Netel Holding AB (publ) (NETEL) Earnings Call Transcript

Welcome to Netel Group Q1 Report for 2023. [Operator Instructions] Now I will hand the conference over to CEO Ove Bergkvist; and CFO, Peter Andersson. Please go ahead.

Thank you. Okay. Welcome to Q1 Netel. Q1 started growth -- we had 9.3% growth. We had organic growth of minus 8.8%. Here, we have -- since a few years, we are stopping to the fiber in Sweden. We have very little left. So if we take all the other segments and business areas and exclude fiber roll-up, which is discontinued, then the rest of the areas have an organic growth of 3.6%. First, overall, and then we go to the countries and give more specific comments. Overall, demand -- there are variations, of course, but in most places, demand are good. There are some weak sites, decent order intake, strong backlog, actually the highest ever. It is Q1, we are doing lots of work outside. We can't start projects when the ground is frozen. So Q1 is always the slowest quarter, the lowest quarter, this year as well. We have contribution from acquisition on top line in Sweden and U.K. When it comes to top line and also overall performance, it's weak in Norway and Finland. Top line wise, as I said, if we adjust for fiber rollout in Sweden, which we are discontinuing, and there's very little left to do, we have on the rest of the business, we have 3.6% organic growth. We are already dependent. We don't start outside project, excavation project in Q1 as long as the ground is frozen. Most of it starts after Easter, May, June. So we are approaching high season. Q1 is very slow normally, slow this year as well. Backlog is high. We look at profit. We have a weak or a low 1.6% first quarter. We had a high 4.5% last year. And again, first quarter is by far, the smallest quarter for us. And it's affected by -- we have strong markets, but it's affected negatively from Norway and Finland. Here we do lots of things, and we would get to that to actually enhance the margins, going forward. If you look at Sweden, Germany, U.K., very strong actually. So these markets are, I would say, overperforming, but that is eaten up by the current status in Norway and Finland. In Finland specifically, we have 1 customer, 2 frame agreements, old frame agreements where we are not compensated for global price increases. And these are hurting. And we are in discussions. We want to limit the effects. Overall, we want to limit the volumes in these frame agreements. We want to get out of them basically. And we want to get more compensation. So that's an ongoing discussion. We will talk more about that when we reach Finland. So this quarter, we have taken SEK 10 million for restructuring of that frame agreements. We actually hope to do more in Q2 because we want to take more actions towards those frame agreements where we don't have any compensation. We have made a change in our reporting. Hopefully, this presents our business a little bit better, more transparent. So we are keeping the countries, the segments. Sweden, Norway, Finland, Germany, U.K. but then we changed the business areas and hopefully, this presents us a little bit better. We introduced what we call Infraservices. This is water sewage, central heating, sales engineering work. And this, we have in Sweden so far. It's roughly SEK 700 million, it's profitable. The aim -- the longer-term aim is to start to expand in the other markets as well. We have Power, it's unchanged. It's all the electrical work we do. It could be public networks, it could be stations, it could be power lines, it could also be installation work, all the electrical work we do now on the railway, on the subway and towards defense, which we got now with the acquisition of Elektrotjänst i Katrineholm. And then Telecom, which is now everything we do in telecoms networks, so to say. So it's fixed. It's mobile. It's fiber, it's 5G, it's service, it's installation, it's rollout. So it's more traditional telecoms. And we hope this will make it easier to follow our business. Starting with the countries. Sweden first; growth, very good growth, both from acquisition, but also in existing business. And Infraservice, here, we have good demand. This is interesting. We have -- of course, we are a little bit exposed to new builds, to property development. This is very slow, there's nothing. But on the municipality side and on the government side, there is lot to do, still a lot of tenders with good volumes. And in the quarter, we had 21% growth, Power, especially on the station side. There's still high demand in Sweden to expand the network. Much more power needs to be distributed. So it's a big push for a station, especially with EON. We are big with EON, so we have a very nice backlog. And it's more demand and supply, so prices are good. We are looking forward to deliver this year. So very high growth on Power. Then within the Power segment, we have the acquisition of Elektrotjänst, and they are partly exposed to the railway, to the underground, and to the defense, and these are good places to be. It's good places to be now and it's going to be good in the future. Telecoms, now it's the new definition of our telecoms. So it's both the 5G and fiber and service. So here, we have a drop in Sweden, of course, since we are not any longer in rollouts, it's high penetration in Sweden. But on the telecom side and on service side, this was a good quarter. We made good money, and we had a decent growth. And in Sweden, even though overall, the telecoms operators are really holding back now, they are selling assets and accumulating cash and they're also holding back on service, and they are holding back a 5-year rollout, actually. But in Sweden, we have Tele2 and Tele2 is really pushing the rollout and they have a joint network with Telenor, and they are also pushing out the 5G rollout. So in Sweden, it's a good situation for 5G rollout even if Telia is aggressive at all. They are holding back. Norway, for development, we have a situation with lower volume, which affects our margins, which leads to what we are doing, we are taking measures actually -- to actually enhance margins going forward. And the situation is that on the power side, we have distribution networks, which are local networks and we have regional networks, which cover more. On the distribution side, you normally have 1 or 2 customers since you are local. Our customer is holding back because of network regulation, it doesn't pay off so much to invest right now, even if demand or capacity is fine. So we have less volume on local network than we expected and then we have built for. On the telecom side, we have a good backlog on fiber rollout, but this has started in Q1. So Q1 doesn't get any contribution from fiber, which is normally a high-margin project -- product. And then we have our service contracts since we are going for service in Norway, and this is a long-term business, and we have big service contracts. But here, these are telecom customers. These are Telenor and these are Telia, and they're holding back. So we now have 4 costs that are lower than we expected. So our organization is a bit too big, and it's designed to actually do more. So both within our Power and Telecoms, we are scaling down a little bit, but we are also working a little bit different to actually get profit out of those volumes we have now. And we're going to get there. It takes a little bit of time, but we will see effects later on this year in Norway. And on the Power side, of course, a little bit longer term -- and longer term. The grid in Norway is in the same, need and more capacity as in Sweden. So long term, it's really good. And service in the telecom networks are also a long-term business that will be there. But we need a little bit of changes and a little bit of efficiency given the new conditions in Norway. Finland, here, we have special situation. Of course, it's winter in Finland, very little is done. So small effects get very big on the result. We have -- if you look at underlying, what will happen in Finland in the next couple of years, of course, they are also a big demand to expand the power grid. And they are behind in fiber rollout. They have quite a low penetration and there is a big push on fiber now in Finland. So the segment as such, demand wise would be okay in the next couple of years. Fiber will be more than okay. Our profit is impacted basically on the Power side. Most Power customer or the few we have, they are compensating. But one isn't, and we have two big frame agreements with this customer. We are not compensated cost increases. We are in discussions, we want to scale down our commitment. We want to, of course, get more take on what we do, and we want to be more efficient ourselves. So we aim at restructuring these frame agreements. We want to get down in volume. We have so far taken SEK 10 million of that restructuring of that -- of those specific trade agreements. We actually hope that we can do more in Q2 so that we can get rid of some of the problems. So we can't roll out. We're actually aiming for a little bit more restructuring in Q2 if we can find such a solution. But then we also have to say that fiber now, we have big contracts on the fiber side. This is the first year they are ramping up. We will start to build a little bit before the summer. We'll build more after the summer. Fiber is normally a more higher-margin project -- product than power. Today, we managed to scale down on the Power side and scale up on the fiber side, and then we should get to profit. So that's the plan, and this is what we aim to do, and this is what we will do. Germany, strong. In the few years now, we are still growing. We have good margins. We have a new customer, very interesting. We got a new big contract, which is ramping up with [indiscernible], which is Unsere Grüne Glasfaser, it's actually Allianz and Telefonica, EUR 5 billion joint venture to build fiber in Germany. So if we have this correct, we will get much more in the future. And then our 2 big customers will be [Indiscernible], which is EON and [indiscernible], which is Allianz and Telefonica. These are big names with a lot of money. We're opening up new offices. We are hiring more people and profit is good. U.K. and U.S. market. We bought 2 companies last year. This is our first Q1 in operation. We are merging the companies to one Netel [Indiscernible]. We have okay volume. We are ramping up with people and organization. We have a good backlog. We got a new order with [Indiscernible] GoFibre, which is SEK 10 million fiber in Scotland, and we are located in Scotland. Good profits, but here, we actually fight to expand capacity and to grow in a very positive market. Few you words on cash flow and working capital from Peter.

Yes. Last year, we started to initiate additional measures in order to reduce capital tied up. And we now -- we can start seeing some effects of this work. And in this quarter, we can see that we have an operating cash flow that was plus SEK 8 million compared to minus SEK 85 million last year, which was not a good quarter. We also see more potential for improvements, reduce capital tied up. So we are continuing to work, basically more potentials with that. The working capital is down from SEK 519 million to SEK 491 million in the start of the year. And we are down to around 12%, if we look at the working capital compared to pro forma sales, if we adjust for the SEK 80 million for the arbitration. And we have orientated that we should be between 9% and 12%. So we continue to work to reduce the working capital. Coming down more on that. We have SEK 601 million in available facilities at the moment. So this is also good. So we have possibilities with that also.

Okay. Thank you, Peter. Acquisition, one this year in Q1, Elektrotjänst i Katrineholm. It's Power, so you will find them in the Power business area. And they're especially interesting. Yes, they do electrical installations, more nuanced, but they also work with big projects toward the railway and the subway and defense. And we do think that if nothing very special happens, the high investment level will continue and the lack of suppliers will also continue in these segments in the next couple of years. So it's a good chance that this will be good, and it's a good first step in these segments. Megatrends, we usually talk about them, no change really. I mean there's a big, big push now, of course. There's a big, big lack of distribution capacity in the power grid. 5G will be rolled out, fiber network will continue, lots and lots of service. Many markets are behind like U.K., like Germany, like Finland. Lots of work in the next couple of years. And then all the other infrastructure, we are in water, sewage, central heating. We're also approaching railway and defense. So there will be lots and lots to do for many, many years. To sum up, weak quarter margin-wise, activities ongoing in Finland and Norway to get back to profitability, especially Finland, we hope to do a lot in Q2. Stable long-term demand also in most places, not in all places, but in most places, also good demand now. We're growing our 12%, 24%. We have a high backlog. We have SEK 600 million in credit facility. However, there are -- we are consolidating a little bit, both operationally on working capital side. So there are less focus on M&A. It's not ruled out, but it's a little bit less focused on M&A next couple of quarters. So that's it for the presentation. So if you have any questions, please?

[Operator Instructions] The next question comes from Gustav Berneblad from Nordea.

Yes. It's Gustav here. Just maybe to start off here on Norway. I think I missed a bit here, what you said around the national regulations for grid operators in Norway. Can you expand this a little bit and also how you view this to play out in 2023?

The power grid is a monopoly. So however you price it, however you charge, send the bill to the end consumer, it's regulated. And the bill that's being sent depends on the status of the network, and the status depends on the investment. So it's basically regulated, how much return on investments you get on network investments. And there are good times and bad times. For this specific time now, there is a little bit less return on investments for this specific for Elvia, which is our big customer [Indiscernible]. So they're holding back a little bit and they do other investments, but that will come back, of course, because networks are getting old. But then on the reason that we have more customers, we span a bigger geography. So overall in Norway, there are investments ongoing. And then for us, especially on the regional network side. And for instance, we just recently won a very big station. It was built first because Google wanted potentially to start data centers. And then there isn't enough power, electricity, then they needed to build a very big station. So we won it, and our work is NOK 70 million, but it doesn't even include the groundwork. So there are big -- there are activities in Norway, but not specifically right now in this area where we are on the local side.

Should we expect that your areas will be suppressed for whole 2023? Or what is your interpretation...

Actually, it is lower. I hope we can scale up on the regional side, but not on the distribution side. So it will be a little bit less. But hopefully, we get started with the bigger station on the regional side, and the aim is to make money on those and to compensate like that. But this we don't know yet, we -- but this is [Indiscernible]. And on the local side, it's more service like, smaller projects. On the regional side, it's more station work, it's bigger projects, and it takes some time to start up. But we have a backlog, and we have some good stations that we want to build. And the aim is to make money, but there are still projects so we haven't done it yet.

And if we move to Finland, and you commented on you having started negotiations with large customers there due to the global cost increases. Can you maybe expand this a bit? And how likely is it that you will be compensated, would you say?

It's very likely, but it's not super likely that we'll be compensated enough. So yes, there will be compensation. So we are also trying to scale down on the commitment. The less we do the better actually in this situation. So the less they order, the better. And there are limits to these contracts. It's a little bit grace on how much we can scale it down. So there are some legal arguments going backwards and forwards. But the strange thing is that they want to build much, much more, but they don't want to pay for it. So demand is there, but the margins aren't there. So we want to do less and they want to do more. And this is sort of where the discussion is going on.

But if we look at the whole of 2023, can we expect a similar as to last year where you sort of worked the whole year on recovering, the lost volumes and then maybe incur higher costs due to this? Or how should we view Finland?

No, this is not our aim, really not. I mean, our aim is to either get compensation or scale down on these specific frame agreements. Well, this, basically restructuring those frame agreements, and that means less people. And then we want to scale up on the fiber side. So when we get to Q3 and Q4, the mix would look different we aim at and the mix would be more profitable then. This is the aim, because it will be more fiber and less power then. If -- but it might turn around, the customer might say we want to do much more and we want to pay you. This is unlikely, but then it might look different. So we're in the middle of it. We are fighting hard, and we have some good arguments, but we don't have all of the arguments.

But for the organic growth sort of for Finland for 2023, should we see sort of a net zero effect? And if you scale down Power and then ramp up fiber or...

If we can get to that, I will be super happy, actually. Then we will be profit, but...

If you reach a 0% organic...

We'll probably get organic growth. But in this case, we rather would get the mix changing so much that we don't get any growth, but we could get profit instead.

Okay. Okay. I see. I see. And then if we sort of move to the positive here, you comment quite positively on Germany. Should we expect the bottlenecks to be completely out of the way there? Or...

No, because now, we start a new customer. And for every customer start in Germany, they're fairly new as well, the customer. So it's a fight to get the projects going. I mean you've followed us for a long time. And now we are in full swing with [indiscernible]. It didn't work out so well with Deutsche Telekom. And now we are with Elvia I think it will work out much better. I think we started producing Q2, we're going to see some upsides in Q3 and maybe sort of full speed in Q4 with that customer. And then the next phase then, and they may be ask us to do apartments because the others are FTTH. And then our sort of dream in Germany is to do apartments, large-scale apartment installation, and this customer might want to do that. That takes some time as well. But when that kicks in, then later on -- then we start to see margin really. So it will slowly grow. It will not be explosive because it just takes too much to start these projects. So we're in there for the long run, and we try to start as many projects as we can and still be in control.

Okay. Are you more positive to 2024 then, I would assume?

I'm positive to '23 and even more to '24.

Okay. Okay. Okay. And then if we sort of ask a similar question in the U.K. here, are you seeing any signs of weakening demand there within the fiber rollout.

There's been lots of turmoil in the U.K., but not with our customers, they're still building. One of our customers got into problems like most of the fiber company does. They build quickly and they realize they have poor quality and they just stop. And this is partly city fiber then. And some Swedish companies are working there, and then they get to stop and nothing happens. British Telecom did the same for some time, and this just stops. And then they throw out their suppliers and they bring in new ones, and that will always happen in the fiber business. We do GoFibre, decent, stable. We do net [indiscernible], and we do see [indiscernible], we're actually a supplier to supplier. And this looks stable and there are demand. But every now and then, things happening because everything should go so fast in a fiber rollout -- in a national fiber rollout because you want to get first to the customer. So I don't see -- and I know some network owners are buying some other network owners and so on, and that might temper that to stop. But from where we see, from the small scale we still operate on, there is enough demand, and we will build, and we are actually fighting to ramp up right now at capacity.

Okay. So a bit of luck in having the right customer then or...

Yes, and being small. I mean if we were building for sort of SEK 2 billion now, I'm sure we would be influenced somewhere, and we couldn't move all of that volume, but we are still in -- it's still very small scale. And then you can actually, okay, one customer is standing still, then you can send the 2 teams to another customer. But you can't send 100 teams to another customer. It's just too much, but we don't have 100 teams.

The next question comes from Karl-Johan Bonnevier from DNB Markets.

Peter, just to get some better feel for what's really happening here, and it's obviously a lot of moving parts. If you start by looking at the record order backlog, how much of that do you see going to be delivered during this year?

We have to come back on that. I don't know how much is from the backlog and how much is sort of incoming orders during the year. I don't know. It's a very good question. Could we sort of log it and...

Yes. No, no fine, fine. Because what I'm aiming at -- because obviously, as you indicated, a lot of network owner are, say, moving their plans and similar kind of things. When you look at that, has that impacted how you calculate the order backlog?

I think -- I mean, you see all of this. You see what the telecom operators are doing. They are selling assets, and they are scaling down and they try to accumulate cash, most of them. And our business on the telecom side, in the Nordics where we see this behavior, it's on service in Norway, right? It's really with those customers. And the -- it's maybe 15% less or something, 20% maybe. But that makes a difference because here, this is a people business where you are well-staffed actually, so you're dependent on them. If you take on the fiber side, we don't rollout, there, there have a backlog, and that will strangely enough, be delivered. It's in order, for instance, it's lots with Telenor. And I'm quite sure -- I might come back in Q2 and say I was wrong, but now I'm quite sure it will be built and it starts now, it's order. It will not be taken away. Sweden, we have very little. In Finland, these are completely new operators, and they will build, there's a rush in Finland. So for us, it's on the service side and on 5G. And on 5G Telia is basically halved. Telenor has basically stopped in Norway. We don't do anything with Telenor. We do very little with Telia. Our big customer in Norway is ICE this year. And ICE is ramping up, their building a new network. We haven't heard so far that they would stop because they want to build a network. We do -- traditionally in Sweden, we do 5G with Telia, sort of the main supply -- very little this year. Luckily, we also started with Tele2, and they are pushing. And since they are pushing to the Telenor is pushing in Sweden since they have a joint network. So there we still see now and after the summer that we have requests to do more than we can deliver actually. A little bit luck, but this will remain, I hope, this bit luck, I mean, that we are so into Tele2 and that we actually did that 2 years ago. Finland, we are very small on 5G. We don't do any 5G in Germany or U.K. That was long, but maybe one answer.

And if you look at it, there's a lot of good indication. So if you think the service contract with Telenor, Telia in Norway for the moment, is running 15%, 20% lower, has that impact, have you calculated that part in the order backlog?

Yes, it should. But this is just 1 year, and then we have to think about next year. And we have -- we don't include sort of 100% of the forecast in the backlog. We maybe take 70%.

We are conservative in the frame agreements that we have, conservative with that when we look at the order backlog. So...

So is it unfair to assume that the duration of the backlog stretched a longer than you saw from [Indiscernible] last year?

Could be. [Indiscernible]. You're more -- you're thinking deeper on these things. You are actually right, yes, if business doesn't disappear. But what it should service in the long run disappear, it should be there. But it might be sort of later and there might be a new negotiations so someone else might have the contracts, so to say, then the duration is longer. But otherwise, if we have the contract, it's longer.

And now when -- obviously, as you alluded to Q1, it's a difficult quarter for you from -- there have been a lot of snow and cold conditions. Have you seen that the agreements that you wanted to see that started in Q2 has started in a good way?

I wouldn't say yes because it's still early on. It's Easter in a few weeks, but I haven't heard that sort of things are stopped really, like sort of a massive -- okay, finance are bad, we stop everything, we haven't heard anything like that.

So a kind of normal spring roll -- ramp-up, that's what you're seeing this year, at last in...

Yes. I mean the trend is good. January still stand, February very little, March, a little bit more, and it's picking up in April again, and then May should be sort of full swing. This is what we think it is.

And the final question for me. Looking at the settlement with IPO only, have you received the money from it? Or is that something that is still outstanding?

It's a short question. I can give you a very long answer. We were quite clear with the arbitration. We had good arguments. They challenge -- you can't challenge an arbitration. You can just challenge the process, right? You can say there's some process error, and they did. And then you go to say, I ordered actually. And at the same time, you can't say, I don't want to pay, I want to pay later. Normally, [indiscernible] accepts that. So they say, okay, you can pay when we have decided. But this time, [indiscernible] said, no, no, no, you have to pay now. This is b*******. And you can always -- you can only get allowance to pay later if you have a fair chance to win in the order, [Indiscernible] said this looks a bit shady, so you should pay. And they should pay, but we don't know when. Now it's with [indiscernible]. And I don't know, I hope soon. You can also escrow it with the Swedish state. But you still pay interest. So the only thing you do is you put it in escrow and you pay later. But it's conditions for that as well. It's sort of you put it in an escrow with the Swedish state, if you think that the counterparty can go bankrupt throughout the process with -- yes, you realize, right? So the answer is, I don't know. It should be in [Indiscernible].

But before the [indiscernible] might accept the case, then they need to put at least the money into an escrow account or something like that for the procedures to continue.

Either -- now they either need to pay us or they need to put it in escrow or it causes bankruptcy. This is -- this is one big fiber customer.

And when you talk to your lawyers, what kind of time frame do they give for, say, getting this to the finalization or at least getting to a situation where you see the money somewhere?

To get it full, there's a queue, to get this type of issues to -- say roughly, a year.

But the -- that, we don't know. It's a decision that [indiscernible] will do. [indiscernible] have to pay it to us.

I expect it soon, otherwise, everything else would be strange. But it has been strange so far. So we have a lot of money, but we want more, of course. The numbers will look better.

Yes. No, no, it's better to have them available so you can say -- I understand the comments why you then believe that maybe M&A shouldn't be the main feature of the company for the next quarter or so, to get, say, the financial structure back in good order. So...

Well, we have a lot of things to -- but I think if we get them right in Finland, it might -- it sounds a bit strange maybe, but we finally get the situation after all of this now when we threw it to a better situation in Finland, that would be nice. That will be a very positive thing.

And I guess your earlier ambition in Finland to at least get it back to breakeven or higher, that might be a little challenging with the current environment, even excluding potential one-offs?

On a yearly basis, yes. But then soon would like to see a quarter with plus. Maybe not Q2, but then if we find a solution with these frame agreements and if we start to push volume on the fiber side and if we deliver what we said, then we should see a quarter. And this is the target.

And if you compare the work that you're now doing in Finland with the work you are planning in Norway, do you feel that the Norwegian challenge is harder or easier if you try to integrate it?

I think it's very different. I think the challenge on the service side, that's a very strategic issue because we really want to do this. We strategically decided we want to do more service. We want the big service agreements. We are making money, but we want to make more money. And now volumes are lower, and we have a good organization. It would take some time, but we will sort it out. And this is long term -- this is really where we want to be. On the Power side, yes, we can improve ourselves. Demand is a little bit weak now, but it will come back. So marketwise and organization-wise, I have more confidence in Norway. It might take a little bit longer time, actually, because it's not sort of a -- sort of restructuring case where you want to sort of get rid of a contract and then it looks better as in Finland.

And when you look at the challenge in the service operation in Norway, you don't have any opportunity to say, basically recycle the [employees] in areas where you have an opportunity, so on seeing demand for it? I guess it's quite...

On the technician side, but not on the back office side. So the first wave here that we're looking at now as we speak, is to reduce back office because we have taken several service contracts with several different organizations from Telia, from Telenor. Now we create one organization. And then we can use the service technicians for more than one customer, and we can also use back office for more than one customer. All of this has to be done. And first step is back office and to reduce overhead, and this is ongoing as we speak.

And finally, when we look at Germany, changing the perspective going -- maybe not doing some [indiscernible] telecom, but going after the Allianz, Telefonica clients you mentioned. Is that a change in your base perspective? Can you use the same kind of subcontractors on your side to be able to cater for it?

Same. Same. Absolutely. It's like a different -- this is more rural. Deutsche Telekom is much more in a city environment, and rural is a little bit easier for us. It's a little bit easy to find subcontractors. You need a little bit less knowledge on permission and stuff. So this would be good. But then again, as I said, we are aiming actually to do apartments as well, large sets of apartments. And I hope within a few quarters, we can present something like that. We did Stockholm, we did lots of apartments in Stockholm. And that's quite easy, it's fast. It's not so much problems. And we have all the subcontractors we need from Europe. But what we do now is rural. It is backbone actually with the -- and we're in the planning . So this is currently a project, which we have been looking for, I'm talking about a long time, and this is the first one.

And when you're looking at payment -- the payment developments from the German clients, is that I think you mentioned earlier that Deutsche Telekom where the weaker payers, so to say, on [indiscernible] this was slightly better. Is this -- when you look at it, do you see a better flow of payments also in the...