NRC Group ASA (NRC) Earnings Call Transcript & Summary

[Foreign Language]

So I will switch over to English for our international viewers. So financially, we had first quarter more or less in line with the same quarter last year, and this is a seasonally weak quarter, as you can see in the graph to the left. For the first quarter, we had reported revenues of NOK 1.3 billion and an operational result on EBIT adjusted at minus NOK 43 million. And this compares to first quarter last year, which also came in at NOK 1.3 billion in turnover, while then our EBIT adjusted was minus NOK 48 million. We see continued positive development and improvement in our Swedish operations, while our Norwegian and Finnish operation is slightly behind the same quarter last year. We also initiated an operational restructuring of our demolition and recycling business kept in Norway to structure that business in line with current market conditions. And we have taken a one-off totaling NOK 59 million in the quarter, and you can see that in adjusted items of minus NOK 56 million. This write-down includes a write-down of assets. We have a discontinued part of the business unit, and we have also reduced the number of employees. And this business unit now is under strategic review. If we move to the different countries, starting with Norway. So the results in Norway are slightly below where we were at the same quarter last year. However, we did have an exceptionally strong order intake with a book-to-bill ratio of 2.5x sale. And right now, we have a much better backlog in Norway than we had at the end of the year 2023, but winning new contracts, both in our Rail and our Civil division remains a high priority. As Anders mentioned, we have had significant change orders in a joint Norwegian, Swedish rail project, where the outcome is still pending. The project is recognized at 0 margin, and it also affects our cash flow negatively, mediation with the customer is to commence now in Q2 and for the resolution for these change orders. Moving to Sweden. In Sweden, with the ongoing transformation has been highly successful, and we are back to deliver a positive result actually in Q1, which is seasonally weak quarter. We have strong organic growth with above 50% of the growth in the remaining business, and we have a book-to-bill ratio of 1.8x sales in Sweden so we have a good backlog, and we're now building a backlog for 2025 and onwards. Operationally, both our maintenance business and our rail business is delivering acceptable results at the moment. In Finland, our activity is down 12% in local currency. We are not satisfied with the performance we have had in the operations in Finland, and this is driven by our Rail division and 1 particular project, which is coming to an end in Q1 -- sorry, in Q2 2024. And when this project is completed, we can free up resources for other more profitable projects. We have already initiated actions in Q4 last year and Q1 this year, and we expect this to yield results going forward. The tender pipeline in Finland is very strong, and we also won another light rail contract in the first quarter, which is currently in the design phase. If this project is decided to go into construction phase, the value of this contract alone is over NOK 1 billion and it's not included in the backlog. Despite this, winning new large contract remains a high priority in all segments in Finland. Some comments on our working capital. Our working capital is highly volatile, as you can see in this graph to the left. First and foremost, we have ceased the volatility where we basically build up working capital during the summer period where the production is very high, and we build this down during the winter period when the production is lower. But we also have working capital volatility intra-month where we build up working capital during the mid of the month and then build it down at the end of the month due to the payment pattern of our customers. And over the last year, we have had increasingly tied up working capital in this joint Norwegian Swedish project and this has escalated further in Q1 and the beginning of Q2. Except from that, we are very satisfied in the way we are managing our working capital, and we believe that we can continue to reduce this into negative territory over time to free up liquidity in the company. However, this project particularly has highlighted the importance to forecast working -- forecasting cash flow when we do tenders to avoid taking on projects where we take too much of the liquidity risk. Moving to the order intake and the backlog. As you can see, we had a good order intake NOK 2.6 billion, which is a book-to-bill ratio of 2.0 isolated in the quarter and measured over the last 12 months, as you can see in the graph to the left, this is at 1.0. And this gave a order backlog of NOK 8.2 billion, which is in line with the same quarter last year. And I will come back with more details later on in the presentation related to our backlog and our pipeline. On the right-hand side, we have a new graph showing how this backlog of NOK 8.2 billion is spread out over the years ahead. So for the current year or the remainder of the year, we have slightly lower backlog than we had at the same time last year. While we're building a very strong backlog now for 2025, as you can see in this graph. Yes, I will be back a little bit more details on numbers, but I'll leave it to you, Anders now.

[Foreign Language]

Thank you. Yes. Switch over to English. Yes, we build infrastructure with a purpose. It's about what we provide to the market, but it's also how we do execution in the projects. As Anders mentioned in his presentation, the mega trends supporting our growth and really driving us forward with urbanization, population growth and so on. And as you know, the national transportation plans have record high investments today and will increase investments, especially in rail-related infrastructure going forward until 2028. The addressable market for MSC Group, as Anders mentioned, is over NOK 80 billion in 2028, which says it's a lot to tender for going forward. So it's about choosing the right projects aligned with this strategy. What we have done and what we will continue to do is to convert a sustainability credentials into contract winning projects. So we use our strong sustainability profile into contracts, and we also see that the customers, both on the governmental side and on the private side. they have an increasing demand on sustainable investments going forward. It's a bit immature different between the maturity in the countries between Norway, Sweden and Finland. But we see an increasing demand, especially in tenders also. We see for soft criteria, that there is a demand to describe both on the quality side, but also on what you will do on the sustainability side. And that's good for us. We have a unique position in our market. We have already reported on taxonomy figures for the past 2 years. We have been really proactive here to be in the forefront on new demands coming also from Europe. And as you can see here, we have for 2023, 72% of our activities in terms of revenue was aligned, meaning that the taxonomy defines our activities as sustainable. This is a classification system that is really important also to help investors choose the right companies to invest in, but also, of course, to scale up sustainable investments with a net positive environmental impact going forward, of course. And if you compare a bit with peers in our market, so other infrastructure companies, you can see that the average aligned revenue activities, we are quite above the peers. And if you compare us with, I would say, the really good green transitioners in the Nordics, you can also see we're not that far behind here either. So 72% aligned according to EU taxonomy is really good. So this is an excellent opportunity also for us to continue to strengthen our sustainable profile, both externally and internally. This makes our employees proud as well. So this is important for employer branding also that we have this strong sustainable profile. It's not just something we say. We act on it. Anders touched upon this also. We have, of course, a continuous focus to prevent injuries. We see that the last numbers here that we are on the positive side, we have reduced the number of injuries in Q1. We had 0 serious injuries in 2023. And the sickness absence in the company is at a healthy level. And I think this is also really good numbers when it comes to -- of course, we don't want to have any injuries, of course, but due also to the very challenging winter conditions we have. It's not acceptable to have any injuries, but it's a good trend. I would also like to mention also that we -- last year, we established our first green finance framework, an external assessment was done, Standard & Poor, and we received the highest possible rating, dark green shading. And also, as you might know that we successfully also completed a green bond issue of NOK 400 million with a 4-year duration at 3-month LIBOR plus margin of 4.4. And in Q1, we announced that the green bond was listed on Oslo Stock Exchange. The proceeds and the environmental impact of the green projects. So to sum up this chapter, short but very important chapter. We see an increased demand from our customers, both on the governmental side and on the client side, both when it comes to national transportation plans and also in tenders on -- from the private sector on the ask for sustainable solutions. We use, of course, this sustainability credentials into winning contracts, obviously. And we also do it to recruit great people. As you will see today, we are not launching any new targets for ESG. And that's because we are just in the middle of completing the double materiality assessment. So when that is finalized, we will discuss ESG targets for the next 4 years and then revert to you with our ambitious targets when it comes to ESG. So everything -- we already offer great sustainable solutions to the market. And now it's about how we execute our project to reduce our footprint and handprint. So it's all about execution, Harri. Do you want to take over and talk more about how we execute our projects?

Happy to. Thanks, Ole. Hello, everyone. So when we presented our previous strategy in '23 NRC Group has been formed as a result of 14 acquisitions and the degree of integration at that time was very low. Business operations were mainly led by the organizations of acquired companies without unified processes and structure. So at that time, our strategy focused on integrating organizations and functions within the countries with the aim of creating strong country organizations with effective processes for business management and tendering and project execution. So now the strengthened platform is in place for delivering profitable growth. In addition to building country organizations and developing processes, we have successfully implemented turnaround measures in loss-making rail construction operations in Norway and Sweden. We have also divested loss-making civil construction operations in Sweden and in addition, we have repositioned our Swedish maintenance operations by winning 5 new contracts with higher margins. Strategic review and improvement measures are underway in Norway for demolition and recycling business. In Finland, profitability of rail construction business weakened last year. And as a result, improvement program has been initiated. When we look at margins of the project portfolio, we see that the margins of projects in upper 25 percentile and lower 25 percentile have increased. But the impact of few nonperforming projects can still be seen. We have identified the root causes and established the strengthened Nordic project governance model in all countries. So the strengthened platform is in place for us to deliver profitable growth. And now we are ready to take the next step in the strategy implementing Nordic unified structures, processes and culture, where we can utilize the best practices of different countries and further develop them. We centralized Nordic structure and processes like centralized tender process, efficient unified project execution, group financial management policies and margin recognition, which I will introduce in more detail later in the presentation. So the centralized tender process improves tender selection and tender review process and governance, the efficient project execution includes Nordic strengthened risk management process from project selection to completion. The margin recognition means that group's new financial management policy with more conservative approach, which focuses on cost control, realistic valuation, risk mitigation and change management-- change order management. Let's deep dive a bit deeper and take a closer look at our unified tender process, which starts with project planning. We have the project scope and quantities, work volumes are determinated at this point, schedule organization, resource plan and market are taken into account the division of the project into subcontracts. And potential or possible partners are selected. After this, we have necessary information for accurate cost calculation. At which stage, subcontracts and materials are tendering. And in addition of production cost calculation, cash flow forecast is prepared as well. After the cost calculation risk assessment is held according to the Nordic risk management process to identify impact of risks on tender price and needed or necessary risk measures. In the price offer preparation, in addition to production costs, the cost of capital based on cash flow forecast and risk adjustment based on risk assessment are taken into account, the target margin is determinated taking into account the overhead cost structure of the business in question to ensure the profitability of the project at EBITDA level as well. Then before submitting the tender risk reviews are held according to our Nordic unified project governance model, risk reviews verify projects, compliance with [ state see ] and approve projects, risk level and final target margin. When submitting an offer, we have -- we have invested especially in a good level of quality documentations to make sure that we are competitiveness in terms of [software used ] as well. So the quality is prepared, in some cases, in addition to price offer based on information obtained from project planning, risk assessment and customer requirements. In some cases after -- or the offer submitting is followed by contract negotiations with the customers, especially with private customers and if the final negotiation result differs from the original tender, it will be reviewed and approved again in tender review process before the contract is signed. Then let's move on to the project execution process. When establishing a project, we first invest in collaboration -- in integration with the customer and partners to ensure understanding of customers' expectations and to create good collaboration. Alliance projects put a lot of effort in the integration at the beginning, which creates good condition for the success of the project. This is important also in other projects. Before starting the work, more detailed operational production plans are prepared, typically, customers require approval of several plants before starting the work, wanting to ensure that customers' requirements and goals are met. In addition to those plans which are required by customer, we prepare also our internal plans to ensure that our goals are met as well. For example, in terms of financial goals. The basis for cost control is a cost plan created from the cost calculation so that the accumulation of the cost continuously can be monitored and compared to the plan. We have created regular routines for the project execution for work planning and progress monitoring. Lean offers good tools for work planning. And from the point of cost control, important issues to be constantly monitored are, for example, progress of the work compared to the schedule, realized quantities and work volumes, realized man hours, machine hours, subcontracts, materials, additional works and possible quality deviations and, of course, realized costs. All of those are monitored against the plan. Without it, you cannot detect the deviations, which are very important to notice in time. During the project execution risks are assessed regularly both for the risks identified in the tender phase and for possible new risks. And if deviations are rejected, those operational plans are revised or separate plans are prepared to manage deviations and risks. This is a process which run continually throughout the project execution to ensure the success of the project. We have implemented unified conservative margin recognition approach across all countries in medium-sized, large and complex projects. It means that at the beginning of the project, margin recognition is started with a slightly lower margin than estimated. At the beginning of the project, uncertainties and risks are at the highest but the decrease as the project progresses, a margin can be gradually increase towards the estimate. This risk reserve for the projects with a low completion rate reduced the result impact of individual project changes on a monthly and quarterly results and that way it makes a reporting of the results more predictable. Thanks. Now all I will continue from this.