NRC Group ASA (NRC) Earnings Call Transcript & Summary

Welcome to the fourth quarter presentation for NRC Group. Welcome to all of you here participating in Oslo and also a warm welcome to those of you participating on the stream. After the session, we will have a Q&A session, where those of you who are participating on the stream can write questions in the chart. We ended 2020 with strong revenue growth and reported revenues in fourth quarter of NOK 2 billion. This represents a 22% growth in revenue versus last year. Unfortunately, we were not able to capitalize on the increased revenues when it comes to results and margins. We delivered an EBITA of NOK 31 million in the quarter, down from NOK 50 million last year. And in combination with the higher revenues, this gives us an EBITA margin for the quarter of 1.6%, down from 3.1% last year. Looking at the countries, we delivered solid performance and good profitability in Finland. We see a very positive development in Norway with both higher revenues and higher margins, while we delivered weak results in Sweden due to losses in the Civil Construction portfolio. We delivered a good cash flow from operating activities in the quarter of NOK 160 million, up from NOK 149 million last year. We had an order intake of NOK 1.3 billion, which leads to an order backlog end of year of NOK 7.8 billion. This is the same level as last year. In the presentation, you will see that during fourth quarter, we have had a positive development in our tender pipeline for the next 9 months. So we will have good opportunities during 2023 to increase our order intake and strengthen our order backlog. When it comes to our health and safety KPIs, we are delivering on an unsatisfactory level. When it comes to total recordable injuries and lost time incidents, we have too many accidents and we also have variations in results between countries in this area. In Norway, we are delivering good results, while Finland impact negatively. And especially in the fourth quarter, we have had too many lost time incidents in Finland connected to slips and trips due to winter conditions. We have had -- we have not had any serious injuries in this quarter. However, we have had 2 serious injuries during the year, and that is 2 too many. Our sickness absence rate is on a healthy level at 4.2%. It's somewhat up compared to last year due to higher COVID-related sickness absence in quarter 1 and also somewhat higher sickness absence in quarter 4, in line with the rest of the society, I would say. Now Ole, he will take us through the financial results.

Thank you, Henning. Starting with the performance for the full year 2022. Financially, we had a good development compared to the last years. We had in 2022 strong revenue growth with 18% higher volumes in 2022 compared to 2021, and we came in with a sale of NOK 7.0 billion. Our EBITA increased slightly from NOK 139 million to NOK 151 million. And note here that in 2021, we had positive gain from sale of machinery, which was NOK 43 million higher than it was in 2022, and this gave a positive impact on the 2021 results. As a sum, the EBITA margin decreased slightly to 2.1% in the quarter -- in the year. Over to net interest-bearing debt, which has come down over the last few years. It increased slightly to NOK 950 million in 2022, while our order backlog remains high at NOK 7.8 billion, which is in line, at the same level as it was at the end of 2021. Looking into 2023, we now expect to continue the positive both operational and financial development we've seen in the last few years. And right now, we see a slight decrease in revenues in 2023 compared to 2022, and we expect a moderate increase in our EBITA margin. Looking at fourth quarter financially. We had strong revenues, but the profitability was somewhat weaker than expected. The sales came in at NOK 2.0 billion, which is up 22% compared to the fourth quarter in 2021, and this was driven by strong growth in Sweden and Norway. On a like-for-like currency, the growth rate was 21%. Our operational profit, which we measure as EBITA excluding M&A expenses, is down NOK 19 million compared to fourth quarter 2021 and came in at NOK 31 million. In Q4 2021, we had positive gain from sale of machinery of NOK 23 million, and this was only NOK 1 million in Q4 this year. We will come back with more details on each country later in the presentation, but I will give you some more flavor on each P&L line. As you can see, the M&A expenses for the fourth quarter 2022 and the fiscal year 2022 is more or less insignificant. And right now, we do not expect any significant costs related to our transactions. However, in Q1, we did sell our Gravco business unit, and we will report a gain of that sale of more than NOK 40 million in Q1 2023. You can also see that amortization and impairment comes in at minus NOK 361 million, and out of this is NOK 352 million related to the goodwill impairment, which we announced earlier related in our Swedish business unit. And NOK 6 million of this is from PPE amortization from the VR Track acquisition back in 2019. And this amortization has now come to an end at Q4 2022. Moving to the net financial items, which came slightly down from fourth quarter last year. A majority of this is related to interest costs. As mentioned earlier, we have hedged the NIBOR on our NOK 600 million bond loan at 1.83%. And as such, we are relatively limited exposed to increased interest rates we have seen lately in the short and medium term. And lastly, you can see that we have a cost of NOK 6 million related to share of profit from joint ventures. In the fourth quarter of 2022, NRC Group made a capital contribution of NOK 6 million in AGN Haga AB to support working capital in that company. Due to substantial uncertainties in the projects, we have not recognized any net income from AGN Haga and all capital contribution has been impaired. And in January this year, we got the termination of 1 of 2 contracts in AGN Haga. We disagreed to this termination and we believe we have a good case. The second contract in AGN Haga is set for completion to be delivered -- to be completely delivered at the end of 2023 or the beginning of 2024. Looking more on the longer-term development measured here as rolling 12-month performance. As mentioned earlier, the improvement program started in 2020 has been gradually yielding results and our financial performance has improved over the last 12 to 18 months. We did expect to increase the EBITA margin in Q4 from Q3 in 2022. However, due to weak financial performance in our Civil Construction business in Sweden, we ended the year at 2.1%. Moving over to the balance sheet. As you can see, we have a total balance of NOK 5.2 billion, which is down from NOK 5.6 billion at the end of 2021. And this is due -- this reduction is due to the impairment of goodwill, as mentioned earlier. If you look at the net interest-bearing debt, this came in at NOK 950 million, which is down NOK 47 million compared to Q3, but up NOK 59 million compared to the same quarter last year. And if you want to measure this on net interest-bearing debt excluding the leases, our net debt is now only NOK 422 million. And as a sum, the net equity ratio remains solid at 45% after the goodwill impairments. Cash flow from operation is good at NOK 160 million in the quarter. If you look at the graph to the left, you can see that we have reduced the net working capital in the quarter with about 100 -- sorry, NOK 100 million, in the graph to the right. This is a normal seasonal pattern for NRC Group. However, if you see the graph in the middle, you can see that the average net working capital has increased slightly over the last 3 quarters due to a combination of our project portfolio and that we had very high volumes in 2022. And if it wasn't for this increase, our operational cash flow would be even higher. The cash flow from investment activities is only NOK 9 million, and this is according to our lean asset-based strategy where we do small investments only. The cash flow from finance activities is minus NOK 93 million. Out of this, the installment to the bank loan is NOK 38 million. We have NOK 46 million in lease payments and we have NOK 10 million in interest payments. At the end of the year, we ended at NOK 472 million in cash. Over to our financial position, which remains solid at the end of the year. We now have a bank loan, a Eurobank loan at NOK 295 million and a bond loan of NOK 600 million. The maturity schedule presented in the slide in the graph in the middle is how it stood at the end of the year. After the end of the quarter -- or after the end of the year, we have done some amendments to the bank loan where we, among others, have reduced installments in the bank loan and we have moved the maturity from Q1 2024 to Q3 2024. On the liquidity side, we have the NOK 472 million in cash, as mentioned earlier, and we have an undrawn credit facility of NOK 200 million. So in sum, we had nearly NOK 700 million in available liquidity. On the right-hand side, you can see our leverage ratio, and we have a target to be below 2.5x EBITDA. And over the last few years, we have come down to this threshold due to a combination of installment payments on our bank loan as well as increased profits. In Q4, this ended at 2.8, which is slightly above our targets. Finally, some comments on our backlog and our order intake. The order intake in the quarter came in at NOK 1.3 billion. This gave an isolated book-to-bill rate of 0.6% in the quarter. But if you look at this over a 12-month running, it came in at 1.0 as shown in the graph to the left. The order backlog is healthy at NOK 7.8 billion, which is in line with the same quarter last year, but slightly down from what we had in Q3. However, if you look at the order intake or the backlog for delivery in 2023, the picture is slightly mixed. As you can see in the graph to the right, we have NOK 3.7 billion in backlog for 2023, and this is a good backlog. However, it's down 9% compared to the end of 2021, but it's up 10% compared to where we were at the end of 2020. The turnover in 2022 was much higher than expected due to significant changed orders in large projects, which were for to delivery during peak season 2022. But as a sum, we believe we will have now a slight reduction in volumes in 2023 compared to 2022. And with Henning, I leave it to you.

Thank you, Ole. We will have an operational review and we will start in Norway, where we see a positive development with growth in revenues and improved margins. As you can see, we have had a revenue growth in fourth quarter of 25% in the Norwegian market, and the revenue growth is driven by a high growth rate in our Rail Construction activities. Within this business unit, we also have a strong order book for 2023, and we believe that the growth will continue for Rail Construction in Norway in 2023. We also see a positive development in the results from our Rail Construction activities, and we have realized improved profitability in 2022. We also delivered strong margins and strong results in our Environment division in Norway, while we delivered somewhat weaker results in Civil Construction in Norway. This is due to 2 big variation in project profitability in the portfolio, but also a tool of volume when it comes to revenues to support our long-term profitability targets for Civil Construction. Looking at the order backlog in Norway, you will see that it's down from last year. However, we do have a solid order backlog for 2023. But as you can see, we need to build a stronger order backlog from 2024 and onwards. As Ole mentioned, we chose to divest the Gravco business unit during January 2023. Gravco is a company working in the water and salvage market. It has limited operational synergies with the rest of the operations in Norway. And while we received a good bid for the company, we chose to sell the business and focus both our operational resources and financial resources towards activities that have more financial and operational synergies with the rest of the business. We do see a solid tender pipeline in the Norwegian market, and it has increased NOK 3 billion compared to last quarter and somewhat above NOK 1 billion compared to where we stood 1 year ago. As you can see, we have a solid tender pipeline of bigger projects. And this is important as it will give us good opportunities to build the longer-term order backlog in Norway with revenues contributing from 2024 and onwards. Going to Sweden, we see a mixed picture. We have realized a very strong revenue growth in the Swedish market in 2021. As you can see, we had a revenue growth in fourth quarter of 69%, mainly driven by volume increases in Rail Construction. We have also been successful building a solid long-term order backlog in the Swedish market during 2022. But looking at the results, both in the quarter and for the year, the results are too weak. Our main priority is to restore profitability in the Swedish market. And based on the weak results, we have done a thorough review of our project portfolio in the Swedish market in order to understand where we stand risk-wise, but also to analyze the underlying root cause for the weak performance. Based on this, we have done several changes in Sweden, and we will continue to do the required changes in order to be profitable as soon as possible in the Swedish market. One of the measures we have implemented is to do a strategic review of our Civil Construction activities in Sweden. As you can see on the left side of the slide, this is a limited activity in the Swedish market, representing NOK 360 million of our total revenues of NOK 2.1 billion in Sweden. If we take a look at the order backlog, it represents NOK 200 million of the NOK 3.2 billion order backlog. And as this business is today, it's subscale. And in order to succeed and to deliver profitability according to our internal targets, we need to significantly grow it, and in parallel, improved performance. And based on this, we have decided to do a strategic review of the Civil Construction activities in Sweden. Looking at the Rail Construction and Maintenance part, our 2 main business lines in Sweden, we do see a positive development throughout 2022. In Maintenance, we have succeeded building a solid long-term order backlog by renewing all existing maintenance contracts throughout the year, but also winning 1 additional new contract that will start to provide revenues and profitability to some extent in 2023, but with full effects in 2024. The Maintenance business in Sweden has delivered stable results for several years. It is profitable, and it is a good foundation to build on to generate improved results and growth by gradually adding more contracts in this business. Looking at Rail Construction, we also see a positive development in 2022. We delivered positive results in Rail Construction for the year in total, which is an important milestone for us as it is the first time in many years that we were able to generate profit from these activities. And this has happened in a year with quite complex operating environment. And the reason for this, as Ole mentioned, our revenues have grown significantly more than expected due to huge increases in revenues in certain projects. We have several projects in the Rail Construction business that have grown between 50% and 100% versus the original contract amount. And this is typically projects that are executed in a very short time in shorter train breaks. And when we get changes or conditions in this magnitude in several projects in parallel, it creates a lot of complexity in the operations. And we have had to put in significantly more resources in order to complete the projects according to the contracted time. This has been expensive and we have not been able to recover all the expenses from our clients. This has impacted profitability in the Rail Construction segment negatively in 2022. But despite this, we do deliver significant improvement in profitability, improving the result by almost NOK 50 million in this segment, and as said, we are able to deliver positive results in Rail Construction in 2022. And to give you a sense of the growth that has been happening in this segment this year, we had revenues in Rail Construction of NOK 600 million in 2021. And in 2022, it was NOK 1.2 billion. So I would say, delivering a positive result with this high growth, that is actually a very good performance, and we have a good foundation in the Rail Construction activities to further develop the organization, continue to work on our core processes when it comes to tendering, project execution, project selection and continue the positive development in this segment going forward. We continue to see high tender activity in Sweden, although down NOK 2.4 billion since last quarter. Compared to a year ago, it's increased by NOK 1.7 billion. As you can see on the first slide on Sweden, the order book for 2023 is somewhat down from last year. However, this is okay, and we will not push aggressively to increase our volumes in Sweden in 2023. The main focus is to tender projects that will contribute with revenue and profit from 2024 and onwards. And based on the projects being tendered, we can be selective on which projects we approach. In Finland, we continued to deliver solid performance and solid profitability. Looking at quarter 4 and also 2022 as a whole, we have delivered strong growth in the Rail Construction segment in Finland and also delivering strong margins from this segment. As you can see, the activity level is somewhat down from 2021, and this is due to lower activity level in light rail maintenance and partly also the materials segment in Finland. Profitability remains solid in the light rail segment, while we have reduced profitability in our maintenance business. And based on this, we have initiated a profit improvement program for this segment in Finland that will run throughout 2023. Looking at the numbers and the weaker results in Finland in quarter 4. It's also important to note that the Q4 figures last year contained NOK 16 million more in gains from sale of assets versus last year. So if you look at the operations, we still deliver solid margins and solid performance in this segment. The order backlog in Finland is down significantly compared to end of last year, and this is mostly due to a reduced long-term order backlog. Basically, we have produced on our big Light rail projects and our maintenance contracts during the year without winning significant new contracts in these businesses. For the Light rail part, that is as expected and planned since there have been no tenders in the market to compete for. But what we see is a new wave of Light rail projects coming up in Finland that will be tendered in 2023 and 2024. And with our strong track record, both when it comes to winning contracts and executing contracts in this segment our plan is, of course, to take our share of these contracts also going forward. What is also a very positive development in Finland is the increase in the tender pipeline we have seen for the past 3 months with an increase of more than NOK 4 billion versus 1 quarter ago and versus 1 year ago. We need to increase our order intake in Finland in 2023 to support and build a stronger order book and order backlog. And based on the tender pipeline we see, we should have good opportunities to do that. So, to sum up 2022 and quarter 4 it has been a year with a strong growth in revenues, both in the fourth quarter and for 2022. In '22, we realized a revenue growth of 18%, while we delivered an EBITA of NOK 151 million, an improvement of 8% versus last year. It's an improvement, but it's not at the level that we aim for, and this is due to weak results in quarter 4 2022 due to weak performance and weak results in Sweden. Our order backlog remains high, NOK 7.8 billion. And as you have seen in the presentation, we have a significant stronger tender pipeline for the next 9 months versus both last quarter and last year. This gives us good opportunities to increase our order intake in 2023 and build a solid order backlog going forward. As we have mentioned, we chose to divest the Gravco business in January 2023, and this will impact the results of quarter 1 in 2023. When it comes to the operations, we delivered solid performance, good profitability in the Finnish market. We continue to see a positive development with revenue growth and increased margins in Norway, while we still deliver weak results in Sweden. And as I said, improving the profitability in Sweden, getting back to black figures as soon as possible, that is our #1 priority. Coming to the outlook for 2023, we expect to continue the positive operational and financial development in NRC Group. Based on the order backlog we have today for 2023, we expect a slight decrease in revenues, and we expect a moderate increase in EBITA margin for the year compared to 2022. Thank you. We will now open up for questions.

We can start with some questions online. A few questions from the sale of Gravco, what was the revenue and EBIT in NRC Group?

When it comes to more details about the Gravco transaction, it will be published as a part of the quarter 1 report 2023.

And for the gain we got from Gravco, is that a part of the outlook you have now set for margins in 2023?

No, that's excluding. So that will come on top.

All right. And then going back to the order backlog, is the 9% year-on-year growth of the 2023 estimates of the order backlog for the Group slide or a moderate increase?

It's a moderate to strong decrease, I would say.

It's a question related to tax. You have a tax cost despite reported pretax loss. What's the reason behind that?

This is related to the goodwill impairment that we have to reverse some tax we had on the tax benefit we had on the balance sheet, and then we have to reverse that out of the balance sheet. So it's related to the goodwill impairment.

Questions to EBITA margin again, what's the margins from rail maintenance versus rail construction?

I guess that the question is related to Sweden since we spent quite a lot of time discussing this during the presentation. As of now, the margins from Rail construction and maintenance in Sweden is approximately at the same level.

Will Sweden deliver a positive EBITA in 2023?

It's obviously our target to deliver positive results in 2023. However, we will, of course, not be able to guarantee that to happen, but we will see improved results and our target is to deliver black figures in 2023.

And then I think we have one more question. Who are the main competitors in Rail?

In Rail. In Finland to start there, we have one company called Destia who operates in rail maintenance, road maintenance and also to some extent project execution on the rail side. We have a company called [ Kerati ], which is listed in the Finnish Stock Exchange in Helsinki with civil activities, but also activities within the rail segment in Finland. We have a privately-owned company called GRK, which is also competing in our segments in Finland. In Sweden, on the rail side, we have the biggest company being Infranord, which is active both in Maintenance and Rail Construction, but by far the biggest player on the maintenance side. We have Strukton, a privately owned company from the Netherlands, also a big player in maintenance, but with somewhat lower activity level on the Rail Construction side. And we have [ Infrakraft ], who is maybe the biggest player together with NRC in the Rail Construction segment. And then you have several, I would say, small to medium-sized players in that market. But on the maintenance side in Sweden, it's basically a market where Strukton, Infranord and NRC is the main players with 90% of the market, I would say. In Sweden, also having significant activities in Norway. And we have also several other sort of medium to small-sized players. But when it comes to the bigger Rail Construction projects in Norway, it's mostly NRC, [ Barnes Sederves ] and Infranord, who has completed regularly, regularly for this contract.

So -- and one additional question related to competitors. Any competitors when it comes to Nordic projects?

I would say, if you look at our competitors, it's only NRC that has significant revenues and significant activities across all 3 countries. Infranord is by far biggest in Sweden, and they have revenues, so I would say, NOK 700 million to NOK 800 million in Norway. But other than that, we are the only player, I would say, with significant activities in all 3 countries.

And one more question related to Sweden. It's about different opportunities when it comes to the Civil construction business. Any interest on acquiring the Swedish business?

We will come back with the results of our strategic review when we have completed it.

That was the last question at least for now online. Any questions here? Yes?