NRC Group ASA (NRC) Earnings Call Transcript & Summary

Welcome to the third quarter presentation for NRC Group. After this presentation, we will host a question-and-answer session. If you are online, please send your questions in the chat. With more than 30 years of experience, I'm honored and excited to address you today as the new CEO of NRC Group. I came from Svevia from the position as President and CEO. Svevia is a Swedish company specialized in infrastructure, with revenue around NOK 12 billion and 2,200 employees. As we now plan to track for the new strategy period from 2024 to 2028, I am confident that the future for NRC Group looks promising. I'm also confident that we have great opportunities ahead of us. With a solid foundation built after 4 years of transformation, we are now well positioned to capitalize on the strong market we operate within. NRC Group is a robust company. The governments in Norway, Sweden and Finland develop long-term national transport plans. There is a broad consensus to build and upgrade critical infrastructure going forward. NRC Group has, per day, a record high tender pipeline. There is an increase in this quarter for around NOK 40 billion compared to the last quarter. The demand for build and upgrade critical infrastructure will remain high, not only to safeguard and maintain what is already built, but also new construction to meet the future demands for harbors, water reservoir and sustainable energy supply and so on. Our markets are driven by populations growth, organization and high demand for build and upgrade critical infrastructure, and not at least, increased requirement for efficient new carbon transport systems. Access to these systems will become increasingly important, and that is perfect for us. This is what we do. We have a strong sustainable profile. As you already knew, we recently received dark green shading in our green finance framework. Norway. Norway has delivered impressive profitability in 8 consecutive quarters and has been on a positive margin trajectory the last 2 years. And margin above 5% in this quarter is strong. Focus now is to grow our order books and win more major contracts going forward. In Finland, we have achieved strong profitability levels in Finland over the years. The expectation now is that profitability will reduce to lower yet sustainable level in the medium term. We now dedicate efforts to analyze the Finnish operations in order to streamline and make the operations more cost effective. We have a unique position in Finland, so I'm confident that profitability in Finland will be market-leading again in long term. In Sweden, the turnaround in Sweden is well on track, now slightly above 1% in the quarter. Our measures to improve profitability are clearly yielding results. So Sweden are navigating in the right direction now and forward. Here, you can see our record high tender pipeline for the next 9 months. There is an increase in this quarter for around NOK 14 billion and NOK 16 billion compared to the same period last year. There is an increase in all 3 countries going forward, and again, high demand for build and upgrade critical infrastructure in Nordic. In Finland, the tender pipeline in Finland doubled compared to the last period -- the last quarter, sorry, supported by new light rail contracts. We have won 6 of 6 contracts that we have participated and 3 new light rail contracts coming up for tender. The revenue impact will be from 2025 and onwards. On health and safety side, we are not satisfied with the results. We have none serious injuries in the quarter, but too many accidents in total. The positive trend with sickness absence continued in this quarter with a rate of 3.7%. This is on a good level compared to the industry peers. Now with this, I hand it over to our CFO. Ole, please?

Thank you, Anders. Looking at the P&L for the third quarter. Financially, we had a good quarter. However, it is below the same quarter last year. Our revenue is down 7% and came in at NOK 1.8 billion. On the like-for-like currency, the revenue -- the negative revenue is 13% due to lower volumes in Finland and Sweden. Our operational result, our EBIT is down NOK 11 million and came in at NOK 80 million in the quarter, which gave an EBIT margin of 4.3%. Net financial items increased from minus NOK 14 million to minus NOK 18 million. And the reason for this is that the increased NIBOR also increases our costs on our lease portfolio as well as our term loan. And after the end of the quarter, we completed the refinancing of both our bank and our bond loan, and we'll come back to more details on this later in the presentation. As a sum, our net profit improved from NOK 46 million to NOK 49 million, and this gave an earnings per share in the quarter of NOK 0.67. Moving to the different countries, starting with Norway. The positive profitability trend in Norway continued in Q3. And the Norwegian organization has succeeded very well in the operational restructuring over the last few years, which is very impressive. The EBIT margin came in at 5.5%, which is an improvement from 4.9% in the same quarter last year. And this is driven by strong results in both our Civil business and our Rail business. Our demolition and recycling business kept delivering weaker results due to very challenging markets, while our transportation company, Gunnar Knutsen, continued to deliver a very solid result in the Q3. Order intake in the quarter was NOK 273 million, and the backlog in Norway is below where we want it to be. After the end of the quarter, we announced a new significant civil contract in Norway worth more than NOK 300 million, which supports backlog from early 2024 and onwards. However, winning new big project in Norway remains a high priority. Moving to Sweden. In Sweden, we are gaining momentum from the changes we initiated in the first half of 2023. The most important action here included a significant reduction of overhead, increasing the tender prices as well as improving the project controlling. In addition to this, we also decided to discontinue the civil business in the Karlstad region. In August, we also signed a final agreement with the management in Karlstad where they acquire this business unit. And the benefits for NRC Group are severalfold. Most importantly, we secure a new home for our employees in that region. And secondly is that we have significantly reduced our operational risk connected with discontinuing this business unit. And the accounting effects of this sale is included in the third quarter numbers. As you can see, the operational result or EBIT is positive, NOK 5 million, up from breakeven last year, and this is because we have somewhat better result in our maintenance division. Order intake in the quarter was only NOK 170 million, but we have a good backlog for fourth quarter in Sweden. And after the quarter end, we also announced a significant contract in our Rail division in Pitebanan, Sweden, worth more than NOK 400 million. And with that, we also have a good backlog for 2024 in Sweden. Moving to Finland. In Finland, on a like-for-like currency basis, the activity is down 12% compared to the same quarter last year. In addition, our operational result is also down NOK 26 million and came in at NOK 49 million in the quarter. As previously announced, we had to do a significant write-down in one Rail project in Q1 this year, and this has continued to impact the results in that division and for Finland for the remainder of 2023. And this project is coming to completion in the first half of 2024. We have not been good enough to secure new high-margin business in Finland in 2023, nor adapting our cost base to the current project portfolio. In addition, we have noted a negative trend in profitability, and we have therefore started to analyze the operations in order to streamline and make the operation more cost efficient. Having said that, and to put it in perspective, the margins in Finland is still in line with peers, and we are not worried about the outlook in the Finnish operation. Order intake in the quarter is in par with what we had in the same quarter last year. But as in Norway, winning new large projects remains a high priority also in Finland. As Anders mentioned earlier, the good thing is that the tender pipeline in Finland is very strong, particularly in the light rail area. And in September, we announced the win of a new light rail project in Tampere with alliance partners, and this project has a value of more than NOK 3 billion. The project is now in the design phase, and if it's decided to go into a production phase or construction phase in 2024, NRC Group will get a significant proportion of the total value of this project with delivery from 2025 to 2028. And since this project is not decided to go into construction yet, it's not part of the backlog. Moving to the backlog. The order intake in the quarter was NOK 773 million, which is below what we expected. And this gave a book-to-bill ratio of 0.7, measured over the last 12 months, as you can see in the graph to the left. With lower order intake, we also have a lower backlog at NOK 6.6 billion, which is down 23% compared to the same quarter last year. The good news here is that we have a very strong tender pipeline in both Norway and Finland, and we have plenty of tender activity ongoing to fill up the backlog from 2024 and 2025. In addition, the 2 mentioned projects I talked about in Norway and Sweden and the light rail project is obviously not in the backlog for Q3. The graph to the right, you can see the backlog for delivery in Q4 this year, and compared to last year, it is down 7%. And with the reported year-to-date sales we have and this backlog, we continue to believe that we will have a slight decrease in revenue in 2023 compared to 2022. A few comments on the balance sheet. Total balance came in at NOK 5.6 billion, which is down from NOK 5.8 billion at the same quarter last year. And our net interest-bearing debt is, as you can see to the right, relatively flat compared to where we were last year, at NOK 992 million. And the net interest-bearing debt, excluding leases, is NOK 504 million, as is mentioned under the graph. Our equity ratio stands firm at 44%. Moving to the cash flow. Cash flow from operations in the quarter was NOK 12 million, which is below NOK 96 million, which we had 1 year ago. And even though our operational cash flow is below last year due to a very strong operational cash flow in the first half of the year, the year-to-date cash flow in 2023 is in par with what we had in 2022. Net working capital increased to a higher level in Q3, and we do have a lot of focus to reduce the working capital in the company. However, we were not able to keep it at a low level, which we saw in 2022 and the beginning of 2023, when we ended Q3 this year. Moving to the right, you can see that the cash flow from investment activities of CapEx was only NOK 7 million and the cash flow from financing activities was minus NOK 80 million, which is at the normal level. And this gave us total cash at the end of the year at 300 -- sorry, end of the quarter of NOK 346 million. After the end of the quarter, we completed our refinancing of both our bank and our bond loan. We refinanced our NOK 600 million bond loan with a NOK 400 million green bond at NIBOR plus 440 basis points. In addition, we increased our overdraft facility from NOK 200 million to NOK 400 million. And lastly, we extended the maturity of the term loan from 2024 to 2027. In the graph to the left, you can see that we have continuously reduced our gross interest-bearing debt over the last few years. And based on the refinancing, we will reduce it furthermore from NOK 1.3 billion to NOK 1.1 billion. On the liquidity side, we will have approximately NOK 150 million in cash and an undrawn credit facility of NOK 400 million, which means that we will have available liquidity of NOK 550 million by the end of Q3. NRC Group had significant volatility in our liquidity, both inter-month and over the year. And this is because we build up quite a lot of working capital during summer, which we built down during the winter period. And this new refinancing and new capital structure is much a better fit with our business model. Now we can draw on our overdraft facility when we require the liquidity instead of sitting with excess cash on the balance sheet all year round. And the benefit with this is that we will have a lower interest cost in the group, all else equal. Anders?

Thank you, Ole. So to summarize the third quarter, with a solid foundation built after 4 years of transformation, we are now well positioned to capitalize on the strong market we operate within. NRC Group is a robust company. In the quarter, we had an EBIT of NOK 80 million with a slight decrease in revenue. The demand for build and upgrade critical infrastructure will remain high. Our markets are driven by population growth, urbanization and again, high demand for build and upgrade critical infrastructure, and increased requirement for efficient, low carbon transport systems, and this is good. This is what we do. NRC Group has, per day, a record high tender pipeline. It's an increase in this quarter for around NOK 40 billion. Our order backlog is solid. But of course, we need to win more major contracts going forward. Norway has delivered impressive profitability in 8 consecutive quarters. Margin above 5% in this quarter is strong. Focus now is to grow our order book and win more major contracts going forward. In Finland, we have achieved strong profitability, leveraging Finland over the years. Expectation now is that the profitability will reduce to lower yet sustainable level in medium term. We now dedicate efforts to analyze the Finnish operation in order to streamline and make the operations more cost effective. We have a unique position in Finland. I'm confident that profitability will be market-leading again in the long term. The turnaround in Sweden is well on track. Our measures to improve profitability are clearly yielding results, now slightly above 1% in the quarter. Sweden are navigating in right direction now. For 2023, we expect a slight decrease in revenue and an EBIT margin in line with 2022. Next year, during the second quarter, we will host a capital markets update to share our new strategy period from 2024 to 2028, how we create the leading company in Nordics for specialized infrastructure. I'm excited to take on this journey with NRC Group, combining our business model with a unique position and deliver specialized sustainable infrastructure. And I'm confident that we will succeed with our ambitions. Thank you. Now we will open up for questions.

Let's start with one online question before.

Yes, sure. Let's go. Yes.

Anders, your early take on the situation in Finland?

As I mentioned, I'm not worried about Finland. We have achieved strong profitability levels over the years. But we now dedicate our efforts to analyze and streamline the operations. But in long term, we will be market-leading again.

Simen?

Yes, Anders, you haven't been with the new company, this company, that long, but can you just give us a general interpretation of what you see as the strength and the weaknesses and the room for improvements based on your historical performance and just your early impression of the company a bit more [ in detail ]?

I don't comment on the past, but I think the future for this company looks promising. We have great opportunities ahead of us. Norway, margin above 5% in this quarter, strong. The markets, the demand for build and upgrade critical infrastructure will remain high. Used to Sweden, markets in Sweden, so the turnaround plan in Sweden, I think, is well on track. Slightly above 1% in the quarter indicates that. And of course, we are a great team.

Also, on the guidance with a slight decrease in revenues for next year, how much is that? Is that including FX or excluding FX? Is it a NOK guidance? Or is it...

It's a NOK guidance, yes.

Go for it.

Going back to Finland. The result has declined for, I think, 8 or 9 consecutive quarters. For 2024, do you foresee a profitability level in absolute terms on the same level as today? Or do you foresee that it is going to increase again?

We will come back with more details on the capital markets update in the first half. So you need to wait a little bit. But directionally, so we have commented on this somewhere. So some of the -- if you go back in 2021, we had quite a lot of sale of machinery, which we always have, but we don't have any meaningful at the moment in the last 12 months. So that's a little bit taking off some of the peak in this graph. In addition, we have 2 projects in Finland in Rail which we are struggling with, one which is with on the write-down, the other one is not really yielding that much margin, and this also impacts results for 2023 and starting of 2024. And lastly, we have had a couple of very good light rail projects, which still are good, but there's not so much in volume when we enter 2024. And the new contract comes into effect in 2025, the new contracts we are bidding on our [indiscernible]. So I think we don't guide per country, but we also have to be realistic in the medium term, but we are very comfortable about our pipeline and what we're doing there. So we don't see this as a huge problem. We will not comment on 2024.

If I should try to interpret, what you're saying is that it will continue to fall a little bit?

That's not we're saying, but you can interpret it...

This is my interpretation. But moving to Sweden, it's obviously a turn in the performance, but really it's not turnaround. You still have negative...

Slightly above 1% in the quarter.

Yes, that's correct. But I just want to comment on this. Because last quarter, we showed a pro forma graph, but because we have obviously discontinued the Civil business, and without the Civil business, we are running at around breakeven now over the last 12 months. So it's a turnaround when you break even. That's what we're claiming. And we think we have a lot of momentum going into 2024 also.

I have another definition. If you have a turnaround, you are actually earning a reasonable profit. So to achieve that, what are you doing to -- or what are the changes you have implemented or planning to implement to achieve a reasonable profitability? Obviously, you are on the right track, but there's still room to improve, I would assume and I would hope.

That's great. I mean I have commented on it earlier. So the first we did was to cut the overhead quite dramatically in 2023 in Sweden. And then you will have full year effect -- this will have gradually full year effect. And then the second is that we increased the tender prices, and that takes time to get full effect. And the last thing we did was to implement better project control, and that we did in second quarter, beginning of third quarter this year. And on the project controlling side, obviously, what it gives you is a better maneuvering tool when you start reporting on the project to a better project controlling, not only basically understanding the result, but also be able to adjust early in the project, you can get more profitability out of this. So this is a gradual process.

Yes. I would like to just address the lower guidance on the margin a little bit further. Could you break down -- you have kind of done a little bit already, but which segments are performing better than what you expected at year-end 2022, and also during the first half of the year? And what segments are below? And for the segments that are below, could you give an operational answer where you say is there 1 or 2 projects? Or are there a weaker underlying margin in the whole backlog? Could you just address a little bit that situation?

Are you talking about the group or...

Yes, first segments.

I think it goes a little bit by saying that with Finland, obviously, we expected more in Finland, and that's what we're saying. And we have had -- going back to especially 2 projects in rail, 1 particular project which is reducing our profitability level in Finland compared to what we expected 1 year ago, you can say. Sweden is moving on track, I would say. This is basically what we targeted when we started the restructuring in Q1 and Q2. And Finland also -- I mean sorry, Norway is giving a good result, so...

Margin about 5% [ this front ].

So Norway and Sweden at approximately what you expected 1 year ago?

Yes, I would say so.

And also, if I could -- could you address the working capital situation a little bit as well?

We have quite significant volatility. And sometimes we get these situations where payment doesn't come in [ today ], the last day. And we have NOK 70 million in invoices -- one invoice of NOK 70 million. This just happened on the weekend this time and we didn't really manage it very well, and it was kind of onetime. We think it's a onetime situation, and we just have to see during the winter if we can do better.

Yes. But does that mean that we should expect similar positive working capital in Q4?