NRC Group ASA (NRC) Earnings Call Transcript & Summary

Welcome to the quarterly presentation of NRC Group. Welcome to all of you present here today in Halse, Oslo and also welcome to all of you present through our live stream. The key figures for third quarter confirms the positive trend for NRC Group. We deliver improved results, and we deliver EBITA margin of 6% versus 4.5% last year. The good trend in order intake continues with a order intake of NOK 2.7 billion in the quarter. And we deliver a very strong cash flow from operations of NOK 238 millions. With a continued good order intake throughout the year, we see that our order book for next year is significantly stronger than same period last year. And this indicates that the trend of declining revenues we have seen for the past couple of quarters should turn entering 2022. We have had some significant wins also this quarter. After spending 2 years in the development phase, we can finally start construction in the Crown Bridge Alliance contract in Helsinki. And this, of course, is an important milestone for our Finnish organization and also for NRC Group. We have also won the electrification of Trønder-Meråkerbanen in a joint venture between our Swedish and Norwegian organization. And this shows how we can utilize synergies across NRC Group to be more competitive, as this project could neither have been won or executed by one of the country organizations alone. These bigger projects are important for NRC Group in order to create a good foundation for profitable growth. And it's also an important tool for us in order to grow and develop our organization. When it comes to our HSE KPIs, we see mixed results this quarter and so far this year. We have a too high injury frequency rate, represented by the LTI 1 figures. However, it's positive to see that we have 0 serious accidents this quarter and also this year. However, looking at accidents causing medical treatment, the frequency rate is still too high. And we need to improve within this area in order to get everyone home safe every day. On the positive side, we can also see that the sickness absence trend -- absence rate continues to trend downwards. And we also have had less impact from COVID-19 in our operations this quarter. However, we need to be ready for setbacks during winter. And Dag, now he will take us through the financials.

Thank you, Henning. Our revenues in quarter 3 was NOK 1.7 billion, which is 13% lower than last year. Adjusted for currency effects, the decline is around 11%, coming mainly from Sweden, where our hit rate the last 18 months has been low. In addition, also the tenders we have had recently in Norway have not had revenue effect yet. The order intake we have seen lately in the last quarters improves the order book in these countries. Hence, the growth looks comfortable going into 2022. In Finland, the revenue in quarter 3 was more or less flat compared with same quarter last year. Our EBITA, excluding M&A, were -- was NOK 102 million, with an EBITA margin of 6%, up from 4.5% last -- same quarter last year. All countries are showing improved profitability. And the main driver for the results in the quarter is Finland with continued strong profitability. In Norway, the profitability has increased. And we see positive development in several parts of the organization going forward. In Sweden, the profitability has also increased. However, it's partly mitigated by lower revenue, which caused negative scale effects. Depreciation, amortization and net finance is more or less on same or normal levels. And pretax profit ended at NOK 71 million, which is 51% increase from the same quarter last year. Moving to our balance sheet. Our total balance at the end of the quarter is NOK 5.6 billion, with an equity ratio of 48%. Our cash position at the end of the quarter was NOK 565 million, up from NOK 441 million in quarter 2. The improvement is explained by increased results but also improvement in net working capital. The improvement in net working capital is due to sharp continued focus on improving working capital as well as seasonal variations. Interest-bearing debt is reduced by NOK 71 million and is NOK 1.55 billion at the end of the quarter. The reduction is mainly due to repayment of bank debt and also reduced leasing debt. And with a cash position of NOK 565 million, our net interest-bearing debt is decreasing by NOK 194 million and is now, at the end of the quarter, NOK 985 million. Deducted for leasing debt, our net debt is approximately NOK 500 million end of quarter. Our cash flow from operation in the third quarter was solid with NOK 238 million, an improvement of NOK 109 million from the same quarter last year. The improvement is due to a continued sharp focus on improving working capital and also beneficial project mix in the quarter. Net cash flow from investing activities was NOK 17 million (sic) [ minus NOK 17 million ] , and net cash flow from financial activities, minus NOK 97 million. And all in all, a cash position of NOK 565 million end of quarter. Our order intake continued strong in the quarter with NOK 2.7 billion of orders. Our book-to-bill was 1.6 in the quarter, continuing the good development we had in quarter 2. Order book at the end of the quarter, NOK 7.6 billion, up from NOK 6.7 billion last quarter. And I will also like to mention that our order intake year-to-date end of quarter 3 is NOK 5.7 billion, which is actually an increase of 45% compared with the same period last year. This is a good indication of a more comfortable growth for next year. Our financial position is robust at the end of the quarter. We have a cash position of NOK 565 million and an unused credit facility of NOK 200 million. The remaining repayment schedule for the bank debt is NOK 37 million in 2021 and then approximately NOK 150 million each year the next 3 years. And our bond has maturity in September 2024. Now Henning will take us through operational review in more details.

Thanks, Dag. We delivered another strong quarter in our Finnish business with an EBITA margin of 10.9% this quarter. And the profitability is driven by very strong performance, both in our rail construction and light rail business. We have had a high order intake also in Finland this quarter with NOK 1.4 billion, of course, mainly due to the win of the Crown Bridge alliance contract. However, we have seen a weak hit rate in our maintenance business, losing 2 of our existing contracts, in total, yielding approximately NOK 100 million in annual revenue. So this indicates a risk for somewhat lower revenues and somewhat weaker profitability in the maintenance business in Finland next year. When it comes to the tender pipeline, we have 2 new maintenance contracts coming up for the next 9 months. And of course, with the losses we experienced this quarter, this will be of high importance for us next year. We still see that the record high investments we have seen in rail construction this year will continue next year in the Finnish market, which will be very positive for us. We also see a pipeline of light rail projects coming up in Finland. However, none of them will be tendered during 2022. The activity level in Norway is impacted by the low hit rate we saw in 2020. But looking at the order backlog, we should have a much stronger position moving forward in the Norwegian market. We see improved results in all divisions. In Norway, we delivered very strong results in our civil construction business, and the excellent project execution we have seen for the past years continues. The results in rail construction are impacted by low volumes. However, we see that the project portfolio is much more healthy and has a much higher margin than what we saw 1 year ago and 2 years ago. So what we need in order to get the full benefits of the improvements in rail construction is more volume. And with the win of Trønder-Meråkerbanen, we should be in a very good position for 2022. Within the environmental division, we have seen a high activity level through the quarter and we also delivered healthy results from that operation. So to sum up the headline in Norway, we are on track to deliver improved profitability. The tender pipeline remains strong in Norway across all our business areas. The biggest change this quarter has been the clear signal from the Norwegian government that they want to end the ongoing privatization process of rail maintenance. This is a lost opportunity for NRC Group, with the annual market of around NOK 2 billion. And it's very sad to see that the Norwegian government has no thanks to significantly reduced expenses maintaining the rail infrastructure. Our benchmarks are very clear in Sweden and Finland. There is a significant savings potential for the Norwegian state in this area. The activity level in Sweden is low. We have stayed loyal to our strategy, not dumping prices to get volume. And this is the only way forward for long-term success in Sweden. Although the volumes are significantly down, we are able to improve the results somewhat compared to last year. That is mainly due to good performance in projects won from 2020 and onwards. We are, of course, very happy to see an increased order intake in the Swedish market as well, with the most significant win being the Trønder-Meråkerbanen for our Swedish organization as well. But as you have seen, we have won several small and medium-sized contracts in Sweden, both in quarter 3 and quarter 4. So our order book for Sweden also looks significantly stronger for next year, and we should be able to return to growth in the Swedish market in 2022. Our hit rate has increased, but we still face a fierce competition in the Swedish market. But the tender pipeline remains strong in Sweden, and it will be interesting to see how our competitive -- competitors price going forward. When it comes to maintenance, 3 of our own contracts are out for tender in Sweden during the next 9 months. The first one has already been submitted but will not be awarded before December this year. The second one is expected to be awarded during quarter 1. And the third one will most likely slide into quarter 2 before we get a decision on it. Our focus for the last 2 years have been to restore our profitability. And on the next couple of slides, we will show you a bit what we have achieved during that process. When we had our Capital Market update in February 2020, we presented our measures to restore profitability. And the big losses leading up to this came from our rail construction unit in Norway and our civil and rail construction unit in Sweden. Our argument for why we should be able to restore the profitability was based on the fact that we had exact similar business represented by the civil construction unit in Norway and rail construction in Finland, delivering excellent result within the exact same business. And our strategy was to change management of the nonperforming units and let the new management implement proven processes from the performing units. One of the most important tasks in order to improve the profitability from the nonperforming units is to reduce the tail of loss-making projects you can see on the right-hand side. And the most important measure to succeed with this is to build robust tender processes. Our slogan for the past 2 years has been to win the right project at the right price. Meaning if we see a project with a big negative asymmetric risk in the tender phase, either we need to increase our price and rather risk losing it, or maybe even better, stop calculation at the early phase, focus our resources on projects with a better risk reward and better suited for our competitive edge. We also saw a potential for improving our project execution, and it was mainly related to how we organize project. And also, we needed to lift critical capabilities within our project teams. So when we compare the performance in the new portfolio in -- where we have projects won after 1st of January 2020 with the performance in the project portfolio we presented at the Capital Markets update, we can clearly see that our measures have been successful. The average margin of the new portfolio is 7 percentage points higher than what we saw in the portfolio presented in February last year. We have not been able to completely eliminate loss-making projects, but they are small in size and have a very limited impact on our profitability. Looking at this portfolio, it's clearly fewer projects but they are bigger in average size. Of course, they are somewhat shorter in the life cycle. But I'm confident that we have a much healthier portfolio with a much more balanced risk. So to sum up, the third quarter has been a good quarter for NRC Group. We have seen clear improvements in many important areas. We deliver better profitability. We have a continued strong order intake, giving us a head start to 2022 when it comes to order booked for a season. And we still see record high investments in our markets. We deliver a very strong cash flow from operation and our financial position remains strong. And as you can see on the last slides, our measures to improve profitability are yielding results. And we will continue the sharp focus on these processes going forward. Our guiding for the year remains unchanged. We expect to deliver a EBITA margin between 1.75% and 2.5%. Now we can open up for questions.

Yes?

Yes. On the previous page, you commented 7% improvement. Is that 7 basis points higher on average margins in the project? Or is it 7% compared to last year in terms of expected margins of the project?

The first one, 7 percentage point versus the average margin in the old portfolio.

And you don't want to say anything about the impact of that will have in the guidance for 2022 maybe?

Well, we won't be precise on the guiding for 2022. But it's obvious that these results you see on the last slide support a continuous improvement in our profit going forward.

With respect to the same slide, if we think about volumes, are the apples to apples are the -- on the left side, is that NOK 6 billion in revenue and the right is NOK 1.5 billion in revenue?

Well, you need to remember that this is only a part of, I think, the annual revenues -- annual revenue from the old project portfolio in 2019 was approximately NOK 1.8 billion, while the annual revenue we see from this portfolio we presented here is NOK 1.2 billion. And that is, of course, also representing the fact that we have had a lower hit rate in 2020. So to get the full benefit of the margin expansion you can see here, we also need more volumes. But as you have seen, we're also having good trend in order intake.

And just to add that it's also only projects which are won after 2020. So of course, that is not the full picture.

So how much of the backlog is on the right side there?

We have NOK 30 million left of the -- you can say the legacy project at the end of the quarter, and that we expect to be finalized during the year.

On guiding, will you continue to guide? Or is that something that you want to discontinue?

That is something for the Board to decide when we are delivering quarter 4 results.