Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2020-Q2

[Morten A. W. Opdal, executive]

Hello, everyone, and welcome to Fjordkraft's Second Quarter 2020 Results Presentation. My name is Morten Opdal, Head of Controlling and Investor Relations at Fjordkraft, and I have the pleasure of guiding you through today's presentation.

Due to the current pandemic, this will be an audiocast only, but we will do a Q&A session at the end of the presentation. We encourage you to submit your questions during the presentation as there is some delay on the broadcast.

Today's presenters will be CEO, Rolf Barmen; and acting CFO, Ole Johan Langenes, and we are starting off with Mr. Rolf Barmen.

[Rolf Barmen, executive]

Thank you, Morten, and welcome, everyone. I'm going directly to Slide 3.

As you probably already have seen, the second quarter turned out to be yet another strong quarter for Fjordkraft, net revenue up 15% year-on-year, EBIT adjusted at 26% and organic customer growth all across the segments.

On the back of our results so far, we will announce a positive revision of our financial outlook. Our CFO will comment more specific on this later in the presentation.

Very encouraging also, both for the company and for the shareholders, is the fact that we, during the summer, deliver on our M&A targets.

Let's move on to Slide #5. Therefore, I am very delighted to start off with some comments on the acquisition of Innlandskraft. The company comprises 2 brands: Gudbrandsdal Energi and Eidsiva Marked with almost 240,000 electricity deliveries and is the third largest electricity retailer in Norway. The transaction increases Fjordkraft's presence in the eastern part of Norway with offices in Hamar, Vinstra and Kongsvinger.

The customer base is characterized by strong loyalty and a high customer satisfaction, and the organization consists of highly skilled employees. The organic growth potential, particularly the Gudbrandsdal Energi brand, made the acquisition a very strategic fit for Fjordkraft.

We see significant potential for both cost synergies and increased sale of value-added services and cross sales as well as financial synergies related to net working capital and purchase of electricity.

The purchase price is based on an enterprise value of NOK 1,410 million on a cash and debt-free basis and assuming an agreed normalized level of working capital. The purchase price shall be paid 50-50 cash and in consideration shares in Fjordkraft at an agreed price per share of NOK 74.50, which is the volume-weighted average price last 15 days prior to signing.

The consideration shares in Fjordkraft all go to Gudbrandsdal Energi holding as Eidsiva will be in cash. The debt of Fjordkraft is expected to increase with around NOK 700 million or is expected to be approximately NOK 700 million after the transaction is completed. The exact number will depend upon the purchase price calculation based on the half year audited financials. This will be calculated within the end of August, actually. So we will disclose the final purchase price on the day of closing.

The competitive authorities approved the transaction on 12th of August, and the closing of the transaction is expected to take place during September 2020. The underlying EBIT estimate for 2020 ex COVID-19 effects for Innlandskraft is NOK 105 million, and we expect synergies to be around NOK 40 million, distributed OpEx synergies of NOK 30 million and COGS synergies of NOK 10 million. In addition, we expect net working capital to be reduced by about NOK 100 million from the agreed normalized level Some words on the market development on Slide #6. No doubt that we also, in this quarter, had a tailwind. The elspot prices continued throughout the quarter to be on a historical low level, mainly driven by hydrology. The temperatures in the quarter affected volume delivered, revenue from cold weather in April and May to a record warm June.

We also have some news from the regulator in the electricity market [ and the EU ]. The market churn figures for 2019 have been adjusted at -- now showing it's 24% annual churn in the Consumer segment and 13% in the Business segment.

Okay. Let's move on to Slide #7. When it comes to the Consumer segment, we saw an organic increase in number of customers as well as increase in average volume per delivery. In total, this amounts to a volume increase year-on-year of 12%. We also launched new functionality in the Fjordkraft app, now supporting monitoring and control of electric heaters and some other consumer-related products.

On to Slide 8. We also see increase in number of customers in the Business segment, but due to comparable fewer tender customers than in the second quarter last year as well as due to a bit lower consumption, reflecting the COVID-19 situation, the total volume decreased by 5% in total.

Slide 9. Going on to the New Growth Initiatives segment. We continue the growth within the Mobile segment. Also, the Extended Alliance concept develops in a positive direction with new partners comprising more than 9,000 electricity deliveries.

All in all, we are very satisfied with the performance in the second quarter, both financially as well as operationally.

Now Ole Johan, our acting CFO, will go deeper into the numbers. Ole Johan, the floor is yours.

[Ole Langenes, executive]

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

I'll start off at Page 11, net revenue. As Rolf said, the second quarter turned out to be another strong quarter with an adjusted net revenue of NOK 314 million on group level. This is up 15% from second quarter 2019, and the growth is driven 75% by margin improvement and 25% by volume growth. The margin improvement is due to a tailwind from favorable market dynamics throughout the first quarter and historically low prices throughout the second quarter. As you can see from the chart at the left-hand side, the Consumer segment has the biggest impact. I will come back to segments in a few moments.

Looking at the last 12 months, adjusted net revenue on the right-hand side, we see a new all-time high of almost NOK 1.43 billion. This represents an increase of 21%, driven by margin improvements.

I'll turn to Page 12, EBIT. At the EBIT slide, we see an adjusted EBIT improvement of NOK 26 million from second quarter of 2019. This brings us up to NOK 124 million, which represents an improvement of 26%.

As you can see in the chart at the left-hand side, the Consumer segment is the main driver for the increase. The EBIT growth represents an increase in EBIT margin of 4 percentage points from 36% in second quarter of 2019 to 40% in second quarter of 2020. The increased OpEx is driven by sales and marketing costs, administrative costs and variable costs.

Looking at the last 12 months on the right-hand side, we see that the adjusted EBIT on group level is up NOK 126 million NOK 446 million in the second quarter of 2019 to NOK 572 million in the second quarter 2020. This represents an increase of 28%, which takes the LTM adjusted EBIT margin up to 40% on group level, up 2 percentage points year-on-year and 1 percentage point from last quarter.

Moving on to the segment slide, Page 13. Starting off on the left-hand side with the Consumer segment. We see an adjusted net revenue that is increasing 20% year-on-year to a nominal level of NOK 230 million. Net revenue improvement is driven 60-40 from volume growth and margin improvements.

The nominal EBIT adjusted level of NOK 92 million is an increase of NOK 29 million year-on-year. This gives an adjusted EBIT margin of 40%, which represents an increase of 7 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 75 million. This represents an increase of 3%, which is driven by improved margins, both from power sales and value-added services. The nominal EBIT adjusted level is NOK 41 million, which gives an adjusted EBIT margin of 55%. This is stable compared with second quarter of 2019. Continuing to the new growth initiatives on the right-hand side, we see a 5% decrease in adjusted net revenue year-on-year, bringing us down to a nominal level of NOK 9.9 million in the second quarter of 2020. The nominal EBIT adjusted is decreased by NOK 4.4 million. The decrease is primarily from reduced margins within Mobile in connection with COVID-19.

During COVID-19, we have seen an increased voice activity, driving cost of goods sold. Providing unlimited voice activity at a set price in the mobile market, we run the risk of margin contractions in occasions like this. As stated by Rolf earlier, we had a solid growth in the Mobile segment, and we had nearly 118,000 subscribers at the end of second quarter of 2020.

Moving on to next slide, Page 14. Quick look at the net working capital tells us that the net working capital is decreasing by NOK 277 million from last quarter to a nominal level of negative NOK 59 million. The decrease is driven by decreasing prices and seasonally lower volumes.

The volume decreased 33% from last quarter, contributing to decrease in net working capital, but we've also seen a 61% price reduction from first quarter to second quarter of 2020, which, of course, reduces the net working capital.

The price reduction also concerns the comparison to second quarter of 2019. The reduction of NOK 182 million in net working capital from last year is driven by 82% lower prices, which offset the 4% volume increase from last year.

As communicated in previous presentations as well, the continuous improvements in the invoicing process is, of course, also contributing positively to the development in net working capital.

Now we look at the next slide, Page 15. Quick look at the cash generation tells us that the cash generation is still strong. And the cash EBIT adjusted, as you see inside the frame, is NOK 114 million in second quarter. This brings us to a net cash position of NOK 583 million at the end of second quarter of 2020.

Next slide, the outlook, Page 16. On the back of the strong resource in second quarter, we made a positive revision of our group outlook. When it comes to FX from the Innlandskraft acquisition on our outlook, these will be included at third quarter reporting after closing of the transaction.

At group level, we increased our guidance and expect double-digit net revenue growth in 2020. This is due to increased guidance, up to double-digit net revenue growth in 2020 in the Consumer segment. We also expect a higher EBIT margin than targeted in 2020 in the Consumer segment, and this is expected to take the group margin to the upper range of the targeted 36% to 38%.

In the Business segment, we keep our guidance, including the minor revision from first quarter reporting. And in the New Growth Initiatives segment, we expect the total segment EBIT in 2020 in the area of negative NOK 30 million to NOK 40 million, up from the comparable NOK 30 million communicated in the first quarter reporting.

As explained at the segment slide, we experienced lower margins in Mobile due to COVID-19, and we are still awaiting new regulations in the mobile market.

Finally, we are increasing our CapEx target to NOK 65 million to NOK 70 million in 2020. With a rapidly growing customer base, we believe this is the time to accelerate investments in future-oriented solutions.

That's all for me. We will now facilitate the Q&A session.

[Morten A. W. Opdal, executive]

Thank you, Ole Johan. We will give the listeners a few moments to submit their questions, should there be any.

[Morten A. W. Opdal, executive]

Okay. We have received one question from Petter Nyström. It's about the Consumer segment, and it goes like this. "Your Consumer segment continues to deliver above expectations on high net revenue margin. Can you give some comments on the market development?"

I can try to give some quick comments on that. Since listing, we have had -- guiding in the Consumer segment, which has been lower than what we have realized. And we are seeing that we are able to actually realize strong margins in the Consumer segment regardless of the price development. And in the latest quarters, we have also had a tailwind from favorable market dynamics, as we have commented on. So that's the short answer on that one. Another question from Øyvind. "Can you explain the increase in volume in the Consumer segment?" The main driver for the variation in Consumer segment is, of course, the temperature, which, in the first 2 months of the quarter, was lower than last year. And this is the main driver for the volume increase. And also, of course, there are some effects, given the COVID-19 situation, where you had some volume kind of going from the Business segment to the Consumer segment since many people are working from home. So those 2 factors would be the main explanations for that volume increase.

One question on M&A for you, Rolf. "How do you view the potential for further acquisitions post the acquisition of Innlandskraft?"

[Rolf Barmen, executive]

We continue our efforts within the M&A track. We go back to the authority, approved this transaction pretty fast, 27% market share now. We expect to be able to grow further within -- without any constraints by the competitive authorities, at least up to 30%, 35%. With the price level in the energy model, we see that pretty many producers are struggling with their financial positions. So we think the outlook for further M&A transaction in Norway is pretty good, actually. But no, we have to concentrate on integrating Innlandskraft to the organization. So let's see. But we are positive on -- we are on the positive side when it comes to further M&A transaction.

[Morten A. W. Opdal, executive]

Great. The last question is from Gard, and it is the final question. "You state that the NGI segment is targeted to comprise up towards 5% of group EBIT in 2022. And is this ex the latest M&A? And also, can you give comments on the updated CapEx?" I can do the first part, but all of this outlook is excluding M&A. So we will come back to the revised outlook on our next reporting, which will also include Innlandskraft.

[Rolf Barmen, executive]

Yes. And I can just comment on that as well because it's -- we are making it more difficult for NGI, of course, to make this 5% due to the fact that the core business will increase tremendously by M&A. So we have to come back to that, of course.

May I have the next question, please?

"Can you give some comments on the updated CapEx, please?" Yes, Ole Johan will do that.

[Ole Langenes, executive]

Yes. As I told in the outlook page, we believe that this is the time to accelerate investments in future-oriented solutions. And when we say that, we mean the Fjordkraft app and the product management systems we have. And this is the reason we believe that we will have some more capitalized costs in both, as you see, we have in second quarter of 2020 and the rest of 2020 going forward.

[Rolf Barmen, executive]

Our -- I would add, our ability to handle investments is, of course, increasing when we are succeeding in the M&A transactions. We have more people to go through all the projects we have set up, and the constraints on the organization is, therefore, not an issue as it was before. So therefore, we are now able to accelerate important issues for us.

[Morten A. W. Opdal, executive]

Great. That was all the questions. And then I'd like to thank you all for your attention, and wish you all a nice day.

[Rolf Barmen, executive]

Bye-bye.