NRC Group ASA

welcome to the fourth quarter presentation for nrc group welcome to all of you here participating in oslo and also a warm welcome to those of you participating on the stream after the session we will have a q a session where those of you who are participating on the stream can write questions in the chat We ended 2022 with strong revenue growth and reported revenues in fourth quarter of 2 billion. This represents a 22% growth in revenue versus last year. Unfortunately, we were not able to capitalize on the increased revenues when it comes to results and margins. We deliver an EBITDA of 31 million in the quarter, down from 50 million last year. And in combination with the higher revenues, this gives us an EBITDA margin for the quarter of 1.6%, down from 3.1% last year. Looking at the countries, we deliver solid performance and good profitability in Finland. We see a very positive development in Norway with both higher revenues and higher margins, while we deliver weak results in Sweden due to losses in the civil construction portfolio. We delivered a good cash flow from operating activities in the quarter of 160 million up from 149 last year. We had an order intake of 1.3 billion, which leads to an order backlog end of year of 7.8 billion. This is the same level as last year. In the presentation, you will see that during fourth quarter, we have had a positive development in our tender pipeline for the next nine months. So we will have good opportunities during 2023 to increase our order intake and strengthen our order backlog. When it comes to our health and safety KPIs, we are delivering on an unsatisfactory level. When it comes to total recordable injuries and lost time incidents, we have too many accidents, and we also have variations in results between countries in this area. In Norway, we are delivering good results while Finland impact negatively. And especially in the fourth quarter, we have had too many lost time incidents in Finland connected to slips and trips due to winter conditions. We have not had any serious injuries in this quarter. However, we have had two serious injuries during the year, and that is too, too many. Our sickness absence rate is on a healthy level at 4.2%. It's somewhat up compared to last year due to higher COVID related sickness absence in quarter one, and also somewhat higher sickness absence in quarter four, in line with the rest of the society, I would say. Now Ole, you will take us through the financial results. Thank you, Henning.

Starting with the performance for the full year 2022. Financially, we had a good development compared to the last years. We had in 2022 strong revenue growths with 18% higher volumes in 2022 compared to 2021. And we came in with a sale of 7.0 billion. Our EBITDA increased slightly from 139 million to 151 million. And note here that in 2021, we had positive gain from sale of machinery, which was 43 million higher than it was in 2022. And this gave a positive impact on the 2021 results. As a sum, the EBITDA margin decreased slightly to 2.1% in the year. Over to net interest bearing debt, which has come down over the last few years. It increased slightly to 950 million in 2022, while our order backlog remains high at 7.8 billion, which is in line at the same level as it was at the end of 2021. Looking into 2023, we now expect to continue the positive both operational and financial development we've seen the last few years. And right now we see a slight decrease in revenues in 2023 compared to 2022. And we expect a moderate increase in our EV day margin. Looking at fourth quarter, financially, we had strong revenues, but the profitability was somewhat weaker than expected. The sales came in at 2.0 billion, which is up 22% compared to the fourth quarter in 2021. And this was driven by strong growth in Sweden and Norway. On the like for like currency, the growth rate was 21%. Our operational profit, which we measure as EBITDA excluding M&A expenses, is down 19 million compared to Q4 2021 and came in at 31 million. In Q4 2021, we had positive gain from sale of machinery of 23 million, and this was only 1 million in Q4 this year. We will come back with more details on each country later in the presentation, but I will give you some more flavor on each P&L line. As you can see, the M&A expenses for the fourth quarter 2022 and the fiscal year 2022 is more or less insignificant. And right now we do not expect any significant costs related to all transactions. However, in Q1, we did sell our Gravco business unit, and we will report a gain of that sale of more than 40 million in Q1 2023. You can also see the amortization and impairment comes in at minus 361 million. And out of this is 352 million related to the Goodwill impairment, which we announced earlier related in our Swedish business unit. And 6 million of this is from PP amortization from the VR track acquisition back in 2019. And this amortization has now come to an end at Q4 2022. Moving to the net financial items, which came slightly down from fourth quarter last year. The majority of this is related to interest costs. As mentioned earlier, we have hedged the NIBOR on our 600 million bond loan at 1.83%. And as such, we are relatively limited exposed to increased interest rates we have seen lately in the short and medium term. And lastly, you can see that we have a cost of 6 million related to share of profit from joint ventures. In the fourth quarter of 2022, NRC Group made the capital contribution of 6 million in Aegean Haga AB to support working capital in that company. Due to substantial uncertainties in the projects, We have not recognized any net income from Adrian Haga and all capital contribution has been impaired. And in January this year, we got the termination of one of two contracts in Aegean Haga. We disagree to this termination, and we believe we have a good case. The second contract in Aegean Haga is set for completion, to be completely delivered at the end of 2023 or the beginning of 2024. Looking more on the longer term of the development measure here as rolling 12 month performance. As mentioned earlier, the improvement program started in 2020 has been gradually yielding result and our financial performance has improved over the last 12 to 18 months. We did expect to increase the EBITDA margin in Q4. from Q3 in 2022. However, due to weak financial performance in our civil construction business in Sweden, we ended the year at 2.1%. Moving over to the balance sheet. As you can see, we have a total balance of 5.2 billion, which is down from 5.6 billion at the end of 2021. And this reduction is due to the impairment of Goodwill, as mentioned earlier. If you look at the net interest bearing debt, this came in at 950 million, which is down 47 million compared to Q3, but up 59 million compared to the same quarter last year. And if you want to measure this on net interest bearing debt, excluding the leases, our net debt is now only 422 million. And as a sum, the equity ratio remains solid at 45% after the Goodwill impairments. Cash flow from operation is good at 160 million in the quarter. If you look at the graph to the left, you can see that we have reduced the net working capital in the quarter with about 100 million in the graph to the right. This is a normal seasonal pattern for NRC Group. However, if you see the graph in the middle, you can see that the average net working capital has increased slightly over the last three quarters due to combination of our project portfolio and that we had very high volumes in 2022. And if it wasn't for this increase, our operational cash flow would have been even higher. The cash flow from investment activities is only 9 million. And this is according to our lean asset-based strategy where we do small investments only. The cash flow from finance activities is minus 93. Out of this, the installments to the bank loan is 38 million. We have 46 million in lease payments and we have 10 million in interest payments. And the end of the year, we ended at 472 million in cash. Over to our financial position, which remains solid at the end of the year. We now have a bank loan, a Euro bank loan, at 295 million Norwegian kroners, and a bond loan of 600 million. The maturity schedule presented in the graph in the middle is how it stood at the end of the year. After the end of the quarter, after the end of the year, we have done some amendments to the bank loan where we, among others, have reduced installments in the bank loan and we have moved the maturity from Q1 2024 to Q3 2024. On the liquidity side, we have the 472 million in cash, as mentioned earlier, and we have an undrawn credit facility of 200 million. So in sum, we have nearly 700 million in available liquidity. On the right hand side, you can see our leverage ratio, and we have a target to be below two and a half time EBITDA. And over the last few years, we have come down to this threshold due to a combination of installment payments on our bank loan, as well as increased profits. In Q4, this ended at 2.8, which is slightly above our targets. Finally, some comments on our backlog and our order intake. The order intake in the quarter came in at 1.3. This gave an isolated book-to-bill rate of 0.6 in the quarter. But if you look at this over a 12-month running, it came in at 1.0, as shown in the graph to the left. The order backlog is healthy at 7.8 billion, which is in line with the same quarter last year, but slightly down from what we had in Q3. However, if you look at the order intake or the backlog for delivery in 2023, the picture is slightly mixed. As you can see in the graph to the right, we have 3.7 billion in backlog for 2023, and this is a good backlog. However, it's down 9% compared to the end of 2021, but it's up 10% compared to where we were at the end of 2020. The turnover in 2022 was much higher than expected due to significant change orders in large projects, which were to deliver during peak season 2022. But as a sum, we believe we will have now a slight reduction in volumes in 2023 compared to 2022. And with that, Henning, I'll leave it to you.

Thank you, Ole. We will have an operational review and we will start in Norway, where we see a positive development with growth in revenues and improved margins. As you can see, we have had a revenue growth in the fourth quarter of 25% in the Norwegian market. And the revenue growth is driven by a high growth rate in our rail construction activities. Within this business unit, we also have a strong order book for 2023, and we believe that the growth will continue for rail construction in Norway in 2023. We also see a positive development in the results from our rail construction activities, and we have realized improved profitability in 2022. We also deliver strong margins and strong results in our environment division in Norway, while we deliver somewhat weaker results in civil construction in Norway. This is due to a too big variation in project profitability in the portfolio, but also a too low volume when it comes to revenues to support our long-term profitability targets for civil construction. Looking at the order backlog in Norway, you will see that it's down from last year. However, we do have a solid order backlog for 2023. But as you can see, we need to build a stronger order backlog from 2024 and onwards. As Ole mentioned, we chose to divest the Gravko business unit during January 2023. Gravko is a company working in the water and sewage market. It has limited operational synergies with the rest of the operations in Norway. While we received a good bid for the company, we chose to sell the business and focus both our operational resources and financial resources towards activities that have more financial and operational synergies with the rest of the business. We do see a solid tender pipeline in the Norwegian market. And it has increased 3 billion compared to last quarter and somewhat above 1 billion compared to where we stood one year ago. As you can see, we have a solid tender pipeline of bigger projects. And this is important as it will give us good opportunities to build the longer term order backlog in Norway with revenues contributing from 2024 and onwards. Going to Sweden, we see a mixed picture. We have realized a very strong revenue growth in the Swedish market in 2021. As you can see, we had a revenue growth in fourth quarter of 69%, mainly driven by volume increases in rail construction. We have also been successful building a solid long-term order backlog in the Swedish market during 2022. But looking at the results, both in the quarter and for the year, the results are too weak. Our main priority is to restore profitability in the Swedish market. And based on the weak results, we have done a thorough review of our project portfolio in the Swedish market in order to understand where we stand risk-wise, but also to analyze the underlying root cause for the weak performance. Based on this, we have done several changes in Sweden and we will continue to do the required changes in order to be profitable as soon as possible in the Swedish market. One of the measures we have implemented is to do a strategic review of our civil construction activities in Sweden. As you can see on the left side of the slide, this is a limited activity in the Swedish market, representing 360 million of our total revenues of 2.1 billion in Sweden. If we take a look at the order backlog, it represents 200 million of the 3.2 billion order backlog. And as this business is today, it's subscale. And in order to succeed and to deliver profitability according to our internal targets, we need to significantly grow it and in parallel improve performance. And based on this, we have decided to do a strategic review of the civil construction activities in Sweden. Looking at the rail construction and maintenance part of our two main business lines in Sweden, we do see a positive development throughout 2022. In maintenance, we have succeeded building a solid long-term order backlog. by renewing all existing maintenance contracts throughout the year, but also winning one additional new contract that will start to provide revenues and profitability to some extent in 2023, but with full effects in 2024. The maintenance business in Sweden has delivered stable results for several years. It is profitable and it is a good foundation to build on to generate improved results and growth by gradually adding more contracts in this business. Looking at rail construction, we also see a positive development in 2022. We delivered positive results in rail construction for the year in total, which is an important milestone for us, as it is the first time in many years that we were able to generate profit from these activities. And this has happened in a year with quite complex operating environments. And the reason for this, as Ole mentioned, our revenues have grown significantly more than expected, due to huge increases in revenues in certain projects. We have several projects in the rail construction business that have grown between 50 and 100% versus the original contract amount. And this is typically projects that are executed in a very short time in shorter train breaks. And when we get changes of conditions in this magnitude in several projects in parallel, it creates a lot of complexity in the operations. And we have had to put in significantly more resources in order to complete the projects according to the contracted time. This has been expensive and we have not been able to recover all the expenses from our clients. This has impacted profitability in the rail construction segment negatively in 2022, but despite this, we do deliver significant improvement in profitability improving the result by almost 50 million in this segment and as said we are able to deliver positive results in rail construction in 2022 and to give you a sense of the growth that has been happening in this segment this year we had revenues in rail construction of 600 million in 2021 And in 2022, it was 1.2 billion. So I would say delivering a positive result with this high growth, that is actually very good performance. And we have a good foundation in the rail construction activities to further develop the organization. continue to work on our core processes when it comes to tendering project execution project selection and continue the positive development in this segment going forward we continue to see high tender activity in sweden although down 2.4 billion since last quarter Compared to a year ago, it's increased by 1.7 billion. As you can see on the first slide on Sweden, the order book for 2023 is somewhat down from last year. However, this is okay. And we will not push aggressively to increase our volumes in Sweden in 2023. The main focus is to tender projects that will contribute with revenue and profit from 2024 and onwards. Based on the projects being tendered, we can be selective on which projects we approach. In Finland, we continue to deliver solid performance and solid profitability. Looking at quarter four and also 2022 as a whole, we have delivered strong growth in the rail construction segment in Finland, and also delivering strong margins from this segment. As you can see, the activity level is somewhat down from 2021, and this is due to lower activity level in light rail, maintenance, and partly also the material segment in Finland. Profitability remains solid in the light rail segment while we have reduced profitability in our maintenance business. And based on this, we have initiated a profit improvement program for this segment in Finland that will run throughout 2023. Looking at the numbers and the weaker results in Finland in quarter four, it's also important to note that the Q4 figures last year contained 16 million more in gains from sale of assets versus last year. So if you look at the operations, we still deliver solid margins and solid performance in this segment. The order backlog in Finland is down significantly compared to end of last year, and this is mostly due to a reduced long-term order backlog. Basically, we have produced on our big light rail projects and our maintenance contracts during the year without winning significant new contracts in these businesses. For the light rail part, that is as expected and planned since there have been no tenders in the market to compete for. But what we see is a new wave of light rail projects coming up in Finland that will be tendered in 2023 and 2024. And with our strong track record, both when it comes to winning contracts and executing contracts in this segment, our plan is of course to take our share of these contracts also going forward. What is also a very positive development in Finland is the increase in the tender pipeline we have seen for the past three months with an increase of more than 4 billion versus one quarter ago and versus one year ago. We need to increase our order intake in Finland in 2023 to support and build a stronger order book and order backlog. And based on the tender pipeline we see, we should have good opportunities to do that. So to sum up 2022 and quarter four, It has been a year with a strong growth in revenues, both in the fourth quarter and for 2022. In 2022, we realized a revenue growth of 18%, while we delivered an EBITDA of 151 million, an improvement of 8% versus last year. It's an improvement, but it's not at the level that we aimed for. and this is due to weak results in Q4 2022 due to weak performance and weak results in Sweden. Our order backlog remains high, 7.8 billion, and as you have seen in the presentation, we have a significant stronger tender pipeline for the next nine months versus both last quarter and last year. This gives us good opportunities to increase our order intake in 2023 and build a solid order backlog going forward. As I mentioned, we chose to divest the GravKo business in January 2023, and this will impact the results of quarter one in 2023. When it comes to the operations, we deliver solid performance, good profitability in the Finnish market. We continue to see a positive development with revenue growth and increased margins in Norway, while we still deliver weak results in Sweden. And as I said, improving the profitability in Sweden, getting back to black figures as soon as possible, that is our number one priority. Coming to the outlook for 2023, we expect to continue the positive operational and financial development in NRC Group. Based on the order backlog we have today for 2023, we expect a slight decrease in revenues and we expect a moderate increase in EBITDA margin for the year compared to 2022. Thank you. We will now open up for questions.

We can start with some questions online. A few questions from the sale of Graco. What was the revenue and EBIT in NRC Graco?

When it comes to more details about the Gravko transaction, it will be published as a part of the Q1 report 2023.

And for the gain we got from Gravko, is that a part of the outlook you have now set for margins in 2023?

No, that's excluding, so that will come on top.

Okay, and then going back to the order backlog, is the 9% year-on-year drop of the 2023 estimates of the order backlog for the group slight or a moderate decrease?

It's a moderate to strong decrease, I would say.

It's a question related to tax. You have a tax cost despite the reported pre-tax loss. What's the reason behind that?

This is related to the goodwill impairment that we have to reverse some tax we had on the other tax benefit we had on the balance sheet. And then we have to reverse that out of the balance sheet. So it's related to the goodwill impairment.

Questions to EBITDA margins again. What's the margins from rail maintenance versus rail construction?

I guess that the question is related to Sweden, since we spent quite a lot of time discussing this during the presentation. So now the margins from rail construction and maintenance in Sweden is approximately at the same level.

Will Sweden deliver a positive EBITDA in 2023?

It's obviously our target to deliver positive results in 2023. However, we will of course not be able to guarantee that to happen, but we will see improved results and our target is to deliver black figures in 2023.

And then I think we have one more question. Who are the main competitors in rail?

In rail? In Finland, to start there, we have one company called Destia, who operates in rail maintenance, road maintenance, and also to some extent project execution on the rail side. We have a company called Kreati, which is listed in the Finnish Stock Exchange in Helsinki, with civil activities, but also activities within the rail segment in Finland. We have a privately owned company called GRK, which is also competing in our segments in Finland. In Sweden, on the rail side, we have the biggest company being Infranor, who is active both in maintenance and rail construction, but by far the biggest player on the maintenance side. We have Strukton, a privately owned company from the Netherlands, Also a big player in maintenance, but with somewhat lower activity level on the rail construction side. And we have Infracraft, who is maybe the biggest player together with NRC in the rail construction segment. And then you have several, I would say, small to medium-sized players in that market. But on the maintenance side in Sweden, it's basically a market where Strukton, Infranor and NRC is the main players with 90% of the market, I would say. in Sweden also having significant activities in Norway. And we have also several other sort of medium to small sized players. But when it comes to the bigger rail construction projects in Norway, it's mostly NRC, Baneservice and Infra Nord who has completed regularly for this contract.

So, and one additional question related to competitors, any competitors when it comes to Nordic projects?

I would say if you look at our competitors, it's only NRC that have significant revenues and significant activities across all three countries. Infra Nord is by far biggest in Sweden, and they have revenues of, I would say, 700 to 800 million NOX in Norway. But other than that, we are the only player, I would say, with significant activities in all three countries.

And one more question related to Sweden. It's about different opportunities when it comes to civil construction business. Any interest on acquiring the Swedish business?

We will come back with the results of our strategic review when we have completed it.

That was the last question, at least for now, online.

Any questions here? If the Swedish civil operations were cleared from the books before the year end, would that have any impact on your outlook statement when it comes to the margin?

Not significantly. Maybe some, but not significantly.

But it would take down the risk, I would say.

It would take down the risk, yeah.

When it comes to the order backlog in Finland, would you compare the mix between rail and maintenance going into 2023 compared to one year ago?

Yeah. One year ago, we had a very strong order backlog in rail construction after having a high hit rate and winning the most significant rail construction projects that were out in the market in 2021. So the order backlog entering into 22 was significantly stronger in the rail construction segment. the tender activity in that segment throughout 2022 has been low, and our wins have been in sort of moderately sized projects. But that is also the big development we have seen in quarter four, that we have several projects coming into the tender pipeline with mixed sizes, which suits our capacity. and activities well in finland so the tender pipeline is much stronger for the rail construction segment in 2023 than what we have seen for the past i would say 12 months in finland when it comes to maintenance this is a sort of rolling schedule when they retender projects and i think we have two significant area contracts that will be out for tender during 2023 and i think we had one or two during 2022 so more or less same activity level last question for me um you put some figures on what you expect in terms of working capital movement in 2023 and also also some capex guidance

I think the working capital is obviously we've been hovering around zero at the moment, and we have to see a little bit because right now we have a couple of big projects on high production, which is demanding quite a lot of working capital. At the same time, obviously, we are guiding a slight reduction in volume, so we might level each other off. But it's a little bit difficult to make a guidance on that. On the capex side, we really expect it to remain low. We might have some strategic investments we want to do on that side, but it's not going to be significant on the pure capex.

No further question from here, but I think you had one question.

I just had a question regarding the order backlog in Sweden. It's increasing significantly. Apparently the order backlog in Finland is decreasing significantly, and Sweden has historically lower margins than Finland. So how does that fit into the equation of ambitions of higher margins long term?

The main increase in the backlog in Sweden is related to the maintenance business, and that is due to the cycle of our own contracts, where three out of four existing contracts were out for tender in 2022. So by renewing those contracts, we automatically have had a big increase in the backlog. As I said in the presentation, we have delivered stable results in the maintenance business in Sweden for several years. We have good performance. But we need to win more contracts, and our strategy is to gradually add on more contracts in order to increase profitability and increase the growth from that area. Your question related to Finland was?

Just a question about how the mix of your projects is going to be in the future, or if you think that you're replacing good margin projects with low margin projects.

Well, we think the mix in Finland in the long term will be more or less the same as we have today. We have produced the bigger light rail projects this year, as I said, without winning new one, but that was expected. These are projects that are planned for several years before they come to the market. And the cycle we have seen is that we will have two projects plus minus this year that will be tendered and another couple of projects in 2024. So our plan is of course to maintain our activities in the light rail segment, and if we are really successful in the tendering phase, we can also increase it. Looking at rail construction and the related activities with rail construction, I think that is the area where we also can grow in the short term, if we are successful in the tender execution. maintenance has a lag from your winning contracts till you can see it on the revenue side typically if we win a contract today we will have between six and twelve months to prepare a startup before you will receive significant revenues and profit from it so our outlook in maintenance is or our forecasting when it comes to revenues from maintenance. That is quite simple because you more or less know what you have for the next 12 months. If you win something new, you will gradually see the effects from 12 months and onwards.

Yes. Do you see any interest rate risk in the medium to long term?

Well, the bond loan falls due in Q3 2024 and our hedge is until then. We have quite a lot of liquidity and we are obviously discussing alternatives. So we just have to see. But obviously, if we just interest rate now are higher than it used to be. So that will obviously impact it if we end up in the same capital structure. But let's see basically when we get there. It's one and a half year down the road and I The capital market might totally change by that time, and obviously our leverage ratio also might come down. So we'll just have to see. We haven't really started the process yet.

So you are deleveraging?

Well, right now we're obviously paying down our loans, and we will continue doing that to get under the two and a half time EBITDA target, because that's our long-term target. And then we'll see in one and a half year where we are, basically.

basically we are generated between 250 and 350 millions in cash flow from operation for the past three or four years and we have used those flows to pay down our debt and and the depth level we have today as such i would say is is fairly in line with what we should have long term but of course it's dependent on on what kind of other opportunities we see in the market or how we want to allocate our capex expenditure going forward versus paying down depth and continue to deleverage

Because it seems that the cash equivalents are decreasing. Is that correct?

It is more or less flat, but it's because we are paying down our debt as we go. So that means the cash obviously, the cash we are generating, we have been used to paying down our debts over the last year at least.

went through this in quite details in the capital markets update so that's also on the internet good thanks for many good questions and thank you for attending both here in oslo and on the stream have a nice day