Multiconsult ASA

OSE:MULTI

Earnings Call Transcript 2018-Q1

[Mirza Koristovic, Head of Investor Relations & Finance]

Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 Earnings Presentation for Multiconsult. My name is Mirza Koristovic and I'm Head of Investor Relations. Today's presentation will be held by the CEO, Christian Nørgaard Madsen; and the CFO, Anne Harris.Today's session can be accessed through the webcast on our webpage under the Investor Relations section. The presentation will last for about 25 minutes, and we will open up for questions after the presentation. So please, CEO, Mr. Madsen.

[Christian Nørgaard Madsen, Chief Executive Officer]

Thank you, Mirza. And ladies and gentlemen, welcome. We will give this presentation of the first quarter results and also a brief update on the profit improvement program, which was launched at the fourth quarter presentation last time here.Start with the introduction page and the highlights for the quarter. As most of you are very well aware, we have quarterly effects related to the calendar. This year the Easter was in the first quarter compared to last year where we have the Easter entirely in the second quarter. For Multiconsult that reduces both the revenues and the EBIT with the same amount of money. This time approximately NOK 70 million, 6 days in difference.The profitability improvement program which was launched is on track as we see it. We also see tangible improvement in Regions Norway especially. The profit improvement program was launched for the Norwegian engineering part as we might remember.LINK arkitektur has had a solid improvement throughout 2017, and LINK arkitektur continues to generate improved profitability in the first quarter. The group-wide billing ratio is now at a satisfactory level as stated by us in our operational [ motives ] and we have had a lot of smaller, medium-sized, and also significant, when it comes to the size, contract awards in the quarter. We have a still stable order backlog, which is approximately at NOK 2.2 billion.Let me go down into the more details. The net revenues increased in the quarter compared to first quarter last year with 7.4%, which was NOK 859 million. The increase despite the 6 fewer working days can mainly be related to Iterio and the Hjellnes group, which was acquired during 2017, Iterio at the first part of the year and Hjellnes group late in the third quarter.The billing ratio increased compared to first quarter last year from 68.4% to 78.6% in the first quarter, which is good of course. And the calendar effect I have already mentioned. To some of you who have noticed might be a year ago or something that we stated that the calendar effect affected us at that stage with around NOK 10 million a day. That has now increased to somewhat above NOK 11 million. That is mainly the cause of the growth in the Norwegian market, which is mainly affected and the Hjellnes Consult acquisition. We are more people in the engineering part in Norway. So that's the reason for the number being close to NOK 70 million and not NOK 60 million. The organic growth in the net operating revenues was negative with 3.8% because of this [ management effect ]. If we adjust it for the calendar effect, it was up 4.8%. And if you want to see the acquisitive growth, then you can take the difference between the 7.4% and the minus 3.8%, which gave us 11.2% or something.The EBIT then came in at NOK 36.1 million, which gives an isolated margin of 4.2% in the quarter. When we adjust it like we did the other way last year, the EBIT margin is 11.3% in the quarter, which is very close to the same amount of adjusted last year.Then to the status on the profitability improvement program. Here you see the main parts on the left, which where the 4 main topics that we stated. You don't have to be in the business for [ many minutes ] to see that these are the main things you can work with: sales billing ratio, project execution, and efficiency gains. The trick is to be able to perform it in the operations, in the day-to-day operations with several thousand people working in different markets, the different customer relations, and so forth.We have tried to give you a brief view through this traffic light system, and when it comes to sales, we stated that we will work further on the strategic sales team that we started on last year, which is a top sales team on the group level, who works on the main and the larger strategic sales. This sales team is well in function, and we see the results of the work.The key account management program is launched further, and we also see effects of that. We do more prioritized tendering, and we can do more prioritized tendering when there is a nice project pipeline. It's easier to turn down bids when we have a large tender pipeline than when there is a very thin tender pipeline. And we have an improvement in the tendering pipeline, so we have been able to prioritize, and we also see effects of that.And we have launched also stricter pricing criteria further down in the organization, not only on the strategic bids that we go for. Still we see the traffic light is yellow. We worked further on this, and we also have it shown in yellow because of the calendar effect. We have had fewer days to sell, but it's not a large issue when it comes to the pipeline for the major projects. But when it comes to day-to-day operation and sales resulting from contact with the clients, 6 days in a quarter is 6 days less to do the main part of the sales, because the main part of the sales is add-on sales to smaller and medium already ongoing projects.When it comes to the billing ratio, it's always easier to increase billing ratio when you have enough workload. That's a basic fact. The increased sales and the improvement in the basic load also has influenced us and is also part of the reason why we have increased the billing ratio to 70.6%. We have improved billing ratio in all our reported segments. And we have also been working on the nitty-gritty parts to align procedures when it comes to how you do your weekly list of billable hours, because of course we have the on-boarding programs, we have also the differences in geography, and we try to take the best practices for billing. And since every quarter or every half hour per week, it really has an impact on the results, we have worked a lot on that with every single employee. So aligned procedures, we've come a long way with that to increase the work on that.We have reduced internal activity. And what does that mean? That means that. For instance. Non-billable activity related to transforming and working on the business area strategies, transforming them to the business unit strategies that we worked a lot on last year. We have not done anything of those kinds of internal workloads. We have internal work, of course, related to training, Safety Health and Environment (sic) [ Health Safety and Environment ] and so forth. But we have reduced to a larger extent the other parts of the internal activity. And we have not acquired anymore new companies, so the amount of integration of new or newly acquired companies has been reduced. Of course, there is ongoing activity from the already existing acquisitions, especially the Hjellnes Consult group here in Oslo as we will see. But this is marked green because of the relative improvement in the billing ratio.And then when it comes to project execution, we stated at the fourth quarter presentation that we would continue already established programs. We have a lot of good training programs, which has worked for us the last 3, 4, and 5 years. We have reduced the net write-downs to significantly lower level than we had some years ago, and it worked. So we are only incrementally improving these already ongoing programs. We say here that the fifth project management training program is completed during the first quarter. We have approximately 20 people on each of those training programs for the medium-sized programs where we emphasize, for instance, client communication to be able to reduce write-downs to take up the discussions with the clients before this individual NOK 10,000 amounts that we have to discuss with the clients become an issue.And we also see some benefit from the improved transportation markets. We have been able to win some of the larger contracts together with the EPC contractors. We have also harvested some of our investments in training on best value procurement, and modifying our project execution models to the larger public transportation EPC projects that have been launched during the last years as a result of Nye Veier and the changes in Bane NOR and also Norwegian roads directorate's changed acquisition principles.When it comes to efficiency gains, we stated that we'll work further on releasing synergies from the new ERP system, which was launched in September last year and fully integrate the existing acquisitions and harvest from that; focus further on cost reduction, of course; and also manning control, which was implemented already in the autumn of 2017.The ERP system has gradually improved. The improvement is slower than we would like, but it's gradually improving. That is the main reason for this traffic light being yellow. We have it working, but I won't say that we can harvest any synergies on the cost side from that at this time, but that will come. We'll work further on that.The integration of the Hjellnes group is according to plan, and we have -- we see operating expenses reductions in both the Greater Oslo Area and in the Regions Norway segment. The manning control principles were all new mannings and hiring of new people is escalated to myself. It works. It's a better coordination across group and it's also causing a significant, I would say, reduction in new employees in the Norwegian engineering company. And that's important, because we have to do the cross-selling internally in the group, get all the new people from the Hjellnes group and otherwise on a higher billable ratio level before we expand too much. And you will see that the increase in headcount has fallen significantly, especially in the Norwegian part.So yellow, there are more things to do on the sales. The billing ratio have been doing a good job there and has increased. Project execution, very well on track. So we just keep up the momentum. Efficiency gains, when we have full functionality on the ERP system that will also switch this over to yellow-green or green completely.In the quarter, the 5 main key ongoing projects are Campus Ås as you're familiar with. You can see the buildings rising out there at Ås. It's Neelum Jhelum the energy project that's a large one which we have been working on for several years. And also the Tønsberg Hospital project, which is performing well, and the project model there. The IPD contract, which is a new model together with Skanska is also still very interesting, was the main topic on the annual meeting on the -- for the Consulting Engineers Association (sic) [ Association of Consulting Engineers ] in Norway a month ago or something.Fornebubanen has been rising. And the activity and the load at the Fornebubanen project has increased as you see since it's on top 5 now. And also the InterCity project Fredrikstad-Sarpsborg in Østfold is on the top 5 list.The sales order intake in the first quarter, as I stated, it's of course affected by the calendar effect to some extent because of the main part of the order intake is related to add-on sales on existing contracts. So we meet the customer fewer hours. And that's really an effect that you wouldn't think about at the first sight perhaps.We see especially that buildings and properties is very good in the quarter. And we have also nice sales in other parts related -- compared to the first quarter last year. We have industry high, but the higher in numbers are buildings, properties, transportation, and renewable energy.Key order intake is a mixture of new contracts and add-on on existing. The roads 3 and 25 up around Elverum is the largest PPP, Public Private Partnering contract awarded ever. It's together with Skanska and Aas Jakobsen, as you might have seen from our listing to -- our stock exchange announcement, yes, in April I think it was. And then there is the bus lane Stavanger-Sandnes and this is in Western part of Norway. New Airbase Ørland, which is an add-on and Mosjøen power system with an industry, which is brand new one interesting, and then there is add-on on the Campus Ås project.The order backlog seen historically since fourth quarter 2015, we had a dip in the middle part of 2016 and it's increasing. It's not increasing when you divide it on number of the headcount. So that's the reason for us stating that it's not a -- this is not the really highlight, but it's okay. The order backlog compared to first quarter last year is up 13.2%, and some of it is also related to acquisition of new companies, around half of it. The absolute figure now is NOK 2,226.9 million, NOK 2.22 billion.We say this every time, because it's significant and it's increasing. That is the use of frame agreements on the larger contracts. And a good example from this last quarter is the large Haakonsvern award by Forsvarsbygg. It's related to submarines, and we mentioned the possible amount in the announcement. It was an official figure of NOK 150 million, but we do not have NOK 150 million in our order backlog, because it's a call-off on the frame agreement, as are lot of others of the larger awards. And you see the division between the different business areas down on the right-hand side.The organization, it's relatively stable. We now are 2,861 employees as of 31st of March. If you go 3 months back to 31st of December last year that's an increase net of 10 people. We were 2,851 employees. And the net increase is mainly in the international operations and to some extent in the architect operations.The group employee turnover in the quarter is in the lower end, I would say, at 5.9%. We have implemented a new organizational structure in The Greater Oslo Area affecting especially Oslo operations. It's in effect from the 1st of March, and that's a result mainly of the acquisition of the Hjellnes group, which is now fully integrated as from the 1st of March. The comprehensive reorganization and integration process that has taken part –– that's taken place, excuse me, has affected more than 1,000 employees in the Oslo Area, but still we've been able to maintain a relatively higher level of billing ratio and improved it also in the Oslo Area. But that is the main reason for us stating that the profit improvement program has had more grip in the Regions Norway up to date than in the region –– in Greater Oslo, but we see effects there as well. But there's, to some extent, a little time lag because of this large reorganization that has taken place. But it's in place and has been in one of the months that this first quarter affects.We have the bottom line here earlier at annual general assembly. Just mention that again. We see to our great pleasure that we are more attractive than ever within the university checks done by Universum. We are for the 6th consecutive year now number 1 in our industry, the consulting engineers, but we are increasing the difference between our competitors and we're more or less trying to grab the number 2 place from Kongsberg Gruppen only 0.04% behind Kongsberg as the most attractive employer among several thousands of the graduate students from the Norwegian universities. And that's very positive. It's the second consecutive year that we're on top 3 place.I'll come back with the outlook, but before the outlook I'll give the table to our CFO, Anne Harris. So Anne, here you are.

[Anne Harris, Chief Financial Officer]

Thank you, Christian. I will then give you some more comments on the financial of the quarter. We see here that we have an operating revenue of NOK 859 million in the quarter. And the main increase from last year, it's of course the acquisitions mainly from the Hjellnes group, but also Iterio was included here.As you noted, we did have some write-downs in the quarter of NOK 12.6 million and that corresponds to a level of 1.5% of the net operating revenues. We think that is what we characterize as a normal level, but of course, we would like to see that even smaller.And then, of course, we have mentioned already that the calendar effect impacts the quarter and here that has been illustrated with the effect that we have estimated at approximately NOK 70 million. We see also that billing rates group-wide show a modest increase.And when you look at the EBIT, you can really see the effect of the calendar. Of course, when we have it on the top line, it has exactly the same number effect on the EBIT line. So if we are calculating with the calendar effect adjusted, the EBIT margin will then be 11.3%, which is then on the same level as the quarter last year.A few more comments on the billing ratio. We see that it is up on the level that we would like to see it. We have stated before to you that we would like to see that above 70%. And now it is 70.6% and that's nearly touching the all-time high that we have reported in the quarters with 70.9% in 2016. And, of course, we are very satisfied with that development, and we see an improvement on all our segments.Few comments on the headcount. You see that since the third quarter 2017, it's rather stable. And that Christian already mentioned, it's the tight money control that we're doing in the operations in Norway is in place, and we can see that it works. So that we are very cautious on the new hires we take in, and we keep the total headcount at the stable level. And compared to the fourth quarter, it's actually a small reduction.The next slide shows the bridge where we can compare the quarter EBIT from last year to the EBIT we are reporting this quarter. And then we see this big effect on the increased capacity that is due to the acquisition and mainly from Hjellnes and the related employee benefit expenses. Of course, we are paying all the people the salary they should have. So then we are showing also the effect of the increased billing ratio. That is quite good in this quarter and then still have the change in write-down here. And the other operating cost also increased, but that increased in line with the headcount increase. And then we can see the big effect of the calendar and the small other and reaching the reported number at this quarter.So then a few more comments on our segments. Here we are showing on the left hand side the Norwegian segments, The Greater Oslo area and Regions Norway. When we compare the reported number to last year, it's a negative development and that is mainly explained by the calendar effect. So we have just for illustration added the numbers if we had not had the calendar effect, so it's easier to compare. And then we can see that the margins are at the comparable level to last year. And that is, of course, a very good sign. And we see also big increase in the billing ratio, mainly in the Regions Norway when we compare it to last year.On the left-hand side, we have the international segment first, and we are reporting there an EBIT margin of 10.5%, which is on a good level, but it's not nearly as good it was last year. We had an extraordinary short-term project in Asia that was [ positive to Asia ] in that quarter. That explains the difference here.LINK arkitektur, we see also that improving, and now the margin is at 9% in the quarter, and we are very pleased to see this improvement. LINK has been reporting good sales and improvements in all operating key performance indicator for the last quarters, and it's still going on. So we are pleased to see that. And especially the operations in Norway, that is giving the biggest increase and also Sweden is okay. Denmark is struggling a bit more with short-term project low activities.Then we will take a look at the operating revenues that we are showing per business area as usual, and we are comparing then the revenues for this quarter compared to last year and showing the percentage at the end here. The greens are increases and the reds are decrease, and we have good increase on almost all the business areas except industry. It's almost just a small decrease, but oil and gas is then decreasing with 40% compared to last year, and we are still struggling to fill up with new project on the oil and gas site currently. But the others are in good shape, and we have a business, the Buildings & Properties is as usual our biggest business area and we are showing a good increase there of 20% almost.Then my last comments would be on the cash flows at the end of this quarter. We see that the cash flows from operation is a rather modest level and, of course, the calendar effect impacts fully also there the cash flows from operations. And then we have an increase in the change in working capital when we compare to the year-end, and that is due to the increase in the same range as we have an increase in the revenues.Ordinary asset replacement is what we show as investments, and then we have an increase in short-term debts that is the increase in financing here, and that is due to seasonal fluctuations of the payment like the VAT, social security, and taxes for employees and things like that towards the end of March. And that is they are not following our quarters when they are due to be paid. And then on the long-term interest-bearing debt, it's stable compared to year-end.So that was my comment on the financials, and then I give the word back to Christian for a comment on the outlook.

[Christian Nørgaard Madsen, Chief Executive Officer]

Yes. Thank you, Anne. Last slide with the outlook. We see improvements, positive development across all our business areas, all of the 7. There are more projects to bid for and the optimism is a little better. As you know, especially in the Norwegian and Swedish markets, the small-to-medium problems that we have with the housing prices going down last year, which psychologically influenced the market a little, is not seen now. We were asked last year, does it influence you, and the direct influence is very small. It's a smaller part of LINK arkitektur's activities, but that little worry is not there anymore. And the other areas are also positive.And the figure on the right-hand side is one of our lot of interesting figures published recently from the Association of Consulting Engineers in Norway. Do this –– it's a poll among the member companies, and it shows an improvement in more or less all of the indicators. This shows one of them, and this is the market outlook 6 months ahead as perceived by the consulting engineer industry. The yellow one shows the amount, the percentage of the companies thinking that in 6 months we will have a larger market. So you see from fall last year when that was around 30%, now it's more or less close to 40%. That [ is the best opinion ]. While the lighter gray here is unchanged market and the number of companies expecting a smaller market is more or less stable. So our view is very close to the industry view. That is the main thing that we want to tell you now.What we see is still some price pressure on larger projects. There is continuous strong competition, but the market rates have increased. There is regional variation and that is in Regions Norway where we have more smaller-to-medium size projects, and we turn around our order backlog faster than we do in the Eastern part of Norway, we see larger improvements because we can fill up with some better projects when it comes to the pricing. We expect that to also happen in the Central Eastern parts of Norway as we go further out in 2018.We have this third bullet, stronger combination of professional capability and stable order backlog. What do we mean by that? We mean that the strategic move to get 100% ownership of LINK 3 years ago turns still out to be a positive move. There was a follow up on the strategic intentions from 2005-'06 which was a good plan, and then we followed it up in 2015, because now we see really an increase in the number of larger projects that are tendered as a total package of architecture and consulting engineers. And the increase in headcount and also the strategic acquisitions that we have done, I would like to mention Hjellnes Consult and Johs Holt is also increasing the Multiconsult group's ability to bid and tender for larger projects as 1 group instead of having to align with smaller- and medium-sized companies that we had to change from project to project. We can do more in-house and we are now able to bid for and win and perform larger and larger projects, which is in line with the market's movements towards larger, integrated projects.We still work actively and systematically on implementing the 3-2-1 Growth and Opportunities strategy, but as we have stated to you in the market, of course, clear emphasis on the profitability leg of the strategy. And we see that both the organizational ability to adopt the profit improvement program and the follow-up down in the organization is good. It works and it's implemented in the daily operations, and we really had the, let me call it, really an alert organization when it comes to this improvement program. So we follow up closely and management on all levels are also very tight on the operations to follow up on the outline headlines that we have just presented to you.The financial calendar, which you will also find, of course, on the Investor Relations page on our website multiconsult.no is like this: dividend payment as you know this Friday and then second quarter and third quarter 2018, these dates. Thank you.

[Mirza Koristovic, Head of Investor Relations & Finance]

We will now open up for questions from the audience here in Oslo before we take on the ones from the webcast. So please state your name and the company you are representing and also please wait for the microphone.

[Rune Sand, Senior Analyst of Shipping and Transportation]

Rune Sand, Nordea Markets. So in your presentation you write that normal level of write-downs is around 1% to 2% per year. Then last year you had write-downs in Q4 only, right. That was NOK 22 million or something. And I think in 2016 also you had write-downs in Q2 and Q4 of around NOK 22 million, NOK 23 million, something like that, the same level. So that's less than 1% of revenue. So the last couple of years at least will you agree that write-downs have been below 1%?

[Christian Nørgaard Madsen, Chief Executive Officer]

I can start. It's correct that the largest amount of write-downs last year was in December in fourth quarter. We had some write-downs earlier as well but to a smaller extent. I think the write-downs –– the part of the write-downs derived in the last quarter of last year was 3/4 of the total. We were at 0.97%, so let's call it 1% last year. So that was really a low level. We have come down from a higher level, and what Anne showed and told you is our expectation –– our view of the other of our larger competitors strive for that is to stay at least below a net write-down level of 2%. We and other competitors have been higher earlier years, but it is fluctuating. Of course, this is sum of a lot of small and medium size write-ups and write-downs in the projects. So staying around this level, we would like to improve, of course, but we do not see any vital red alerts when it's at this lower level. And it's a result of hard work and several years of training and improving the project execution. So if you want to add something.

[Anne Harris, Chief Financial Officer]

Yes. I can just add a comment maybe on the timing because you are quite right that we haven't had a write-down in the first quarter of this size at least for the last 2 years, but the write-downs of projects, they arise when they arise when the project is not going as it should go. So it is very difficult to actually have an estimate of the timing itself, and I would say that it is a good sign that we actually have write-downs in every quarter because that means that the project leaders, managers are really hands-on tied to the project and doing the write-downs when they should and then not waiting to a year-end effect that was may be a more traditional way of looking at the project management. So that could be 1 explanation, but it is difficult to estimate the timing of these write-downs, but it should be expected at the normal business like us have a write-down of approximately 1% to 2% any period, yes.

[Rune Sand, Senior Analyst of Shipping and Transportation]

And last question also on your outlook/. Would you agree that –– are you trying to communicate a more positive outlook? In the last several quarters you have only stated a fairly positive outlook. So it is fair to say that––

[Christian Nørgaard Madsen, Chief Executive Officer]

It is fair to say, yes. It is psychological and it is you really see that –– I would emphasis the [indiscernible] contract, for instance. We see some of the public clients really using their evaluation criteria. So you don't really have to be the cheapest bidder to win. On that project we were in the final. We were total of 4 in the final, and we were evaluated best on performance and CVs and project execution, and we were slightly more expensive than 3 others but we were still awarded the contract. So this has been stated for a long time. We have seen it on some projects, but it also seems to be more and more in line with what the clients state in their tendering.

[Jørgen Stenshagen]

Jørgen Stenshagen, Stenshagen Invest. Would you comment on the development so far in Q2? The billing ratio had good numbers in Q1. Should we expect good trend to continue? And regarding the integration of Hjellnes Group, is that as much work in Q2 and how should we look upon that throughout the year?

[Christian Nørgaard Madsen, Chief Executive Officer]

I think I will start saying, as you know, we don’t guide, but what we can say is, of course, Q2 has small working days than Q2 last year. You won't get the 6 days back. You can see the financial calendar on the IR webpage. We look at [ 5 back ] related to last year, and the 1 difference is the difference between 2018 and 2017 as total. But since we are depending on good sales and a lot of activity, we said that we have relatively good activity. So that drives [ towards an okay ] level of the billing ratio. And we have not acquired any new companies, so we haven't had new internal activity for onboarding of those companies. We still keep the internal processes to a low level. So the 1 thing that we are not really sure about. If I was sure about that, I could have commented, of course, but I'm not sure we should have done it, but it is May. We are not sure how the month of May will hit or not hit because of a lot of Tuesdays and Thursdays being public holidays, and then you have then a lot of Mondays and Fridays that are working days, but we don't detail control, of course, our employees and the amount of spare time they take out on those days. So April and June should be good months. May, we are really not sure. That was first on Hjellnes. You have followed that. Hjellnes, I will say that the largest amount of integration is behind us, but of course integration in our kind of business is an ongoing project for a lot of time. And that's the cultural part of it, and really training. It should never stop, but that's the integral part of business.

[Mirza Koristovic, Head of Investor Relations & Finance]

Anymore questions here in Oslo? No, I don't see any questions on the webcast. So that concludes our session for today. Thank you very much for your attention and have a great summer day. Thank you.