Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2021-Q2

[Morten A. W. Opdal, executive]

Welcome, everyone, to Fjordkraft's Second Quarter Results presentation. My name is Morten Opdal, Investor Relations at Fjordkraft, and I will be guiding you through today's presentation. Due to the ongoing pandemic, this event is a webcast only. However, we encourage you to submit questions through the webcast player as there will be a Q&A section at the end. And due to the delay on the broadcast, we encourage you to submit the questions during the presentation.

Today's presenters are our CEO, Rolf Barmen; and our CFO, Birte Strander, and we are starting off with Rolf Barmen.

[Rolf Barmen, executive]

Thank you, Morten, and welcome to everyone joining on in this webcast this morning. It's a pleasure to announce that the second quarter has been a quarter with growth both in net revenue and EBIT adjusted year-on-year. Net revenue increased 24% year-on-year and EBIT adjusted increased 40% year-on-year. The main driver of the increase being the M&A activity.

The overall number of electricity deliveries decreased by almost 2,000 in the quarter, which is a significant improvement from last quarter's development, which as you probably know, was highly affected by COVID restrictions hampering our sales activity. The activity level is now a lot higher, and I will come back to some of the ongoing initiatives and campaigns in a few moments. We have also done our first acquisition of mobile customers. Yesterday, we announced the acquisition of Skymobil's customer portfolio of about 38,000 customers.

Our decision to be an MVNO instead of a service provider or makes it interesting to look into opportunities also when it comes to acquiring mobile portfolios. As the purchase price depends on how many customers we succeed in migrating to the Fjordkraft brand. The purchase price will be announced in the reported material for the third quarter.

Next slide, Page 4. When it comes to regulatory development in our industry, there has been some events worth commenting on. The Norwegian parliament adopted a resolution in May this year requesting that the Norwegian government implements 3 items. Number one is a standardized price information making it easier for consumers to compare prices across different contract types and price models. Number two and three is requesting clearer information about changes in terms, conditions and pricing communicated in a good time and mandatory information about the duration of the price of the contract.

Our view on these items is that standardization of rules and practice between the players in the industry is beneficial for large players like Fjordkraft. And historically, we adapt quickly to new regulations in an appropriate manner.

Regarding standardized price information, this matter has been discussed in the industry for many years now without being solved. The complexity of the industry accelerated now by more volatile energy sources, which is actually paving the way for multiple ways of hedging the electricity price also in the Consumer segment seems to make it even more difficult to standardize price information. But we welcome the discussion and we'll take an active role together with [ Energy Olje ] in this matter.

The second and third item on the regulatory development is covered through the Trygg Strømhandel certification process. This ongoing certification process of electricity retailers in Norway, we expect that the first batch of retailers will be announced during the third quarter. It has been a comprehensive process of certification involving a broad range of employees and departments within our organization, and I'm very confident in the work that has been put into the certification from our side.

Next page, Page 5. I mentioned that our sales activities have been hampered by COVID restrictions in this pandemic. The situation in Norway is different now. And in the last part of June, our customer growth was back to positive again.

In our customer offering, we have had a lot of success with a variable contract with an attractive price ceiling. This has been well received by new customers, especially in a year with volatile and high elspot prices. Our physical sales channels are on the way back to pre-COVID levels, and we have several ongoing campaigns.

One is through Power, the Nordic electronic retailer, with discounts to new electricity customers, both in store and online. And another one is through Trumf, a bonus program, which rewards both new and existing customers.

Regarding our M&A agenda, I will come back to that later, just saying that we are continuously working on this and the activity level continues at a high level unaffected by COVID restrictions.

Next page, Page 7. In the second quarter of 2021, the average daily system price was 647% higher than the second quarter of 2020. While 2020 as a whole, including the second quarter was a year with exceptionally low electricity price due to the hydrology. The second quarter of 2021 has been affected not only by a weaker hydrology level than last year, but also affected by an increase in the price of CO2 quotas, increased coal and gas prices and lower amount generation from wind power.

The second quarter 2020 represented definitely a very favorable market situation, while the market dynamics in the second quarter 2021 have been quite different. Birte will come back to the financial impact of this.

Next page, Page 8. In the Consumer segment, the number of electricity deliveries in the Consumer segment decreased by 10,640 deliveries. But there was a clear positive trend throughout the quarter with positive growth figures in the second half of June and a significant improvement versus the development in the first quarter. Volumes sold is increasing by 35% year-on-year, driven by M&A.

Next page, Page 9. The Business segment continues the strong development and grew by more than 2,000 deliveries in the quarter. Volumes sold increased by 26% year-on-year, also here driven by M&A. Our new concepts presented on our Capital Market Day are well received, and we look forward to report from these initiatives on the third quarter presentation.

Next page, Page 9 (sic) [ Page 10 ]. The Nordic segment is also developing well with a growth of more than 6,500 deliveries in the quarter. The growth is within both B2C and B2B and is in both Sweden and Finland.

As I mentioned earlier, the M&A activity is quite unaffected by the COVID now and the activity mainly takes place in Sweden and Finland. Our target is still to have a top 4 position, both in Sweden and Finland within the end of 2023.

Next page, Page 10 (sic) [ Page 11 ]. In our new growth initiatives, the organic development in mobile subscribers was quite flat during the quarter. As I mentioned earlier, we acquired Skymobil's 38,000 subscribers yesterday. And this will obviously have a positive impact on the segment going forward. The Alliance business grows its volume sold by 26% year-on-year, and the growth in the Extended Alliance deliveries is very strong this quarter, up more than 22,000 following the start-up of 2 new Alliance partners.

Then I'd like to give the word to our CFO, Birte Strander, who is back from her maternity leave. Birte, the floor is yours.

[Birte Strander, executive]

Thank you, Rolf. I will start to make some comments on net revenue. That's Page 13. We are pleased to announce that we have increased our net revenue with 24% or NOK 74 million nominally year-on-year. And as you can see from the graph to the left of the slide, all segments are contributing positively to the growth, although the electricity price have increased by 647% year-on-year. The second quarter 2020 represented a very favorable market situation for us, resulting in strong financials driven by the variable contracts in the Consumer segment while the market dynamics this second quarter have been more neutral. The main driver for the positive net revenue development in the group is the acquisition of both Innlandskraft and Switch Nordic Green customers.

Next page, Page 14. EBIT adjusted is NOK 141 million this quarter, that's up 14% year-on-year or NOK 17 million in nominal kroners. All segments, except the Consumer segment have a positive development year-on-year. And also here, the main driver is the M&A growth. The negative development in EBIT adjusted of NOK 17 million year-on-year in the Consumer segment is explained by, as I mentioned, the significant favorable market dynamics we experienced last year.

The synergy realization of the Innlandskraft transaction is developing as planned. The Eidsiva brand is now successfully integrated into the Fjordkraft factory and full synergy realization is still expected last quarter this year. LTM EBIT adjusted increases to NOK 603 million. That gives us an LTM EBIT adjusted margin of 37%, which is within our guidance of 36% to 38% for the group.

Then moving to Page 15, making some comments on the segment slide, starting with the Consumer segment. As already mentioned, the Consumer segment has a marginal positive development, 4% growth in net revenue but a negative development of 18% year-on-year on EBIT adjusted level.

We believe this to be a good and more normalized achievement due to the extraordinary development in the elspot price year-on-year.

The EBIT adjusted margin is down 9 percentage points year-on-year to 31%. Calculating it on an LTM basis makes an EBIT margin year-on-year of 32%, well in line with our long-term guidance.

On the right side of the same page, you see the development in the Business segment. The Business segment has a significant positive development year-on-year with a growth of 30% in net revenue and 41% in EBIT adjusted.

The net revenue growth is driven 85 percentage points by volume growth from the M&A transactions, but we have also been able to grow our product margins in the segment.

In addition to this significant growth in net revenue, the segment is also benefiting from a relatively low cost development year-on-year.

Then moving to Page 16, starting with some comments on the Nordic segment. This segment is new as of the fourth quarter last year when we closed the SNG transaction, giving us approximately 165,000 deliveries in Finland and Sweden.

This quarter, the segment delivers a net revenue of NOK 35 million and an EBIT adjusted of NOK 12 million, which is a performance well in line with our increased guidance from last quarter.

The New Growth Initiatives segment is showing improved EBIT adjusted for the fourth consecutive quarter. The improvement is driven by the Mobile segment.

Then moving to Page 17 and some key elements from the balance sheet and the cash flow statement, starting with the net working capital. Net working capital is decreasing to NOK 218 million at quarter end. It's a significant decline since last quarter, but please mark that Q1 level of net working capital was inflated due to public holidays or Easter at the end of the first quarter.

Year-on-year, net working capital is increasing by NOK 277 million, both prices and volume has had a significant increase since the second quarter last year, and there will always be some irregularities in the invoicing pattern.

A quick comment also on the NIBD development. We have a net debt of NOK 742 million at the end of the quarter. It's a reduction of NOK 60 million last quarter, dividend of NOK 3.5 per share or NOK 400 million in total has been paid out to our shareholders this quarter, but is more than offset by the positive change in networking capital and our cash EBIT adjusted performance this quarter. And the cash generation is still strong with a cash EBIT adjusted of NOK 117 million, as you can see from inside the frame on this page.

Moving to Page 18. We have prepared a slide for you this time with an update on our hedging strategy. As you know, historically, Fjordkraft has not done any hedging of the price risk due to the short-term 14 days notification period attached to the variable products. But on the back of increased elspot volatility and decreased demand for risk mitigation products from our customers, we have revised our hedging policy. Still within our low-risk framework to increase the predictability of our purchase price and financial results, Fjordkraft will hedge a larger portion of the variable contract portfolio going forward.

Turning to the last page, Page 19, our presentation today, our outlook. We have made no changes to our outlook. The revisions that we did last quarter are still valid, maintaining our target of an EBIT adjusted margin for the group in the range of 36% to 38%.

And now we will move on to a Q&A session facilitated by you, Morten. Thank you.

[Morten A. W. Opdal, executive]

Thank you, Birte. And as I mentioned in the introduction, you can submit questions through the webcast player. We've already received some questions. So I think we can start with the first one. It's from Ole Martin, and it goes like this. How has the trend in deliveries been since the end of the second quarter? Maybe you can make a comment on that, Rolf.

[Rolf Barmen, executive]

Yes. Thank you very much for the question, Ole Martin. The trend is positive. I reckon you are particularly interested in the Consumer segment and I can confirm that the trend is positive.

[Morten A. W. Opdal, executive]

Good. A second question from Ole Martin is the following. The power prices are currently at a very high level. How does this impact your margins in the near term?

I can make a quick comment on that. Obviously, as we mentioned in the presentation, there is a big difference between 2020 elspot price level and this year's price level. What we have previously said about the price level is still valid. The exact level of the price level is not detrimental to our margins. The volatility has an impact on margins. And also, as Birte mentioned, we are -- we have revised our hedging strategy. So we have some measures in order to handle this price level as well.

The third question from Ole martin is the following. Has the market activity in the third quarter so far been above normalized levels? Maybe you want to comment that, Rolf.

[Rolf Barmen, executive]

We are very happy that we are heading towards a more normalized situation. And as I said in my presentation, we have several campaigns now. But I cannot say that it is above a normalized level. I think it is. We are happy that we are returning to normalized levels. I think that would be correct to say.

[Morten A. W. Opdal, executive]

Good. Another question is the following: Can you comment on the revenue per subscriber for Skymobil? I can comment on that. As stated in the press release, Skymobil has been very attractively priced among the low data plans -- price plans, and that might be an indication.

Other than that, we don't have an explicit statement on that.

Then there are some questions on the hedging. One is on the cost impact. Another one is on how much of the volumes we should expect Fjordkraft to hedge? Do you want to give some comments on that, Birte?

[Birte Strander, executive]

Yes, I can do because of the -- us being a very big player and also the liquidity in the financial market that we can do these kind of trades. We won't say anything specific about this because it's -- we regard this as a sensitive matter, both towards the trading activities in the market, but also to our competitors. But I think you should look upon it as a positive element. It is a mitigation factor for us easing out the results, the financial results. So that's how we at least look upon it from our side.

[Morten A. W. Opdal, executive]

Great. Another question is the following: Do you expect at least stable dividend for the financial year '21?

[Rolf Barmen, executive]

I can comment on that. That was an easy one, yes. The answer is yes.

[Morten A. W. Opdal, executive]

Okay. We've been through all the questions, and I think we will conclude on that. So we'd like to thank you all for your attention, and have a nice day.

[Rolf Barmen, executive]

Have a nice day.