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Edited Transcript of ELTEL.ST earnings conference call or presentation 14-Feb-20 9:00am GMT

Q4 2019 Eltel AB Earnings Call

BROMMA Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Eltel AB earnings conference call or presentation Friday, February 14, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Casimir Lindholm

Eltel AB (publ) - President & CEO

* Petter Traaholt

Eltel AB (publ) - CFO

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Eltel Audiocast for Teleconference Q4 2019 Call. Today, I am pleased to present CEO, Casimir Lindholm; and CFO, Petter Traaholt. (Operator Instructions) Speakers, please begin.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [2]

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Good morning, everyone, and welcome to this audiocast. My name is Casimir Lindholm. I'm the CEO of Eltel. With me, I have our CFO, Petter Traaholt. We'll today present the Q4 report. I will start by going through the highlights of the third -- for the fourth quarter on Page 3.

Entering the quarter, we had a clear ambition to lower the net debt of the company. We were able to have strong cash flow during the period. And thereby, we were able to reduce our net debt by EUR 67.6 million for the quarter and EUR 24.2 million for the full year.

I'm also glad to see that we have continued to improve the quality of deliveries and services towards our main customers. Eltel's quarterly result is nonetheless negative due to 3 main reasons: lower net sales, restructuring costs and project revisions. As anticipated, net sales during the quarter decreased for High Voltage Poland; Smart Grids and Communication Sweden; while Communication Norway and Denmark continued to improve revenues, thanks to increased market shares.

The project write-downs and provisions mainly relate to Communication Sweden and High Voltage.

In Power, the High Voltage project write-downs are mainly related to one large project in Norway and a handful of projects in Poland. We focused on milestone invoicing in High Voltage Poland during the quarter, and we'll continue the customer dialogue regarding compensation for projects -- project delays out of Eltel's control.

Our efforts to reduce the capital tied up, particularly in Poland, paid off, and we managed to release EUR 33.4 million from these projects. In order to reduce the exposure towards larger projects, we updated strategy for High Voltage in Poland. As part of this strategy change and turnaround of the Polish operations is ongoing, and we have made management changes and taking steps regarding restructuring the business.

Like in the third quarter, the large volume drop from our main customer, Communications Sweden, continued to impact the results negatively. The reduced net sales led to overcapacity and restructuring costs, which burdened the result.

Write-downs and margin revisions also impacted the result negatively. Going into 2020, we have rightsized the Swedish organization to current and expected volumes.

Looking at the full year, the volume reduction and related costs, including restructuring in Sweden, negatively impacted the result by more than EUR 13 million. Despite the challenging situation, I would like to point out that there are large parts of the company that are performing significantly better than in 2019.

In Power, Finland improved its net sales and EBITA during the second half of 2019 due to the enhanced performance and continuous selective tendering.

In Communication, we see strong market, both in Norway and Denmark, where we have increased net sales and operative EBITA substantially compared to the previous year.

In January, we signed an agreement to divest our German Communication business. The planned divestment of business area Aviation & Security in Sweden is proceeding according to plan, as both parties have undertaken to ensure a definitive agreement is signed during the first quarter of 2020.

These actions will further strengthen our balance sheet and lower the net debt level of the company. We also signed an amendment to our bank agreement in February.

I now hand over to Petter as we return to Page 4 to look at group overall numbers.

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Petter Traaholt, Eltel AB (publ) - CFO [3]

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Thank you, Casimir. We're turning now to Page #4 to first look at the group overall numbers. Net sales decreased 15.7% to EUR 278.9 million against EUR 330.9 million last year. Organic net sales in segment Power and Communication, adjusted for currency effects and divestments, decreased 10.9%. Net sales decreased in Power by EUR 22 million and in Communication by EUR 24.2 million. Other decreased by EUR 0.4 million.

Operative EBITA amounted to minus EUR 14.9 million compared to EUR 2.9 million last year. In Power, operative EBITA decreased by EUR 10.2 million and in Communication by EUR 7.7 million.

Operative EBITA increased in Other by EUR 0.4 million and items not allocated decreased by EUR 0.2 million.

On the positive side, our operative cash flow from operating activities ended at EUR 59.5 million, and the net debt was reduced with almost EUR 70 million in the quarter.

We will discuss the main deviation of drivers for the financial development in each segment as we present and discuss those on the coming slides.

Let's now turn to Page 5 and look at net sales in the segments.

In segment Power, net sales decreased by EUR 22.1 million to EUR 93 million, down from EUR 115.1 million last year, representing a decrease of 19.2%. Organic net sales adjusted for currency effect decreased 19%. The majority of the decrease is coming from reduced customer orders in High Voltage due to lower investment levels and from project write-downs.

Furthermore, the expected lower volumes in Smart Grids as the projects in Norway and Denmark are finalized impacted the net sales negatively. The decrease is moreover explained by the loss of contracts and ramp-down of the service operations, including project write-downs in Sweden. The decrease was partly offset by high activity in wind power projects prior to the winter breaks in Finland.

In segment Communication, net sales decreased by EUR 24.2 million to EUR 182.9 million from EUR 207.1 million, representing a decrease of 11.7%.

Organic net sales, adjusted for currency effect and divestments, decreased 6.3%. The decrease is mainly attributed to a 25% volume drop in customer investments and write-downs in Sweden.

Finland also impacted by the reduced customer investments, but to a lower extent. Furthermore, EUR 7.1 million of the decline refers to divestment of the Polish Communication business during the third quarter of 2019.

The communication market demands varies, and the decline was partly offset by volume increases in Norway, Denmark and Germany.

Net sales in Other decreased by EUR 0.4 million to EUR 3.2 million. The net sales relates almost fully to remaining projects in Power Transmission International, in line with our ramp-down plan.

Let's now turn to Page 6 and look more in detail on the operative EBITA development. In segment Power, operative EBITA decreased to minus EUR 12 million compared to minus EUR 1.9 million last year, and the operative EBITA margin was minus EUR 12.9 million -- 12.9%, sorry, down from 1.6% last year. The decrease is mainly attributed to project write-downs in High Voltage related to outage, delays, increased cost to complete and subsequent order capacity.

The write-downs mainly relate to one large project in Norway and a handful of projects in Poland. We did focus on our efforts on milestone invoicing and cash collection during the quarter. And we continue the dialogue with our customers to potentially collect compensation project delays out of Eltel's control.

Our effort to reduce the capital resulted in cash release in Poland for the quarter of EUR 33.4 million from these projects.

In Sweden, costs related to finalizing unprofitable project and ramp-down operation impacted results. In addition, the decreased revenue in Smart Grids led to reduced operative EBITA of EUR 2.4 million compared to last year. The decrease was partly offset by Finland due to the volume growth, improved performance and selective tendering.

In segment Communication, operative EBITA decreased to EUR 2 million from EUR 9.7 million last year, and the operative EBITA margin was 1.1% compared to 4.7% last year. The decrease is mainly explained by Sweden's large reduced net sales, the subsequent workforce overcapacity and restructuring costs, overall representing a negative impact of approximately EUR 6 million in the quarter.

Furthermore, write-downs and provision impacted the Swedish results negatively, for which the majority of these came from build projects awarded during 2016 and 2017.

Finland faced similar challenges as Sweden, reduced volumes and restructuring costs, but on a smaller scale. Norway continued to deliver strong results for the quarter.

In Other, operative EBITA increased to minus EUR 0.6 million from minus EUR 1.1 million last year, and operative EBITA margin was minus 20%, in line with the planned ramp down.

And we turn on to Page 7 to look at the full year, ending with net sales down approximately with EUR 100 million and 8.5% year-over-year and operative EBITA margin of minus 1%. Cash flow from operating activities was EUR 25.7 million.

With that, I'll turn the word back to Casimir.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [4]

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Thank you, Petter. Focus in 2020 now changes here. We'll focus on our daily operations, continue our operational excellence strategy going forward, improve the quality, improve the control and the deliveries of our operations going forward.

We will also make sure that we secure the tendering process, ensure that we have the right people in the right places, we'll focus on implementing our contracts and projects in a good way. And a lot of focus on production planning, focusing on improving the efficiency and productivity in our operations. The evaluation of the existing portfolio will be ongoing, including the intended divestment of Aviation & Security during the first quarter in 2020. We are focusing on restructuring the Polish High Voltage operations and continue to strengthen the balance sheet and put more and more effort on improving the operations overall.

All these activities will be ongoing in 2020 and 2021. And the target and the aim is to improve our position in the Nordics, improve our customer satisfaction and, of course, improve the employee engagement. And also by bringing down the risk in the portfolio as such and not tendering into large projects going forward will, of course, lower the risks and take down the capital needed in the company.

In 2020, all our large projects, projects in Africa, and the big project in Norway will all end during 2020. And that will, of course, have an impact on the portfolio and the risk going forward in the company.

I'll now turn to Page #9. There are no changes in the long-term plan. And as I mentioned before, the focus is on the operations in 2020 and 2021, and then bringing down the risk in the company by lowering our involvement in large projects.

And at the end of the day, strengthen the balance sheet for the company, improving the productivity and by doing that, also improving the results of the company.

And then turning to the last page and opening up for any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So we receive the first question. It's from [Stefan Lindslodt].

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Unidentified Analyst, [2]

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I was wondering if we could go through the impact on EBITA from both in Power and Communication from the all the sort of rewrite-downs, restructurings, project completions, et cetera. And if we could start with Power, that would be a good place to start, I think. And just to understand a little bit, how much is sort of -- I know it's not recurring, but at least sort of the projects that are finished, how much did that cost in the quarter? Because it clearly could be talking about overcapacity, et cetera. Is it possible to go through that?

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Petter Traaholt, Eltel AB (publ) - CFO [3]

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We can at least try to shed some light on it. And these large projects in Poland that we have been working on for a long time, and that tied up a lot of capital, they are coming towards its end. And in that, we have had [partner] discussions. Then because of the delays in these projects with the customers for the -- of getting compensation for those delays, we choose now to invoice them and get paid for them and continue the dialogue with the customer afterwards. So some of the impact of those write-downs is related to that.

And it's a handful of large projects, always. I think the longest one has been since 2014 or taken 2014, probably started 2015, something like that. And then we have this large project in Norway that you are familiar with, building another [headline up on the north bottom].

And if you look at the overall, let's say, deviation between the years and take away the impact that we already disclosed there on Smart Grids, I would say that approximately 50% of the remaining difference is related to Poland and 50% to the Norwegian project.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [4]

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And maybe...

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Unidentified Analyst, [5]

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How much was this cost to finish the project in Sweden?

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Petter Traaholt, Eltel AB (publ) - CFO [6]

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You think about the ramp-downs in Sweden?

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Unidentified Analyst, [7]

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Yes. You said your costs relate to finalizing unprofited projects and ramp-down in Sweden. But that is kind of finished now. Is it? Or is that sort of still ongoing?

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Petter Traaholt, Eltel AB (publ) - CFO [8]

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Still have a handful of projects finalizing during the first half of this year.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [9]

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Yes. So all in all, you have to remember that the Norwegian project is ending Q4 this year. The African projects are ending, most of them Q2 and partly in Q4 this year, and the ramp-down of Power to districts in Sweden will be done by Q2 this year. So all these large projects and also the Polish ones in that sense, ending this year, and we are not entering to this kind of business going forward in the [company].

And the only part where we have Power going forward in a more substantial way is in Finland. And even there, mainly going to smaller- and mid-sized projects, not entering to large overhead line projects anymore.

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Unidentified Analyst, [10]

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Yes. So the big loss in Q4, is that driven by the fact that you want to get payments then? Or what was the large sort of write-downs in Q4 versus, for instance, Q3?

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Petter Traaholt, Eltel AB (publ) - CFO [11]

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It's partly related to that, that we wanted to finalize the project, get them invoiced and get the money and then rather take the dispute to the customer later on. And then, of course, we cannot take in the order books the anticipated, let's say, success with those discussions. So they are definitely part of the write-downs that are large because of that, yes.

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Unidentified Analyst, [12]

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And is there more -- should we expect more like that moving forward? Or is this sort of -- was this the bulk of it? Or is this sort of -- is the site going to come sort of on a quarter-by-quarter basis? Or why was it so big in Q4? And should we expect this to sort of continue up until the project is finished?

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Petter Traaholt, Eltel AB (publ) - CFO [13]

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We always value the project as per the current estimates. So in that sense, you can say it's to our best knowledge, the projects are balanced and is valued according to cost to complete at this stage.

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Unidentified Analyst, [14]

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And is that agreed with the customer?

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Petter Traaholt, Eltel AB (publ) - CFO [15]

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Yes. So yes, so absolutely. So the over and above that we have taken is what we think we should go and ask the customer for, but that's not then any -- let's say, there's not any risk in a project today. Those risks are taken.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [16]

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Yes. And those discussions are only for the Polish projects.

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Petter Traaholt, Eltel AB (publ) - CFO [17]

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Yes, yes.

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Unidentified Analyst, [18]

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So the way to look at it is that the cost that you've taken in Q4 should not recur, unless something happens, should not recur moving forward?

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Petter Traaholt, Eltel AB (publ) - CFO [19]

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Correct.

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Unidentified Analyst, [20]

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And if you were to strip out all these costs, is Power sort of breakeven? Or is it still significantly loss-making? Or what is sort of -- what is the underlying profitability in Power at this stage, would you say?

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Petter Traaholt, Eltel AB (publ) - CFO [21]

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I think what we could say is that there is no reason why, over time, we shouldn't reach those targets that we have for both Power and Communication of having a 5% EBITA, but that's our target. And then, of course, it's a long-term target, obviously, but the risk profile, we get to support that view still.

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Unidentified Analyst, [22]

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Yes. But is it -- would you say it's loss-making underlying now? Or is it sort of breakeven underlying now?

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Petter Traaholt, Eltel AB (publ) - CFO [23]

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I don't think we can go to that level because that would -- I don't think we can go to that level of disclosure. But I think we stay with that comment that we believe that the long-term targets are achievable.

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Unidentified Analyst, [24]

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Okay. And just on Communication, the same sort of if we look there, there -- I mean, clearly, a big customer has sort of reduced its demand quite significantly. Is that sort of right path now? So the impact in Q4 that -- is Sweden now profit-making, would you say, based on that, the rightsizing unless everything else equal, clearly?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [25]

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We have rightsized the operations in Q4, and that came with the cost, which was guided for in Q3. So going forward, the same answer there that we believe that we can get long term to a 5% overall EBITA in the company. And of course, Communication is a big part of that and Sweden is a big part of Communication.

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Operator [26]

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There are no further questions at this time. Please go ahead, speakers.

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Petter Traaholt, Eltel AB (publ) - CFO [27]

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We have one question on the web here from [Musico Skinnen]. And this question is how Eltel market shares in different markets and business is doing.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [28]

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In communications, we are a market leader in Finland, in Sweden, in Norway and in Denmark, Denmark, in those segments where we are present. So there are no changes in that. And actually, we have been able to strengthen our market position in 2019 in all markets by winning new contracts, for example, the Telenor contract in Sweden, which we haven't had since 2011. And we have been able to increase our market share towards existing customers in all these 4 countries. So we are the #1 player in Communication in the Nordics, and we are the market leader also in Power in Finland.

But otherwise, regarding Power as such, we are decreasing our volumes in Sweden and we have a very minor business in Power in Norway and a small one in Denmark. Of course, we are in High Voltage. And in Poland, we are a major player even though the market as such, is coming down. So that's the overall picture.

So the market leader position has been strengthened in Communication in 2019 in the Nordics.

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Petter Traaholt, Eltel AB (publ) - CFO [29]

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So then we don't have any further questions on the webcast here, and I don't think we have any further on the line either.

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Operator [30]

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We have one on the line now.

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Petter Traaholt, Eltel AB (publ) - CFO [31]

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Okay.

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Operator [32]

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Okay. So the question is from [Manija Hutra] of [AFLA].

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Unidentified Shareholder, [33]

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I just want to clarify that you can hear me, please?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [34]

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Yes, we can hear you.

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Unidentified Shareholder, [35]

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Okay. So I am fairly new to the stock. I understand what you're trying to do. But in fact, I'm actually a little bit confused. So I'm going to ask you some fairly basic questions. Sort of towards the end of your presentation, you talk about your sort of medium-term objectives and then you talk about a long-term objective of 5% to 7%. But if I look at your quarter results now, they seem at least at face value, and you're not really giving as much further information to be able to build an understanding here, in my view. They seem to have gone [quads] right? Your underlying EBITA margin, you're not actually telling us what it is in Power and Communication. So why should I have any stakes you're on track? I can see in terms of your cash flow, but I cannot see it, and I do not have enough information from what you're telling me to make any meaning or inference on where your EBITA margin is and how you are going to get to the 5% to 7%. Or is that just pie in the sky?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [36]

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First of all, in any turnaround situation, which also Eltel is within, it's pretty typical that the company focuses short term on bringing down the net debt by improving the cash flow. Those are the typical first signs that you see in any transformation, any turnaround project. And those are the signs that you can see now. So that's the first indication of that we are going in the right direction.

Of course, the strategy to move towards the Nordics is the second key element. Eltel has been too widespread in too many geographies and markets, and that transition takes a couple of years more before we are in the Nordics solidly. So that's the second point.

The third point is that we're the market leader in the Nordics in Communication and in Power in Finland. And normally, in any business, the market leader is the successful player going forward. The whole industry is going through a turbulent time. But we can see clear evidence of that the market is now more healthy going forward, partly because Eltel and especially Eltel's competition has had financial challenges in the last years. And of course, the main customer can recognize that and the price is not at the moment the #1 thing that we're talking about regarding our -- or with our main customers, rather quality is -- is getting more and more attention. And we are bringing quality to the table and towards our biggest customers in the Nordics.

The fourth point is that our Norwegian operations, where we also are a market leader in Communication, is already above our target of 5% EBITA and so is our Danish operations as well.

So Finland is on its way towards where Finland used to be. And then we had a challenging situation in Sweden, which we are now working with and have done regarding rightsizing the company in Q4.

So in that sense, yes, we are not revealing all the numbers in the underlying business, but I would say that these 4 basic elements and the strength of the company and the market position of the company, is the basis for our targets of reaching the 5% EBITA going forward.

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Unidentified Shareholder, [37]

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Can I respond back to that, please?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [38]

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Yes.

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Unidentified Shareholder, [39]

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So my question is, your long-term plan doesn't tell me anything, right? There is nothing there in terms of numbers. So to be completely clear, what are -- as a shareholder, what should I expect because you're not telling me very much, with all due respect. So in 2020, what is -- because, again, in quarter 4, your EBIT margin has gone down, and I don't know what the underlying number is. So why are you not providing more transparency here? And how can I think about what your targets are going to be in 2020 and 2021, specifically on EBITA margin in Power and Communication?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [40]

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Yes. We have chosen not to have a guidance in the company, which is also quite normal in a turbulent and in a turnaround situation where we're at. But we'll take note of your questions and see if we can be more sharp in the communication going forward.

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Unidentified Shareholder, [41]

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Okay. I'd like to respond to that one more time. You are a small company. Transparency is absolutely crucial to delivering shareholder value. And I cannot understand why you choose to put down many exceptionals and write-downs and not clarify what the underlying business is doing. Because I cannot see for 1 minute how this improves and creates shareholder value. And it puzzles me because I have -- I'm a shareholder, I'm an investor in the market for many years, and I would expect to see financial targets, right? Because that's what you should be judged on, and you need to make those transparent. And how can we measure you as a management team on what you're delivering if we have no idea of what you're actually trying to achieve? I mean I listen to the CEO's closing remarks, and not once that he talk about profitability of the business. He talked about improving cash flow and reducing net debt, but he did not talk about profitability. And if you continue to post negative EBITA margin data, we can see what the reaction to the share price is. So it puzzles me as to why you're doing this. And also a little bit more about the Board and the shareholders that you have on your register and why they would actively choose to ensure that there is this lack of transparency that hurts your share price.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [42]

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Thank you. We'll take those remarks with us and see if we can be more precise going forward.

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Unidentified Shareholder, [43]

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Well, I would like that. And I will hold you to that, please.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [44]

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Thank you.

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Petter Traaholt, Eltel AB (publ) - CFO [45]

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And we have another question here from [Eric Pattinson of Lancelot]. Can you please classify the size of the write-downs in the respective business area? How much did divestment impact EBITA, i.e., loss of EBITA from sold business? How much did the number of working days impact organic growth for the business areas? Can you elaborate on the agreements with the banks given market comments on need for an equity raise? How much net Sweden net working capital reduction remaining?

I think we have already touched about -- the 2 first questions there about write-downs and EBITA. And [Manija] has also made her point in regards to our disclosure level. So I think I refrain from those 2 questions. The working days impact was not any huge impact for the quarter. So that -- it is not a major issue. The agreements with the banks is basically that we have agreed with them on a covenant package that secures the financing and gives us adequate headwinds to the covenant levels back to when the plan we have to deliver on. So I think that's -- it's a well-balanced package, I would say, to the end of the agreement with the bankers.

And on net working capital in Sweden, they have done a tremendous good job, I would say, the Swedish management of getting the net working capital down. So I would say that we, to a large extent, are on the level we should be now.

Casimir, anything else to add?

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Casimir Lindholm, Eltel AB (publ) - President & CEO [46]

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No. I think you answered them all. If Eric doesn't have follow-up questions...

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Operator [47]

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There are no further questions over the phone.

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Casimir Lindholm, Eltel AB (publ) - President & CEO [48]

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Okay. Thank you for listening, and thanks for the questions and a good discussion around them. And we take your feedback seriously and see what we can do better going forward. Thanks for the call.

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Petter Traaholt, Eltel AB (publ) - CFO [49]

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Thank you.