NRC Group ASA

Welcome to the quarterly presentation of NRC Group. I'm joined here today by Ole Gullsvik, our new CFO, who started in the company 1st of March. And Ole will go through our key financial figures later in the presentation. We will also run a Q&A session at the end, and for those of you being online, you can write questions in the chat as we go through the presentation. On the first page here you see a picture from our Nittedal station project. And this is a project that is showcasing NRC's business model and strategy in a perfect way. This is a picture from last week where we within five days demolished the old railway bridge through our own demolition and recycling company. Putting in place a new railway bridge constructed by our civil construction unit. And then finally put in place, we have all rail technical disciplines, re-establishing the operation of the rail tracks, putting it out ballast, sleepers, rails, installing a new signaling system and a new catenary system, all within five days. NRC Group, we build sustainable infrastructure and our strategy is to be able to deliver all required work in that process. Quarter one started out with strict restrictions from the pandemic and was followed by the war in Ukraine and increased raw material prices. And I would like to thank all our employees for the great work done, making sure all our projects run according to plan and limiting the effects of these external events. Because despite these external events, NRC Group see a positive development in first quarter. We deliver improved results. We deliver strong cash flow from operation. and the good order intake we saw throughout 2021 is starting to show in our revenues, with a 7% growth rate adjusted for currency. You see continued strong performance in Finland, while the increasing revenues and improved profit comes from a positive development in our Norwegian and Swedish operations. The order backlog is somewhat lower than what we have seen for the past three quarters, although at the same level as last year. And the reason for the somewhat lower order intake is the fact that we haven't won any bigger projects in quarter one. But as said before, with a more focus towards bigger projects, our order intake will be a bit more volatile going forward. And I guess you have also seen the two important wins published last week. Our health and safety KPIs are showing mixed results. We do see a good improvement when it comes to the lost time incident frequency, and we also see an improvement when it comes to total recordable injuries. However, it is still at a too high level, and this quarter we also had one serious injury in our company. So we cannot be satisfied with these results, and we need to continue the hard work to improve. The sickness absence rate is somewhat higher than same quarter last year, and this is due to the effects of the pandemic. As said, NRC Group builds sustainable infrastructure, but we also care how we do it. April this year, we published our sustainability report, and I want to share a couple of highlights from that report today. First of all, In our activities in 2021, more than 60% of our revenues would be classified as aligned according to the EU taxonomy. And as more companies start to report on this, we believe this will highlight NRC Group's unique position and our unique business model in the construction industry. A second important achievement in 2021 is the fact that we were able to reduce our CO2 footprint by 13.5%. And this was done by taking good choices in our projects and investments in more sustainable machinery. And I'm happy to say that we are well on track in order to reach our 2024 target of reducing CO2 emissions from our operations with more than 30%. The war in Ukraine has created more uncertainty in the market, shown by higher raw material prices. NRC Group has very limited exposure, direct exposure to Ukraine and towards Russia. And we have seen very little impact from their rising material prices so far. We also believe to be well protected in the short term for these increased material prices and is mainly connected to three reasons. First one being that our customer delivers most of our rail technical equipment and have the price and the supply risk for it. Second element is the fact that a majority of our contracts are indexed towards different construction cost indexes. So in the case of increased material prices, revenues in the projects will increase at the same time. The third element protecting us in short term is our operating model and our strategy to try to procure as much as possible when it comes to services and materials early in the project at fixed price. However, we are not immune in NRC Group either. And especially when it comes to potential disruptions in the value chain, it's difficult to forecast where and how they will materialize. So far, we have seen very little impact from this. But we do also face a medium to long-term risk as government spending on defense will increase. This might have an effect on government spending on infrastructure. However, we have not seen any projects being canceled so far, and we believe that governments still will have a high priority on investing in sustainable infrastructure. So, Ole, now it's time to go through the financials. Thank you, Henning.

Financially, we had a good first quarter and we had a solid improvement in most of our finance KPIs. The revenue came in at 1.2 billion, which is a growth of 7% over first quarter last year in local currency. This was driven by a very strong growth in Norway with 18% and the same with Sweden with a 90% growth over first quarter last year measured in like-for-like currency. And it was partly offset by a reduction in sales in Finland with 10%. But we will come back to the different countries later on in the presentation. Our profits, which we measure as EBITDA, excluding M&A costs, improved with 22 million compared to the first quarter last year and came in at minus 37 million. And this also gave an improvement in the EBITDA margin to minus 3.2 percent compared to minus 5.2 percent in the same quarter last year. And as you're all aware of, Q1 is a low season for our industry and for NRC, so we measure our performance based on our improvement over last year. Some other more detailed comments on the different P&A lines. As you can see, the M&A expenses came in at minus 1 million, and we had earlier guided that we expect the 2022 M&A expenses to be well below what we had in 2021. You can also see that the depreciation is reduced to 45 million in the quarter compared to the same quarter last year. And this is because we have a smaller asset base and we're utilizing our asset base better now than we did a year ago. A couple of comments also to the amortization of 9 million. 6 million of this is related to amortization of PPE from the acquisition of VRTrack back in 2019. And we expect this amortization to be completed around year end 2022. And the remaining 3 million here is related to amortization of IT investments. Lastly, as you also can see, is that the net financial items is minus 14 million. And this is down from last year. And the majority of this reduction is related to us having less interest in debt and thus less interest costs compared to last year. If you look a little bit more longer term, or on the longer term development, measured here as a rolling 12 months performance. We have now seen a steady improvement in our profits for the last few quarters, and our EBIT A came in at 161 million in Q1 2022. And operational turnarounds takes a long time, particularly in the project business. So what you have to do is to gradually renew your order book, basically getting new contracts at better margins and replacing the old loss-making contract. Balance of 5.3 billion and an equity ratio of 48%. Our cash is 593 million, and this is somewhat down from the year end, which we're at 626 million. And the reason for this reduction is related to our losses we had in the quarter, and also that we had a reduction of debt in the period. And this was partly offset by a very strong net working capital, and I will come back to the cash flow in the next slide. Our gross interest-bearing debt is now 1.4 billion, and this is a reduction during the quarter of 82 million. Out of this, 50 million is related to favorable currency mix, and the rest is reduced interest-bearing debt through bank installments and also less lease liabilities. And as a sum, we have then 843 million in net interest-bearing debt now, which is an improvement of 48 million during the quarter. And if you'd like to measure this without leases, we have a net interest-bearing debt excluding leases of only 383 million at Q1. And then there have been a couple of questions related to the booking of the AGN Haga projects. So we have a 20% ownership in a company called AGN Haga, which executes two projects in Gothenburg in Sweden. We treat this as a financial investment, not only because of the size of our ownership, which is 20%, but also because our only participation is related to having a board representative. So we don't have any operational involvement at all. The projects are very complex and there has been significant changes over the last year. The book value of this investment is only 500,000 in NRC's balance sheet. However, there might be scenarios where we, for commercial reasons, would like to inject more capital, as according to our ownership structure. Our cash flow from operation was solid 69 million, and this is 52 million better than we had in the same quarter last year. And we are satisfied with this performance, and it's well above the reported EBITDA at 7 million. As you can see, we had a very strong operational cash flow the last three quarters. And one of the reasons for this is the steady improvement we had in net working capital that came in at minus 84 million in Q1. And one of the reasons of this is that we have over a long period now focused on working capital in the organization and into the projects. And this has given results. However, we expect the net working capital to be volatile from quarter to quarter going forward. If we go back to the left hand side of the slide, you can see that the seasonal pattern here is to have a weak operational cash flow in the first half of the year and a strong operational cash flow in the second half of the year. And in light of that, we think it's particularly strong with the 69 million in the first quarter. Moving all the way to the right-hand side, we can see that in addition to operational cash flow, we also have cash flow from investment activities of minus 7 million. But this includes 20 million in positive proceeds from sale of machinery. And lastly, we have cash flow from financing activities at minus 91 million. And this is 36 million related to bank installments. 41 million related to lease payments and the last 14 million is interest costs so in total we have now 593 million in cash looking at our financial position we have 375 million now in bank debt and 600 million in bond debt The bank debt installment profile is about 35 million per quarter going forward, and it falls due in first quarter 2024, while the bond falls due in total in Q3 2024. Looking at the liquidity sources side, we have the mentioned 593 million in cash. And then on top of this, we have an undrawn credit facility of 200 million. So in sum, we have around 800 million. in available liquidity. And lastly, if we look at the leverage ratio to the right-hand side, we have seen now a steady improvement in the net interest rate in debt divided on EBITDA, and it came in at 2.4 times EBITDA in Q1. And we are happy with this development, and it's in line with our target to be below 2.5 times EBITDA. Lastly, looking at the backlog and the order intake. So the order intake came in at just shy of 900 million, which is on par with what we had in Q1 2021. And this was a book to bill of 0.7. But if you measure this over the last 12 months, we have now been steady around 1.3 over three quarters. Our total backlog is 7.3 billion, which is 23% higher than we were at the same time last year. But more importantly, short term, out of this 7.3 billion, 3.5 billion is for delivery for the rest of the year, that meaning Q2 to Q4. And this position is 19% higher than we were in the same time in 2021. And with that, I give it back to you.

Thank you, Ola. We will have a short operational review, and we will start with Gildan. We still see a strong performance in our finish operation, although the activity level is somewhat lower this quarter compared to last year. And this is, of course, also impacting our results. The lower activity is driven by lower volumes from our light rail business, as we did hand over Tampere Phase 1 to our client first quarter last year. and also that our Jukeri light rail project in Helsinki reached their peak production year in 2021. The lower volumes in light rail is partly compensated by a higher activity level in our rail construction business. Looking at the order intake, we see that we have somewhat lower or significantly lower order intake in first quarter compared to last year. And that is mainly due to the fact that we haven't seen any bigger wins in Finland in quarter one. And as you can see, we have a very strong order book in Finland. And during the past 12 months, we have a book-to-bill ratio of 1.5%. Looking at the tender pipeline in Finland, we see a reduction in the tender pipeline, and especially in the rail construction segment, we see a big discrepancy between what budgeted levels are forecasted or are for this year versus what we can see of actual projects in the tender pipeline. However, we have a strong order book in the rail construction segment, so this is no immediate concern for us. But of course, we would like to see this situation change rather soon than later. But all indication points towards that direction, that there will continue to come projects going forward in Finland in this segment. Looking at the maintenance business, we have identified zero projects out for tender in the next nine months. So in practice, this means status quo for our maintenance business for the next year. In Norway, we see that the high order book we had entering the year is really reflected in a high revenue growth. Like Ole said, 18% this quarter versus same quarter last year. And this growth is driven by rail construction and environment. We deliver a strong improvement in results in Norway, and we are able to deliver a positive EBITDA in the low season quarter one, which I would say is really strong. The results improvements are coming from environment and most of it from our demolition and recycling business where we started an improvement program one year ago. The order intake in Norway is somewhat lower than what we saw last year due to not publishing any bigger wins in the quarter. But as you have seen, we did publish an important win in Norway last week. with the literal intent of doing the biggest mass transportation contract in NRC Group's history. And this will give a good base load capacity for our mass transportation unit for the next four years and will be a good foundation for growth in that business. And important for NRC Group, It's a sustainable contract. We have invested in new trucks fueled by biogas that will be utilized to execute on this work. And we expect the final contract to be signed within this second quarter. We see that we still have a high tender activity in Norway, although somewhat lower than what we saw last quarter, and the reduction is mainly driven by rail construction, where Bananur has awarded two bigger contracts in quarter one, where we unfortunately did not win any of them. But with a big win we had on Tønder med Råkerbanen Q3 2021, and still a tender pipeline with a lot of interesting opportunities, this segment is still a good growth opportunity for us going forward. We can also see higher activities in Sweden due to also entering the year with a stronger order book. And the growth here is mainly coming from rail construction and civil construction. With a higher activity and a healthier order book, this also results in better results. And we expect this improvement to continue throughout this year. Our order intake in Sweden is more or less in line with last year. We have seen an okay hit rate throughout the quarter, but competition is still intense in Sweden. But more important than the order intake in first quarter is the contract win we published last week, where we won the Vestra Götaland Vest maintenance contract in Sweden. This is an important win for us because it is our existing contract today and it confirms the competitiveness of our Swedish maintenance business. Looking at the tender pipeline in Sweden it's still at very high levels both in rail construction and rail maintenance. As you see, we have nine tenders coming up in the Swedish market within maintenance in the next nine months, reduced to eight as of now, as we have already won one of them. And for the remaining eight, two of those is our own contracts. And we expect the first one to be awarded during quarter two. And the last one will most likely slide into quarter three before we see any decisions. But as you can see, there are lots of opportunities in the market. To sum up quarter one, it has been a positive quarter for NRC Group, where we deliver improved results, a strong cash flow from operation, and a growth rate adjusted for currency of 7%. The war in Ukraine with rising raw material costs have had limited impact so far, and we believe to be well protected in short term due to our contract structures and operating model. However, there's an increased uncertainty for medium to long term due to increased government spending on defense that might have some impact on also priorities within the infrastructure segment. However, we believe that there will be strong priorities and investing in sustainable infrastructure will still be prioritized going forward. Our operational focus will remain the same. We will focus on our core processes within tendering and project execution to generate profitable growth. We still see solid performance in Finland, and we expect the performance to remain solid in 2022. We see that the very positive development that was starting to show in Norway second half of 2021 continues in first quarter, and it's expected to continue going forward. And we also see finally that results are improving in our Swedish business. The order intake has been a bit weaker in quarter three, but we believe that the two significant wins we published last week is a positive signal that the strong order intake we saw in 2021 will also continue going forward. Now we will, yeah, let's take the last bullet as well. The financial outlook is unchanged. We believe that the positive operational and financial development We'll continue, and we see moderate to strong revenue growth this year, and a moderate increase in EBITDA margins compared to 2021. So then we will open up for questions.

In terms of wage growth and your ability to keep workers, is that an issue?

I think the wage growth is mainly related to Norway when we look at how the negotiations are going in different countries. In Norway, we can expect an average salary increase between 3.5% to 4%, while in Sweden and Finland, we are closer to 2% and 2.5%. 50% of our employees are situated in Finland. So this limits, of course, the effect or the extraordinary effects we see on salary increases in our business. So this is a limited concern for us. Of course, we always calculate with salary increases, but some higher increases in Norway this year, but in total for NRC Group, this has limited effects.

And then on the two rail contracts you lost in Norway, was that entirely due to price or were there other issues?

Mainly related to the price. So we were fairly tight on one of them and a bit further ahead of the field in the last one.

Thank you. Simon from D&B. In terms of handling the supply disruptions, how are your contracts? signed up today if you, for instance, can't get a hold of steel, can't get a hold of concrete elements, if there's actually supply, because we've got the price element that is indexed, but if you aren't able to actually deliver these products in projects, how will that affect operations and potentially economically in light of that?

If we are not getting the sourced supply, it will, of course, delay the project if we are unable to source it from other sources. That's obvious. In this situation, we will always try to use the forced mature clauses in our contracts, which... quite clearly defines what kind of responsibility we need to bear, our own cost, and what kind of responsibility the customer is having, or the cost the customer is having due to this delay. So typically, if we are in a force majeure situation, we will not be applied penalties for late deliveries. But of course, this is, if the situation arises, a discussion we need to take in each separate project. But I will say, We see customers having a fair approach to this, given the situation in the market.

Maybe you should comment also if there's rail technical equipment and the client is delivering.

Yeah, so rail technical equipment, then the responsibility is not on our side, and then our exposure is also limited. But what is also important to say that we haven't experienced any supply shortage giving significant impact in our production as of today. And I think as time moves forward, we should see a normalization if events are not escalating. So, yeah.

There was also asset sale in the quarter, impacting the figures and on the cash flow. You can just elaborate a bit. What was that and what division was this game recognized?

We had some sales of machinery this quarter as well.

It was around 19 million in book effect and 20 million cash effect.

And it was more or less the same level as we had in quarter one last year. And it's in the Finnish business.

Depreciations, you commented on amortizations and that was good, but depreciations also fell almost 10% year on year. Could you please elaborate about what you expect for that going forward as well?

No, it depends obviously on the different projects. As we mentioned now, we have one quite a significant project on mass transportation, which requires some investments. All in all, we expect actually the depreciation to be kind of around this level. We see that our asset base is lower, and there's no particular reason for this, except that we are more efficient when we're utilizing our assets. So we think this is the correct level going forward, but I haven't done the detailed calculation on it. Okay.

There are no indication of it in the quarter report, but are there any minor project write-downs in the quarter?

we always have minor project breakdowns in the quarter that's that's always given so but of course in a big portfolio the the the goal is to have more positive adjustments than negative adjustments this should be the normal situation this has been the situation in quarter one but we will always have project breakdowns

I have a question from Arctic. How concerned are you about the potential compilations of projects or tenders going forward?

In short term, not concerned. I think our main concern is the medium to long term effects. I think it's unlikely to see big reprioritization of projects being late stage in the planning phase. So in short term, not concerned. We haven't seen any examples from our business yet. Medium to long term, yeah, we will see what the politicians do. But we believe that sustainable infrastructure should be a priority also in the future. So we believe our segment to be more protected than the general infrastructure segment. Good. That was all the questions from today. Thank you for participating both here in Vika and for those of you participating on the stream. Thank you.