NRC Group ASA (NRC) Earnings Call Transcript & Summary

Welcome to the presentation of third quarter results for NRC Group. After the presentation, we will host a Q&A session. And for those of you participating on the stream, you can write questions in the chat. NRC Group delivered a solid third quarter with a record-high activity level with revenues of NOK 2 billion, representing a growth from last year of 17%. We delivered a good result of NOK 94 million, down NOK 8 million last year, and we delivered an EBITA margin lower than same period last year. And the lower margin is driven by high growth and a high activity level in Sweden, where we do have lower margins on our projects. We delivered another solid quarter when it comes to order intake with NOK 2.2 billion, representing a book-to-bill ratio of 1.1 for the quarter. We delivered a good operating cash flow of NOK 96 million, although lower than last year as the activity level has been higher this year. We haven't been able to reduce the working capital in the same way we did third quarter last year. We are ending the quarter with a record-high order backlog of NOK 8.6 million, representing a growth from last year by 13%. When it comes to our health and safety results, we have delivered stable results when it comes to the lost time injury frequency and also total recordable injuries this year on a lower level than last year, which is positive. We have a sickness absence rate of 4% year-to-date, which is an acceptable level given the higher COVID-related absence in the beginning of the year. We have one serious injury in our company in the quarter and 2 year-to-date. And this quarter, we had one employee in one of our maintenance contracts, getting voltage through his body while working on the catenary installation system. He got serious burns in one of his hands and had to stay home for 26 days to recover. In NRC Group, we work with high-voltage systems every day, and we know that accidents related to this can have a serious damage potential. And we have done a thorough investigation of this accident, updating our processes and procedures in order to avoid similar accidents going forward. And safety is the #1 priority in NRC Group, and all employees should come home safely every day. Looking at the market development. We still have a high inflationary environment. We see still high material prices and also disruptions in value chain impacting the global economy. However, for NRC Group's markets, we still believe to see strong investments in the rail infrastructure in 2023. But with the new economic situation, politicians need to prioritize, and they need to look into all spend, including rail infrastructure. And we do expect to see a shift from focusing on the bigger investment projects to turn more funding into the existing infrastructure. And on this picture, you can see a quote from Bane NOR from their Annual Suppliers' Day last month where they gave their view on the market outlook going forward. And basically, they say that the time to start new investments in big double track lines has passed for now, and they need to shift focus towards projects where they see the best economic effects. And in practice, this is the existing infrastructure, maintaining and upgrading this. And in Bane NOR's forecast, this means that we will see a higher demand for rail technical contractors in the Norwegian market going forward. And that is, of course, important for NRC Group because for investors in NRC, it's important to understand that EUR 1 invested in new double track lines is not the same as EUR 1 invested in the existing infrastructure. As we do not compete for the bigger groundwork contracts that is a part of the bigger investments, our addressable market of the big investment projects are only close to 20%, while for all euros spent on the existing infrastructure, our addressable share of the spend is close to 100%. And I would like to draw the attention towards the maintenance backlog and also the long-term trends in this market. With the maintenance backlog of NOK 80 billion across our 3 markets, it will yield lots of opportunities for NRC Group also for the years to come. Now Ole will take us through the financials.

Thank you, Henning. Financially, we had a good third quarter. Our revenues came in at NOK 2.0 billion, which is up 17% compared to the same quarter last year. On a year-to-date basis, we are also up 17% compared to the first 9 months last year. On the like-for-like currency, the growth in Q3 was 20%, and the growth year-to-date is 19% in the like-for-like currency. The strong growth was supported by well performance in Norway with 12% growth and a 63% growth in Sweden on a like-for-like currency, while Finland is more or less flat. Our profits, which we measure as EBITA, excluding M&A costs, is down NOK 8 million compared to the same quarter last year but still a strong NOK 94 million, and this gave an EBITA margin of 4.7%. And we will come back to details on each country later on in the presentation. But before I move on, let's go some details into the other P&L lines. As you can see, the M&A expenses is 0 in the quarter. And as of now, we do not expect any significant negative costs related to old transactions. The depreciation is coming down NOK 5 million to minus NOK 44 million, and this is due to a reduced and better utilization of our asset base as according to our strategy. Amortization is at minus NOK 9 million. And as mentioned a couple of times before, NOK 6 million of this is related to PPE amortization from the VR Track acquisition back in 2019. And this amortization will come to an end at the end of the year. Net financial item is at minus NOK 14 million, and this is mostly related to interest costs from our debt, and as you can see, coming down compared to last year as we are reducing our debt and paying down our debt. And please note that we have hedged the NIBOR on our bond loan at 1.83%. And as such, we are limitedly exposed to the volatility and increased interest rates in the markets. Lastly, you can also see that we have a share of profit from joint ventures at minus NOK 9 million. In Q3 2022, NRC Group made a capital contribution of SEK 8 million to AGN Haga AB to support working capital in that company. There are significant uncertainty to the project, and all net profit in AGN Haga has been -- or has not been recognized in NRC Group accounts, and all capital contribution of total SEK 9.5 million has been impaired. Looking a little bit more longer term, measured here as rolling 12-month performance. The improvement program is gradually yielding results. The last 12 to 18 months, we've seen a significant improvement in profits and profit margins. And as you can see in the graph in the middle, the EBITA came in at NOK 170 million in Q3, measured over the last 12 months. However, if you look to the slide or look to the graph to the left, you can now see that the last 2 quarters, we've also seen a significant ramp-up in volumes, and this bodes well for the future. We expect to deliver a solid Q4 and that the rolling margin will increase as according to our 2022 guidance. Moving over to the balance sheet. Our total balance by the end of September is at NOK 5.8 billion. And our gross interest-bearing debt, including operational and financial leases, is down NOK 14 million compared to the last quarter. We have paid down -- we had a scheduled bank installment of NOK 38 million, but this was partly offset by increased leases of NOK 15 million as well as unfavorable exchange rates, which increased the loan with NOK 10 million. The net interest-bearing debt, as you can see on the graph to the right, is just shy of NOK 1 billion, which is more or less flat to the same quarter last year and also to Q2 2022. And the net interest-bearing debt, excluding leases, is now only NOK 522 million. Cash flow from operation was strong at NOK 96 million, although down from NOK 238 million in Q3 last year. The solid cash flow we have seen over the last year has been supported by continuously lowering our working capital. However, due to a 34% sales increase in September this year compared to September last year, the seasonal reduction in working capital has been somewhat delayed. We are continuously working on managing our working capital. But obviously, it is dependent on other factors such as our sales volumes as well as our contract portfolio. If we go to the right-hand graph, you can see that we have cash flow from investment activity or CapEx of only minus NOK 11 million. And this is according to our lean asset base strategy. And the cash flow from investment activities -- sorry, cash flow from finance activities is at minus NOK 89 million, and this consists of the NOK 38 million in bank installment as we mentioned earlier, a NOK 42 million payment in leases and NOK 10 million in payment of interest. And as I mentioned earlier, the NIBOR on our NOK 600 million bond loan is hedged at 1.83%, so we expect the interest cost to remain low in the short to medium term. In sum, we ended with a cash position, as you can see here, of NOK 412 million. Moving over to the financial position, which remains robust at Q3. We have a euro bank debt at value of NOK 334 million and a bond loan of NOK 600 million. The bank loan has installment profile of approximately NOK 36 million per quarter and falls due in Q1 2024, while the bond loan falls due in complete in Q3 2024. On the liquidity side, we have the mentioned cash position of NOK 412 million, and we have an undrawn credit facility of NOK 200 million, which means that we have more than NOK 600 million in available liquidity as of now. If we move to the right-hand graph, you can see that we have a long-term leverage ratio target to be below 2.5x EBITA. And over the last years, we have come down to this threshold due to a combination of improved profits as well as down payment of our debt. And the leverage ratio came in at 2.8x EBITA in Q3, which is slightly above our target. The order intake in the quarter was strong at NOK 2.2 billion. And this gave a book-to-bill ratio of 1.1, and measure over the last 12 months is also at 1.1, which you can see in the graph to the left. Our order backlog is record high at NOK 8.6 billion, which is up 13% compared to where we were last year. The record-high order backlog supports our long-term growth outlook and gives a good platform. Having said that, if we look at the order backlog in the short to medium term, it's more of a mixed picture. The solid order intake we had in Q2 and Q3 this year was driven by long-term maintenance contract in Sweden, and we need to deliver more contracts for 2023 to continue the growth path. If you look at the graph to the right, you can see that the order backlog for the next 5 quarters are more or less flat compared to where we were at the same time last year. However, while we have a good NOK 1.5 billion for delivery in Q4 this year, which is 8% higher than we were at the same time last year, the current order backlog for 2023 is slightly below where we were at the same time last year. Having said that, as you can see, we are well above where we were in 2020. And with that, I'll leave it back to you, Henning.

Thank you, Ole. We'll go more detail into our 3 countries for operational review, and we will start with Norway, where we see that we continue the positive development we have seen for some quarters now. We deliver a growth in revenues of 12%. We deliver improved EBITDA results and we deliver improved EBITDA margins. Looking at the order backlog. It's more or less at the same level as we saw 1 year ago. And as Ole said, we need to win more contracts within rail construction and civil construction in Norway to continue a good growth path in the Norwegian market for next year. Going more into the operations. We have had strong performance and strong results from our environmental division in third quarter. We have also seen improved results in rail construction, however, partly offset by weaker results in civil. Looking at the short-term market outlook. We have a very solid tender pipeline in Norway with several big projects to compete for. And we can be selective in which of the projects we engage in, which is, of course, positive for us. The proposal for the national budget in Norway came a couple of weeks ago, and the proposal is to continue the record-high investment level that we saw in 2022 also in 2023 when it comes to rail infrastructure in Norway, which will give a very attractive market for us in Norway also in 2023. The politicians have decided to do a revision of the national transportation plan in Norway 1 year earlier than planned, and we expect that this will show what also our clients said that there will be a shift from bigger investment projects to focus more on existing infrastructure. Going to Sweden. We have seen a very high activity level in the Swedish market in quarter 3 with a growth in revenue of 64% for the quarter. And this is mainly driven by higher volumes in our rail construction operations. However, we deliver results at same level as last year. We have been implemented several measures for the past 3 years, and we do see a positive development in our results in Sweden, and we believe this trend to continue going forward. Looking at the performance in quarter 3. We see improvements in results in rail construction. However, this is offset by weaker results in civil. And this is related to 2 factors: selective projects with poor performance but also effects from higher material prices. We have seen a very strong order intake in Sweden, as Ole mentioned, and we have won 4 new maintenance contracts this year, where 3 is a renewal of our existing contracts, but this quarter, we also won a new contract in Sweden. And this gives a solid foundation for us in Sweden to continue to develop our maintenance business, and it is a good starting point to realize profitable growth also within the maintenance segment in Sweden. As in Norway, we expect the high tender activity in Sweden to continue in the next 9 months. We have more than enough projects to compete for in all our 3 segments in Sweden. We have seen a change of government in Sweden the last quarter, and it will be interesting to see their priorities when they launch the national budget as well. We believe that the development will be in a similar path as in Norway, where they focus more on the existing infrastructure and less on bigger investment projects. In Finland, we delivered another solid quarter with strong results with an EBITA result of NOK 78 million in the quarter and an EBITA margin of 9.7%. And we believe that the good results in Finland will also continue next year. Looking at the performance in Finland. We see that we have a very -- that we have a high growth rate in rail construction and also strong results in that area. Looking at light rail, we see a lower activity level as expected but still strong results from our project execution in light rail projects. We see somewhat weaker results in maintenance due to weaker results in some of our contracts. Looking at the order intake in Finland. It has been limited in the quarter with NOK 316 million. And for the past 12 months, we have a book-to-bill in Finland of 0.9. And looking at the tender pipeline in Finland. It is more modest compared to Sweden and Norway, and we have seen a decline in the tender pipeline compared to 1 year ago, especially within rail construction. In maintenance, it's more or less stable. And when it comes to light rail, we expect a high investment level when it comes to new light rail projects going forward. However, we will not see the effects of that before 2024. In Finland, they will do a revision of their national transportation plan this year. We will also see an election in Finland spring next year, where we will probably see a change of government. However, there is a strong political consensus in Finland for investing in rail infrastructure. And although we see a somewhat declining market, especially within rail construction in Finland next year, we go into the year with a very strong order book in Finland. And we expect to deliver strong results, and we also see and believe that we will have good market opportunities in the Finnish market in the medium to long term. So to sum up quarter 3, we delivered a solid quarter with good results and a growth in revenue of 17% despite the global economic uncertainties. We have a record-high backlog. We have a market driven by strong global megatrends such as urbanization and the need for sustainable infrastructure. And in combination with the maintenance backlog of NOK 80 billion in our 3 markets, we believe to be very well positioned for the future, and we expect the positive development in NRC Group to continue. Looking at operations. We continue to deliver strong results from Finland. The positive development in Norway with better results, better margin and growth continues. And we have seen a very high activity level in Sweden, although the results are at same level as last year. And again, I would like to highlight the wins in maintenance where we now have a solid platform to further develop the Swedish maintenance business and a good starting point for delivering profitable growth also on the maintenance side in Sweden. We have a positive outlook for the year. We expect that the positive operational and financial development will continue. Based on figures year-to-date and also the order book rest of year, we believe to see strong revenue growth and that we will see a moderate increase in EBITDA margins compared to last year. So then we will open up for questions.

Just on the Finnish market, you have a book-to-bill of 0.9. How do you see your chances of keeping the revenue in fixed currencies at the same level in 2023 or in 1 year ahead? Will -- is the backlog good enough for growth? Or you will have to see declining operations in Finland?

Our target is to deliver revenues approximately at the same level. And if we succeed in the tender market, we are able to do that, but it's not given that we are able to do it. We can also see a slight decline given the weak tender pipeline, especially in rail construction, but our target is to deliver approximately the same level on the revenue side for next year.

In terms of sizing up and down operations, you're not thinking about reducing employees and taking up employees?

No, we have a very high capacity utilization in the Finnish market now. So we don't see any need to reduce our capacity.

In the Swedish operations, you said rail had good performance, but civil had a kind of a hit. Was this short-term one-offs? Or how do you expect that one to trend going forward? Will we see any recurring element of civil losses in Sweden? Or -- and how is the Swedish rail operations performing versus what we see in Norway and Finland?

I'll take the last one. First, we do have lower margins in rail construction in Sweden compared to Norway and Finland. And this is due to the competitive situation we have been discussing for a while in Sweden. So we had lower margins in rail construction in Sweden compared to Norway and Finland. When it comes to civil, we have a couple of projects with bad performance, which we have taken losses. And we have seen effects of higher material prices, and the civil segment in Sweden is where we have the highest exposure when it comes to increased material prices because we have a higher share of private customers and the contracts is also of shorter duration. Normally, that's an advantage. But with the steep increase we saw from last [ soaring ] material prices, both as a fact due to the war in Ukraine, but also before that, we weren't able to compensate that well enough in the Swedish civil construction operations. However, when it comes to the future, we do not expect, of course, to have more project losses, but we have a civil operation in Sweden that have a fairly small scale, approximately SEK 300 million in revenues, if you remember from the Capital Market Day. So we do not expect it to be profitable as such as we have a little bit subscale operations at the moment.

Just to add on, your question was if it's a recurring problem on the project, and obviously, in civil business, the duration of the projects are relatively small. So it's not like it will continue far into the future. Then it will be a new portfolio of project. And hopefully, we will deliver better project execution on the new portfolio.

What is the average duration of civil contracts?

I will say, in Sweden, maybe 9 months.