Norconsult ASA (NORCO) Earnings Call Transcript

Good morning, everyone, and welcome to Norconsult's presentation of the second quarter results. My name is Egil Hogna, I'm the CEO of the company, and I will share today's presentation with our CFO, Dag Fladby. In the second quarter, Norconsult continues to show solid growth and stable profitability. We've had a solid market during the quarter, and we've had several important wins, out of which you see the largest one on the front page, which is the Norwegian Broadcasting Corporation's new head office and media house in Oslo. For those of you who are new to Norconsult, we'd like to just briefly give you an overview of the company. We are Norway's largest and the leading Nordic engineering and architecture company. We have 6 reporting segments. The 2 largest are the Norwegian Head Office and Norway Regions, while the others cover the rest of the Nordics. We have roughly half of our customers in the public sector, half in the private sector, and we have our business fairly evenly spread between Buildings & Architecture, Infrastructure and finally, Energy & Industry. We have shown a stable growth and profitability over time, and we currently have approximately 6,600 employees and 140 offices, mainly in the Nordic region. During the second quarter, we had net revenues increasing to NOK 2.468 billion. We had an organic growth of 6% adjusted for calendar effects. Calendar effects is important in our business because we charge according to the time worked. And in the second quarter this year, we had Easter, while in the second quarter last year, we had -- sorry, in the second quarter last year, we had Easter during the first quarter. That resulted in calendar effects of approximately NOK 140 million, and this was the direct reason for why our adjusted EBITA ended at NOK 152 million. If you add the calendar effect on top of that, it was a better EBITA compared to last year. And this, we also see in our margin, which adjusted for the calendar effect was 11.2% this year compared to 11.0% last year. The main event during the second quarter was the announcement of our acquisition of the Aas-Jakobsen Group, and I will revert to that later. But that was a major strategic development due to the strong competence of the Aas-Jakobsen Group, in particular, infrastructure and complex construction projects. Our order book continued to increase to NOK 7.1 billion, and we have a solid starting point for the second half of this year. For the first half, we saw again an increase in net revenues to NOK 5.1 billion and our adjusted EBITA was approximately the same as last year at NOK 487 million. There was a small negative calendar effect and adjusting for this, which was NOK 20 million, our adjusted EBITA was slightly higher than last year. All in all, the EBITA margin adjusted for the calendar effects was 9.9%, which aligns very well with our communicated financial target of 10%. On the people and organization side, we had a stable number of employees from the first quarter, 6,600, while the number of full-time equivalents increased by 4.5% compared to the same quarter last year. In Norconsult, approximately half of the company is owned by our employees. And every year, we have a share program for the employees. And again, we had a record participation in this employee share program as 66% of our employees participated and bought shares. This is significantly higher than at other comparable companies, something we are proud of and something which we believe align the interests between employees and shareholders. During the second quarter, we also had our Sustainability Week, which is our largest conference -- digital conference where we invite both customers and other partners. We had approximately 60 webinars during the week, approximately 6,700 viewings. And I think in total now in retrospect, we have passed approximately 10,000. The market has been quite stable. All in all, it has been maybe slightly more positive than in the first quarter, but there are no major developments. The private Buildings & Architecture market continues to be slow, but with indications of slightly growing optimism. Public projects, including the defense sector is stable. Defense is growing, and this is then partly compensating for the somewhat weaker private sector. Infrastructure continues to be stable, very much aligned with the long-term public spending plans in all of the Nordic countries. Energy & Industry is still one of our strongest markets, in particular, the Energy market for power production and power distribution. In Industry, there are differences between different industries. Some are quite strong. Others are a bit weaker. And most recently, we've seen that the weaker segments have been mostly in the green industry sector and some export industries. I'd then like to give you some examples of recent project wins. And let me start by talking a little bit more about the Norwegian Broadcasting Corporation, NRK's new head office, which we are very proud to have won both on the architectural side and the engineering side. On the architectural side, we competed against, I think I have to say, all of the leading Scandinavian architects. And we won this design competition. And the construction of the building was awarded to HENT, which is a part of the Sentia company. And when they won the award, they awarded most of the engineering disciplines to Norconsult. This is a major project where the design work has already started, and it will continue for several years. I would also like to add a comment about, in general, the architectural business because the architectural business has been quite challenging. What we are seeing now is that in Denmark, for example, our architects are very much catching speed. We are hiring architects and we are growing. And in Norway, in the Nordic Office of Architecture, which is the name of the architectural business, where most of our architects are working in Norway. They have also started hiring freshly educated architects, which is a positive and happy development in this part of the industry. Another important win was the planning and zoning for the extension of Bybanen in Bergen. This is a light rail development in Bergen going to Sandviken. We've done a lot of work for Bybanen in the past, and we are very thankful for the continued confidence from our customer to continue to develop this. Another important win, both on the architectural side and the engineering side is the new University Hospital in North Norway, where the Åsgård hospital for mental health and substance abuse is going through a major renovation and expansion. And this is again a project where we are benefiting from working together with our architectural colleagues in Nordic Office of Architecture as well as the Norconsult engineers and also Norconsult architects. The final project example I want to show you is the North Sea offshore wind development on the Norwegian part. This is called Sørlige Nordsjø II, where we are working for the joint venture, Ventyr. Here, we have won a major front-end engineering and design study for the onshore grid infrastructure together with the environmental impact assessments. This is a strategically important project for Norway. It's the first major wind development offshore and we are looking forward to developing this together with Ventyr. And with that, I would like to give the word to our CFO, Dag Fladby, who will take you through the financials.

Thank you, Egil. We will start with the Q2 figures, of course. Net revenue in first quarter ended at NOK 2.47 billion, up from NOK 2.4 billion the same quarter last year. As Egil mentioned in the beginning of the presentation, this quarter has substantially calendar effects as we had 3 less working days, amounting to minus NOK 141 million. Adjusted for that, our net revenue growth was 9% in the quarter and the organic growth, 6%, driven by increased billing rates and also increased FTEs. Our billing ratio at the end of the quarter, 74.7%, up from 74.6%. And the main driver of the improvement is Norway Regions. EBITA NOK 152 million compared to NOK 263 million the same quarter last year. And adjusted for the calendar effect, we have an EBITA margin of 11.2%, up from 11.1% -- 11.0%. The improvement is mainly due to Norway Region, but also Norway Head Office. Profit after tax, NOK 114 million compared to NOK 138 million last year. And last year included one-off cost of the gift shares of NOK 87 million pretax, while this year has a really strong negative calendar effect. A quick look at the first half, where we have minor calendar effect, just minus NOK 20 million. Net revenue at NOK 5.1 billion, which is up from NOK 4.76 billion. Increase of net revenue of 8%, while organic growth is 8%, driven by increased FTEs and also increased billing ratio -- billing rates. The billing ratio at 73%, slightly down from last year. And as we see -- as we saw from the Q2 figures, the improvement is now coming in quarter 2. EBITA, NOK 487 million compared to NOK 490 million and the adjusted EBITA margin adjusted for the calendar effect is 9.9%, slightly down from 10.3% and that is mainly due to a soft quarter in first quarter. As we have seen, the second quarter is improving, mainly as we see effects from measures we have taken in previous -- in selected business areas in previous quarters. In first half, we also have a negative EBITA effect of the integration of Sigma Civil of amounting to NOK 9 million. The integration plan is going as planned, and we will come back to more details later in the presentation. Profit after tax, NOK 371 million compared to NOK 242 million and last year included cost for gift shares of NOK 167 million. EPS, NOK 1.23 versus NOK 0.85. And now back to second quarter figures again. And before we deep dive into the segments, a short look at the contributors, where I mentioned that Norway region is contributing EBITA the most, but also Norway Head Office and also Renewable Energy is positive contribution adjusted for calendar effects. Sweden, Denmark and Technogarden and Digital are slightly behind last year. Moving into the segments, starting with to the left, Norway Head Office, where we had a net revenue in the quarter of NOK 735 million compared to NOK 740 million. The organic growth is 6%, driven by increased FTEs and billing rates. The calendar effect is negative with NOK 54 million this quarter. EBITA, NOK 69 million compared to NOK 109 million the same quarter last year, where we have the adjusted EBITA margin in second quarter now at 15.5%, up from 14.8%. And that is mainly due to increased revenue, but also continued high billing ratio and good performance in project execution. Looking at first half figures for Norway Region (sic) [ Norway Head Office ], we have an organic growth of 5%, adjusted EBITA margin of 12.6% versus 13.3% same period last year, and that is mainly due to a soft first quarter. Norway Region net revenue, NOK 714 million, up from NOK 706 million. The organic growth in the quarter is 9%, driven by increased FTEs, increased billing rate, but also increased billing ratio. And the billing ratio is now for first time in several quarters, higher than last year. And that is due to the measures we have taken the previous quarters. That also is positive to the EBITA and the underlying EBITA margin, which ended at 14.4% up from 12.5%. Looking at first half for Norway Region, we have an organic growth of 8% and also now due to the performance in second quarter, a better underlying EBITA margin of 11% compared with 10.4%. Moving to Sweden to the left. Net revenue, NOK 464 million in the quarter compared with NOK 398 million. It's negative calendar effects of minus NOK 12 million in the quarter. And adjusted for that, we have a growth of 20%. Sigma Civil is included from February with NOK 23 million. The organic growth in Sweden is 6%, and that is driven by higher number of employees and also increased billing ratio. EBIT (sic) [ EBITA ] ended at NOK 3 million in the quarter compared with NOK 20 million. And adjusted for the calendar effects, we have an EBITA margin of 3.2%, which is down from 5.1%. And as I mentioned in first half results, Sigma Civil is now integrated in the company, but that has also affected the quarter 2 slightly negative with NOK 6 million. We are seeing positive development on billing ratio from the integration, but it will take some time before we get up to a satisfactory level of performance. Egil will come more back to details on integration plan at the end of the presentation. Denmark, organic growth of 7%, driven by higher billing rates and also increased FTEs. The calendar effect is minus NOK 6 million in the quarter and adjusted EBITA margin, 6.2%, slightly below second quarter last year. We have invested in senior recruitment in this quarter and also year-to-date. This quarter affects negatively by NOK 3 million, while the first half is around NOK 6 million. And the investment is to secure long-term growth. Then Renewable Energy. And Renewable Energy has an organic growth this quarter with 7%. However, strong organic growth in hydropower and transmission amounting to approximately 17% organic growth. So that market is strong. This is partly offset by lower revenue in the international operations. EBITA at NOK 24 million, down from NOK 36 million. And adjusted for the calendar effect, we have a strong EBITA margin of 17.8%, slightly up from 17.5% last year. And the maintained solid margin is due to a continued high billing ratio and also increased rates. Finally, on segments, Digital and Technogarden, the total revenue declined by 11%. That is mainly due to lower volume in Sweden and also less FTEs in both Digital and Technogarden. Adjusted EBITA, NOK 6 million, down from NOK 10 million and the profitability is slightly lower. We have improved profitability in digital due to the measures we did in 2024. And however, Technogarden is performing under expectation. We have done some measures, and we will continue to take measures to improve profitability. Now into cash flow and focus on this slide is cash flow from operation, where we have, in this quarter, NOK 395 million in terms of cash flow from operation versus NOK 501 million same quarter last year. The quarter -- second quarter 2024 was affected by a positive cutoff effect as payment, which were due first quarter had -- was in a bank holiday, and then we received that payment in second quarter in 2024. That is approximately NOK 80 million. We also have some increased working capital due to seasonal changes. Cash flow from investment activities more or less at the same level as last year, while cash flow from financing activities is minus NOK 610 million, increasing from NOK 454 million, mainly due to increased dividend payment in second quarter. A few words on the balance sheet. Our balance sheet is strong. This is end of June, cash and cash equivalents of NOK 1.2 billion. We have a leverage of minus 1.33x, excluding the IFRS and net working capital slightly above 0 with NOK 33 million. In third quarter, the balance sheet will be affected by the acquisition of Aas-Jakobsen, where we also will have external debt. Egil will come slightly back to that later when we talk about integration process of Aas-Jakobsen. And finally, from my side, a few words about the order book, which increased to NOK 7.1 billion, up from NOK 7 billion in quarter 1. The order intake in second quarter has been a good mix of smaller and medium and also larger projects with -- in the different market areas. We have also won several important framework contracts where 2 of them are on this picture, which secure us for the revenue growth going forward. And that Egil, I leave the word to you to talk about -- give some more flavor on how we work with the integration.

Thank you very much, Dag. And I would like to tell you a little bit more about how we integrate our acquisitions because we have recently made, 1 in Sweden and 1 in Norway, and they are so far progressing well. First, a few words about our Swedish acquisition of Sigma Civil. This is a company working mostly in the Construction and Infrastructure segment with approximately 100 employees. When we acquired it, it was a company where we knew that it was a turnaround case, but we also knew that they had strong competence in the company in the form of the engineers and the fundamental operations. We had a low acquisition price in this case as it was a turnaround case, but we had the opportunity to integrate all of the 4 -- sorry, the 5 offices into existing locations where Norconsult already had offices. At this stage, all of the Sigma Civil teams are fully integrated into our operations. We have put in place actions to improve the billing ratio. And after the acquisition in February, we've seen a steady improvement in the billing ratio since the month of April. Administrative functions have been streamlined. There has been demanding taking place there because there were overlapping functions. And these costs have not been separated out. But when we look at the negative effects presented by our CFO, the NOK 6 million in the second quarter, the NOK 9 million in total over the first half, approximately half of that is onetime cost associated with the restructuring. The other half is associated with a somewhat lower billing ratio at the start of the integration. All in all, we are progressing well on track. And 3 of the 5 Sigma Civil offices have now been relocated into the Norconsult offices. We see the cost synergies. And when we look at the total number of Sigma Civil employees, 2/3 of them have been integrated into existing Norconsult office space, meaning that we have not had to rent further space. The remaining 1/3, we will have to rent some more space. But all in all, we expect to see considerable synergies here. Then on to our largest acquisition this year and actually the largest Norconsult has done historically. For those of you who know the construction industry in Norway intimately, you will be very familiar with the Aas-Jakobsen name. It is a company with approximately 90 years of experience mainly with advanced and complex structures and in particular, infrastructure. They are very similar to some of the departments we have in Norconsult, where we have assembled a very strong expertise over time, actually fairly similar to the one we see in Aas-Jakobsen. One of the features of the company is that they have experienced quite a stable growth at approximately 5% per year and a consistent profitability with an EBITA margin at approximately 20% or actually consistently above 20% for the last decade. This is higher than the average of Norconsult, but it is actually very similar to those parts of Norconsult, which are similar to Aas-Jakobsen because this is a business in a particularly high expertise area where the value of that expertise catches high margins with customers. And this is then in particular for large roads, bridges, rail and metro projects where the complexity is particularly high. Aas-Jakobsen has 230 employees in Trondheim and Oslo, close to where Norconsult has its offices. We believe that Aas-Jakobsen will further strengthen our market leadership. It will increase our ability to deliver large and complex infrastructure projects. We have cooperated historically on a number of projects because we see that the combination of Aas-Jakobsen and Norconsult is particularly relevant for the most advanced projects. And this has been highly appreciated by our customers in the past, and we believe it will continue to be even more appreciated as we now will be completely integrated. In terms of some transaction highlights, we have now closed the transaction. It was closed on the 6th of August following the approval from the Norwegian competition authorities. The enterprise value was NOK 1.43 billion, which represents a multiplier of 13.9x compared to our adjusted -- sorry, compared to the adjusted EBITA of 2024. The final equity purchase price was approximately NOK 1.5 billion, and it was paid with 80% cash and 20% of shares, resulting in the issuance of a bit more than 7 million Norconsult shares to the former Aas-Jakobsen shareholders. The financial impact is that our net -- sorry, net debt-to-EBITDA ratio, including the IFRS 16 leasing commitments is approximately at 1x, meaning that it is far below our long-term debt target ceiling. Pretax cost synergies, we estimate to NOK 25 million. They will not be fully phased in before 2028 due to some existing leasing commitments of Aas-Jakobsen, which expire in 2027. The financials will be included from this month, August. And in terms of the seasonality, you should expect it is very similar to Norconsult, meaning that also the calendar effects are quite similar. We have now set up joint management teams, which are working on the integration plan and synergies. It is important for us to do this in full cooperation with our new colleagues from Aas-Jakobsen to make sure that they are well integrated in the best possible way. The estimated integration costs are NOK 10 million, which we estimate half to come this year -- sorry, half next year and half in 2027. We will give a further update on -- in terms of targets and what will happen at our Capital Markets Day on the 5th of November this year. That is the same date as our third quarter presentation. And with that, I'd like to give some final comments relating to the outlook. When it comes to the outlook, the main message is mainly boring, but we continue to see a stable market. There is uncertainty linked to the international political situation, but that is impacting a fairly small part of our business, mainly the export-oriented industries, which may be affected by tariffs. We continue to see signs of optimism in the private market for Buildings & Architecture. And I mentioned previously that our architects are seeing some increased demand. But here, there is still a difference between the public and private sectors. So there is no bonanza for the architects working in the private sector, while the public sector is at a good level, partly compensating for the private parts. Infrastructure is stable. And when it comes to energy, we continue to see a good demand in renewable energy, mainly hydropower. It's a little bit slow in wind and in solar, but transmission is also strong across all of our Nordic markets. I talked a little bit about the industry markets where we do see some variability between the sectors. When we had our first quarter presentation, we talked about taking proactive measures where we see weaknesses in our business. All in all, our business is doing well. But as our CFO explained, there are parts of it where we see improvement needs. And there, we continue to take action to make sure all parts of Norconsult are doing well on a sustainable basis. And with that, we would like to open up for questions. We will start with questions here in the auditorium in Oslo, and then we continue with questions received online.

And the first question comes from Simen in DNB Carnegie.

Congratulations with the good billing ratio this quarter. Naturally, I can start with this straight on. A competitor of yours was out with the Q2 results yesterday with some market comments about price pressure and cost pressure not necessarily matching. What is your take on those kind of statements about the Norwegian market at the moment?

At our first quarter presentation, we talked about the index adjustments this year being smaller than last year, meaning that our ability to adjust prices for multiyear contracts was a bit less this year on average compared to last year. That is still valid, and that has some impact on overall pricing. But when it comes to the pricing for new projects, we do not see a particular price. So we do not recognize the same impact, which you referred to.

And in terms of recruitment -- hiring of students in Q3, typically a big quarter on that. Your competitor again said we were holding a bit back. What is your approach in this Q3 result, Q3?

This week, we are receiving approximately 200 new employees in our Norwegian operations. We will recruit plenty of new students, but we expect to recruit somewhat less than what we did last year.

Final question in this round. The Aas-Jakobsen transaction was done clearly at higher multiples than what has been in former M&As. And we've seen the last M&A deals going through has been a bit higher for a competitor as well. Is this price pressure upwards on M&A deals in the market? How do you assess the -- and the rationale about the last valuations, especially on the multiple side in M&A and what you see in things that is moving in the market at the moment?

The pricing of M&A is completely dependent on the quality of the company and the situation the company is in. Sigma Civil was probably our cheapest acquisition ever. Aas-Jakobsen in terms of multiplier was probably the most expensive. So they represent, in many ways, the full range of possibilities. And I don't think -- I can say I'm aware of any company having the same consistency in terms of margins as Aas-Jakobsen. So that was a record high multiplier, which I don't think I expect to see again. But what do you say, Dag?

No. But I will say, in general, the multiples has not changed in the market. So it depends on the company, of course, smaller companies should have far less multiple. But in general, there is no change to our -- what we see.

Magnus Rasmussen, SEB. Your closest competitor also yesterday were saying that they see some cost pressure on IT, for example. I see that your other OpEx is up just around 3%. Can you comment on how you've been able to keep costs that low and whether that will continue going forward?

We work with cost efficiency all the time. Of course, it's a balance when you have people as resources. IT cost is increasing. However, we also have some benefits when we grow. The other costs could be volatile because it's not straight 12 months cost level. So it could go up and down. But in general, we are extremely focused on cost development, but it is a pressure on costs because, especially personnel cost and the salaries.