NRC Group ASA

Welcome to the quarterly presentation of NRC Group. Welcome to all of you present here today in House of Oslo, and also welcome to all of you present through our live stream. The key figures for third quarter confirms the positive trend for NRC Group. We deliver improved results and we deliver EBITDA margin of 6% versus 4.5% last year. The good trend in order intake continues, with an order intake of 2.7 billion in the quarter, and we deliver a very strong cash flow from operations of 238 million. With a continued good order intake throughout the year, we see that our order book for next year is significantly stronger than same period last year. And this indicates that trend of declining revenues we have seen for the past couple of quarters should turn entering 2022. We have had some significant wins also this quarter. After spending two years in the development phase, we can finally start construction in the Crown Bridge Alliance contract in Helsinki. And this, of course, is an important milestone for our Finnish organization. and also for NRC Group. We have also won the electrification of Trønder med Råkerbanen in a joint venture between our Swedish and Norwegian organization. And this shows how we can utilize synergies across NRC Group to be more competitive, as this project could neither have been won or executed by one of the country organizations alone. These bigger projects are important for NRC Group in order to create a good foundation for profitable growth. And it's also an important tool for us in order to grow and develop our organization. When it comes to our HSE KPIs, we see mixed results this quarter and so far this year. We have a too high injury frequency rate represented by the LTI1 figures. However, it's positive to see that we have zero serious accidents this quarter and also this year. However, looking at the Looking at the accidents causing medical treatment, the frequency rate is still too high and we need to improve within this area in order to get everyone home safe every day. On the positive side, we can also see that the sickness absence rate continues to trend downwards, and we also have had less impact from COVID-19 in our operations this quarter. However, we need to be ready for setbacks during winter. Dag, now you will take us through the financials.

Thank you, Anning. Our revenues in Q3 was 1.7 billion, which is 13% lower than last year. Adjusted for currency effects, the decline is around 11%, coming mainly from Sweden, where our hit rate the last 18 months has been low. In addition, also the tenders we have had recently in Norway have not had revenue effect yet. The order intake we have seen lately, the last quarters, improves the order book in these countries. Hence, the growth looks comfortable going into 2022. In Finland, the revenue in quarter three was more or less flat compared with the same quarter last year. Our EBITDA, excluding M&A, was 102 million. with an EBITDA margin of 6% up from 4.5% in the same quarter last year. All countries are showing improved profitability, and the main driver for the results in the quarter is Finland with continued strong profitability. In Norway, the profitability has increased. And we see positive development in several parts of the organization going forward. In Sweden, the profitability has also increased. However, it's partly mitigated by low revenue, which caused negative scale effects. Depreciation, amortization and net finance is more or less on normal levels. And pre-tax profit ended at 71 million, which is 51% increase from the same quarter last year. Moving to our balance sheet, our total balance at the end of the quarter is 5.6 billion with an equity ratio of 48%. Our cash position at the end of the quarter was 565 million, up from 441 in 42. The improvement is explained by increased results, but also improvement in net working capital. The improvement in net working capital is due to sharp continued focus on improving working capital as well as seasonal variations. Interest bearing debt is reduced by 71 million and is 1.55 billion at the end of the quarter. Reduction is mainly due to repayment of bank debt and also reduced leasing debt. And with a cash position of 565 million, our net interest bearing debt is decreasing by 194 million and is now at the end of the quarter 985 million. Deducted for leasing debt, our net debt is approximately 500 million end of quarter. Our cash flow from operation in third quarter was solid with 238 million. and improvement of 109 million from the same quarter last year. The improvement is due to continued sharp focus on improving working capital and also beneficial project mix in the quarter. Net cash flow from investing activities was 17 million and net cash flow from financial activities minus 97. And all in all, a cash position of 565 million end of quarter. Our order intake continued strong in the quarter with 2.7 billion of orders. Our book to bill was 1.6 in the quarter, continuing the good development we had in quarter two. Order book. At the end of the quarter, 7.6 billion up from 6.7 billion last quarter. And I will also like to mention that our order intake year to date, end of quarter three, is 5.7 billion, which is actually an increase of 45% compared with the same period last year. This is a good indication of a more comfortable growth for next year. Our financial position is robust at the end of the quarter. We have a cash position of 565 million and an unused credit facility of 200 million. The remaining repayment schedule for the bank debt is 37 million in 2021 and then approximately 150 million each year the next three years. And our bond has maturity in September 2024. Now Henning will take us through operational review in more details.

We deliver another strong quarter in our Finnish business with an EBITDA margin of 10.9% this quarter. And the profitability is driven by very strong performance both in our rail construction and light rail business. We have had a high order intake also in Finland this quarter with 1.4 billion, of course, mainly due to the win of the Crown Bridge Alliance contract. However, we have seen a weak hit rate in our maintenance business, losing two of our existing contracts, in total yielding approximately 100 million Norwegian kronors in annual revenue. So this indicates a risk for somewhat lower revenues and somewhat weaker profitability in the maintenance business in Finland next year. When it comes to the tender pipeline, we have two new maintenance contracts coming up for the next nine months. And of course, with the losses we experienced this quarter, this will be of high importance for us next year. We still see that the record high investments we have seen in rail construction this year will continue next year in the Finnish market, which will be very positive for us. We also see a pipeline of light rail projects coming up in Finland. However, none of them will be tendered during 2022. The activity level in Norway is impacted by the low heat rate we saw in 2020. But looking at the order backlog, we should have a much stronger position moving forward in the Norwegian market. We see improved results in all divisions in Norway. We deliver very strong results in our civil construction business, and the excellent project execution we have seen for the past years continues. The results in rail construction are impacted by low volumes. However, we see that the project portfolio is much more healthy and has a much higher margin than what we saw one year ago and two years ago. So what we need in order to get the full benefits of the improvements in rail construction is more volume. And with the win of Trønder med Råkerbanen, we should be in a very good position for 2022. Within the environmental division, we have seen a high activity level through the quarter, and we also deliver healthy results from that operation. So to sum up the headline in Norway, we are on track to deliver improved profitability. The tender pipeline remains strong in Norway across all our business areas. The biggest change this quarter has been the clear signal from the Norwegian government that they want to end the ongoing privatization process of rail maintenance. This is a lost opportunity for NRC Group with the annual market of around 2 billion. And it's very sad to see that the Norwegian government says no thanks to significantly reduced expenses maintaining the rail infrastructure. Our benchmarks are very clear in Sweden and Finland. There is a significant savings potential for the Norwegian state in this area. The activity level in Sweden is low. We have stayed loyal to our strategy, not dumping prices to get volume. And this is the only way forward for long-term success in Sweden. Although the volumes are significantly down, we are able to improve the results somewhat compared to last year. That is mainly due to good performance in projects one from 2020 and onwards. We are of course very happy to see and increased order intake in the Swedish market as well, with the most significant win being the Trønder med Råkerbanan for our Swedish organization as well. But as you have seen, we have won several small and medium sized contracts in Sweden, both in quarter three and quarter four. So our order book for Sweden also looks significantly stronger for next year, and we should be able to return to growth in the Swedish market in 2022. Our heat rate has increased, but we still face a fierce competition in the Swedish market. But the tender pipeline remains strong in Sweden, and it will be interesting to see how our competitors price going forward. When it comes to maintenance, three of our own contracts are out for tender in Sweden during the next nine months. The first one has already been submitted, but will not be awarded before December this year. The second one is expected to be awarded during quarter one, and the third one will most likely slide into quarter two before we get a decision on it. Our focus for the last two years have been to restore our profitability, and on the next couple of slides, we will show you a bit what we have achieved during that process. When we had our capital market update in February 2020, We presented our measures to restore profitability and the big losses leading up to this came from our rail construction unit in Norway and our civil and rail construction unit in Sweden. Our argument for why we should be able to restore the profitability was based on the fact that we had exact similar business represented by the civil construction unit in Norway and rail construction in Finland, delivering excellent result within the exact same business. And our strategy was to change management of the non-performing units and let the new management implement proven processes from the performing units. One of the most important tasks in order to improve the profitability from the non-performing units is to reduce the tail of loss-making projects you can see on the right hand side. And the most important measure to succeed with this is to build robust tender processes. Our slogan for the past two years has been to win the right project at the right price, meaning if we see a project with a big negative asymmetric risk in the tender phase, either we need to increase our price and rather risk losing it, Or maybe even better, stop calculation at the early phase, focus our resources on projects with a better risk reward and better suited for our competitive edge. We also saw a potential for improving our project execution, and it was mainly related to how we organize projects. and also we needed to lift critical capabilities within our project teams. So when we compare the performance in the new portfolio, where we have projects won after 1st of January 2020, with the performance in the project portfolio we presented at the capital markets update, we can clearly see that our measures have been successful. The average margin of the new portfolio is seven percentage points higher than what we saw in the portfolio presented in February last year. We have not been able to completely eliminate loss-making projects, but they are small in size and have a very limited impact on our profitability. Looking at this portfolio, it's clearly fewer projects, but they are bigger in average size. Of course, they are somewhat shorter in the life cycle, but I'm confident that we have a much healthier portfolio with a much more balanced risk. So to sum up, The third quarter has been a good quarter for NRC Group. We have seen clear improvements in many important areas. We deliver better profitability. We have a continued strong order intake, giving us a head start to 2022 when it comes to order booked for the season. And we still see record high investments in our markets. We deliver a very strong cash flow from operation and our financial position remains strong. And as you can see on the last slides, our measures to improve profitability are yielding results. And we will continue the sharp focus on these processes going forward. Our guiding for the year remains unchanged. We expect to deliver an EBITDA margin between 1.75 and 2.5%. Now we can open up for questions.

On the previous page, you commented 7% improvement. Is that seven basis points higher on average margins in the project, or is it 7% compared to last year in terms of expected margins?

the first one seven percentage point versus the average margin in the old portfolio and you can want to say anything about the impact of that we'll have in the guidance for 2022 maybe well we won't be precise on the guiding for 2022 but it's obvious that these results you see on the last slide support a continuous improvement in our profit going forward thank you

With respect to the same slide, if you think about volumes, are there apples for lappers? On the left side is that $6 billion in revenue and the right is $1.5 billion in revenue.

Well, you need to remember that this is only a part of this. I think the annual revenues from the old project portfolio in 2019 was approximately 1.8 billion, while the annual revenue we see from this portfolio we presented here is 1.2 billion. And that is, of course, also representing the fact that we have had a lower hit rate in 2020. So to get the full benefit of the margin expansion you can see here, we also need more volumes. But as you have seen, we also have a good trend in order intake.

And just to add, it's also only projects which are one after 2020. So of course, that is not the full picture. So how much of the backlog is on the right side then? We have 30 million left of the legacy project at the end of the quarter and that we expect to be finalized during the year.

On guiding, will you continue to guide or is that something you want to discontinue?

That is something for the board to decide when we are delivering Q4 results.

Steel and concrete prices, how will that impact business next year with steel prices rallying up and concrete situation in Sweden being what it is, and also with Nord Cement also increasing prices in Norway? How do you see those impacts?

Well, of course, it will impact some of our projects, but we don't see any major impact on our profitability based on this. Our exposure through to steel and concrete prices are not very high. Of course, we have some projects where we build concrete structures, but that is not a significant part of our operation. We have seen the same price increase that you indicate, Simon, and it will impact some of our projects, but at new contracts with tender, we will of course take it into account when we deliver our prices as well.

and just getting enough concrete how are your like in sweden how well are your connections to if if rationing starts now in december how will that how well are you prepared for it if that actually happens which is looks like the attack is going to be

If you look at our civil construction activity, which is the business that supposedly should use most of the concrete in our business, our projects in Sweden is mostly related to groundwork and not concrete work. We have one big project in Sweden in the joint venture with V-Build and Gyllermark in Gothenburg. And there, of course, we are dependent on concrete, but we have agreements for that in place.

On recruiting, obviously project economics is also dependent on very good project leaders and expanding, let's say, your capabilities within the organization. How is that going compared to, let's say, one year ago?

I would say we have a stronger organization when it comes to our project execution capability today compared to what we had two years ago. We also have a much stronger management on the operational businesses that we have, which is also important, especially when it comes to tender and also when it comes to doing follow up of the existing projects. course recruiting those kind of capabilities are maybe the biggest bottleneck in the market and that i would say is also the only real bottleneck for nrc group in order to reach our long-term target And that has been one of the topics we have worked with systematically throughout the two last years to also build our brand for recruiting new people. I think the most important measure here is to build competence within our existing employees, recruit less experienced people and train them through the projects that's why i also said that these bigger projects are important for us because they are a good tool to actually take that journey with less experienced employees but obviously in long term this is our biggest bottleneck but it's also something we work very systematically on in order to mitigate

I always like also the recruitment of, uh, perhaps not as qualified personal engineers and like the boots on the ground. Um, with COVID restrictions and all of that in the various markets with border closed, getting people from Poland historically becomes harder for the operations. How are you seeing that impacting operations now in Norway, Sweden?

I would say nearly no impact currently. The travel restrictions have been lifted. We have no problems getting people into our countries and it's mainly related for our part to the civil construction and partly some of the environmental companies in Norway where we use foreign labor. When we talk about rail construction and maintenance, it's mostly local and Nordic employees as it requires certificates, et cetera, from the local transport agencies.

Final question from me. On the competitive picture, probably a bit more color on the Norwegian market when we hear Mesta is probably changing a bit and moving into your market. We know that Sweden is tough. How do you see the Norwegian competitive market within the different segments and also maybe some comments on the Finnish market given the loss of the maintenance contracts?

yeah i think for the norwegian market if you talk rail construction which i guess is your your question um mesta bought a small rail contractor i think the main strategy behind it was to be positioned for the maintenance market which is now most likely closed We have seen somewhat higher competition when it comes to the smaller projects in rail construction in Norway, and that is also one of the reasons behind our lower volume in rail construction this year, with RIAS, the company Mesta bought, being one player, with Spordrift, the monopolist of maintenance, being one new player. we will of course push very hard for sport drift to continue now being a monopolist but removing their mandate to compete in the private market it doesn't make any sense for them to operate in the private market while being a monopolist in maintenance so on the smaller projects in norway somewhat increased competition on the bigger projects has been stable we see three to four players on the bigger contracts and we don't expect that to to change materially And Finland, I would say it's a stable, competitive environment. Same players as we have seen for the past two, three years.

Last time we met was the CMD. It's been a while. You're now repeating the same guidance for 2021. How do you think about your long-term ambition? You presented that to CMD. Are those still valid?

we are still keeping our long-term ambition but as we have been clear for the past two or three quarters we are clearly delayed at reaching that ambition but i see no significant changes saying that we should not be able to achieve those ambition in the long term but obviously with the numbers you have seen for the past 18 months we are delayed even though your order backlog has improved as much as we've seen it will be yeah Thank you. I think that was everything for today. Thank you for good questions here from the audience in House of Oslo. And also thank you to all of you joining on our stream. Have a nice day.