NRC Group ASA

Hello, and welcome to the NRC Group second quarter and first half 2021 results question and answer session. Throughout the call, all participants will be in a listen-only mode, and after a short summary, there will be a question and answer session. I will now hand the conference over to Lena Ingebrigtsen, Head of Communications in NRC Group. Please go ahead.

Thank you, and good morning, everyone. By now, you have received a copy of the earnings release and investor supplement for the company's second quarter and half-year results. If you have not, copies are available on our website, nrcgroup.com. The speakers we have on today's call are Henning Olsson, Chief Executive Officer, and Doug Gladby, Chief Finance Officer. With that, I would like to turn the call over to Henning Olsson. Please go ahead, Henning.

Thank you, Leanne. I'll start with a short summary of the announced results from this morning. During the quarter, we made good progress with our main priorities, improving profitability and winning the right projects at the right price. In quarter two, the activity level is picking up and we report a revenue of 1.5 billion. Adjusted for currency, the growth rate was minus 3%. We delivered an EBITDA of 47 million, significantly better than last year, and we see that the improvement work put down for the past two years is starting to yield results. Improved results are driven by a very strong performance in Finland. We see continued strong performance in rail construction, and we see improved results in the maintenance business. In Sweden, we deliver results at the same level as last year. The volumes are low due to tough market conditions. We continue to work with our improvement initiatives, but we also need to see better market conditions before we can return to our targeted margin level. The results in Norway are weaker than the same period last year due to low activity in civil and weak margins in our recycling and demolition business. This is a consequence of the low order intake last year in Seville and the ongoing turnaround process in the demolition and recycling units. However, we made good progress during the first half of 2021 in both areas. Although the results are not at the level we want in Norway this quarter, I'm confident that they're moving in the right direction as we continue to build the foundation for improved results and future growth in Norway. We had a very strong order intake of 2.2 billion in quarter two, with a book to bill of 1.5 in the quarter. We also won the material supply contract for the Finnish Transport Agency with an estimated value of 2 billion, which is not a part of the reported order intake and order book. So in the quarter, we actually secured orders for more than 4 billion. I'm confident that we are moving in the right direction with a strong order intake, a solid tender pipeline, and many interesting projects coming up. We are on track to return to profitable growth. As a part of the quarterly presentation, we also published our sustainability targets and an estimate of how our business will align with the EU taxonomy. Now we will open up for questions.

Operator, are you available? Operator, are there any questions from the audience? Let's hold for two minutes.

Thank you. If you wish to ask a question, please press star 1 on your telephone keypad. Please ensure your new function is switched off to allow your signal to reach our equipment. If you wish to withdraw your Q&A, you may do so by pressing star 2 to cancel. There will be a brief pause while questions are being registered. We will now take our first question from Bendik Engelkristian from Danske Bank. Please go ahead.

Thank you very much. Good morning. Do you hear me?

Thank you.

Happy to see the improvement in activity. It seems clear that the company is on the right path towards profitability. I just wondered if you could provide a bit more color on the order intake in Finland this quarter. You were granted a 200 million euro contract, but this doesn't appear to be part of the backlog. Could you provide a bit more color on this contract and how it differs from the rest of the company's contracts?

Yeah, as this is a frame agreement, without any minimum volume in the contract, it's not recorded as a part of the order book. This is also how this contract has been treated in the history in NRC. This has been a contract that has been operated by our Finnish organization for many years already. So as we said in the presentation earlier today, we have a lot of experience with this business. From our point of view, there are no insecurities with regard to volumes. This is a highly predictable business where we supply rail technical materials, tracks, et cetera, to the Finnish Transport Agency as the sole supplier. So as long as the activity level in the Finnish rail segment is continuing, the volumes here are very predictable as such. But due to technicalities, it's not a part of our order book.

All right. Thank you very much. That's understood. Second question and then final question from me. Recently, we have been reading a bit about trend of processes in Sweden. I believe the newspaper was Dagens Industri. It appears that some competitors, their bids in certain projects in Sweden have been significantly lower perhaps than the bids from NRC. Can you comment on this? Is this a result of higher costs in NRC or higher requirements for profitability? Could you comment on this at all?

We can for sure comment on this. And the article you are referring to is an article relating to the maintenance contracts that have been awarded in the Swedish market this year, where four contracts have been out for tender. And in Franor... A company owned 100% by the Swedish state has won all four contracts. And in two of them, they have priced significantly lower, not only lower than NRC, but lower than all other competitors. So in one of the contracts, I think they were 25% lower than us, and we were number two. And in one contract, they were, I think, 45% lower than us, but still 25% lower than number two. And that contract was really not a contract that we were aiming to win. It was not a part of our prioritized contract, but still we did an offer. But as the article states, without saying it directly, we are, of course, wondering a lot of what's happening in Sanur and how they act, because there are no chance at all that they will have any profits on this contract. So this is price something, and that is what we tried to say without saying it in the article directly.

Okay, that's understood. Thank you for that call, and that's all from me. Thank you very much for taking my questions.

We will now take our next question from Hans Jacobsen from Nordea. Please go ahead.

Thank you, and good morning. Back to Sweden, it seems like the pipeline still is very good, and the competition, as you just explained, is continuing to, it seems like it's getting even worse. Do you see any let-up here in the short term, in terms of the competitive picture? I would believe that, you know, with a lot of tenders, there should be a possibility to receive some orders where you and others could start to make a profit.

Yeah, we can comment a bit on that. I think I commented on the maintenance part. But when it comes to rail construction, the competition has also been fierce in the market in Sweden for the past 12 or 18 months. The tender pipeline is still very high, and of course, we hope that the continued high supply of contract will improve market conditions. But of course, there's no guarantees for that happening. But we feel that we are in very good control of our tender process in Sweden, and our strategy has been and will be to focus on winning robust projects rather than to aim for growth at the current market state. If the market conditions are improving, we will, of course, also aim to grow our business, but currently we focus on winning robust projects that we can have a profit on and try to defend the revenue we have today, of course, but we see no reason to be very aggressive for growth when market conditions are as tough as it seems

Okay, thank you. And then to Norway. You have three areas there where the civil construction and NSS are continuing to show a weak performance and hopefully the initiation of all the measures you have taken here will improve results. But when it comes to rail, is it profitable in Norway in line with Sweden? Or is it not Sweden but Finland?

The rail construction unit in Norway is profitable. As you remember, this was one of the areas we mainly struggled the most with in 2019, and one of the reasons for the poor results in 2019. We initiated an improvement program in the rail construction unit starting in late 2019, and that improvement program has been very successful. We are gradually improving the results. We are not at the profitability level as we are in Finland currently, but the progress is very good. It's continuously getting better, so we feel we are on a good track in that business area.

Very good. Thanks a lot.

We will now take our next question from Carl from Arctic Securities. Please go ahead.

Please ensure your line is unmuted.

Thank you. We can hear you now.

Perfect. Thank you. Good morning, everyone. I would just have a question regarding the EBITDA margin in the quarter related to your sort of medium-term, medium to long-term target of 7% and your guidance for somewhere in between 1.75 and 2.5 for this year. Could you please share some thoughts on how you see the progress here going and what you feel sort of is realistic to expect in the coming quarters?

Yeah, let's start with the guiding this year. The guiding for the year is unchanged at an EBITDA between 1.75% and 2.5%. And we feel that the results we have delivered today is supporting that guidance. And also the progress we have made during our improvement programs across our business is also supporting that guidance. So we are retracing that guidance. When it comes to what you can expect going forward, we have a clear ambition to return to profitable growth. The order intake we have seen both in quarter one and quarter two is supporting that we will return to growth. Our improvement programs are moving forward according to plan, of course, with some exceptions in Sweden due to the very tough market conditions. But our expectation is that we will return to profitable growth. Our target and ambition in 2024 is still the same. We have been quite clear that we are maybe a bit delayed on that road, but the ambition is still there.

Perfect. And just to follow up, I would sort of assume that the improvement you have seen in Finland over the past four months have to be on track or ahead of schedule. And I was just wondering, what will it sort of take in the medium term to see a similar improvement in Norway and Sweden? Is it a question primarily on overhead expenses, or do you also have to see a significantly higher activity level to see a similar improvement?

To start with Norway, we need to see that the improvement program in the demolition and recycling business continues with the progress we have seen and all our data points are pointing in that direction currently. And then it's also about the volumes in the civil construction unit, which has been very low this year. And of course, with low volumes, it's also difficult to have a high profit margin due to the fiscal space. But they have been winning a lot of contracts in the civil construction unit so far this year. It takes some time to ramp up the project and activity level. and we also try to be a bit conservative, taking out profits in the start. But with the activity level coming back in Seville and turnaround progress in NSF showing good progress, as we were also talking about this year, and good progress also in rail construction. And as I said in the presentation earlier today, a high activity level in tendering across all three segments, I'm hoping that we will soon see a result in Norway at a different level than what we have presented today. So I would say that we are on track to come back to a better profitability in the Norwegian market. I think the road for that in Sweden is longer, and it's mainly due to the tough market conditions we see. We still have improvements to do internally, which will improve the results. But before we can get even close to the margins we see in the Finnish market, we need to see a significant improvement in market conditions. And even though we can hope for that with the continuous high tender activity, I think we need to be prepared for that to take more time.

Perfect. Thank you very much. Those are my questions.

We will now take the next question from Harold London from London Holdings. Please go ahead.

Hello. You mentioned – can you hear me?

Yes.

Okay, good. You mentioned earlier that you had 70% of your business at 7% margin, and then there was trouble with 30%. How does that look today?

Well, if you look at our business today, the number is not 70% for sure, but I haven't calculated the exact percentage. But what has happened since that is that one of the main contributors to those 70% was the civil construction activities in Norway and the environmental activities in Norway. lower activity level and volume in civil, it's impossible to stay at that margin level. The project execution in civil in Norway is still very strong in the projects we have ongoing, but we have had too low volume to reach those margins. When it comes to the environmental division in Norway, which was also above 7% margin, We have these challenges in one area, the demolition and recycling business. The rest of that business is still on the same high margin level. So after we have been able to complete the turnaround of the demolition and recycling business, our expectation would be to return to that margin level in this business as well. So based on... Yeah.

I wonder the size of the trouble contracts, i.e. the ones with zero margin or loss, is that still around 30%?

I think I haven't measured it on the zero margin. When you refer to the zero margin projects, they have reported on and commented on. That was... First of all, loss-making projects in the Norwegian rail construction units. Those are complete to 98% as of now, and we are in good control of those. The rest of that portfolio and the biggest share of that portfolio was approximately 400 million in revenue in the Swedish business. and we were clear on that in quarter three and quarter four 2020 that we had to take additional losses on on those contracts but looking at the volumes now we are also very close to completion of those projects the construction activity is actually finished in All of them, and the only thing we have left in those projects are the last negotiations with the clients. So in reference to these zero margin projects, we are close to closing that chapter. In the order book, it's around 100 million left in the quarter two. Okay.

Then I'm... I'm also a bit puzzled about the tough situation in Sweden because we have a construction boom here like never before, and it's an enormous shortage of capacity here and there. And it seems strange to me that you and your competitor can't find alternative work at decent levels. What's the reason for this strange anomaly that you have one sector with enormous price pressure where everything else is booming, basically.

Yeah, we see a big difference in how the players are behaving and pricing their contracts in the rail construction segment and the more traditional civil construction segment and the bigger contracts. And I think that has something to do with the the size of the players operating in the market. So, in the civil construction area in Sweden, you have, on the bigger contracts, the big four players, Teal, Bentefe, Skanska, and also some foreign competitors. And I think they have more or less the same approach to bidding as we have, where we expect to have some profitability in the end. When it comes to how our competitors have behaved in the rail construction market, it is difficult for us to understand why they are behaving as they are. As you said, the volumes are high, so there should be every chance to have decent prices. But again and again, we see that some players are pricing contracts at a very, very low level. And these are, for most cases, quite, I would say, standardized work that we have a very good knowledge of the cost base. And then with three players pricing 30% below us, we can't follow that. and we need to be patient and let them run into, hopefully for our sake, quite a big problem exercising on those projects so we can see that they can learn a lesson and apply it in a different way in the future.

Okay, thank you for me.

As a reminder to ask a question, please press star 1. We will now take the next question from Daniel Hoglund from ABG. Please go ahead.

Good morning. Can you hear me?

Yes. Very good. So I was just wondering a couple of questions on these maintenance contracts that are going out in the market. So my understanding is that three of your contracts are coming into the market, maintenance contracts, in the next nine months. add a bit of flavor on how big are these contracts? What type of run rate revenues does that consist for you in Sweden?

Yeah, of course, we cannot be specific on each separate contract. Those are commercial sensitive information. But in average, you can assume that one maintenance contract are yielding approximately 100 million in revenue per year. And these maintenance contracts also have a long lead time from winning it to the start of operation. So if we win a new contract or lose an existing contract, the financial effects of that will first come during 2023.

Okay. Very good. Thank you. Another question on the taxonomy presentation you held. You talked about recycling rates in Finland. Could you comment on where you are on those rates today?

We will not comment on what level we are today, but we are on a level quite above 70% in both Norway and Sweden, so we are quite confident that we know what we need to do in order to get there in Finland as well. The reason for why we are higher in Norway and Sweden is the fact that this has been been strict to contract requirements in Norway and Sweden for recycling rates. So this is not a very complicated thing, and we are quite confident that we will reach that level. But it's good to have it identified already now, so we can start the processes now and make sure that we are well inside those rates when we are starting to report on it.

All right. Thank you very much. That was all from Maya.

As there are no further questions at this time, I would like to turn the call back to your speakers for any additional or closing remarks.

Thank you. A short summary from our side. During the quarter, we have made good progress with our main priorities, improving profitability and winning the right projects at the right price. results in second quarter is significantly better than last year and we have secured new contracts for more than 4 billion in the quarter. I'm confident we are moving in the right direction and with a strong order intake, solid pipeline and many interesting projects coming up, we are on track to return to profitable growth. Thank you for many good questions and have a nice day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.