Eltel AB (publ)

A warm welcome to this presentation of the second quarter results by LTEL. My name is Alexandra Tjärnlund. I am communications director at LTEL. But you won't see so much of me because the presentations will be held by our president and CFO, CEO Håkan Dahlström, as well as our CFO, Tarja Leikas. And after their presentation, we will open up for questions. And you are most welcome to post these questions throughout the webcast, either online via the webcast or by dialing in. And if you dial in, you press hash key five on your keypads. With that, I think it's time to hand over to you, Håkan.

Thank you, Alexandra. Good morning and very welcome, everybody. I will go through shortly our highlights from the second quarter and I would like to start with the net sales. I think we have a solid growth. Happy to see 5.3% organic growth in the segment and for the whole group 3.8%. So in line with our targets and really nice to see. What is also very satisfying for me is that we have been able to secure a very important contract during the quarter and this to a total value of 370 million euro to be compared with second quarter last year of 164. By this, we have been able to increase the value in our order book to 1.3 billion. And this is, as you understand, an estimate since we have so many frame agreements. But it's a bit larger than what we had before with 1.2 billion. So really nice to see the development there. What is not so good is the decline in volume that we are having in Norway. And this is, of course, burdening both the top line and the bottom line, even though the reduction in the second quarter was less than previously experienced we also see in all the nordic market particularly sweden and denmark a shift of volume from communication to power and i will elaborate a little bit on this in a moment but first a few words about our profit and financial position So during the second quarter, we were able to improve by 2 million euro. And this is, of course, very important for us. And our main task is in the company to strengthen our profitability, of course. So with a 0.5 million euro profit in the second quarter, we have taken a step, another step in the right direction. But we are not where we want to be. Also good to see that the cash flow year to date has improved in all segments and the liquidity situation is significantly better now than a year ago. So a few really important proof points here. One of them is the networking capital that has been improved down to minus 54 million. All different parts of the organization have contributed to this. So that's also nice to see. Our commercial terms are paying off. Looking at the strategy within the end of this presentation today, elaborate a little bit on the progress we have in our strategy. And the short version here is that the gross profit year to date has increased with 40%, meaning from roughly 29 million euro to a bit more than 40 million euro year to date. And I think that is one important milestone towards more healthy financial result. It's also great to see the quality in our strong pipeline. When we now have the ambition to broaden our customer base and address new and adjacent business, we see that this is something that many, many customers and potential customers are happy to discuss with El Talen. So this is a really nice development we have here. And one proof point of this is that during the quarter, we were able to sign a new contract in the area of new business for 14.6 million euro. And that to be compared with 4 million a year ago. And this is one of the main result of the strategy that we launched early 2023. We also have finalized the divestment of high voltage Poland during the quarter, and I will mention a few words about that. But first, a little bit more about this, what is happening in the market as we see it. It's two things happening at the same time in the market where the traditional telecom operators in most of the cases in Nordic, they are reducing the investment in infrastructure like 5G and fiber network. At the same time, there is much more initiative in the power sector, and it's about transition to green energy, renewable energy, but also strengthen the critical infrastructure as we have in all of the society when it comes to power transmission and power distribution. Here there is one exception, and that is Finland. We see that the communication business based on the traditional operator demand is still increasing in Finland, and that is due to the ongoing fiber rollout. On the other side, on the power side, we see an updated regulation that is sort of creating a bit of hesitation and reduced investment from the distributor of the power segment in Finland. development a little bit by itself, more communication, a little bit hesitation in power, versus the other part of the Nordic, where it is a lot of new initiatives, idea, investment in power, and the traditional operators are a bit reducing their investment and a bit hesitant. But we see also new players coming in to communication, asking for the same type of services that we traditionally have sold to the operators. And this is, to a large extent, public sector. An example of this is the agreement that we have signed with the Swedish Defense Material Administration, FMV, about the air bases in Sweden. We have another example in Norway with the contract with Equinor. So this... When the operators are reducing the investment, we broaden the customer base and find new customers for the same type of services as we have done traditionally for the operators. We also see that there is a lot of new initiatives when it comes to renewable energy, particularly solar. The wind industry has been more hesitant and we have not seen any significant initiatives in the Nordic when it comes to wind. A lot of planning, a lot of projects, a lot of discussions, but it is within the solar that we expect the most activity going forward, short term. Also a few words then about the high voltage polar. And as we communicated second week of April, we have signed an agreement to divest this. And now 6th of June communicated the 7th of June. We have finalized that process and the divestment is done. This has been done to reduce the risk for ELTEL and our shareholders. And I can see already now that this is... bit of a relief for us that we are now able to have stronger focus on our core market and develop our margin in the business in the Nordics. There is a lot of complexity in the Polish market when it comes to this type of project that we have run. And as you can see on the right side, this has been a business that has had significant losses over a couple of years, five, six years, and we have, during 2023, been able to improve the business to a level where it was possible to divest it. The financial impact of this for Eltäl is, as we have said during the first quarter report and earlier communicated, but we could just confirm that this is now finalized and to the financial impact, as we have said before. So I think that is the chapter that we are happy to leave behind us. And with that, I would like to ask Tarja to join me here to tell you more about the group numbers.

Yeah, and really nice numbers. Nice to be reporting the second quarter result. Our group net sales increased, like Håkan said, 3.8%, and in the segments, the growth was 5.3%. The growth engines here were Denmark, Finland and Sweden, and that's the order of the magnitude. In June, we completed, like Håkan mentioned, high voltage Poland divestment, and the Polish business is no longer part of LTL. When we exclude Poland from our numbers, the growth is slightly more rapid. Regarding profitability, we note that our adjusted EBIT A has improved by 2 million. Majority of Eltel's second quarter result is in line with our expectations. The only exception being slower than anticipated communication market in Norway. We do report positive development in return on capital employed, which has turned from the negative 11.7 to positive 14.3%. This is a result from profitability improvement and the lower operative capital we have employed. Our result includes negative 23.1 million from the divestment of Poland. This number will be shown in items affecting comparability going forward. The transaction had a negative cashflow impact of 4 million euros in the second quarter. Then we have the segment results, and first we have Finland. Finland's share of our operations is 43%. The second quarter Finland, they turned to growth. Net sales increased 8.7% compared to previous year, and the first half was 3.6% higher than the previous year. The market demand has remained strong in communication, and the volumes in power transmission have increased. The power distribution has declined, and this is due to the updated market regulation, although the impact has not been as significant as we initially anticipated. Adjusted EBITDA improved by 1.5 million and came to 2.4 million. The communications, good volumes, smart grids, and the improved outcome from the earlier reported unfavorable power service contracts were the main items behind the improvement. The positive momentum Team Finland has built has really held on. Then we move on to Sweden, which share of LTL is 24%. In Sweden, net sales have remained stable compared to previous year. The declining communication volumes, like Håkan presented earlier, have slowed us down, but the sharp increase in power volumes has been enough to secure the stable development. Adjusted EBITDA of the quarter was slightly higher than previous year and came to one million. Then we go to Norway, which share of Eltel is 15%. We have been suffering from the declined communications market for the past two years in Norway. Our second quarter net sales declined by 2.5% compared to the previous year, and first half, we are more than 11% lower than previous year. New strategy execution is progressing in Norway, but this has not been enough to compensate the decreasing traditional communications volumes. Profitability-wise, the volume decline mitigating actions have prevented us from major profitability decline. Second quarter EBIT A came still to negative 1 million, being 200,000 lower than previous year. The continued volume declining communication will lead to adjustments in our Norwegian operations. This will happen during the second half. The planning is ongoing. Then we go to Denmark. Denmark's share of our operation is 12%. After the first quiet quarter, Denmark is growing again. The growth is now 17.9% compared to previous year's second quarter. The profitability is equally bouncing back to 4.6%. Cumulative first halves EBIT A is lower than previous year, as we did expect. This is being due to less favorable business mix. We have a very good reason to be pleased and confident about our Danish operations. And then we go to other business. where high-voltage Poland was included until its divestment in June. Business-wise, second quarter net sales declined from previous year and came to 18.1 million. Poland's share of this was 6.3 million. Here we report a profitability improvement. EBITDA loss has more than halved and came to negative 0.4 million. And then we look at the balance sheet items. In all here presented balance sheet items, we report major improvement compared to previous year. Our financial position is stronger. Cash flows from remaining LTL business entities were stronger than previous year. Our leverage has improved from last year's slightly over six, now to 3.6. Net debt has decreased from 141.6 to 127.9 million. Interest-bearing debt from 161.8 to 141.6 million. Networking capital development has been positive as well. From negative 2.4, we go down to negative 54.3. With these balance sheet items, we complete the second quarter and the first half year's financial report. As usual, we take a look at Eltel's financial target setting by the end of 2025. These we have kept unchanged. The targets by the end of 2025, EBITDA margin 5%, growth between 2% and 4%, leverage between 1.5% and 2.5%, and dividend payout subject to leverage target. Thank you for the attention and handing over to Hawk.

Thank you, Tarja. I would like to take a moment to remind you of our strategy. And first, I would like to point out to this improved efficiency and profitability in the current business. And this is, of course, very much about Operation Excellent, but also about price increases. And here it's great to see that three out of our four segments have improved profitability during this quarter. Then, as we have talked about what is happening in the market with The traditional operators is reducing the investment and we see a need to search for other customer both in power and communication. We have as a part of the strategy to broaden the customer base. But it's also so that we see what is happening in the society and the fantastic trend, a very strong trend about digitalization and electrification of society together with the sustainability that is pushing a lot of initiatives in the power segment. All of this is, of course, a possibility for us. And due to this, we are addressing this, what we call a new and adjacent market. And this is, of course, also great to see. And I will mention a few examples next here about what we have been able to achieve. Sustainability is something that is higher and higher up on the agenda in all our discussions with customers, and I will shortly come back to this. But this is, of course, a more and more relevant point or part of our strategy. And within the LTL, we continuously need to develop our commercial skills and capabilities when we now are becoming more and more proactive in our sales and put more and more effort to go out and catch a market that we have selected instead of doing what customers actually is asking from us. So with this said, what is the progress? And here I would like to start with this profitability and again, repeating its gross profit year to date improvement with 40%. That is, of course, a very important milestone, not where we want to be, but one step more on a journey towards decent financial result. We see that the EBITDA is improved in all segments except Norway. And this is, of course, due to the large reduction of volume and our cost of adjusting the organization in Norway. And I have to say that we have not seen the end of this yet. This will be more of this as I see it going forward. But it's also very encouraging to see that the last 12 months cash flow has improved in all segments. The broadening in the customer base I have talked about have now resulted that our order book is larger than ever, and we have 1.3 billion in the order book. Part of this, a big part of this is frame agreement, of course. And due to that, it's really hard to exactly predict what type of revenue this will generate in the future. But our best estimate of today is that we have 1.3 billion of value in our order book. The mix in the order book is also started to be seen this, that we have more power, more new initiative than what we had in the past and a little bit lower on communication side, even though we during this quarter have been able to renegotiate and secure contract with both Telia, Telenor and Elisa, all three with a significant value. But on the new business side, we can see that the new contract has a value of more than 14 million euro during the second quarter. And this is, of course, nice to see that we reach also contract. It's not only a pipeline, it's it's mature and it gets to contract. We also see an increase during the second quarter in the revenue from this segment. or this business area of us. And it's great to see now that all countries have revenue in the second quarter from areas like solar PV. E-mobility, we have had revenue for quite long. And mobile indoor and the type of private network solutions have generated revenue for at least two, three years, and in some countries even longer. But now we have revenue streams in all areas and also soon in the battery energy storage system, where we have the first significant contract during the second quarter, followed by also a good contract in Finland. This is an area that is moving quite fast, so I expect more to happen soon. So the net sales during the second quarter for this area came up to eight point five million to be compared to three and a half in the first quarter. So nice development here. Happy for this. And then on the other part of the strategy, we see, as I mentioned, the sustainability to become more and more important in the discussions with customer. And it's two-sided here. One part is the offering side, where we, as many times as we have a possibility, we could offer an alternative to the solution that the customer have asked for. So we try to propose a green version, an add-on sales activity, to reduce the emission of the operation of our customers or what we are doing for them. But then we also have our own operation. And in our own operation, the largest part of the emission that we are contributing with is our fleet and here we transform the traditional fleet where we have diesel and gas driven cars into electrical vehicles and as we speak we have a bit more than 400 electrical vehicles now in our fleet and this is roughly than 11 percent of all the cars we have I mentioned before a little bit of commercial skills and capabilities and here I see that we have increased our ambition when it comes to commercial terms, when it comes to pricing, invoicing conditions and payment conditions and all of this we see improvement in the numbers of the second quarter. And we expect also this to continue going forward. But one proof point, as you could see here a minute ago, was the net working capital. I think that's a very nice level we have reached, and we expect the commercial terms to come in in a larger and larger extent that you can see on the right side here, a picture we have shown many times now. But we see that the actual numbers is also following this estimate that we have on the right side. So nice to see with the strong pipeline and the TCV in the order book, I expect further positive development in both our activities to broaden the customer base, but also our adjacent and new businesses. With that, we have finalized the presentation. It's time for questions. Please, Alexandra.

yes and as a reminder if you dial in you press hash key five on your keypads to pose your questions and we actually have one caller it's adrian gilani from abg sandal collier good morning adrian how are you uh yeah all good a couple questions from my end i'd like to start off on the communications business just um

In general, in terms of the outlook, do you expect any improvement in the communications business towards the end of the year? Because it seems we are hearing some optimism from both telecom operators and equipment providers that investments will gradually start increasing. So what's your view on that?

Yeah. We believe that the swap of 5G, if you start on the mobile side, the swap into 5G from 3G and 4G have been done very much based on the existing footprint. Now we see that they need to build more greenfield sites. That means more work for players like us. So I believe that it's one contributor that have a potential to increase the investment, but also that we hear from some of the operators that they they need to increase the investment also on fiber side but i think Another is this new segment that we talk about, like public infra. It can be a private 5G network for a hospital, like we have during the second quarter, won a contract with Region Jönköping. It can be the defense. It can be other part of the public sector, like road authority or railway. So we see that the public infra is growing quite rapidly. If this will compensate... for the decline from the classic telecom operators is not yet proven but at least there is some indication that this will compensate but i don't think that we will see the same significant investment as it was for two years ago from from the operators okay i understand uh and when you talk about this sort of shift and demand from communications instead into power

Are there any mix effects we should be taking into account? So do you have sort of similar gross margins on power and communication contracts, or do they differ materially?

Every time we have a shift in volume, there is also a bit of a cost to adjust. Because in reality, it is a reduction on communication and an increase on power. And I think you can see that, let's take Denmark as an example here, that there is a little bit softer margin in Denmark in the second quarter is driven by this, that communication is going down, power is going up. And the shift as such cost a bit. And I think that's what we have. Then going forward, I don't see any reason why we would have weaker margin in power than what we have had in communication. And particularly in the new business areas, we see potential of higher margin.

Okay, understood. And then on Norway specifically, you write that you will need to scale back operations further, given that that market specifically is quite weak right now. How much in cost savings would this lead to? And can you give some sort of indication on the timeline in quantifiable terms?

No, I don't have a number for you today, but we believe that we will see more of these units late this year and early next year. it's due to the general investment level but also that we in in the new contract with telenor we have a smaller footprint even though we are the largest provider to telenor also going forward and to i would claim all the nordic operators we we are the largest one but there is a reduction that we see in in the future in norway absolutely

Okay. And then a final one from my end, and maybe you mentioned it in the presentation, but are you able to share what the EBITDA contribution was in Q2 from the divested high voltage business in Poland specifically, just so we can get a clearer picture of the underlying profitability in the quarter?

When comparing the quartals, last year HV Poland was quite strong. So in that sense, we don't see margin improvement. And then again, Poland was included until the end of May. So there's only one month without Poland now.

What I'm wondering is, if you can say the number that Poland contributed to the earnings in this quarter, just so we can sort of know what given that that's now gone so that we can see what the underlying profitability is if we exclude that from the numbers.

No, we don't have that in the report.

Okay. In that case, that was all for me. So thank you for taking my questions. Okay.

Thank you, Adrian. Bye. And we have a few questions coming in through the web conference. And first one, or there are two questions from Nordea. Nordea, Marco, hello. You mentioned this, we have touched upon this, but I will... Let's still take this question. You mentioned this volume shift from communication to power. Can you discuss what the impact of this shift has on LTL? Do you have the capacity to do more power projects? And does this shift have an impact on your profitability?

I think this is something we want to do. We see that the fiber rollout, with the exception of Finland, the fiber rollout is mainly done. What is still to be done in the Nordic when it comes to fiber is densification. But that will not have significant volume going forward. So we see that the skills we have and the people we have would very much be able to contribute in the power segment, even though they had traditionally worked on the telco side. So this is something that has a cost when we sort of change, we train and we help our people to get skilled in the new areas. But it is not so big difference. It depends a little bit on the task, of course. But for many roles, we can quite smoothly transform ourselves from telco to power. So we see that as something That is good. And we believe that the increased demand in the power segment will be here for many, many years. So I think this is something that we will see coming next year after that also. When it happened, it has, of course, some impact on our cost side, but not any significant.

But profitability wise?

Yeah, due to that, we have a bit higher cost when we do the shift.

It will also ramping. Yeah. All right. Second question from Maria.

You highlighted I think I didn't answer on the capability or capacity where I don't see that as an issue. We are happy to improve and increase our capacity also on the amount of work we can do on the power side. We see that doing very nicely in Denmark as we speak. And we have for sure the capacity and the capabilities in Finland. In Sweden, it's more a build up. In Norway, we don't have power as a part of our business today.

but I'm sure a cross-border strategy also contributes.

Yes, that helps us when we work on the concept, yes.

Good. You highlighted in the report that the updated market regulation in Finland is having a negative impact to power distribution sales volumes. On a longer term, how much do you expect that volumes will come down as a result of this, and are you expecting to offset this with other businesses?

We don't expect this to be a long-term effect of this. Even though the regulation is down for four years, there's a checkpoint two years after, so we have already done half a year of this. It has some reduction on the volume today. We believe, however, that the need in the market is so strong that Also in Finland, the infrastructure in the distribution of energy has to be built out. So this will happen. It's a bit of a setback here and now. I don't expect this to continue. I expect the volume to come back. It's a short-term effect here and now.

Yes, all right. Apelipour Simo from Indres. Thank you very much for your question. It's a long question. How are you going to leverage your geographical coverage in power to seize the opportunity of the growing investment levels outside of Finland? For example, in Norway, do you see any short-term opportunities in power that could mitigate the negative effects of the reduced volumes in communication?

We don't see that so easily done to use resources from Finland in Norway. We believe that we will build the new business area in Norway. We don't have any sort of solution for the power segment in Norway today. That's just how it is. I think for five, six years ago, it was also power operation in Norway within Eltel. But we don't have that today and we don't have any plans to do that tomorrow either. It will be communication with a broader customer base and it will be a new business. So a lot of EV mobility, a lot of solar initiatives.

Okay. And then, we apologize, there was a slight delay in the slides, so we would need Patrick, an investor then, has asked us to clarify the divestment of Poland We will, of course, adjust the slide when we publish the recording on the website. But the effects of the divestment of Poland, and if there are still any financial actions to be taken in that sense, in that business, are we done?

We are done with the divestment. It's closed. There is sort of nothing... on our side more there the financial effect is four million in cash flow and that is the three million seven hundred fifty thousand euro that we agreed in the investment agreement to leave at the table and then there is cost into with the transactional cost around that event that sums up to the 4 million.

And to add up that, the cost of this 23.1, initially we estimated 23.2 and the actual outcome was 23.1. So the P&L effect has already been registered. What Håkan was referring to was cash.

Yes. So the 23.1, is taken in the first quarter. Yeah. Okay.

That was actually the last question. So the full report, as well as the recording of this webcast and the presentation, will be available on LTEL's website quite shortly. On October 31st, it's time to present the Q3 results, and we hope that you are with us then. So with that, I'd like to thank you, Tarja, Håkan, and of course, you. who have been watching this webcast. See you. Goodbye. Thank you.