Eltel Group: Full-year report January–December 2016

January–December 2016

  • Net sales amounted to EUR 1,399.8 million (1,254.9), up 13.5% in local currencies, organic net sales increased by 1.8%*
  • Operative EBITA amounted to EUR 2.1 million (62.2) or 0.1% of net sales (5.0)
  • Write-downs and provisions in operative EBITA amounted to EUR 49.8 million
  • Goodwill impairment of EUR 55.0 million recognised relating to the power transmission business
  • EBIT amounted to EUR -67.4 million (46.6)
  • Net financial expenses amounted to EUR -12.6 million (-14.4)
  • The net result amounted to EUR -82.2 million (43.2)
  • Earnings per share was EUR -1.33 (0.69)
  • Operative cash flow was negative at EUR 8.0 million (+45.8), cash conversion was -387.4% on a rolling 12-month basis
  • The Board proposes that no dividend be paid for the year 2016 (0.24)

October–December 2016

  • Net sales amounted to EUR 387.1 million (397.3), down 1.8% in local currencies, organic net sales decreased by 2.8%*
  • Operative EBITA amounted to EUR -14.6 million (20.5) or -3.8% of net sales (5.2)
  • Write-downs and provisions in operative EBITA amounted to EUR 34.1 million
  • Goodwill impairment of EUR 55.0 million recognised relating to the power transmission business
  • EBIT amounted to EUR -73.2 million (16.5)
  • Net financial expenses amounted to EUR -4.5 million (-2.2)
  • The net result amounted to EUR -80.3 million (17.3)
  • Earnings per share was EUR -1.29 (0.27)
  • Operative cash flow was positive at EUR 22.5 million (90.4)

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

* Organic net sales excludes the U-SERV acquisition in 2016 and the Norwegian Communication business until 1 September 2016 (Eltel Sønnico) and is presented using comparable exchange rates.

Important decisions and events at the Board meeting on 20 February 2017

Decisions by the Board of Directors to focus and stabilise the operations:

  • Eltel’s management and Board of Directors have decided on strategic focus on Eltel’s core businesses in Power and Communication
  • Geographically, the markets in the Nordics and Poland will be prioritised, as will further growth opportunities in Germany
  • Combined net sales of operations in Power and Communication amounted to approximately EUR 1.2 billion, corresponding to 87% of Group total net sales in 2016
  • Following this decision, operations excluding Eltel’s core businesses will be divested, with the intention to find new owners with relevant core expertise in the respective business areas. The decision covers the following businesses:
    – The power transmission business in Africa
    – The rail business
    – The power distribution business in the Baltics
  • Net sales of businesses intended to be divested amounted to approximately EUR 180 million in 2016
  • Eltel and its creditors have agreed on revised covenants for 2016
  • The Board of Directors decided to initiate a process for a preferential rights issue to enable required restructuring and growth in core markets
  • Eltel’s largest shareholders, Zeres Capital, Solero Luxco S.á.r.l., The Fourth Swedish National Pension Fund (AP4), Swedbank Robur Funds and The First Swedish National Pension Fund (AP1), representing 49.02% of Eltel’s share capital as of 31 January 2017, support the decision of a preferential rights issue
  • The Board has decided to appoint a special investigator regarding the liabilities of potential historical inaccuracies in the accounting of the project business

Comments by the CEO

Strategy to achieve stable growth in our core area

After taking on my position as CEO of Eltel on 19 September 2016, we initiated an operational review of the project business. Next, a Group Project function was established to execute certain operational improvement actions within the project business, including project governance, risk assessment and reporting. A decision was made to implement an in-depth investigation, led by external auditors, of projects with high risk profile and focus mainly in Africa. In parallel, Eltel’s management, in close cooperation with the Board, has continued to review the remaining business.

Our conclusions following the review are clear. Eltel’s core competence is in Power and Communication in our domestic markets in the Nordics and in Poland. Furthermore, there are growth opportunities in Germany – a market that is close to the Nordics both in cultural and structural terms. Expansion in other markets has not been successful. Eltel has had difficulties to achieve critical mass and consequently profitability.

In light of the above analysis and Eltel’s financial situation, management has developed a strategy and action plan which the Board has decided to implement in 2017.

We will focus Eltel’s operations on our stable and profitable businesses within Power and Communication in the Nordics and Poland, and evaluate our continued growth opportunities in Germany. This is where we have long-term ability to generate stable profitability. These markets also offer attractive market potential, stable customers and an interesting development in fibre and smart meters. In 2016, the operations in Power and Communication in the Nordics, Poland and Germany recorded net sales of approximately EUR 1.2 billion, corresponding to 87% of Group net sales.

As a consequence of the decision, Eltel’s operations, excluding the core business, will be divested to new owners with core expertise in the business area concerned. The decision is in line with our ambition to reduce the risk level in our operations and release resources for our core business. As a consequence of the decision, the intention is to initiate sales processes regarding the power transmission business in Africa, the rail business and our power distribution business in the Baltics. In 2016, net sales of these operations amounted to approximately EUR 180 million.

To enable execution of stated actions, Eltel and its banks have agreed on revised covenants for 2016. However, in order to create long-term shareholder value, a balance sheet allowing for a balanced debt structure combined with investments in growth in our core markets, is required. The Board has consequently decided to initiate a process for a preferential rights issue. Eltel’s largest shareholders, Zeres Capital, Solero Luxco S.á.r.l., The Fourth Swedish National Pension Fund (AP4), Swedbank Robur Funds and The First Swedish National Pension Fund (AP1), representing 49% of Eltel’s share capital as of 31 January 2017, support the decision of a preferential rights issue. This Board decision and the expressed support by the main owners are important cornerstones for the turnaround now put in action.

The outcome of our investigation led by external auditors and covering certain projects shows larger deficiencies than earlier anticipated. This resulted in larger than expected write-downs compared to estimates provided in the profit warning in January. Revenue recognition in power transmission has proven to have been more aggressive than previously anticipated, mainly in projects in Africa. The work, initiated as I started as CEO, to investigate the project business and implementation of new governance and control continues. Eltel’s Board has decided to appoint a special investigator regarding the liabilities of potential historical inaccuracies in the accounting of the project business.

Considering the development in the fourth quarter, net sales decreased by 1.8% to EUR 387.1 million. For the full-year 2016, net sales amounted to EUR 1.4 billion, growth by 13.5%, mainly driven by acquisitions in the Communication segment. In the fourth quarter, operative EBITA was negative at EUR -14.6 million and positive at EUR 2.1 million for full-year 2016. In 2016, Group operative EBITA was negatively impacted by EUR 49.8 million of provisions and write-downs mainly related to the project business in power transmission in Africa and the rail business in Norway. Of these, EUR 34.1 million were recorded in the fourth quarter.

The weak result is concerning, although there are clear explanations. At the same time, I feel great confidence in us now taking right actions. Eltel’s operations are fundamentally solid with highly skilled employees and loyal customers. We have a strong and solution-focused culture and a long track record of delivering value-adding services. Our decision to refocus on our core businesses and markets goes back a long way, and we know our customers and markets well. Together with our Board and our owners, we will now channel all our efforts on implementing this action plan to restore Eltel to become a stable company that will have what it takes to capitalise on the clear growth opportunities in our core business.

–Håkan Kirstein, President and CEO

For further information:

Ingela Ulfves
VP – Investor Relations 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 and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above, at 07.00 CET on 21 February 2017.

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Ingela Ulfves
Ingela Ulfves +358 40 311 3009

ingela.ulfves@eltelnetworks.com