial position in our segment, in our countries. We look for good companies. We look for profitable companies that add to our margin. We look for companies with strong management, and we look for companies that have something we don't have. They should have better skills or a better position or a position we don't have or geography we don't. We look to grow revenue profitable, of course, either within the company or through synergies with something else in our group. Maybe we can offer larger frame agreements within Power, for instance, in Sweden.
We can now offer national frame agreement in Sweden through collecting the different companies we have in the group. This continues. Next page 14, acquisitions in 2022, we have done 6. 4 of them we talked about in Q1. They are a mix of power and Infraservices. Recently, we have done 2, Border and Doocey, both in the U.K., with a combined revenue of SEK 114 million. They are mainly or primarily in fiber. We can move to the next page, 15, where we talk a little bit about the U.K. U.K. have very low fiber penetration. U.K. have very old infrastructure when it comes to gas, water, sewage, power. It's like in Sweden, but worse. We start with fiber because it's one way of entering U.K. We are extremely confident. We have high skills.
This is actually our Norwegian organization who takes care of Norway, and they're very skilled in fiber. We know the companies, we know the individuals. It's a good start. Over time, we should grow these companies. This is first priority, and we will. We should also expand into the other sectors. Over time, we aim at building a complete Netel also in the UK. Fiber will be a good start due to skills, due to contacts, due to the market, and to the very low penetration in the UK and the high willingness to invest. We have strong financing, and we're gonna require financing to support our strategies. I hand over to you to talk a little bit about cash.
Thank you. Yeah. We have a significant financial scope for further acquisition. We have the cash flow in Q2. It was according to plan. We have some lagging behind in the Q1 effect due to weather conditions and also that we started a lot of new projects and a lot of projects ongoing, high production level. Cash conversion 92% in the quarter as well as year to date, also 92%. Net debt, if we exclude the lease liabilities, the net debt ratio is 2.2, which is below the target, which is also good. When it comes to our financial position, at the moment, we have available funds of SEK 500 million, of which 181 is cash.
We will also generate a good cash flow, hopefully during the second half year, which will also add to our capabilities on the financial side. If we look for acquisitions, we also pay a part of acquisition price with the shares. With that, we have a very strong position going forward for acquisitions. That's the quick summary about that. Working capital level, we have indicated that we should be between 9% and 12%. It fluctuates during the year. We are at 11.5% at this moment if we do that pro forma adjustment. Yeah, it's about our situation. We can move forward with our M&A agenda in a good way. Continue.
Thank you, Peter. We are now on page 19, a sum up. Markets are long-term good. Demand will be long-term good. There is big needs for investments into many of these old critical infra networks. We are growing. We have now a track record since the unveil 12 years of an annual growth rate of 24.1%, and we have 18% profit increase in the period. We had growth year-to-date. We have organic growth. We are doing M&A. We will continue with that.
We do think that if things are as they are, if deliveries keep on coming, there is in the third line, and if prices and our ability to actually manage price increases in the way we have done so far, we think we are in a good position to actually reach our financial target this year as well. You know, the world is uncertain. If it keeps as it is today, we think we will reach it. That's it. Thank you. I think we have. Do we have a question?
We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speakerphone, please pick up the handsets before pressing the keys. If at any time your question has been addressed and you would like to withdraw your questions, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Gustav Berneblad from Nordea. Please go ahead.
Yes. Good morning. It's Gustav here from Nordea. Just a couple of questions from my side here. Your order backlog is down somewhat year over year, and I would assume there is a price component supporting the backlog this year, and you also have some acquisitions. Have you become stricter with what orders you take on, or do you see a general softer demand, would you say?
Not a softer demand. That's not the reason. There are different reasons. The first one is that it takes some time before we include acquired companies backlog because you want to, you know, be certain what it is. So that's some of that. It's always a delay between making acquisition and when we place them in the backlog. The second reason is that a few years ago, we took the big service contract in Norway, the Telia one and the Telenor one, and they are several hundred million SEK a year, and they are long, and they are renewed in a few years' time, hopefully. During that time period, you actually will see a decline in the backlog in those contracts, which is completely natural. So when we keep it at this level, it means that we're actually filling up.
Maybe we can explain that better next time. There is a component of service contracts, who is actually declining in the backlog because of natural reasons.
All right. Very good. Then on the operating cash flow, it's quite weak in the quarter, burdened by accounts receivable. Is this mainly due to the material shortage and you not being able to finalize the projects? Due to this, we should interpret that once you get a better material flow, we will see a working capital release in H2, or?
We do think that we will catch up in second half year. Maybe not fully. There are different reasons for this. One is, as you pointed out, material. If you don't get material, you maybe can't install your transformers, and then your station isn't ready, and you can't make the final invoice. There's some of that. Might be more of that, actually. It's some of the having growth in Germany. It's very complicated, and it takes a very long time to invoice in Germany. We know this, and you need to complete your projects. The more Deutsche Telekom we get, the better the ratio should be. Now we have lots of E.ON still, and that's a fact. It ties up a lot of capital. We can be better. We can be quicker to invoice.
We can find ways to actually send an invoice and claim that the area is complete and so on, maybe divide it into some area. That's partly how it is and partly up to us. We have lots of capital tied up in Norway, especially with Telia. Here we haven't been able to conclude invoices. We haven't been able to get all the data we need to actually send invoices. There's a heavy work going into it. Not happy about it. No risk in it, but we need to actually finalize the invoices so we can send them and get paid. A little bit on our side, a little bit on structural reasons. The aim is actually to sort of catch up most of it second half year.
If we get lots of late material, then of course we have a situation, but we monitor it.
Do you see the situation progressing now by the end of Q2, beginning of Q3, or what do you see there?
Maybe just out of the summer. It starts up again. We are. I mean, we're totally aware of it. It's sort of an ongoing discussion. We try to sort of put as much capacity on it as we have in parallel to actually producing. We expect a good cash flow, especially in the last quarter.
Okay, perfect.
Okay.
Okay. Okay.
Yeah.
Just the final one here. On the cost inflation, do you feel like this has led to somewhat lower customer demand or at all?
I mean, we were quite worried in the beginning of the year. We had some good orders, but it goes a little bit up and down. Of course, we worried. I mean, everyone is, but we can't say that we so far can see it. We have good demands for Power, which is a big part. We have some really good orders on water and sewage, central heating, related civil engineering. Fiber is I mean, fiber in Germany and fiber in the UK, that's just they just have to build, it doesn't matter. These are state-supported projects. They have to reach the target. Service in fiber networks I mean, it can't be affected. We have upgrade on cable TV, which is quite big now. It's full splices ahead.
That might be in some areas, you do water and sewage for a private house builder. Yeah, might be a problem because maybe he doesn't start that project. You will see it. If you're in a frame agreement with the municipality that needs to upgrade the water and Sewage Network, you will probably not see it because he has to do that. It's a mix. I think we're again in a quite good place because this is infrastructure that has to be done.
All right, perfect. That's all for me. Thank you.
Next question comes from Karl-Johan Bonnevier from DNB Markets. Please go ahead.
Yes. Good morning, Ove and Peter. Just to continue on the previous question. When you look at the specific problems you highlighted in Finland with, say, the winter impact and Norway, the delayed completions of the projects that you, I guess, hoped to have been completed already during Q2. Are those still impacting the business that you have, say, not being able to conclude those projects already in Q3? Given that we are so far into the quarter, it would be good to get some sort of summary view of what how you have managed to catch up, or it's not, or it's not so.
No, many of those have been caught up. You get new ones. I mean, there are new stations being concluded, and there are new risk related materials. I don't know what will happen to ABB's plant in Switzerland. Will they get material in there or not? I mean, it's a world issue. Yes, that one might be delayed.
You indicate, obviously, we understand that when contracts are running smoothly, then obviously you have your best profitability coming out of them. When you end up in this situation, how can you compensate yourself and protect your margin, if you put it like that?
In the worst case, if you start from the downside, is that the customer is saying, "You are late, you gonna pay penalties, and you have to take all the costs." That's the worst case. We don't want to go there. The other is, okay, "No, no. The customer, I accept that." I mean, that's a good reason for being late. You know, you can't actually.
We will not sign penalties, but you take the cost because, I mean, it's your fault anyhow." The better situation, which is almost in most places, that the customer say, "Okay, we need to find a reason why we are late in this project, and we will accept that reason, and therefore, we will pay a little bit for you being late because we understand the situation completely, and we don't want to kill suppliers." I think in most, this is where you are in most places. You find a way.
The impact is more on, say, the next phase of projects being slightly delayed, I guess, in that respect.
Yeah. Then if it continues, you build less, basically. I mean, of course, you build slower, you build less. Your total turnover is getting lower, and you have slightly higher cost, and it influences your margin. If you totally compensate yourself, you're extremely good, and we try to do that. I mean, we almost did so far, but there are risks, of course.
Obviously. It sounds convincing when you talk about, say, the potential and at least that the market is not working against you in the way that you're gonna be able to deliver on your financial targets in the full year. It's gonna be more of a hockey stick, if I understand you right, that most of that is gonna happen in Q4.
Q4 is always the strongest and the biggest because you conclude projects. Q3 and Q2 is all even. It varies between the year which quarter is the best. Q1 is always very weak.
Peter, well, I also understand your comment on working capital release, that that's more of a Q4 opportunity for you to rebuild your, say, the financial muscle again, so.
Yeah. Exactly. We have, at the moment, end of June, we have SEK 500 million already available fund. Of course, with a good cash release second half year, that will build up even more. It creates good opportunities for us going forward.
When you look at these new markets that you're now entering, the UK and then also the new segments verticals like the sewage and district heating and so on. Are the working capital or the cash flow profile of those segments very different compared to your traditional segments and market?
U.K. more. We have a little bit more machinery, this we have in this company. Slightly different. We have a slightly lower cash conversion, I would guess, looking for. You see that in the overall numbers.
Otherwise, Peter, I don't know it.
No, it's. It depends. We bought two companies now in the UK. One of them has quite a lot of own personnel, but they can also do more service-related businesses, what they're doing. It is different. Potentially high margin in the market. It is very good and good demand.
Growth can be with also more in that asset-light model. We're more actually bringing in the resources from Norway and Sweden to the UK to the fiber.
Yeah.
When I look at the acquisitions, obviously a very impressive flow you have had so far this year, and looks like you're concluding them at very attractive kind of valuations as well. Looking into the second half of this year, do you see you have a similar kind of pipeline at this stage?
Yeah, we have interesting cases, but hopefully we can reach the finish line. You never know. We had a few other ones which we didn't reach the finish line with. That was a pity. You would have been very happy about those, but.
In those cases, have you lost them to somebody else, or is that just deals has been delayed or the owner has decided to keep the operations themselves, or what has happened?
Yeah. The biggest one, the most interesting one, they decided not to sell. We decided not to increase price, so.
Sounds like a good protection of shareholders' money, but then hopefully you can come back at the later stage concluding it. Thank you very much and good luck out there.
Thank you. Thank you.
Ladies and gentlemen, this concludes the question and answer session. I would like to turn the conference back over to Ove Bergkvist for any closing remarks. Thank you.
Thank you very much for listening. We will be back in Q3. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.