Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2020-Q1

[Morten A. W. Opdal, executive]

All right. Welcome, everyone, to Fjordkraft's First Quarter 2020 Results Presentation. My name is Morten Opdal, Head of Controlling and Investor Relations at Fjordkraft, and I will be guiding you through today's presentation.

Due to the current corona situation, this presentation will be an audiocast only. So if you have questions, please submit them through the audiocast web page.

The results presentation will be presented by CEO, Rolf Barmen; and acting CFO, Ole Johan Langenes. And we are starting off with Rolf Barmen.

[Rolf Barmen, executive]

Thank you, Morten. Welcome, everyone. It's a pleasure to once again announce strong numbers from Fjordkraft, 27% increase year-on-year in net revenue and 31% in EBIT adjusted on group level. We have enjoyed historically low elspot prices during the quarter, which affected our COGS positively. The solid growth in the number of Mobile subscriptions continues, with net adds this quarter exceeding 10,000 on the back of the results this quarter. We have revised our OpEx slightly. Ole Johan will come back to that later.

Please go to next slide. Do we have the technicians with us? Next slide, please. Okay. For listeners now, please go to the slide, operational and financial impact from COVID-19, please. I'm now at the operational and financial impact on COVID-19. We'll give you some words on the operational and financial impact from COVID-19 to start with. When it comes to M&A, our activity level is high as always. And even though the coronavirus stops us from traveling, we are able to set up meetings over Skype and phones, so this does not affect us in a big way. We can, of course, not comment specifically on our M&A pipeline, even though we understand many of you are curious on the subject.

One driver for consolidation that we have previously pointed out and that it's now very relevant is the fact that in this low electricity price situation, the coal producers earn less than what they normally do. Should the vertically integrated companies that own many of our prospects be in need of money, for instance, to do necessary investments in the way of grids, the sale of the retail part of their business might be an option as the funding from the production business is limited.

Please -- the technicians, please go to the next slide, the operational and financial impact from COVID-19. Thank you very much. Please keep it on that page.

Operationally, we maintained a high level of both sales activities as well as marketing activities, even though we have adjusted our efforts in accordance with the government's recommendations in connection with the corona situation. For instance, our sales personnel have, to a larger extent, done telemarketing sales instead of door-to-door sales or store sales. Our sales and customer service are mainly working from home, but we have a good and flexible IT setup that enable us to do our work without the quality of our services to be compromised.

Further, we have taken measures to ensure close monitoring of the COVID situation with every EVP reporting the risk situation within the area of responsibility on a weekly basis. We also monitor our accounts receivable closely every day and try to balance risk of losses and corporate social responsibility. Our employees' safety and health are our main priorities, so we take necessary measures to ensure this.

When it comes to the demand of electricity, we see a slight reduction in consumption in the Business segment due to reduced activity following the COVID-19 restrictions. We also experienced increased voice activity in the Mobile segment, and this drives cost of goods sold in this segment and reduces our margins. We'll get back to this later in the presentation.

So please go to next slide, and I'm now on the slide with the head Market development. Please go to Market development slide. The market development during the quarter, as you can see from the right picture, the price development in the quarter has been favorable throughout the quarter, reaching a historical low level at the end of the quarter. The main driver for this development is mainly the hydrogeological situation in the Nordics, giving a production surplus we haven't seen for years. The price of oil and gas and coal has enforced the development of the elspot price curve.

When it comes to the demand side, the temperature affects volume consumed negatively, as all 3 months were warmer than last year. The regulator has had some issues with reporting market churn due to the Elhub launch last year. Their statement now is that new stats cannot be compared to stats from before Elhub. Reported annual churn for 2019 was 21% in the Consumer segment and 14% in the Business segment.

So I will now go to the next slide, segment development, Consumer. The number of electricity deliveries in Consumer segment decreased by 700 -- 1,717 deliveries in the quarter driven by strong competition. At the end of the first quarter 2020, this segment comprised 542,000 deliveries, which, however, represents a growth of 12,000 deliveries year-on-year. The volumes sold in the first quarter 2020 was 2,328 gigawatt hour, which is 1% increase from the first quarter 2019. And the increased number of deliveries is a driver for the positive volume development.

Financial performance in the segment is very strong. Ole Johan will come back to the details on this later in the presentation.

The Fjordkraft app has been further improved, now also including Mobile subscription overview, and owners of solar panels are now able to virtually save excess production for later use.

Okay. Let's move on to the next slide, segment development, Business. We are now on Page #8. The Business segment comprised at the end of the first quarter 79,000 electricity deliveries, which represents an increase of 973 deliveries during the quarter, all of which organically. The volume sold was 1,826 gigawatt hour, a decrease of 13% compared to first quarter 2019. The decrease is driven by a 16% decrease in average volume per delivery due to mild weather, fewer low profit tender customers and COVID-19 restrictions.

Our new concept, Klimasmart, has been well received in the Business segment. This is a concept, which includes local energy production from solar panels or heat pumps as well as monitoring services, further expanding our value proposition within the segment.

Please go to the next slide, New Growth Initiatives. At the end of first quarter, the number of Mobile subscribers was 110,000 subscribers, which represent, as mentioned before, an organic growth of more than 10,000 subscribers during the quarter. Alliance volume in the first quarter 2020 was 1,320 gigawatt hours, which is a 13% year-on-year decrease as Vesterålskraft is now included in Consumer and Business segments. One new Extended Alliance partner was implemented in the quarter and the first ever broadband customers were handled in the Fjordkraft factory on behalf of Alliance partners. The customer growth in both Mobile and Extended Alliance develops according to plan.

So now I will leave the floor to Ole Johan to present our financials. Please, Ole Johan.

[Ole Langenes, executive]

Thank you, Rolf. This is Ole Johan speaking. I'm once again delighted to present the financials for you today, especially given the results we published this morning.

Next slide, please. I'm now at page 11. First off, we'll look at the net revenue adjusted. As Rolf said, the first quarter turned to be a strong start of the year with an adjusted net revenue of NOK 481 million on group level. This is up 27% from first quarter 2019, and the growth is driven by margin improvements.

As you can see, the Consumer segment has the biggest impact. The margin improvements is due to particularly favorable market dynamics in both the elspot market and other commodity markets, positively affecting our cost of goods sold. Looking at the last 12 months, adjusted net revenue on the right-hand side, we see a new all-time high of NOK 1.39 billion. This represents an increase of 20% driven by margin improvement.

Next slide, page 12. Moving on to the EBIT adjusted slide. We see an adjusted EBIT improvement of NOK 56 million from first quarter of 2019. This brings us up to NOK 238 million, which represents an improvement of 31%. As you can see in the chart on the left-hand side, the Consumer segment is the driver for the increase. The EBIT growth represents an increase in EBIT margin of 1 percentage point from 48% in first quarter 2019 to 49% in first quarter 2020. The increased OpEx is driven by sales and marketing costs, administrative costs as well as an increase in expected loss on receivables due to COVID-19.

Looking at the last 12 months on the right-hand side, we see that the adjusted EBIT on group level is up NOK 122 million from NOK 425 million in the first quarter 2019 to NOK 547 million in the first quarter of 2020. This represents an increase of 29%, which takes the LTM adjusted EBIT margin up to 39% on group level, up 2 percentage points year-on-year and 1 percentage point from last quarter.

Next slide, please, page 13. In this slide, we break the numbers down to the reporting segments. Starting off on the left-hand side with the Consumer segment. In the Consumer segment, adjusted net revenue is increasing 36% year-on-year to a nominal level of all-time high NOK 362 million. The increase is mainly due to margin improvements and favorable market dynamics. The all-time high nominal EBIT adjusted level of NOK 189 million is an increase of NOK 63 million year-on-year. This gives an adjusted EBIT margin of 52%, which represents an increase of 5 percentage points year-on-year driven by net revenue growth.

Moving on to the Business segment. We have a nominal adjusted net revenue of NOK 108 million. This represents an increase of 11%, which is driven by improved margins primarily from power sales, but value-added services increases as well. The nominal EBIT adjusted level is stable at NOK 59 million, which gives an adjusted EBIT margin of 55%. This is a 5 percentage points contraction year-on-year driven by expected increase in losses on receivables due to COVID-19.

Continuing to the New Growth Initiatives. On the right-hand side, we see a 19% decrease in adjusted net revenue year-on-year, bringing us down to a nominal level of NOK 11.5 million in the first quarter of 2020. The nominal EBIT adjusted is decreased by NOK 7.5 million. The decrease in adjusted net revenue is primarily from reduced margins within Mobile in connection with COVID-19.

As Rolf said, we have seen an increased voice activity driving costs of goods sold. Providing unlimited voice activity at a set price in the Mobile market, we were under a risk of a margin contraction in occasion with change in consumption patterns, just like we see now during COVID-19. As stated earlier by Rolf, we had a solid growth in the Mobile segment, passing 110,000 subscribers at the end of first quarter 2020.

Next slide, please, page 14, net working capital. A quick look at the net working capital slide tells us that net working capital is increasing by NOK 251 million from last quarter to a nominal level of NOK 218 million. The increase is driven by settlement of el certificates from 2019 and higher volumes. The post-payment practice of el certificates has a positive effect on net working capital throughout the year, meaning that this seasonal increase in net working capital was expected.

The volume increased 4% from last quarter, contributing to increased net working capital, but we have also seen a 60% price reduction from fourth quarter of 2019 to first quarter of 2020, which, of course, reduces the net working capital. When we have such large price variations, as we have seen lately, the comparisons between quarters becomes less prevalent. This also concerns the comparison to first quarter in 2019. The reduction of NOK 376 million in net working capital from last year is driven by 65% lower prices and 6% lower volume. That being said, the continuous improvements in the invoicing process is, of course, also contributing positively to the development.

Next slide, please, page 15. The cash generation is still strong, and the cash EBIT adjusted, as you see inside the frame, is NOK 241 million in this quarter. This is in line with the EBIT adjusted from group level and brings us to a net cash position of NOK 511 million at the end of the first quarter 2020.

Next slide, please, page 16. This is the outlook we presented at the Capital Markets Day back in February. First off, due to the positive development in the Consumer segment, we expect that both the net revenue growth and EBIT margin will be somewhat higher than targeted in 2020. In the Business segment, we expect that COVID-19 will bring the net revenue growth down to a sustainable mid-single-digit annual growth level in 2020. At the Capital Markets Day, we expected this to take place from 2021. That being said, we still keep our target of an adjusted EBIT margin of 52% to 54% on an organic basis in the Business segment.

In the New Growth Initiatives segment, we have -- we expect a weaker adjusted EBIT than targeted, mainly due to COVID-19, as explained on the segment slide. However, we still expect a slight positive development from last year, adjusted from the impact of new spinoffs.

That's all from me for now. Morten will now facilitate the Q&A session. Thank you.

[Morten A. W. Opdal, executive]

Thank you, Ole Johan, and thank you, Rolf. We will give the audience a few seconds if they have any questions to submit. We have not received any questions so far.

Okay. Still no questions received. So I think that wrap things up, and thank you all for your attention. And should you have any questions, please reach out to me. My contact is on the last page of the presentation. Thank you, everyone.