Fjordkraft Holding ASA

F:1ZK

Earnings Call Transcript 2021-Q4

[Morten A. W. Opdal, executive]

Welcome, everyone, to Fjordkraft's fourth quarter results presentation. My name is Morten Opdal, Investor Relations at Fjordkraft, and I have the pleasure of cutting you through today's presentation. Today's event is a webcast-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. The first speaker is CEO, Rolf Barmen.

[Rolf Barmen, executive]

Good morning, everyone. Nice to be here. Let's go directly to Page 3. And let me start by showing you some highlights from the quarter. This has been a quarter with strong financial performance in the Norwegian operations. We have experienced tailwinds from good hedges, and we have also performed good cost control in the quarter. The Consumer EBIT adjusted increased by 24% year-on-year, while the Business segment increased by 22%. The New Growth Initiatives segment is as targeted, showing positive EBITDA adjusted in the quarter for the first time since the launch of Mobile in 2017. We are obviously very proud of that. But as you already know, the Nordics segment has been significantly affected by the extraordinary situation in the Nordic power market with a loss of NOK 71 million in the quarter from hedging in efficiency. We will go into details on this later in the presentation, but no doubt this hinder the group's financial results to be the best full year results ever. Regarding customer development, the competition is intense in the Consumer segment. We lost 34,000 customers in the segment last quarter. The termination of our price match service, the service which gave consumer customers with negative margins actually, was an important driver of the decrease.

When it comes to dividend, the Board proposed -- decided yesterday to propose a dividend of NOK 3.50 per share, which will be addressed on the AGM later this year.

Let's go to Page #5. And I would like to give some words on the market development. The power market situation is truly extraordinary, elspot prices were record high in the quarter, driven by geopolitical tension, high gas prices and a weak hydrological situation. In addition to this, there are large geographical differences due to limitation in transmission capacity, particularly in Norway, but also in Nordics.

For instance, the southern part of Norway has experienced a very high price level in the quarter, while the Northern parts have had power surplus and comparatively very low prices. In Sweden and Finland, the situation has been even more extreme than in the southern part of Norway.

During December, the daily elspot price in Finland and Southern Sweden passed NOK 4 per kilowatt hour on several occasions. And on average, the price level and peak/off-peak price differences, we're around 4x the normal level. The fixed price contracts in the Nordic segment are hedged according to our best estimated volume and the associated profile and volume risk are covered in the market where these contracts are initiated. However, the market extremities that occurred in the fourth quarter in combination with very cold weather in Sweden and Finland, especially in December, led to losses from hedging inefficiencies in the Nordic segment.

As you probably know, the Norwegian government has launched a subsidizing protocol in the consumer market to mitigate the effect of the extreme price level. As the subsidy was 55% of the cost exceeding NOK 0.7 in December, the subsidy is increased to 80% in the first quarter of 2022.

Let's go to Page 6. Today, I want to spend some extra time on the consumer markets. First, our observations confirms that consumers respond to the extreme price level with decreased consumption. We see a reduction in the average consumption per delivery on 24%, which obviously is a significant response from the consumer customers to the high elspot price.

Page 7, please. From our point of view, the increase in both volatility and price level increases the importance of a broad product portfolio in the consumer market. And as the biggest player in the market, we must offer products that meet most demands. Our portfolio in 2022 will basically consist of 2 different kinds of contracts, 2 different product families.

On 1 side, we have launched a spot price fighter in order to match aggressively priced competition, although we do not offer negative margins. We also offer spot with trading, which is similar to an existing offering in the business segment. It enables the customers to take part in professional power traders view on the market. And in 2021, this product beat the market in 11 out of 12 months.

The customers buying spot products are more or less risk lovers, not particularly interesting in hedging themselves from fluctuating elspot prices. But they can't optimize their usage by looking thoroughly on their consumption pattern during day and night and tailor suit consumption in order to reduce consumption when prices are high, typically in the morning and in the afternoon.

The other kind of contracts is fixed contracts where the price is fixed regardless of time of use. The most common product here is running contract with a 14 days notification period ahead of any price change. The customers buying these contracts prefer to be indifferent whether they consume electricity daytime or nighttime. That means that the price is the same independent of when electricity is consumed. These kind of running contracts may also include a price cap in a set time frame.

We sold such contracts second half of 2021, and it was a very popular value proposition to the customers. We also offer fixed price contracts with longer duration as well, typically somewhere between 6 months and 15 months. Consumers buying more predictable price formats are less willing to take risk and want flexibility when it comes to when they may consume electricity during the day and night.

So there are quite big differences between these 2 product families. We serve customers in both segments. And regardless of contract choice, our customers can use our wide range of benefits and services, smartphone consumption, data, home modernization, inside's loyalty programs and most of them also get their grid rent and electricity on 1 invoice, particularly convenient now as the government subsidizing protocol is related to payment of the grid rents.

In this section, I also want to make some comments on our digital ecosystem. It is no doubt that consumers are much more interested in their consumption pattern and ways to monitor this better now than before. Digitalization of the industry puts us in a position where we can get -- really get input to the consumers in this matter. In December, we were, third year in a row, awarded a digital leader price in our sector by BearingPoint.

We are on a maturity level, well above any of all competitors also well above our so-called full digital competitors. Our app is downloaded by 300,000 customers now: smart charging, real-time monitoring, self service through the app, access to devices, posts from our marketplace, well-functioning joint phase for new entrants, all features enabled by the app. We are, of course, proud our digital ecosystem, really adding value to our products, but we are also very proud of the work we do by serving old customers not able to serve themselves digitally on the telephone. The situation we have been through in the latest months tells us that this is necessary to have enough agents available for the customers on the phone. We do not believe this is the time to expect all customers to go digitally, rather the opposite. What has hurt me most these last months, personally speaking, is that we haven't been able to serve all the customers that have tried to reach us by phone. We have invested heavily in manpower, but COVID and other sick leave reasons have unfortunately kept most of the effect of the enforcement. But now, we see the light and our availability is improving. Let's go to Page #8. The Business segments, a number of deliveries is stable in the quarter, but volume decreased slightly due to lower consumption per delivery. Operationally, the segment is performing very well. It is outperforming versus the financial targets, and the segment has also a solid customer pipeline for the first quarter this year. Our broad product offering with associated value-added services are resonating well in the market, and we experienced good traction on our new concepts and services, particularly when it comes to solar and charging concepts as well as energy monitoring concepts. Page #9. The Nordic segment increased number of deliveries by 5,000 in the quarter. But as mentioned before, hedging inefficiencies led to losses in the fourth quarter. The group has initiated a process of aligning the business customers contract structure and product portfolio with the Norwegian model in order to reduce the associated volume risk on the fixed price contracts going forward.

This far, in the year, the consumption volumes in Sweden and Finland, have been in line with expectations, and we have no indication of under-hedging in January. However, the increased peak and off-peak differences is likely to continue throughout the first quarter, which will negatively affect the segment's profitability also this quarter, and Birte will come back to this later.

So has this changed your view on our investment in the Nordic green energy? No. We bought the company to a fair price. And from our perspective, this was a ticket to Nordic expansion. The price is still, power point of view, quite reasonable. We have ambitions to grow in Nordics, even though the market sentiment might have hampered our expansion speed somewhat, but no doubt that we will expand in the Nordics.

Page #10. Within Mobile, we increased the portfolio by 29,000 in the quarter due to the acquisition of Skymobil, which was included in the figures this quarter. Financial performance is in line with our targets, and Mobile showed a positive EBITDA adjusted in December.

Alliance continues to grow with a 15% year-on-year volume growth and 5,000 new deliveries on our Extended Alliance Service. The year-on-year growth is more than 30,000 and we are very satisfied with the development of this business area.

We are really looking forward to elaborate both more on the new growth initiatives segment as well as giving you insights on several other topics of our business on our Capital Market Day which will be held on the 6th of April, hopefully, as an in-person event in Oslo. Okay, Birte, please give us the financial update.

[Birte Strander, executive]

Thank you, Rolf. Some of our numbers are already known from our update in January. But you will see from my presentation today that they ended a little bit better than indicated. I will start my presentation by walking you through the Q4 numbers, spending some time at the end summarizing our full year performance against our financial guidance. I will start with Page 12 with some comments on our net revenue performance. Our net revenue in Q4 was NOK 436 million. It's down 6% from Q4 last year. As you can see from the graph to the left, all the Norwegian segment contributes positively to the year-on-year development, but the Nordic segment was negatively affected by the extraordinary situation in the Nordic power market. The fixed price contracts in the Nordics are hedged according to our best estimated volume and the associated profile and volume risks are covered in the market when these contracts are initiated. But the very cold December resulted in an underhedged situation. Normally, these underhedged situations would have a limited financial impact, but due to current extraordinary high price level and spread between the market price and the contract fixed price, this underhedge had a significant negative financial effect. And in addition, an extraordinary peak and off-peak intraday and intramonth price volatility throughout Q4 resulted in a much higher than normal profile cost. This also negatively affecting margins on the fixed-price portfolio in the Nordic segment.

Turning to Page 13. EBIT adjusted of NOK 141 million and just outside the upper end of the range presented in the update in January. EBIT adjusted is down 16% year-on-year, and it's driven by the negative performance in the Nordic segment.

As you can see, the Norwegian segments had a positive contribution to our EBIT-adjusted performance year-on-year. And it's, of course, driven by the net revenue performance and then, again, good hedges, but it's also in a combination with good cost control in the quarter.

Moving to some quick comments on the segments on Page 14, starting with the Consumer segment. The net revenue here is up 3% year-on-year. It's driven by margin improvement, and we also had good tailwind from our hedges. The EBIT adjusted margin is up 6 percentage points, driven by both the net revenue improvement and also a decrease in OpEx adjusted year-on-year.

Also, the Business segment has an improvement in net revenue and also in EBIT adjusted. The net revenue is up 13% year-on-year. It's also driven by margin improvement and the EBIT adjusted margin is up 5 percentage points to 64%.

Turning to Page 15 on the Nordic segment. The results here are already well addressed. But to be clear, the EBIT adjusted loss was NOK 71 million, and this is NOK 4 million better than we indicated in the January update.

Looking into this quarter, the consumption volumes in Sweden and Finland in Q1 have been in line with expectations, and we have no indications of underhedging so far this quarter. However, the increased peak and off-peak differences is likely to continue throughout the quarter, and a negative EBIT adjusted is expected also this quarter; however, likely not as negative as in Q4.

From what we observe right now an improvement of around 60% in EBIT adjusted from Q4 to Q1 is expected, but this is very dependent on how the weather consumption turns out. As Rolf already mentioned, the New Growth Initiatives segment delivered its first quarter with positive EBIT adjusted since the launch of Mobile in 2017.

And that is in line with our long-term guidance. Both Alliance and Mobile are showing year-on-year improvements. The Mobile segment is the most important contributor, but also Alliance segment has negatively -- has nearly doubled its performance year-on-year. Moving to Page 16. Net working capital is decreasing to minus NOK 15 at quarter end. We do have large intraquarter fluctuations higher than normal due to the high elspot prices. Part of the November power purchase was paid into January, which led to increase accounts payables and lower reported net working capital at year-end.

A quick comment also on the net development on Page 17. We have a net debt of NOK 513 million at the end of this quarter. It's a reduction of NOK 155 million from last quarter. And the drivers are our cash EBIT adjusted performance and also the positive development in net working capital this quarter. Turning to Page 18. Before the Q&A session, I would like to summarize our full year performance against our financial targets. I will not go through each one of them. The slide hopefully gives you the big picture. And we are very satisfied with achieving all our Norwegian targets in the segments here in Norway. But of course, we are highly aware of the negative results from the Nordic segment and how it affects our group EBIT adjusted margin. And it's underperforming our financial guidance with 2 percentage points. As Rolf already have mentioned, we are working on several initiatives to bring the Nordic business into positive numbers again.

And what's left for me to remind you all before the Q&A session is the date for our Capital Markets Day. That will be the 6th of April. And there, we will present our updated plans and also our new targets for the coming years. And now we will proceed with a Q&A. Thank you.

[Morten A. W. Opdal, executive]

Okay. We are moving over to the Q&A session. We have received some questions already. The first one is from Mr. Tomstol. Do you expect to buy any additional business in 2022 in the Nordics, especially outside Norway? Maybe you can -- Rolf, can make a comment on that one.

[Rolf Barmen, executive]

Yes. We don't comment on the time line of our acquisitions, obviously. So -- but what we see now is that Finland is hampered by the situation in -- the same situation as we have experienced in NGE -- our NGE company. But yes, we -- to be honest, I think that we cannot say too much about our plans or timeline. Our signal is that we are going to expand in the Nordics. But if it will be in 2022 or 2023, we cannot comment on.

[Morten A. W. Opdal, executive]

Thank you. The next question is from Seimen Hoist. What was the underlying consumer EBIT margin adjusted for hedge gains in Q4?

[Birte Strander, executive]

I'm sorry, but we don't disclose that. We go on our cost of goods sold as a whole and that's how we steer the business. So we won't give you the details on the underlying hedges.

[Morten A. W. Opdal, executive]

The next one also from Seimen. How has the higher power prices in Q1 impacted you so far, especially for the Consumer segment?

[Birte Strander, executive]

We will give you an update on our results on the Capital Markets Day for the first quarter. I think that will be my answer. As we have said earlier, it's not possible for us to disclose anything about our hedging strategy, but you know that we are doing it. So that, I think, will be my comment on that question.

[Morten A. W. Opdal, executive]

Okay. Another question from Mr. Øyvind Mossige. Can you please comment on the customer development within Consumer so far in 2022?

[Rolf Barmen, executive]

I'm afraid, I'm getting a bit boring here because I have to answer the same thing. We don't comment on our running business inside the quarter. So I'm sorry, we cannot tell you anything about that.

[Morten A. W. Opdal, executive]

Okay. Another question from -- also from Øyvind. Can you talk us through the increase in customer acquisition costs in Q4?

[Birte Strander, executive]

Yes. You can see that we have used NOK 83 million on customer acquisitions this quarter. It's quitely developed between the Nordic segment and the Norwegian segment. We are having a good net add as you can see in the Nordics. And around half of the spending is used there. I think you should also bear in mind that the contract structure here is a little bit different than in Norway.

And also the period for the contracts are much longer. So we do have these customers for a longer time period. It's a binding product structure in the Nordics. That's a little bit different and also the CPOs are a little bit higher there than in Norway because of that.

[Morten A. W. Opdal, executive]

Okay. That concludes the Q&A session. So we want to thank you all for participating, and wish you all a pleasant day. Thank you.