Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2018-Q3

[Morten A. W. Opdal, executive]

[Audio Gap]

towards the industry and for us it's been another solid quarter. Our CEO, Rolf Barmen; and our CFO, Birte Strander, will take you through the operational and financial highlights, followed by a Q&A session. And for media, we will be doing interviews after the presentation. We're starting off with Mr. Rolf Barmen.

[Rolf Barmen, executive]

Thank you, Morten. Yes, this is another solid quarter from Fjordkraft. The power market has received a lot of attention in the third quarter, and our operation proves to be as robust as we have communicated in our investment highlights.

Adjusted net revenue is up 23% year-on-year, and adjusted EBIT increased by 34% year-on-year, going up to NOK 58.3 million. In fact, 12-months rolling, adjusted EBIT reached the record-breaking NOK 379 million. The number of deliveries has increased by 14% year-on-year. And quarter by quarter, growth is up by approximately 660 power deliveries, 7,700 deliveries within the Extended Alliance concept and 4,300 mobile subscriptions. We also recently acquired a smaller customer portfolio, about 1,600 deliveries. The transaction was completed on the 30th of October.

There are 2 nonfinancial highlights we want to comment on in this presentation. And the first highlight is the reason behind the temporarily green profile of our presentation material. We need more companies like Fjordkraft. The United Nations Climate Change secretariat stated on the 27th of September, announcing that Fjordkraft is the 2018 winner of United Nations "Momentum for Change" Climate Action Award. As climate changes accelerate, we need solutions that accelerate. And our initiative Klimanjaro is such a solution as we demand climate neutrality from our suppliers and encourage them to make the same demand to their sub-suppliers. We are very proud to be the first Norwegian company being awarded this Climate Action Award. And I would like to take the opportunity to recommend everyone to visit our Klimanjaro site to learn more about the initiative.

The second nonfinancial highlight we want to comment is the Kantar TNS survey on brand positioning in Norwegian electricity consumer markets. It is very satisfying to announce that we maintain and, in fact, strengthen our position as the leading electricity brand in Norway. As mentioned initially, the power market has received a lot of attention this quarter. In regards to the Einar Aas trade, we had no exposure to the Nasdaq Clearing loss.

Independently of this incident, volatility continues. And the temperature has been higher in 3 of the 3 months, which, of course, affects average volume per delivery within all our segments. Despite this effect from temperature, we increased volume delivered by 12% year-on-year in the Consumer segment and 7% year-on-year in the Business segment. The churn figures for the second quarter were revealed by the regulator in third quarter stating increasing numbers. This is, of course, due to higher prices but also due to intensified competition. As communicated before, we expect particularly the latter to fuel the consolidation momentum going forward.

Our Consumer segment has upheld the number of deliveries throughout the quarter despite heavy attacks from competitors. The deliveries from the Oppdal transaction announced in our second quarter presentation and the deliveries from the Etne transactions will be included from fourth quarter. We emphasize our efforts to maintain #1 position when it comes to sales power and have signed another distribution agreement, this time with Consort, a telemarketing and door-to-door sales channel, equipping us with even more sales power in the Trøndelag area.

Our Business segment continues the organic growth, showing improving financial numbers, as our CFO, Birte Strander, will present in a few moments. When it comes to new growth initiatives, we are happy to announce further growth in numbers of mobile subscriptions. And we are also very satisfied by reaching the milestone of showing positive net revenue from the Mobile segment each month this quarter. We are on track both when it comes to growth and profitability. We also launched a new mobile app in July, giving customers a complete overview of their subscription.

The Extended Alliance concept is now comprising 33,500 deliveries, including a total of 6 alliance partners. Due to the Elhub market freeze conducted by the Norwegian system operator, Statnett, and as commented in August, there will not be any more Extended Alliance partners including in our Fjordkraft factory before the freeze period, hence, around summer 2019.

And now I would like to hand over the floor to Mrs. Birte Strander.

[Birte Strander, executive]

Thank you, Rolf. Morten and Rolf have already mentioned our solid quarter, so I'm pleased to give you some more details.

We have a continued growth in adjusted net revenue also this quarter, up 23% or NOK 42 million. And as you probably see from the slide quite easily, it's -- all segments are contributing. Consumer segment is particularly strong, also this segment. And that's mainly because of the price -- significant price drop that we had in September. That is beneficial for the variable products.

If you look to the right on the slide, you see our net revenue on an LTM basis. It's also a solid development there with 18%. It's driven by 40/60 split by margins and volume growth. And also this time, for the first time, the New Growth Initiatives segment has small impact, 1 percentage point is from that segment, and it's mainly from the mobile service.

It's a strong EBIT performance this quarter, NOK 58 million. It's up NOK 15 million or 33% (sic) [ 34% ]. And as you also can see here, it's all segments contributing, particularly strong in -- relatively in the Business and New Growth Initiatives segment. Of course, EBIT performance is driven by the net revenue increase, but also OpEx adjusted is increasing year-on-year. And it's the same drivers that we have spoken about earlier with sales and marketing costs, customer service costs and also other variable costs due to our growth in customer deliveries.

To the right, you see EBIT adjusted on an LTM basis. And as Rolf already has commented, it's an all-time-high level with NOK 379 million and a 4% increase, also positive development in adjusted LTM EBIT margin with a flat trend over the last quarters.

Digging into the segments' quarterly figures here. All over, all segments are doing very good. It's a good performance in all segments. I'll make some comments on each of them.

Consumer segment's up NOK 26 million in net revenue year-on-year, 20%. And the main reason we already have commented on, it's the variable product positively impacted by Elspot price drop in September. And in the appendix, you can look up our product mix in the segments, and the variable products are still 50%, as it was also a year ago.

EBIT performance also good. It's NOK 35 million, it's up NOK 3 million from third quarter '17, giving us an EBIT margin of 23%, a contraction of 2 percentage point. But that is stronger than expected and as we have targeted in the Consumer segment.

Business segment, also a strong performance, NOK 65 million in net -- adjusted net revenue. It's up 23%. Here, we have succeeded in improving our margins both on power sales and value-added services, making margin stand for 70% of the net revenue increase. And it's around 1/3 or 30% that are from volume growth. We grew with approximately 15,000 electricity deliveries year-on-year in this segment. NOK 31 million in EBIT adjusted, it's up NOK 8 million, giving us an EBIT margin of 48%, a 5 percentage point margin improvement year-on-year.

New Growth Initiative is a small segment but doing also good this quarter. It's up NOK 4 million in net revenue and approximately the same in EBIT level. And it's all over. It is Mobile being the main driver for the improvement. And we see that the new product range that we launched second quarter has a positive effect and also, of course, the growth in subscriptions.

Moving to the balance sheet and the net working capital. It's reduced from last quarter with NOK 57 million, expected due to consumption normally being on its lowest in the third quarter. But some of the volume or consume -- consumption effect is partly offset by 30% higher Elspot prices third quarter due to second quarter '18. Net working capital on a year-on-year basis increased by NOK 159 million coming from a very low level in third quarter '17. Main reasons -- main drivers are volume growth of 13% and 81% higher prices than third quarter '17. You see from the slide that the orange color there, that capital sales commissions dropped with NOK 8 million. That is due to an effect that we have adjusted, the TEM PPA. So underlying sales commission spending is in line with the amortization in third quarter '18. You can look it up -- the purchase price allocation, you can look it up in note 10.

My last page is on our net cash position. It has improved by NOK 90 million, up till NOK 133 million in net cash. Long-term debt from TEM acquisition is now NOK 264 million, and we paid our first installment this third quarter. We can see that from the graph. Net revenue, a main driver of the positive net cash development. But also, as you can see, net -- our underlying cash generation is good, here represented with a cash EBIT adjusted, a level of NOK 57 million, quite equal to the P&L adjusted EBIT of NOK 58 million, implying that we are in a steady state in our investments.

Now Rolf will make some short comments on our outlook.

[Rolf Barmen, executive]

Thank you, Birte.

We expect the Elspot prices on a higher level, obviously, than 2017 throughout the rest of the year. And as mentioned earlier, the Elhub market freeze from the 1st of September until the 1st of May will stop implementing new Extended Alliance partners in this period. When it comes to the margin outlook, we maintained 2018 targets for the Business and New Growth Initiatives segments, but we revised our Consumer target for 2018 to be stronger than earlier announced. Revised targets for 2019 and 2020 for all segments included a, an updated road map to growth will be presented at the Capital Markets Day on the 14th of February 2019. And that will also be the date for our fourth quarter presentation.

So now Morten, you can wrap it up, and we can have some Q&A.

[Morten A. W. Opdal, executive]

Yes. We are moving over to the Q&A session. So if you have any questions, please, you're welcome to ask them. Yes?

[Øyvind Mossige, analyst]

Øyvind Mossige, SpareBank 1. Could you elaborate a little bit more about the future outlook for the Alliance Partner thinking that you have given what's going on in the industry presently?

[Rolf Barmen, executive]

Yes. We -- thank you for the question. When it comes to the -- there are many regulations now for this industry that are waiting to be put in place. And of course, when it comes to 2020 and 2021, the debundling of the brands and the split between the grid companies and the production companies and the retail companies will be put in place. And all of the Alliance Partners, all of our smaller companies around the country will have a need for certain services. We offer these kind of services when it comes to invoicing, rating and billing and so forth. But we are -- in the short term, these next 5 months, we are hindered by this Elhub freeze, but we are, of course, selling our products and our solutions. And we don't think that they will all come into us next summer because we have to do some preparation, and we have to take them in case by case. So therefore, the benefit from this alliance concept will be postponed. We will come back to this on our Capital Markets Day and scrutinize it more in detail actually.

[Lars Ove Skorpen, analyst]

Lars Ove Skorpen, Pareto. Could you say something about the M&A opportunities, consolidation in the sector as well as potential growth outside of Norway?

[Rolf Barmen, executive]

Thank you. We are not commenting on ongoing talks, of course, but we can see that this period that we have been through has been quite difficult for many retail companies actually. The competition -- the heavy competition obviously fuels the consolidation momentum, but we have to agree upon prices. We -- it must be good timing for everything. So we have already said that we will put more efforts in our M&A work. In our road map to growth, we have changed the road map to growth. We did that last quarter, telling you that more of our growth will come from M&A transactions actually. So that's what we can comment on when it comes to M&A transactions in Norway. We'd also like to say that we can take the big bucks, and we -- of course, we can take the smaller ones. So we are looking in every segment when it comes to size of M&A prospects. When it comes to Sweden and Finland and Denmark and other countries, we are looking into these countries. We have done quite a lot of work this quarter to get a grip on how the market develops in Sweden and in Finland. But we have no immediately thoughts of going abroad. We certainly think that we have a lot to do in Norway. We know the Norwegian market's very good, and we want to come a little bit further in the Norwegian market before we are going abroad. But this will also be commented very thoroughly on our Capital Markets Day on the 14th of February. Now I think it was Petter Nyström?

[Petter Nystrøm, analyst]

Petter Nyström, ABG. Two questions from me. First of all, in the Consumer segment, you had flattish deliveries there Q-over-Q. Is it possible to say something about the regions? Where are you having momentum? Where do you see more challenging markets? And the second question is on tax. It seems like the tax rates in the quarter were around 28%. Any reasons for that?

[Rolf Barmen, executive]

Yes, I can comment on the growth in the consumer markets, and then Birte will say a little bit about the taxes. We don't comment on the regional challenging -- challenges that we have. It's -- we are a nationwide company. We will certainly be struggling a bit around the countries when it comes to growth. It has all to do with how strong the local players are, but we see that the trend is very positive also in the consumer market actually. So we -- but we don't comment any further about that. This is also about how our M&A strategy is carried out actually, where do we really hit the market to also be strong in the M&A negotiation and so forth. The tax?

[Birte Strander, executive]

Yes. The tax rate is -- it's due to internal transactions between TrøndelagKraft and Fjordkraft AS. It's TrøndelagKraft selling the big customers from the TEM acquisition over to Fjordkraft AS because we have better solutions for handling them there, making that an income in TrøndelagKraft that is taxable and making our tax high this quarter. And then there will be amortization in the Fjordkraft AS company over the coming year. So in -- all in all, it will not affect us, but it's this quarter, it affects the tax rate.

[Øyvind Mossige, analyst]

Could you please elaborate a little bit more about the new growth initiatives? And in particular, on the mobile subscription side, do you -- does your previous guideline in terms of how many subscribers you need to have in order to reach EBITDA (sic) [ EBIT ] profitability still -- is that still valid? And can you describe that a little bit more how you saw there?

[Rolf Barmen, executive]

Yes, we are on track. We are following the path that we set out starting of this initiative. We have earlier said that we, by the end of 2020, will be EBIT positive on a level of 125,000 subscriptions. In our presentation for Q2, we said that it is possible for us to be profitable on a lower level than 125,000 without specifying what that number is, but we are on track when it comes to our mobile initiatives, definitely.

[Morten A. W. Opdal, executive]

Okay, if there are no further questions, then we would like to thank you for the attention, and wish you all a nice day.

[Rolf Barmen, executive]

Thank you.