Eltel Group: Interim Report January–March 2017

January–March 2017

• Group net sales* amounted to EUR 297.8 million (287.5), up 3.5% in local currencies, organic net sales increased by 2.5%**
  • Net sales in the Power segment amounted to EUR 103.8 million (95.3); up 8.7% in local currencies
  • Net sales in the Communication segment amounted to EUR 163.3 million (148.0); up 9.4% in local currencies
  • Net sales in Other amounted to EUR 30.9 million (44.7), down 27.9% in local currencies
• Group operative EBITA amounted to EUR -9.7 million (3.2)***
  • Operative EBITA in the Power segment amounted to EUR 0.5 million (2.0)
  • Operative EBITA in the Communication segment amounted to EUR 3.6 million (3.0)
  • Operative EBITA in Other amounted to EUR -10.0 million (-1.0)
• Items affecting comparability amounted to EUR -1.0 million (0.0)****
• Goodwill impairment of EUR 145.6 million based on decision of lower risk exposure and related lower growth expectations in the power transmission business and lower noted market value of the rail business
• EBIT amounted to EUR -159.8 million (-0.4)
• Net financial expenses amounted to EUR -3.1 million (-3.7)
• The net result amounted to EUR -161.4 million (-3.6)
• Earnings per share was EUR -2.58 (-0.06)
• Operative cash flow was negative at EUR 66.4 million (-37.4)

Unless otherwise stated, figures in brackets refer to the same period in the preceding year

* All information in this report is presented based on the new segment structure. For further information, see “Segment information”

** Organic net sales excludes the U-SERV acquisition in 2016 and is presented using comparable exchange rates

*** Items not allocated to segments consist of Group management costs and costs related to among others development projects

**** Items affecting comparability consist of cost related to reviews and investigations

IMPORTANT DECISIONS AT THE BOARD MEETING ON 2 MAY 2017

• A decision was made to ramp down the lossmaking power transmission business outside of Europe, published in a separate press release on 2 May 2017. The cost of discontinuing this business is estimated to be approximately EUR 40 million. Main part of the cost is expected to occur in 2017 and the remainder in 2018. See separate press release on 2 May.
• The Board of Directors has resolved on a rights issue of EUR 150 million, subject to approval at the AGM. Eltel’s largest shareholders support the rights issue. Zeres Capital, The Fourth Swedish National Pension Fund (AP4) and The First Swedish National Pension Fund (AP1) have expressed their support for the rights issue and have undertaken to subscribe for their respective pro rata share of the rights issue, as well as to vote in favour of the right issue at the AGM. Furthermore, Solero Luxco S.á.r.l. (a company controlled by Triton Funds) and Swedbank Robur Funds have expressed their intention to subscribe for their respective pro rata share of the rights issue and to vote in favour of the right issue at the AGM. The main shareholders have a total ownership representing 52% of Eltel’s share capital*. Danske Bank A/S, Helsinki Branch, OP Corporate Bank plc and Skandinaviska Enskilda Banken AB are acting as joint lead underwriters in connection with the rights issue and have confirmed their expectation to no later than when the detailed terms of the rights issue are finally determined, subject to certain given conditions enter into an underwriting agreement in respect of the remaining 48% of the shares to be issued in the rights issue that is conditional upon inter alia that the above mentioned shareholders subscribe for shares corresponding to a total of at least 52% of the rights issue. See separate press release on 2 May.
• Eltel and its bank consortium have agreed on future financing.
• Eltel’s Board decided that a report to the police will be filed against former CEO Axel Hjärne regarding suspicions of accounting violation and/or fraud. The report to the police is based on investigations, conducted by PwC and Calissendorff Swarting Advokatbyrå on assignment by Eltel’s Board, regarding revenue recognition in the project business. See separate press release on 2 May.
• A decision was made to merge the business units Power Distribution and Power Transmission within the Power segment. Juha Luusua is appointed President – Power.

* Based on the total number of shares in the Company, excluding the 537,000 C shares held by the Company

Comments by the CEO

Solid core business, significant goodwill impairments and capital injection

During the first quarter, Eltel showed good growth in its core business Communication and Power, which represent approximately 90% of Eltel’s operations. Net sales in the core business increased by 9.8% to EUR 267.1 million, while operative EBITA declined somewhat to EUR 4.1 million. Performance in the segment Other, comprising operations to be divested or ramped down, was weak. Net sales declined by almost 31% to EUR 30.9 million, and operative EBITA amounted to EUR -10.0 million. Overall, Group net sales increased by 3.6 % to EUR 297.8 million and Group operative EBITA amounted to EUR -9.7 million.

Net sales in Communication increased by 10.3% to EUR 163.3 million, driven by a positive development in the Nordics and Germany. Operative EBITA amounted to EUR 3.6 million, up 21% compared to previous year. It is also gratifying that we during the quarter signed a number of frame agreements, for example, fibre installation in Germany amounting to a total value of approximately EUR 25 million.

Also in Power, net sales increased and totalled EUR 103.8 million. The increase of 9% is mainly driven by the positive development in the power distribution business in Finland and solid growth in smart meter installations in Norway. Operative EBITA amounted to EUR 0.5 million, a decline from last year’s result of EUR 2.0 million. The lower profitability is primarily related to lower production volumes in power transmission in Poland and Germany as well as margin adjustments in certain power distribution contracts in Sweden.

The decline in net sales in Other was primarily due to lower production volumes in Africa. The rail and road business in Norway as well as the aviation and security business in Sweden also showed somewhat lower net sales compared to previous year. The project business mainly in Africa accounted for EUR -8.0 million of the total operative EBITA loss of EUR -10.0 million.

As part of Group efficiency measures, we merged the fixed and mobile communication businesses in the Communication segment during the quarter. During the ongoing integration process, it has also become evident that there are synergies between Communication and Eltel’s aviation and security business in Denmark and parts of the operations in Sweden. We will therefore integrate these operations into Communication. After the end of the quarter, the power distribution and power transmission businesses in the Power segment were also decided to be merged. Our ambition with these changes is to improve customer focus and cost efficiency.

Significant goodwill impairment

During the quarter, Eltel, as previously communicated, decided to focus its business on the Group’s healthy core areas with lower risk - operations where we have a market-leading position and competence – and where the business model is repetitive. Eltel’s core competences are within Power and Communication in Eltel’s markets, the Nordics, Poland and Germany. The operations outside Eltel’s core business; Power Transmission outside of Europe, the rail business within Rail & Road, the power distribution business in the Baltics and parts of the aviation and security business in Sweden will be divested or ramped down.

Growth expectations in the power transmission business within the Power segment are lower compared to earlier plans due to our decision to adapt Eltel’s expansion plans to a balanced risk level adjusted for Eltel. The lower expected growth rate has resulted in required goodwill impairments of EUR 100 million for Power Transmission.

Furthermore, the divestment process to exit the rail business has revealed that the market value of this business is below current book value, resulting in goodwill impairment of EUR 45.6 million. For the first quarter, Group EBIT consequently amounted to a loss of EUR 159.8 million including recognised goodwill impairment of EUR 145.6 million.

The power transmission business outside of Europe, comprising projects mainly in Africa, has resulted in major losses for Eltel, while at the same time, the prospects of carrying out a successful divestment of this business are estimated to be low. After the end of the first quarter, Eltel’s Board of Directors decided to discontinue this business. The cost for discontinuation is estimated to be approximately EUR 40 million. Main part of the cost is expected to occur in 2017 and the remainder in 2018.

Future financing

The strategic decisions taken create opportunities to further strengthen our positions in Eltel’s core markets, but assume a strengthened balance sheet after the past year’s major reported losses. With these prerequisites, the Board decided on 2 May 2017 to implement a preferential rights issue of approximately EUR 150 million for Eltel’s shareholders. The Board’s decision on a preferential rights issue will be on the agenda of the Annual General Meeting in June 2017. Eltel’s largest shareholders, with a total holding of 52% of shares*, have announced that they support the preferential rights issue according to what is stated above. After the end of the quarter, an agreement was also reached with Eltel’s banks regarding future financing.

The Board’s decision and the main owners’ stated support constitute key pillars for the turnaround of the business we now are executing. We intend to build Eltel based on realistic expectations – both in terms of market conditions and Eltel’s core competencies. Communication and Power are our core. The business is healthy, with very good employees and long-term customer relations. Together with our Board and our owners we will now be fully committed to implement the action plan to restore Eltel as a stable company that is given the opportunity to capitalise on the clear growth opportunities that exist in the company’s core business.

* Based on the total number of shares in the Company, excluding the 537,000 C shares held by the Company

–Håkan Kirstein, President and CEO

For further information:
Ingela Ulfves
VP – IR and Group Communications
Tel: +358 40 311 3009, ingela.ulfves@eltelnetworks.com

This information is information that Eltel AB is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out above, at 23.00 CET on 2 May 2017.

Eltel in Brief
Eltel is a leading Northern European provider of technical services for critical infrastructure networks – Infranets – in the segments of Power, Communication and Other, with operations throughout the Nordics, Poland and Germany. Eltel provides a broad and integrated range of services, spanning from maintenance and upgrade services to project deliveries. Eltel has a diverse contract portfolio and a loyal and growing customer base of large network owners. In 2016, Eltel net sales amounted to EUR 1.4 billion. The current number of employees is approximately 9,500. Since February 2015, Eltel AB is listed on Nasdaq Stockholm.