Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2023-Q2

[Rolf Barmen, executive]

Good morning, everyone. It's a pleasure to welcome you all to our second quarter presentation. As usual, I will give you some highlights initially before Henning dig into the financials, and I will come back and give you an update on how we see the market going forward and address our main focus areas in the upcoming quarters. After that, we will conduct the Q&A session. And our Head of Investor Relations, Morten Opdal, will forward the questions you may enter during the presentation. Please note that we have some time lag in the broadcast.

Okay. Overall, we have every reason to be proud of results the group presents this quarter, particularly given the fact that the consumer segment is facing transformational changes when it comes to changes in the product mix. The migration from variable products to spot-based products reduces the Group's price risk exposure and year-on-year, the percentage of variable contracts in the consumer segment has been reduced from 27% to 7%.

Further, the consumer segment is facing strong comparables this quarter as variable products had a significantly positive impact on the results in the second quarter last year. The volumes sold increased by 2% year-on-year in Norway, driven by growth in number of deliveries while the decrease in the risk exposure in the Nordic segment drives the segment's volume decrease. The efforts we have made in the Nordics segment materialized in a significant improvement in EBIT adjusted year-on-year. In fact, the EBIT adjusted of NOK 18 million is the second best quarterly results since the acquisition of Swiss Nordic Green in 2020.

This quarter, we successfully migrate the mobile customer portfolio or to Telia's network. The migration is actually the largest of its kind in Norwegian telecom history. The customer churn related to the migration was 15,000 and this is in line with the expectations. Our cost-efficient program is progressing as planned, and Henning will go more in detail in his part of the presentation.

When it comes to the profit of the sale of shares in Fjordkraft Mobil to Telia it generated proceeds of NOK 150 million and is booked as a change in equity positively affecting our cash position. We also distributed our dividend this quarter. Seasonally lower volumes and reduced elspot prices drive the reduction in net working capital, and we have also been able to reduce our net interest during debt from last quarter.

Some words on the market development. The chart on the left-hand side shows the Nordic price system development. And as you can see, the price level in the second quarter has generally been lower than that of the last year. However, there are regional price differences due to limitations in grid transfer capacity. Electricity prices in Southern Norway have been lower and less volatile in the quarter compared to second quarter last year. Whereas Central and Northern Norway experienced increased volatility on prices year-on-year.

In Sweden and Finland, the price level has generally been lower in the quarter compared to second quarter last year. The decrease in the elspot price level contributes obviously positively to the group's net working capital and the reduced price level is also affecting the supply chain activity in the market. As you can see from the chart on the right-hand side of the slide, the supply changes actually have been lower in 2023 than it was the previous 3 years, which in turn contributes to reduced sales costs.

As for the deliveries and volume per segment, the consumer segment upholds volume sold year-on-year due to growth in number of customers. The business segment increases in both volumes sold and number of deliveries year-on-year. And as mentioned earlier, the Nordics segment decreased in volume -- and this is related to the phaseout of non-strategic customers. The development in the Consumer segment customer base quarter-on-quarter is a result of a revision of the Group's appetite and non-profit price centers versus long-term profitability.

The introduction of increased markets, particularly in the GE brand led to minor customer losses in the quarter but will strengthen the Group's profitability in the consumer segment going forward. Now Henning, the floor is yours.

[Henning Nordgulen, executive]

Thank you, Rolf, and good morning, everyone. Overall, this was a financially solid quarter with positive developments in many areas. Although the quarter doesn't fully match a very strong Q2 of 2022. EBIT adjusted of over NOK 300 million for the first half compares well to historical group levels. Let's look at some of the details. Starting on the left-hand side, net revenue adjusted decreased by 10% year-on-year to NOK 376 million. The product mix change in the consumer segment drives the decrease but was partly offset by the NOK 32 million year-on-year improvement in the Nordic segment. On the right-hand side, EBIT adjusted in the quarter came in at NOK 106 million, a decrease of 24% year-on-year. Also here, the consumer segment was the primary driver for the decrease, but cost reduction in the segment reduced the EBIT impact of the net revenue decrease.

In total, the Group's adjusted operating expenses decreased by NOK 10 million compared to the second quarter of last year. The transaction with Telia over 39% of the shares in Fjordkraft Mobil were sold, generated proceeds of NOK 115 million and were booked as a positive change in equity in the quarter. One-off items in the quarter amounted to NOK 25 million include implementation costs related to the tele-transaction and migration process and severance packages related to our cost reduction program.

Let's then turn to the segments. In the Consumer segment, net revenue decreased by NOK 72 million year-on-year, driven primarily by a reduction in the number of customers on variable contracts. As for the end of the second quarter, the variable customer portfolio represented 7% of consumer segments deliveries compared to 27% in Q2 2022. The revenue decrease was partly offset by cost reductions in the segment. EBIT adjusted came in at NOK 30 million in the quarter, which is a reduction of NOK 44 million year-on-year. Net revenue in the business segment was stable year-on-year at NOK 115 million this quarter. This was despite lower and decreasing elspot prices, which typically reduce net revenues. EBIT adjusted was NOK 54 million in the quarter, a reduction of NOK 14 million, mainly driven by increased IT costs related to digital products and services.

In the Nordic segment, net revenue was NOK 59 million in the quarter, an increase of NOK 32 million year-on-year. The phaseout of legacy fixed price contracts in combination with favorable price and volume development resulted in a particularly strong quarter. And as Rolf mentioned, it is the second best quarter result since the acquisition of the company in 2020. The New Growth initiatives shows a stable development year-on-year. And from Q3, the migration of Group's mobile customers to Telia's network will have a positive impact on the segment's results.

Then turning to costs. Our cost efficiency program is targeting NOK 100 million reduction in run rate OpEx at year-end 2023 compared to year-end 2022. It is progressing as scheduled. The number of FTEs has been reduced by 10%, severance packages of NOK 9 million were booked in this quarter in that connection. From the cash flow statement, you can also see that payments to obtain contracts being external sales commissions have been reduced to NOK 38 million in this quarter compared to NOK 53 million in Q2 of last year. Sales commissions are capitalized and amortized according to IFRS. Thus, the reduced spend will be reflected in lower amortization going forward.

We continue our efforts to reduce the complexity of operation to harmonize our technological platforms and to streamline our processes, and we do have confidence in our cost reduction targets.

Then finally, the net working capital was NOK 551 million at the end of the second quarter, which is a reduction of NOK 350 million compared to the end of the first quarter. And according with our indication in our Q1 earnings call. Seasonally lower volumes and lower spot prices were the main drivers for the decrease. The revolving credit utilization has been reduced by NOK 150 million in the quarter due to improved liquidity in the Nordic segment. On the right-hand side, Net interest-bearing debt decreased by NOK 355 million to NOK 1.3 billion, driven by the reduction in the net working capital. Cash EBIT adjusted in the quarter was NOK 121 million and a dividend of NOK 163 million was distributed in the quarter. The consideration from Telia strengthened the cash position by NOK 115 million and the remaining NOK 68 million primarily consists of net interest payments and one-off expenses. And that concludes the financial review, and I'll now give the word back to you, Rolf.

[Rolf Barmen, executive]

Thank you very much. When it comes to outlook for the power market, prices are expected to be significantly lower in the next 12 months than we have experienced the previous 12 months. This will affect volume and financing costs positively, particularly in the consumer segment. And a stabilized and in the longer term, reduced interest rate level will obviously also reduce cost of financing.

Financial power trading marketplace has been characterized by lower liquidity than normal, affecting product management and price offerings negatively. We expect this to improve in near future. We believe that EU's decision and partly lowering cash deposit to be replaced by bank guarantees will affect the liquidity of the marketplace positively. We also believe that the [ EEX ] statement taking on [indiscernible] and [indiscernible] regarding one sound contracts will be beneficial when it comes to pricing of these kind of contracts. Phase-out of production windfall tax during next year will also increase the demand for hedging contracts from the producer perspective, which will also be beneficial for both the customers and the retailers in terms of prices and offerings.

When it comes to regulatory issues, we do not expect new regulations with significant influence on the Group's financial performance. So what are our key focus activities in the upcoming quarters, we make no big changes from our first quarter presentation. Following the financial improvements in the Nordic segment, we continue our efforts across border, mainly in the business segment.

The Consumer segment focus on profitability, reduced complexity and cost efficiency. And the group's NOK 100 million cost program is progressing as we have heard, as planned, and we will continue to work on that. Our strategy for growth through M&A is unchanged, even though the sellers' price expectations pan-Nordic still are too hard to be sufficiently accretive. But we expect prices to come down as the number of retailers have disclosed negative figures recently.

As to Fjordkraft Mobil, we expect, as stated before, that the successful migration of mobile customers to Telia's network will give positive EBITDA just the contribution to the NGI segment, from third quarter and onwards. So let's start the Q&A session. Morten, do you have any incoming questions to us. Please come up, any?

[Morten A. W. Opdal, executive]

We have received some questions. And the first one is the following. The margins in the business segment have decreased. Why? And should we expect a further decrease in the margins?

[Rolf Barmen, executive]

The cost in the segment have increased year-on-year, and the increase is primarily from IT costs related to digital products and services. This area is an important differentiating factor for us, so we need to make sure that the quality of our offerings and services is at the top level. The extraordinary high elspot prices through last year also gave some tailwind to revenue as certain revenue streams are correlated with price level. So the comparables are quite important also to focus on here. But the segment is performing very well. We have a strong position, and we will continue to further develop our business in this segment.

[Morten A. W. Opdal, executive]

The next question is on regulatory issues and whether we can elaborate a bit on how we see the development going there.

[Rolf Barmen, executive]

Yes. We have had this question up a number of times. And I think that the answer is the same. We work closely with regulatory authorities and politicians to ensure an attractive [indiscernible] market for oil players also in the future. We have experienced almost 10 years now with high predictability when it comes to regulatory framework. The regulator's focus has been concentrated on leveling the playing field and multiple measures, which we have acknowledged and highly supported have been put in place.

The war situation in Ukraine and the impact the gas situation had on the prices in the power market did not actually put pressure on the regulatory framework as such. But we do understand the need for the politicians to take action and the support scheme that was launched was a fairly good measure to mitigate negative effect to end users. The instrument eases the burden and at the same time, it stimulates energy savings.

But to conclude, our take based on multiple meetings and conversations with stakeholders and politicians is that majority of the decision makers understand that the way the retail market has been regulated and is regulated in Norway, actually is the best way of organizing such a marketplace. So this is why we believe that the regulator will continue to regulate the market in a balanced way and continue the path they have followed for a long time, now leveled the playing field, increased transparency, support to the Trygg Strømhandel certification and of course, also strengthened focus on the importance of the retailer's role in the value chain.

[Morten A. W. Opdal, executive]

The next question is regarding the one-off costs and whether we can comment a bit on what the costs were related to.

[Henning Nordgulen, executive]

Yes. They were related to 2 items. First of all, we completed the ramp-up and migration process with the Telia migration in the quarter, which represented in excess of NOK 15 million. And as I commented in my review, we had costs related to severance packages which were related to reducing the workforce, which were concluded with a cost of just below NOK 9 million. We do not foresee costs, one, of course, at such levels in the processes employment processes were completed during the first half of the year. And as we said, the Telia process has now concluded.

[Morten A. W. Opdal, executive]

The next question is what should we expect for financial costs going forward?

[Henning Nordgulen, executive]

Very good question. And it's a fact that interest levels have increased significantly over the last years. By and large, this is driven by volume and spot prices. very sensitive to the prices, as you can see during the last quarter. Interest rate levels, we have given an Norges Bank's prediction. There is a Central Bank meeting today where consensus is that we will see a further increase. So for the time being, we do have to expect financial cost at least at the levels we are seeing today. And our indication given the prediction in the key policy rate curve, it should come down over time.

[Morten A. W. Opdal, executive]

Next question is where do you see the variable share at the year-end, so the share of variable contracts in the consumer segment?

[Rolf Barmen, executive]

It might seem that this share is balancing out, but we still believe that it will decrease somewhat. We do what we can to get it lower actually. But we don't believe that it will decrease in the same pace that it has decreased up to now. We think that it will slow down a bit, actually.

[Morten A. W. Opdal, executive]

Good. Next question is, how should we think about the Nordic segment in the coming quarters, given the strong performance in the second quarter? Are the losses now behind us?

[Henning Nordgulen, executive]

Yes. As you know, we generally don't guide on hard figures going forward. As we said, this was a very positive quarter. We have had headwinds in the segment in some previous quarters. We had a tailwind this quarter. Clearly, the risk related to the legacy portfolio is significantly really significantly reduced. Now it's a matter of building business volume, which will primarily be organic in the short term.

The positive side of this is that Sweden and Finland is largely going to away from fixed price to spot-based products, which suits the model we have in Norway, which suits the digital offering we have. We have now launched in the first quarter, the app in Finland, and we are looking at how we can progress with developing in the business. Having said that, in the short term, we don't think there will be a major contribution for this segment just yet. But hopefully, risk now on the downside is significantly reduced.

[Morten A. W. Opdal, executive]

Can you provide any details about how many customers that are now on the spot [indiscernible] contracts? And how has the development been on that portfolio?

[Rolf Barmen, executive]

Yes. No, we don't disclose those kind of numbers, of course, we have seen a growth, definitely, over the year that we have -- that has an since the introduction, market inaction, but we can now see that the growth is slowing down and this is, of course, due to the fact that the last couple of months, it has been not very profitable, but it is very important for us to say that this kind of product has a long history of beating the spot price. And the purpose of the project is to reduce the peak or the elspot price.

But with the recent price development, with occasionally negative prices, it is difficult to beat the market. But over time, the product has proven to offer additional value to our customers. So I think that it would bounce back. I myself, I have this product. So I really love it, even though it has gone wrong direction a couple of months now.

[Morten A. W. Opdal, executive]

Okay. Thank you very much. That would conclude our Q&A session. So thank you very much for your attention, and have a nice day.