Norconsult ASA (NORCO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to today's presentation of Norconsult's first quarter results. My name's Egil Hogna. I'm the CEO of the company, and I will present the quarter together with our CFO, Dag Fladby. After the presentation, we will take questions. We will start with the auditorium, and then we will move on to those of you who are following us online. Please enter questions along the presentation in the chat, and then we will answer them after the presentation. As usual, I start my presentation by reminding you about some of the basic facts about the Norconsult. Our purpose is every day to improve everyday life and as one of the largest design and engineering companies in the Nordic region. This is our main mission. We have 6 business areas, the Norway Head Office and Regions, Sweden, Denmark, Renewable Energy and finally, Digital and Technogarden. A bit more than half of our revenues are from public customers, the rest from private. And at the end of the first quarter, we had 6,600 employees spread around 140 offices, mostly in the Nordic region. At the bottom of the slide, you will see how our revenues and margins have developed over the last 7 years. And as you can see, we continue to have a rolling 12-month EBITA margin of 10% also after the first quarter. In terms of the financial highlights. So the first quarter we report moderate growth and profitability. Our net revenues increased by 12% to a bit more than NOK 2.6 billion, which adjusted for calendar effects, represents a 5% organic growth. One of the characteristics of the quarter this year is that the calendar effect is quite big, because this year Easter fell in April rather than March last year, and that means that there is a positive calendar effect from on average 3 more working days in the first quarter this year compared to the previous year. Our adjusted EBITA ended at NOK 335 million, up from NOK 227 million. The EBITA margin was 12.7%. While when we adjust for the calendar effect, the underlying EBITA margin was at 8.5% compared to 9.6% the same quarter last year. One of the very important and positive developments was that our order book increased to NOK 7 billion, compared to NOK 6.4 billion at the end of last year. This NOK 600 million increase represents both a considerable effort on our side to win new orders, but also some improvement in the overall market. During the quarter, we also adjusted [ manning ] and cost in 2 of our business areas in Norway Regions, and the Technogarden, where we saw some weaknesses at the end of last year. In Norway Regions, these measures will mainly take effect from April this year, while in Technogarden, we already saw a significant improvement at the end of the first quarter. When it comes to people and the organization, I already mentioned that we ended the quarter at 6,600 employees. That is compared to 6,300, 1 year ago. An important reason for the increase during this quarter is the integration of 115 new colleagues from the Swedish company Sigma Civil, which was an acquisition we completed during the first quarter. We also celebrated outstanding projects and team performances with our Norconsult Award event during the first quarter, and we extended our collaboration with Engineers Without Borders, which is an organization supporting societies in developing countries with building essential infrastructure. We also renewed our partnership with MOT Norway, which is an organization supporting mental health, in particular amongst youth. I would also like to mention that Norconsult's commitment to diversity, equality and inclusion continues as before, because we believe this is fundamental to have a strong business performance. And one of the examples, which we had a nice event on during the first quarter was a panel debate and event relating to International Women's Day. When it comes to the market, in the first quarter this year, it was rather stable overall. We saw an activity level remaining subdued in the private part of buildings and architecture, but we do see indications of growing optimism, and I'll revert to that in the Outlook section. The public part of buildings and architecture was stable. There is one particularly growing segment, which is the defense spending, with a large number of projects, both small and larger projects. And this is the case in all of the Nordic countries where we operate. I would also like to mention it from a geographical point of view, we see that the Danish market is probably where we have the strongest positive development when it comes to buildings and architecture for the time being. Infrastructure, which includes transportation, water and environment remains stable and very much in line with the long-term public spending plans in the Nordic countries. Energy continues to be the most positive segment. We are mainly operating in Renewable Energy, and it is in particular hydropower which is showing the most positive development. But there are also wind projects, which are of interest and where we keep on winning a fair share of those projects. When it comes to traditional or other types of industry, there are big differences between the segments. We have seen some segments in green industry weakening, while there are other segments, including the defense industry, which are growing. I'd like to show you some examples of projects which we have won during the first quarter. And the first example is the largest single project which has entered into our order book, and that is the E6 highway, close to Lillehammer between the 2 places of Roterud and Storhove. This is going to be a 23 kilometer highway, including both a twin-tube tunnel and a large bridge. This is a project which has been in the planning for actually approximately 5 years, so it was a major win for us when we finally won this together with the Norwegian construction company AF Gruppen during the first quarter. Another project in the area of infrastructure is a road which constitutes the main access into the Southeastern Norwegian city of Sarpsborg between Hafslund and Dondern. This is a project where Norconsult has all of the different technical disciplines, and it includes the upgrading of significant areas around the road as well. Excuse me. Then we have a project which -- Nordic Office of Architecture, which is a fully owned subsidiary of Norconsult, has won together with Norconsult and certain other companies for the design and engineering of the new cultural building or block in the northern city of Tromso. I hope that you are able to recognize the profiles of some of the mountains around Tromso from the facade of this building. This is going to be a landmark building in Tromso, which we think is going to create a lot of pride in the local community. Finally, we have a significant project in Northern Sweden, where we are working to support Boliden at their Ronnskar plant, where Norconsult will be providing mechanical, electrical, plumbing, HVAC process and piping design for the plant in Ronnskar. And with that, I would like to give the word to our CFO, Dag Fladby.

Thank you, Egil. First quarter had a moderate revenue growth and our net revenue ended at NOK 2.6 billion, up from NOK 2.4 billion. That's 12% increase and as Egil mentioned, this quarter has a substantial positive calendar effect of NOK 122 million. Our organic growth was 5%, excluding the calendar effects. The growth is driven through higher FTEs and also increased billing rates. The increase in billing rates is also affected by lower index regulations than the same period last year 2024, because the inflation has come down. When it comes to billing ratio, that ended up 71.5% down from 72.1%, mainly due to a continued weak building and architecture market on the private side affecting Norway Region the most. We are not satisfied with the billing ratio. Hence, we have taken measures to do temporary layoffs by effect -- with effect from end of March of 25 people in Norway Region. EBITA ended at NOK 335 million, up from NOK 227 million, and that's a margin of 12.7%, but the underlying margin is 8.5%, down from 9.6% and the main explanation for the decline is lower billing ratio, but also more vacation in the beginning of the year, where we typically had 2 so called [ bridge ] days in the first week of January. Profit after tax NOK 257 million, up from NOK 103 million and last year included NOK 77 million of cost for the gift shares. Before we go into the segments, short overview over the EBITA contributors in the quarter. And as you see from the graph on the right side, Technogarden and Digital as well as Sweden and Denmark contribute positively, while Norway Head Office and also Renewable Energy has a decreasing EBITA adjusted for the calendar effect. Then moving into the segments, and as always, we will start with the Norway Head Office. Net revenue ended at NOK 802 million, up from NOK 716 million. We had an organic growth in Head Office of 4%, driven by increased FTEs and also increased billing rates. The increase in billing rates is slightly lower in these segments as the index regulation is slightly lower because of large infrastructure projects, which is typically indexed by CPI regulations. And as inflation has come down, that is also lower than 2024. EBITA ended at NOK 123 million, up from NOK 84 million with an underlying margin on 9.7% compared with 11.8% the same quarter Last year. The main reason for the lower profitability is lower -- slightly lower billing ratio, but also more vacation days in the beginning of the year, and it's also slightly affected by a lower index regulation. Norway Region ended with a net revenue of NOK 788 million, up from NOK 690 million. Organic growth was 7% due to increased FTEs and also increased billing rates. The EBITA was NOK 107 million, up from NOK 56 million, including a calendar effect of NOK 52 million. Hence the EBITA margin was 7.5%, down from 8.1%. And as mentioned from Egil in the beginning of the presentation, we are not satisfied with the development -- with the billing ratio and probability in Norway Region. Hence we did a temporary layoff of 25 people, and with effect end of March. Then moving to Sweden. And in Sweden, we had a net revenue of NOK 463 million, up from NOK 394 million. That's a 17% increase, which also includes Sigma Civil for 2 months. Organic growth was 8% driven by higher number of FTEs and also slightly increased billing rates. Billing ratio was stable in Sweden. When it comes to the EBITA, NOK 40 million end of the quarter -- in the quarter, up from NOK 37 million. That's a slightly decline in profitability from 9.3% to 8.3%. That is also part -- that is also due to a dilution from the Sigma Civil which reported 0 in the quarter for the 2 first months from February to March, and also some integration costs of approximately NOK 3 million related to that acquisition. Denmark had an organic growth of 8%, EBITA at NOK 17 million, up from NOK 13 million, and the profitability more or less in line with last year. Then into Renewable Energy. And in Renewable Energy, the largest division, Hydropower and Transmission continue strongly with 11% organic growth driven by increased FTEs and also increased billing rates and continued high, stable billing ratio. On wind and solar, the billing ratio was slightly lower, and also we had some -- fewer FTEs in other segments, which leads to an organic growth of 3% in this segment. When it comes to EBITA, NOK 43 million, up from NOK 36 million still strong margin of 14.8% compared to 18.1% the same quarter last year. Hydropower and Transmission continue with strong operational performance. And finally, on segments Digital and Technogarden, where we have a total revenue of NOK 288 million, down from NOK 317 million, 9% decrease, mainly due to reduced FTEs and also slightly lower volume in Technogarden. We have increased the profitability in Digital due to the measures we've done in 2024. And in Technogarden, this quarter has lower probability, but we have taken measures to improve that. Keywords on the cash flow and cash flow from operation follows seasonality. In this quarter, we have cash flow from operation of minus NOK 53 million due to increased working capital, and one of the largest explanation is reduced liability on the withholding tax related to the gift shares we distributed last year, which had a positive effect in quarter 4, that is amounting to around NOK 160 million. In addition to that, we had some increase in working capital due to growth. Cash flow from investment activities, minus NOK 58 million, slightly up from NOK 46 million. Slightly higher CapEx, and that is partly mitigated by lower payments to M&A compared with the same quarter last year. And cash flow from financing activities, more or less in line with last year of NOK 102 million in minus. Our balance sheet is strong. We have cash and cash equivalents of NOK 1.4 billion at the end of the quarter compared with NOK 1.6 billion at the year-end. And I remind you that we have paid out NOK 160 million in the withholding tax, which was included in the year-end balance. We don't have any interest-bearing debt. Hence, our leverage ratio is minus 1.39x, and our working capital at the end of the quarter is NOK 127 million compared with year-end, which is negative by NOK 308 million. And if you compare this with the same quarter last year, that was plus NOK 14 million. And as I mentioned, the increase is mainly due to growth. And finally, from my side, the order book ended at NOK 7 billion due to good order intake in the quarter, representing a good mix of smaller, medium and also larger projects. The order book includes 2 major infrastructure projects, [indiscernible] and also an extension of an existing project, railway project in [indiscernible]. These 2 are examples of good prospects for continued medium-growth and long-term growth. And by that, Egil, I leave the word to you to give you us more insight about our position in the airport market.

Right. The airport market is a market where our subsidiary, Nordic Office Architecture has a particularly strong position. And I left the previous slide on -- a little bit longer on purpose because one of their other new wins is the new football arena in Bodo, where the famous Norwegian football team, Bodo/Glimt, which has done very well in the Europe League, will have a new stadium. But Nordic, as we call it, is also a global leader in airport design. And on this picture, you probably recognize the newer part of the Gardermoen Airport, the Oslo Airport, which is an award-winning airport. It continues to win awards both for its designs and its functionality. And the Nordic Office of Architecture, people started their work in airports more than 35 years ago. And it was the airport in Oslo, which was the real breakthrough in their international reputation for the reasons which I mentioned. And since then, they have won and executed airport projects around the world with approximately 40 airport projects completed now in total during this period. The airport market was significantly subdued during the pandemic. And during that period, profitability and activity clearly dropped. But what we are seeing now is that this is increasing nicely again. Airports are very large and complex projects. From a design point of view, they are all expected to be landmark projects. They shape society in terms of how they look, and they are expected to both reflect the leading state-of-the-art design as well as the local society and nature where they are located. But in addition to that, airports are extremely complex from a logistical point of view with during peak times enormous numbers of passengers passing through the airports with their luggage. And of course, people expect the luggage to be there when they arrive. So airports require a very strong cooperation between architects and engineers to be successful. And this was one of the main reasons why Norconsult acquired Nordic some years ago. We worked together at the Gardermoen Airport, which is now more than 30 years ago. But finally, we then became part of the same company 8 years ago. I have a video, which I would like to show to you, which shows some of the both historical and current projects, which Nordic Office of Architecture has conducted. Many of them have been together with Norconsult, but some has also been with other partners. So with that I'd like to... [Presentation]

So, those were some of the examples of the excellent architecture of Nordic Office of Architecture. Then I'd like to round it all off with our outlook comments. We continue to expect our overall market to be stable, but there is a continued uncertainty relating to the international political situation. And I say that not because Norconsult is particularly exposed to tariffs or the geopolitical uncertainty. But tariffs and the geopolitical factors may affect the total economy. And of course, if there would be a recession in the economy, that is something which would also impact Norconsult. That being said, we continue to see signs of optimism in the private market for buildings and architecture. I've already mentioned that from a geographical point of view, we see the strongest tendencies in Denmark. However, what we do see is a larger number of projects coming up in all of the Nordic markets. However, several of the projects are not so big. And some of them are still in a very early phase. But when we look at the first quarter this year, we see that we have written more offers. And as you have seen, we have also increased our order book more compared to what we did 1 year ago at this point in time. Infrastructure continues to be characterized by stable demand. And when it comes to Energy and Industry, we continue to see roughly the same picture, as I described during the first quarter, with a very strong market in Energy with differences between the various segments in other types of industry. A challenge for the industrial market is that there have been delays taking place during the first quarter. This is something which has affected Norconsult's project. It has also affected competitors' projects. We are hoping that there will be stability in the frame conditions going forward, which we think are maybe the most important factor to allow industrial companies to trigger the investments which they have been planning for quite some time. We have mentioned that in the first quarter we have taken certain measures to improve underlying profitability and maintain our efficiency. To the extent that will be necessary, we will continue to take similar types of measures, but we have no immediate plans for any further measures as we speak right now. And I think with that, we would like to open up for questions, and we will start with questions in the auditorium, and then we will move on to questions from those of you following us online.

So who would like to go first? Magnus?

Three questions, if I may. Firstly, there is a small change in the wording on the outlook for the Buildings and Architecture segment. I think it changed from small signs of improvement to signs of optimism. I'm just wondering whether that's a positive change? Secondly, on the Sweden segment, you've had very strong improvements year-on-year over the past couple of quarters. We don't really see that this quarter, more of a flat development, also sort of looking besides Sigma Civil. Does that mean that you sort of have taken out the easy wins? Or can we expect more improvements in Sweden going forward? And also the FTE count in Sweden increases more than the number of employees or FTEs acquired in Sigma Civil, especially if only 2/3 of that is counted. So I'm just wondering whether there's been some significant recruitment in Sweden beyond Sigma Civil as well?

[indiscernible]. You started by asking questions about the little text here on signs of optimism, whether it is a little bit more positive than the slightly text last quarter. I think it's fair to say that it is slightly more positive this time. But I would like to underline slightly because it is not so that we see a fundamental change, but it is a little bit better now compared to what we saw at the end of the fourth quarter. Your second question was relating to Sweden. Would you like to comment upon that, Dag?

Yes. You are right in Sigma Civil is diluting the margins, approximately 0.5% points. In addition, we have the integration cost of NOK 3 million. But your question was, have we taken out the improvement opportunities in Sweden? I will say no. Our target is still to be on, you can say, 10% in all countries, but this will vary from quarter-to-quarter. When it comes to -- even if the billing ratio was quite stable, we saw some stops in larger infrastructure projects, which affected slightly also the infrastructure department in Sweden, but that was temporary because some of them stopped. I can maybe also answer the FTE question. The count -- when we do the counting of FTEs, it is not the average. So it's the end of month. Meaning that you include the full 115 in the quarter. Yes, we do recruitment in addition to that because we feel that we have a position to recruit, and we would like to grow further in Sweden.

Yes, we have a position to recruit. And I would like to say that we are very happy with the popularity we experienced in Sweden relative to candidates. We get a lot of applications from qualified candidates, and that is, and has been and we expect to continue to be a very important mode of growth for our business in Sweden. Martine?

I think you answered my first question. It's just like the end of employee count, does that include the 25 that you are taking measure on this quarter?

No, they are not excluded because they...

Okay, so that's next quarter.

Next quarter.

Okay. Perfect. And if you can just say any comments around the development and the run rate in the billing ratio and what do you expect going into the next quarters? And also like a little bit on how that measure will affect the overall billing ratio?

Dag, would you like to...?

Yes. We have taken some measures in Norway Regions. With the temporary layoffs, we expect that to improve the billing ratio going forward. So that is one measure. We have a positive order intake and a good order book. So hopefully, that will also develop the, you can say, the billing ratio positively. We are not satisfied with 71.5%. And as Egil mentioned, if we feel it's necessary, we will do further measures.

Yes, Ben?

Three questions, if I may. Maybe back to Martine's questions on the billing ratio. Maybe you could elaborate a little bit about the bridge year-over-year, what has impacted the billing ratio drop [ year-over-year ] compared to last quarter -- same quarter last year? Second question would be on the competitive picture. Do you see any price pressures, increased competition somewhere in some pockets? And the final question would be on the M&A. You have 1% growth from M&A this quarter. Historically, it has been 3%. So you obviously -- the M&A growth is lower now than compared to its history. Is it due to tougher competition, fewer candidates, higher price demands, et cetera?

Do you [ want ] to start with the billing ratio and then I can...

Yes, on the billing ratio, the bridge year-over-year is mainly, I will say, Norway Region, the drop, due to the weak market we had the last year in private building and architecture. On the other segments, it's no major changes really.

Then, when it comes to competitive price pressure, we see that in some segments, there is quite some competition. There is some price pressure. There is always, but there has been a little bit more, I would say, this quarter than maybe what it was 1 year before. When it comes to M&A, we spend quite a bit of time analyzing and working on M&A opportunities. Norconsult has a size today, which means that we need to focus on slightly larger M&A projects than what we have done previously. So instead of going after very small acquisitions, we are looking now at somewhat larger acquisitions. That naturally means that this will be a little bit more chunky. So you might see quarters where there is not so much happening and then there might be quarters where there is more happening. So this is of a high focus to us. We are ambitious when it comes to growth, both organically and when it comes to acquisitions, but you might expect to see a little bit more of a lumpy development going forward.

And also, since the 3 acquisitions we did last year was kind of small bolt-ons, they don't really -- you can't see them really in the figures for the growth.

[indiscernible] I was wondering if it's possible to quantify how much improvement you expect in the billing ratio for the segments where you're doing layoffs next quarter -- or temporary layoffs, sorry?

I don't think we will guide on it. We will -- I think we will see gradually improvement. It's not a big bang. So this will develop gradually during the year.

Okay. And then I also have a question on the outlook here for the Building and Architecture segment, because I think this wording is something you've said for the past 5 quarters that you're seeing some signs of optimism. So I was wondering, are you surprised about how long it's taken to materialize into actual demand?

Well, we are surprised that we have not yet seen any interest rate cuts in Norway, as I think most analysts are as well. We expected to see that maybe 1 year ago, and then it has dragged on. We have seen, as I mentioned, that interest rate cuts in Denmark have had an impact and there the market has, in fact, changed. It hasn't really changed that much in Sweden, which is maybe the larger surprise because they did interest rate cuts at the same time as Denmark. However, a previous question was whether this comment here is now a little bit more positive compared to what it has been previously. And I replied yes to that question because we have seen an increase in our order book, and we have seen an increase in the numbers of offers written and also total number of assignments coming into our order book, which has increased somewhat. So yes, it is moving slow. This is a little bit frustrating, but it is moving in the right direction.

One more question from me, Magnus Rasmussen, SEB. My understanding is that increased number of vacation days early this year because of the bridge days in January does not affect the billing ratio. Is that correct? So the lower billing ratio is driven by other reasons?

That's correct.

Last quarter you were talking about that there's more smaller projects than mega projects. Is this the same picture you're seeing now? Or has there been any change to this view?

The general tendency is correct, small to medium rather than very large. But we do have one very large project, which we presented here, which is the E6 project close to Lillehammer. During this quarterly presentation we have not spent time on the NRK building because it did not enter, or it was not won during the quarter, but that is also a very large project. But that will be part of the second quarter when the quarantine period is finished. One more question here in the auditorium?

Just out of curiosity, is Easter better to have it in the first quarter or the second quarter for Norconsult's business?

It's an interesting question.

What should we say on that. I think it's neutral.

It is fairly neutral. Sometimes it can have a little bit of an impact if it is exactly at the end of the month or not, but that's not really an issue this year. So due to some invoicing patterns and so on. Unless there are more questions in the auditorium, I think we then move on to the questions we have received online.

We will. You're listening to Chris Aasland, I work with Investor Relations in Norconsult. We have answered some of the questions that we have received, but I'll summarize 3 from Jesper Stugemo in Handelsbanken. The first question relates to our utilization. What's required from Norconsult to lift utilization? Is this largely market-driven? Or is it based on internal processes? The second question relates to the FTE adjustments in Norway Region. What's the expected cost reductions associated with this in Q2? And will this be reported as a nonrecurring item in the Q2 presentation? And thirdly, on further efficiency measures, is this mostly related to overheads? Or is this related to billing ratio on consultants?

Okay. Maybe I can start on how to lift the utilization and then Dag you do the FTE adjustments and costs. When it comes to lifting the utilization and how we do that, this is a very active discussion we continue to have almost on a weekly basis in the company because we are matching our capacity to what we are receiving in terms of orders and frame agreements and so on, and we continually have to evaluate our capacity relative to what we think is coming in. During the quarter, we have decided to make some adjustments in the Norwegian regions due to the fact that we perceived some of the necessary capacity adjustments to be necessary to make, because we saw that we had too much capacity in some areas. One of those was in terms of local architects. However, we expect to see both improvements going forward when it comes to the orders, which we have received in our increased order book. And we will see some improvements relating to the [ demanning ], some temporary layoffs and permanent layoffs, which has been executed. So it is a combination of both. But as I mentioned previously, we will continue to work on making sure our capacity is in line with the demand. And then Dag, will you...?

Yes. On the temporary layoffs, the cost effect in quarter 2 will be approximately NOK 4 million. And remind you that these are temporary layoffs. So -- and that is for time being for 6 months. So we get the refund from the government. So that's why it's NOK 4 million.

Reported as a nonrecurring item?

No, this will be reported as ordinary stuff. So we will not have a nonrecurring item on this.

And I believe the final question was whether efficiency measures were only relating to overhead or [ demanning ] and how it will impact? We mentioned previously that we have done some [ demanning ] and some cost reduction. This is mostly on the overhead side, both the cost reductions and the -- yes, well, the [ demanning ] is a combination actually. In Technogarden, it is on the overhead side. In Regions Norway, it is on the consultancy side. I hope that answered the question.

I hope so, too. Thank you, Egil. I think that completes our online questions.

Okay. I then ask if there are any more questions from the auditorium? Doesn't seem to be any more questions. Then I would like to thank everyone for following our first quarter presentation. Looking forward to see you again after the second quarter. Thank you.

Thank you.