NRC Group ASA (NRC) Earnings Call Transcript & Summary

Hello, and welcome to the NRC Group Second Quarter and First Half 2021 Results Question-and-Answer Session. [Operator Instructions] I will now hand the conference over to Lene Engebretsen, Head of Communications in NRC Group. Please go ahead.

Thank you, and good morning, everyone. By now you will have received a copy of the earnings and investor supplement for the company's second-quarter and half year results. If you have not, the copies are available on our website, nrcgroup.com. The speakers we have on today's call are Henning Olsen, Chief Executive Officer; and Dag Fladby, Chief Finance Officer. With that, I would like to turn the call over to Henning Olsen. Please go ahead.

Thank you, Lene. I'll start with a short summary of the announced results from this morning. During the quarter, we made good progress with our main priorities, improving profitability and winning the right projects at the right price. In quarter 2, the activity level is picking up, and we report a revenue of SEK 1.5 billion. Adjusted for currency, the growth rate was minus 3%. We delivered an EBITDA of NOK 47 million, significantly better than last year. And we see that improvement work we've done for the past 2 years is starting to yield results. The improved results are driven by a very strong performance in Finland. We see continued strong performance in Rail Construction, and we see improved results in the Maintenance business. In Sweden, we delivered results at the same level as last year. The volumes are low due to a tough market condition. We continue to work with our improvement initiatives, but we also need to see better market conditions before we can return to our targeted margin levels. The results in Norway are weaker than the same period last year due to low activity in Civil and weak margins in our Recycling and Demolition business. This is a consequence of the low order intake last year in Civil and the ongoing turnaround process in the Demolition and Recycling unit. However, we made good progress during the first half of 2021 in both areas. Although the results are not at the level we want in Norway this quarter, I'm confident that they're moving in the right direction as we continue to build the foundation for improved results and future growth in Norway. We had a very strong order intake of NOK 2.2 billion in quarter 2 with a book-to-bill of 1.5 in the quarter. We also won the material supply contract for the Finnish transport agency with an estimated value of NOK 2 billion, which is not a part of the reported order intake and order book. So in the quarter, we actually secured orders for more than SEK 4 billion. I'm confident that we are moving in the right direction with a strong order intake, a solid tender pipeline, and many interesting projects coming up, we are on track to return to profitable growth. As a part of the quarterly presentation, we also published our sustainability target and an estimate of how our business will align with the EU Taxonomy. Now we will open up for questions.

Operator, are you available? Operator, are there any questions from the audience. Let's hold for 2 minutes.

[Operator Instructions] We will now take our first question from Bendik Engebretsen from Danske Bank.

Happy to see the improvement in activity. It seems clear that the company is on the right path towards profitability. I just wondered if you could provide a bit more color on the order intake in Finland this quarter. You were granted a EUR200 million contract, but this doesn't appear to be part of the backlog. Could you provide a bit more color on this contract and how it differs from the rest of the company's contracts?

Yes. As this is a frame agreement without any minimum volume in the contract, it's not recorded as a part of the order book. And this is also how this contract has been treated in the history in NRC. This has been a contract that has been operated by our Finnish organization for many years already. So as we said in the presentation earlier today, we have a lot of experience with this business. From our point of view, there are no insecurity with regard to volumes. This is a highly predictable business where we supply rail technical materials, tracks, et cetera, to the Finnish transport agency as the sole supplier. So as long as the activity level in the Finnish rail segment is continuing, the volumes here are very predictable as such. But due to technicalities, it's not a part of our order book.

All right. That's understood. Second question and then final question from me. Recently, we have been reading a bit about tender processes in Sweden, and I believe the newspaper was Dagens industri. And it appears that some competitors -- their bids in certain projects in Sweden have been lower -- significantly lower perhaps than those -- the bids from NRC. Can you comment on this? Is this a result of higher costs in NRC or higher requirements for profitability? Could you comment on this at all?

We can for sure comment on this and the article you are referring to is an article relating to the maintenance contracts that have been awarded in the Swedish market this year where 4 contracts have been out for tender. And Infranord, a company owned 100% by the Swedish state, has won all 4 contracts. And in 2 of them, they have priced significantly lower, not only lower than NRC but lower than all other competitors. So in one of the contracts, I think they were 25% lower than us and we were number 2. And in one contract they were, I think, 45% lower than us, but still 25% lower than #2. And that contract was really not a contract that we were aiming to win. It was not a part of our prioritized contracts, but still, we did an offer. But as the article states, without saying it directly, we are, of course, wondering a lot of what's happening in Infranord and how they act because there are no chance at all that they will have any profits on these contracts. So this is price [indiscernible], and that is what we tried to say without saying it in the article directly.

We will now take our next question from Hans Jacobsen from Nordea.

Back to Sweden. It seems like the pipeline still is very good. And the competition, as you just explained, is continuing to it seems likely getting even worse. Do you see any let up here in the short-term in terms of the competitive picture? I would believe that with a lot of tenders, there should be a possibility to receive some orders where you and others could start to make a profit.

Yes. We can comment a bit on that. I think I commented on Maintenance. However, when it comes to Rail Construction. There competition has also been fierce in the market in Sweden for the past 12 or 18 months. The tender pipeline is still very high. And of course, we hope that continued high supply of contracts will improve market conditions. But of course, there's no guarantees for that happening. But we feel that we are in very good control of our tender process in Sweden, and our strategy has been and will be to focus on winning robust projects rather than to aim for growth at the current market state. If the market conditions are improving, we will, of course, also aim to grow our business. But currently, we focus on winning robust projects that we can have a profit on and try to defend the revenue we have today, of course. But we see no reason to be very aggressive for growth when market conditions are as tough as it seems today.

Okay. And then to Norway, you have 3 areas there where the Civil Construction and NSS are continuing to show a weak performance, and hopefully, the initiation of all the measures you would have taken here will improve results. But when it comes to rail, is it profitable in Norway in line with Sweden or -- not Sweden but Finland?

The Rail Construction unit in Norway is profitable. As you remember, this was one of the areas we maybe struggled the most with in 2019 and one of the reasons for the poor results in 2019. We initiated an improvement program in the Rail Construction unit starting in the late 2019, and that improvement program has been very successful. We are gradually improving the results. We are not at the profitability level as we are in Finland currently. But the progress is very good. It continuously are getting better. So we feel we are on a good track in that business area in Norway.

We will now take our next question from Carl from Arctic Securities.

I just had a question regarding the EBITDA margin in the quarter related to your sort of medium-term -- medium- to long-term target of 7% and your guidance for somewhere in between 1.75% and 2.5% for this year. Could you please share some thoughts, Henning, on how you see the progress here going? And what you feel sort of is realistic to expect in the coming quarters?

Yes. Let's start with guiding this year. The guiding for the year is unchanged at an EBITDA between 1.75% and 2.5%. And we feel that the results we have delivered today is supporting that guidance and also the progress we have made during our improvement programs across our business is also supporting that guidance. So we are reiterating that guidance. When it comes to what you can expect going forward, we have a clear ambition to return to profitable growth. The order intake, we have seen both in quarter 1 and quarter 2 is supporting that we will return to growth. Our improvement programs are moving forward according to plan, of course, with some exceptions in Sweden due to the very tough market conditions. But our expectation is that we will return to profitable growth. Our target and ambition in 2024 is still the same. We have been quite clear that we are maybe a bit delayed on that road, but the ambition is still there.

Perfect. And just a follow-up. I would sort of assume that the improvement you have seen in Finland over the past 12 months have to be on track or ahead of schedule. And I was just wondering what will it sort of take in the medium-term to see a similar improvement in Norway and Sweden? Is it a question primarily on overhead expenses? Or do you also have to see a significantly higher activity level to see a similar improvement?