NRC Group ASA (NRC) Earnings Call Transcript & Summary

Welcome to the quarterly presentation for NRC Group. After the presentation, Lene, our Communication Director, will facilitate a Q&A session. And for those of you who participate on the stream, you can write questions in the chat. 2021 has been a good year for NRC Group, and quarter 4 confirms the positive financial and operational trend. Revenue for the quarter was NOK 1.6 billion, an organic growth of 7%. The profit for the year -- the profit for the quarter was up by NOK 60 million and the systematic work we have put down for the last 2 years are clearly yielding results. The order intake for the quarter was NOK 500 million above last year and ended up at NOK 1.9 billion. So the third consecutive quarter with a book-to-bill significantly above 1. We also saw a strong operating cash flow of NOK 149 million, an improvement from NOK 110 million last year. So quarter 4 showed an improvement on all key financial metrics. Looking at full year figures, we can also see the positive trend. We started out the year with a low order book, and that has led to a moderate decline in revenues. However, we have used this opportunity to improve our core processes and build a strong foundation for profitable growth. We have seen a strong increase in EBITDA margins from 0.9 and 0.8 for the past 2 years to 2.3% this year in the higher end of our guided range. With a strong operating cash flow, our net interest-bearing debt is down to NOK 891 million. And combined with improved profitability, the ratio between net interest-bearing debt versus adjusted EBITDA is down from 4.2 starting the year to 2.7 end of the year. So we are getting closer to our long-term target of staying below 2.5 on this ratio. With a continued good order intake throughout the year, we end the year with a 20% higher order book than last year. We expect the improvement in operational and financial development to continue into 2022. We expect a moderate to strong growth in revenue, and we expect a moderate increase in EBITDA margins versus 2021. We have mixed results within HCC. We had too many lost time accidents throughout 2021. However, the trend has improved for the second half of the year. But most importantly, we have 0 serious accidents. Our sickness absence rate is down from 4.8% to 3.9% this year, and that in a year heavily impacted by COVID. So this represents a healthy organization, a productive and motivated organization. As you all know, infection rates are still high when it comes to COVID. NRC Group is in low season, and operational impact has been limited. However, we move closer to spring and closer to high season, so our exposure will increase. We believe NRC Group is in a unique position within our industry, building sustainable infrastructure. But it's not only about the product, it's also about the process and how we contribute as a company. These are the 6 most important topics for NRC Group in order to build a sustainable company. And of course, health and safety is a very important topic being a construction company, but it's also about building a diverse and including workforce. It's about training and developing our employees, making sure they have an interesting carrier path in NRC Group. And it's also about our greenhouse gas emissions where we have made concrete targets to reduce our greenhouse gas emissions by 30% within 2024 and to become carbon neutral within 2050. We will continue the systematic work with these 6 topics in order to build a sustainable company, but this is also important enablers for us to reach our commercial goals. The EU Taxonomy will be important for how attractive it is to invest in NRC Group and other companies going forward. We believe that the EU Taxonomy will highlight NRC Group's uniqueness in the construction industry as we build sustainable infrastructure. Preliminary results for 2021 shows that 87% of our activities are eligible within the taxonomy. In 2021, 62% of activities were aligned. And by continuing implementing measures, we believe that we can raise that number to above 70% going forward. NRC Group started out the year with a low order book, and that has, of course, impacted the revenues for the year. However, the trend has turned and we realized a 7% organic growth for the quarter. The results are improving. The EBITDA is up NOK 60 million versus 2020 in the fourth quarter, and that is mainly due to improvements in the Norwegian business. We had M&A expenses of NOK 22 million in the quarter. It's mainly related to legal expenses in a legal case against the sellers of Signal and Banyan back in 2017, where we lost a court case in the district court this quarter. However, this judgment has been appealed. But is also related to an insurance claim from back in 2016 in the Finnish operation. We have seen high M&A costs in 2021, but we believe it will be significantly lower in '22 and hopefully close to 0 unless we start new M&A transactions. Amortization for the quarter was NOK 19 million, NOK 8 million above the normalized level, and this is due to write-down of software in Finland. For 2020, we expect the level to be on a normalized level of NOK 40 million. Our balance sheet has been improving throughout the year. and we have a very strong cash position of NOK 626 million. And with a strong operating cash flow in fourth quarter, we have been able to reduce our net interest-bearing debt by NOK 93 million in the quarter. We will continue to work with our balance sheet in order to be as capital efficient as possible. The strong cash flow generation we saw in quarter 3 has continued into quarter 4. And for the year, we have realized a net operating cash flow of NOK 358 million versus NOK 312 million last year. And for the quarter, we had a positive operating cash flow of NOK 149 million. Net financial items ended up at minus 91 million, and that covers leasing, interest and also installment on our loans. The cash flow from operating activities has been strong, both in 2020 and 2021 and above our EBITDA. And for 2021, we also see a positive cash flow in total for the company. With a strong operating cash flow throughout the year, we have been able to reduce our net interest-bearing debt from NOK 1.2 billion starting the year to NOK 891 million end of year. And combined with increased profitability, we see that the ratio between net interest-bearing debt and adjusted EBITDA is down from 4.2 to 2.7 ending there. So getting closer to our long-term target of staying below 2.5 on this ratio. So we have a solid financial position entering 2022. We have also seen a solid order intake in quarter 4 with significant wins. Some examples being the track renewal project in Sweden of NOK 195 million. We also won the extension of the Tampere tramway in Finland of NOK 250 million, and we also won the Robo terminal project in Finland in Habari Olin of NOK 200 million. So with a continued strong order intake, we end the year with an order book of NOK 7.8 billion, an increase of 20% versus last year. And with a strong order book, we have a good starting point for 2022. We have already secured contracts for 4.1 billion for this year. And compared to the same period last year, that was 3.4. So 2022 should be the year when we get back to a growth level we want to see in NRC Group. And to continue that growth beyond 2022, we need to make sure that we are even better at utilizing our Nordic capabilities and Nordic capacity to succeed in the market. We need to keep our market share within small and medium-sized projects. But to get the growth rate we want, we also need to win more big projects. 2021 has been a very strong year in our Finnish operation, and we delivered strong profitability. In Norwegian currency, the revenues are somewhat down in quarter 4. However, in local currency, we saw an organic growth of 3%. We delivered a strong EBITA of NOK 59 million, representing an EBITA margin of 8.3% in the quarter and we delivered 8% for the full year. And this is due to strong performance in our light rail business and our rail construction business and also some contribution from sales of machinery. We have seen a strong order intake in Finland in quarter 4, winning important projects for all business lines, and I mentioned a few of them earlier. We also received an extension of 2 years for Maintenance Area 4 in Finland, and this is important for us to continue to build a solid maintenance business in Finland. When we look into 2022, the revenue mix will change somewhat in Finland. We have finished the first step of the Tampere tramway project. In the U.K. Light Rail project, the activity level will also be somewhat lower in 2022 versus 2021. So even though we ramp up activities in the Crown Bridge project, the revenues from this segment will be somewhat lower in 2022. And as you know, we like to be a bit more conservative booking project, booking profit early in the project cycle, so this might also impact the results for 2022 somewhat. As you know, we have had a low hit rate in new maintenance tenders throughout 2021 in Finland. So this will also impact the revenue on the negative side for next year. So all in all, even though we start the year with a very strong order book in Finland, we expect a slight decrease in revenues for 2022 for the country as such. Tender pipeline in Finland is down in rail construction, both if we compare to last quarter and comparing 1 year ago. However, we start the year with a very strong order book in this business, so we will realize growth in 2022. And comparing the tender pipeline and the expected investments level ahead, rail construction will provide us with good growth opportunities in Finland going forward. 2021 has also been a good year in NRC Group where we finally see the positive development that we have worked hard to achieve. The strong order intake throughout the year is starting to show in revenues, and we see a 15% organic growth in the quarter. We delivered a good result with an EBITDA of NOK 21 million, representing a margin of 4.2%. And this is good, especially when we compare to the situation 1 year ago. In our demolition and recycling business, we are delivering margins on the level we want to see again in quarter 4, and the improvement program we started 1 year ago has been successful. And the environment business, the rest of it, is also delivering a strong fourth quarter. In rail construction and civil construction, the low activity level still impacts result, but project execution is still strong. And with improved activity level in 2022, margins and results should also improve from this part of the business. We have a very strong order book entering 2022, so we expect a strong increase in revenues in Norway, and we also expect improved margins for 2022. We still see a solid tender pipeline in the Norwegian market. We can be selective in which tenders we want to participate in. As we move and focus more on bigger projects, the order intake might be a bit more volatile going forward. In Sweden, we have not yet been able to convert all the good work done into better results. We delivered a weak quarter with minus NOK 21 million in EBITA and we delivered a weak result for the year. And the weak results for the year are mainly driven by a low activity level and further provisions on old projects. But we see also in Sweden that the good order intake throughout the year is starting to show in revenues with organic growth of 7% in the quarter and we have a much better outlook for 2022 than what we have seen for the past couple of years. The order book for 2022 is up by 25% comparing to 1 year ago. And more important, we have a healthy order book consistent of projects won in 2020 and 2021. We still see fierce competition in the market, and our focus is to build a solid order book beyond 2022. I -- we still see high tender activity within rail construction in Sweden. As you know, in our maintenance business, we have not won new contracts in 2021, and this is what impacts the order book beyond 2022. This year, 3 of our own contracts were expected to be tendered, and we submitted a bid on 2 of those in quarter 4. We recently received news from our client that the tenders was canceled, and the likely outcome of that is that we will keep those projects for 1 more year, securing the revenues at least in 2023. But nothing is final here. We still await response from our client on how they will go forward with these 2 projects. The third contract expected to be tendered in '21 will be tendered this quarter, quarter 1 2021. If we look at the maintenance tenders in Sweden in 2021, the situation has been very unpredictable. We have tendered in total 10 contracts -- and 5 of those tenders has been canceled after we submitted the bid. So this will, of course, come back and be tendered later when the client is ready, but the situation has been unpredictable this year. So to sum up fourth quarter, the continued good order intake throughout the year is starting to show in our revenues and we saw a 7% organic growth in the quarter. We delivered improved profitability mainly due to the improvements shown in Norway. We delivered a strong order intake, and we delivered a strong cash flow from operation. If we look at the full year, we delivered a very strong result from our Finnish operation. We see a good improvement in the Norwegian business, but we still have some work left in Sweden, but we start the year with a much better starting point than what we have seen for the past couple of years. We will, of course, continue the good work we are doing in order to improve our core processes in tendering and project execution and our focus is on generating profitable growth. The tender pipeline is still strong, but we need to better utilize our Nordic competence and capacity to succeed in the market. And the good operational and financial trend we have seen in 2021 is expected to continue for 2022. We expect a moderate to strong growth in revenues and a moderate increase in EBITA margins compared to 2021. Thank you. Now we will open up for questions.

Yes, in English?

Yes.

You say moderate growth and EBIT margins. What is moderate and what kind of ranges do you think when you talk about moderate, it could be anything because if you look to the history, the company had very high margins. Now we have a few years with low. So what are the relevant to reference in terms of moderate EBIT recovery.

Yes. I think what we commented on 2021 was that when comparing to 2020 and 2019 with EBITA margins of 0.8 and 0.9, we have seen a strong increase in EBITDA margins to this year of 2.3. So that's an improvement of 1.5 percentage points. So a moderate increase, that should be somewhere below that level.

Hans Jacobsen of Nordea. In Sweden, your profitability in line with your competitors has been weak for a considerable time. And you said that you expect the competition to remain fierce, you don't see any consolidation or any of our competitors going out of business that could give some high margins to those remaining?

Well, we have seen a tough market in Sweden for the past couple of years. Some competitors has been struggling, although we haven't seen sort of a washout in the market. What tends to happen is that the players that are struggling are getting financed by new equity from private equity companies and other new owners putting capital into the operations. So we haven't seen any improvement, material improvement in the competitive situation. But we see that the projects we have won in 2020 and 2021 in the same fierce competition is profitable for us. And if we are able to continue that trend going forward, we will be able to deliver better results in Sweden even with this fierce competition.

And on Sweden, the 5 contracts you said was canceled. Are you sure they are coming back.

They need to come back. Our client is a public client and they need to tender all their activities.

Simen from DNB. The book-to-bill is very good year-on-year. And if you look at the orders which are maturing 2020, they were up quite significantly when you see of the maturity profile of the orders. How much when you say strong growth is the relevance? Can we look at the deviation of the order backlog and assume that is going to be the growth for this year compared to last year's revenue in terms of the order in a brand butter experience and volatility you spoke about because there are 2 billion potential increase here in revenues in 2020.

Yes, and that is too optimistic, taking the comparable figures and just adding that as the growth rate in 2022. So that's why we say we expect a moderate to strong growth. We are still early in the year, so we have contracted 4.1 billion. So where we end up, if it's 7% growth, 10% growth or 13% growth, that is a bit early to say. But with the order book we have, we should see a moderate to strong growth. And how we succeed with tenders for the next 6 months will, of course, provide the final answer to that.

Two questions, if I can. We start with the long-term picture. You have removed the slide with your long-term ambition. Is that deliberately? Or -- yes, any color on that? And the second question would be, if you look at orders for execution in Finland, it's up compared to 1 year ago, but you are signaling that revenue will be lower. You have a good explanation, but could you talk a little bit about the drivers behind that?

Yes. Let's start with the last one first. The reason why we say we expect a decrease in revenues is due to the falling revenues in the light rail business and in the maintenance business. We are not able to move those resources to rail construction and get the same or get fully compensated the revenues we lose. And when we enter the year with a high order book in rail construction. Our capacity to win new orders for this year is also a bit lower than what we saw 1 year ago. So we could have grown more in the rail construction business, but we have tied up quite a bit of our capacity already. So that's why we expect lower revenues. And the first question as well. It's correct that we have removed the picture. We have not changed our ambition level. But as we have been saying throughout 2021, they are obviously delayed on reaching those targets. So we will come back later this year, updating our financial ambitions going forward. There's no reason to decrease the ambition level, but obviously, we are delayed on getting there.

I have a question regarding the unannounced order intake in the quarter, which was strong once again. Could you give us some color on how your clients are behaving these days? Is it sort of a very active dialogue? In the sense, it seems like you are landing a lot of business on the short notice here these days.

Yes. And the unannounced order intake, that's, of course, win of smaller orders beyond the 30 million that we normally published on the stock exchange. It's day-to-day business in some of our smaller contract, smaller companies like [indiscernible], and the mass transportation company, the demolition and recycling business. Those are normally orders that are not big enough to be published on the stock exchange. But also a significant part of that is growth in existing projects. So we're then receiving change orders. That will grow the order book. And we have had some projects where we have seen a significant increase in scope impacting the order book in a positive way.