Multiconsult ASA

OSE:MULTI

Earnings Call Transcript 2018-Q4

[Mirza Koristovic, Head of Investor Relations & Finance]

Ladies and gentlemen, welcome to the Fourth Quarter 2018 Conference Call for Multiconsult. My name is Mirza Koristovic, and I'm Head of Investor Relations. Today's conference call will be held by the acting CEO, Lars Opsahl; and CFO, Anne Harris. Today's session can be accessed on our web page under the IR section. The presentation will last for approximately 25 minutes, and we will open up for questions after the presentation. So with that, I'll leave the word to Mr. Opsahl.

[Lars Opsahl, Executive Vice President of Regions Norway]

Good morning, and welcome to our presentation. We have a fourth quarter earnings weaker than expected, and we are not satisfied with the performance. We have a growth from improving billing ratio and also billing rates in the later part of Q4, but unfortunately these improvements are reduced by high level of project write-downs in the period. I also have a weak result in LINK arkitektur. For full year 2018, we also see improvement in billing ratio, and they also have a capacity increase. Also here, we have a reduction due to write-downs in the projects. We have reduced earnings in LINK arkitektur and in the international part of the business. The positive part is the strong increase in sales and order backlog, which is up NOK 2.8 billion. We have a solid cash generation and reduced interest bearing debt and that paves the way for a proposed dividend of NOK 1.50 per share. The financial status is that we have a net operating revenues up 5.4% year-to-year up to NOK 892 billion -- NOK 892 million, and the EBIT margin is -- the EBIT is NOK 9.5 million with a margin of 1.1%, which is below our expectations. For the full year 2018, the net operating revenues are up 11.4% to NOK 3.3 billion, and we have a organic growth of 4%. We have growth due to acquisitions and increased billing ratio, and we have -- but have a high level of project write-downs, which is 2%, which is the upper limit of what we expect and see in the market. We have a calendar effect from the full year of one working day equal to about NOK 13 million. The EBIT is NOK 99 million with a margin of 3%. We introduced the last year, an improvement program for the Norwegian part of the business, and I will run through the main topics in that program. Project execution, which I have informed of earlier this year, which is higher than expected. Also have a big rise in Q4, and the Norwegian business is above the 2% margin. So that further improved project execution and that's top of our list.On efficiency gains cost, we have a marginal decrease per employee, and we also continue with the money control and cost control and expect more gain in that going forward. The big positive improvement is on the billing ratio. We have guided earlier that we want to be below -- above 70%, and we have increased the billing ratio 2.8% to 70.3%, which is within our expectations. So on the billing ratio part, we have to improve a bit further, but we are -- we have a level, which we can be -- we can live with. On the sales, we have a very positive effect. We have sale per person increased 32%, which is all-time high for a quarter, and our backlog is also very positive with an increase of 36%. The main topic within the sales now is to improve the quality of the sales and billing rates included in our office. One major order intake in the quarter is the water supply to Oslo and Oslo Kommune, and there were 4 contracts for competition, and we won all of them. Estimated value of about NOK 200 million for a 3-year period, and there are also additional options in that contract. We also have very positive sales in our Polish business with 3 major contracts won in the period. If you look at order intake and business areas, we have order intake of NOK 1.48 million -- billion in the period, up 44.2% year-on-year. We have a very strong tender pipeline, especially in -- within transportation, and we have been awarded several large projects in that period. We see that the sales in the transportation business has doubled from last year, very healthy and with a good quality. We have buildings and properties, which is a stable market, but they have increased the sales also there. Water and environment is a very stable market, especially in Norway and we have a very strong sale, mainly due to the one I mentioned earlier. Small problem with the sales is in the renewable energy, which is below last year. We lacked the big sales internationally and that's our priority going forward. Industry market is good, and we are an important player in that market and also very healthy in the city and society, which we have struggled a bit with, but it's looking better. Oil and gas is on a very low level. In addition to the projects I have mentioned earlier, we have a very nice and big contract with Aarhus University Hospital, which is important for our LINK business in Denmark, and we have increased sales in GET-FiT, Zambia, which is also an important project for us. If you look at the order backlog, you see a big steep increase in last part of 2018. The backlog is up 30.5% year-on-year to NOK 2.8 billion. In addition to this backlog we have frame agreements, which we have informed of earlier. The big one is Fornebubanen, which we -- where we got the additional sales of NOK 105 million in January, and we also have add-on sales on Haakonsvern submarine base and safety contracted Bane NOR. On the organizational part, we have big changes in the top management, but this is now in place. We have a new CEO starting 1st on March, Grethe Bergly, which -- who is -- who has been in the military counsel for a long time and knows the business, knows the firm. I have been acting CEO, and I'm going back to the position as AVP of Regions Norway. We have a new AVP, Rune Hardersen, who starts 1st of March and there'll be a deputy CEO, and they also have a new HR and Corporate Communication Director, Kari Nicolaisen, starting 1st of April. Yesterday, we announced a new CEO (sic) [ CFO ], Hans-Jorgen Wibstad, which -- who will start before or at the latest 1st of June this year. We have been awarded some prizes in the period. We have been Eco-Lighthouse of the Year among the big firms in Norway, which we are very proud of, and we also have some master students, who won a prize in developing structural program for calculation of grid structures. On the organization part, we have successfully had a share -- our share purchase program, and 21% of the employees participated in that program, which we are very proud and happy with. We have 2,934 employees at the end of 2018, and we have a turnover at 10.2%, which is a bit higher than we're used to, and we are looking into the reasons for that, and we will work with that further on. So with that, I leave the word to Anne Harris, who will go to the financial review.

[Anne Harris, Former Executive VP & CFO]

Thank you, Lars. Again I start by commenting on the financial highlights for the fourth quarter of 2018. As you can see, we have net operating revenues increasing slightly above 5% compared to last year. On the positive side, we have increased billing ratio and also seen the increase in the billing rates for the fourth quarter that we are very pleased to see. But on the other side, we have the increased project write-downs now reaching a level of 3.8% in the quarter, and that is not a satisfactory level, as Lars already has mentioned. Looking then at the EBIT, we end up with only NOK 9.5 million for the quarter giving a margin just about 1%. In addition to the effects of the income that I just commented, we see that the operating expenses broadly develop as expected compared to the increase in capacity. Looking then at the billing ratio, we can see that we have now succeeded in lifting up the billing ratio from previous levels. That has been an aim for some time to lift it up on a yearly basis above 70%. And this is the first year for a long time that we have managed to reach this level, and of course, we are very satisfied with that. When it comes to the number of employees, we show a small increase towards the end of the year and that is in the Norwegian part of the business that earlier this year had a small reduction. So in the average of the year, the Norwegian business is very stable when it comes to money. So the increase we see year-on-year is actually from the internationally -- international activities in Poland and Iterio in Sweden. Then a few comments on the financial highlights for the full year of 2018. The net operating revenue have a good increase above 11% that is mainly explained by the increased capacity from the acquisition of Hjellnes last year. We also see the positive effect of the increased billing ratio. On the negative side, we have the increased levels of net project write down. So far, we had communicated that the normal range for us will be to be between 1% and 2% in the range, and now, we are at the highest end of that range, and we would very -- we work very hard to put it further down again. In this year, we also had one less working day that counts for NOK 13 million lost revenues. When it comes to the operating expenses, we see that employee benefit cost increased as expected due to the increased capacity and also ordinary salary adjustment. On other operating expenses, we have also included some provision for legal claims and also business development cost for international energy that we have an increase compared to previous year on that last one. So then we end up with an EBIT for the year of NOK 99 million with a margin at 3%, and that is below the level that we are satisfied with. The next page show you the EBIT range that explains the various elements how it impact EBIT. So the first column here is increased capacity that is mainly related to the effect of the acquisition of Hjellnes last year. And then we show the effect of the billing ratio increase and very pleased to see that the billing rate increase now is visible on this bridge. But unfortunately, then it's reduced again by the write-downs that I mentioned, and we also see that the increased employee benefit expenses that is linked to the increased capacity on salary adjustment included here. Other operating expenses, I have also commented on. Other effect is mainly related to the gain that we had in 2017 related to sale of an office building and that we don't have any of such gains in -- for this year. Then a few comments on our segments for the full year 2018 starting with the Greater Oslo Area. Here we see that the EBIT and the margin is reduced compared to last year, although we note a very good increase in the billing ratio that we have lifted now also for this area above 70% that we are very satisfied with. Reason for the weak development in EBIT is linked to the credit write-downs, but it's also an effect of the increased cost base on this segment. In the first half year of 2018, we had some increased integration costs related to Hjellnes and the organization of the business, and in the latter part of the year, we also have increased legal claims and also the business development for international energy that I mentioned earlier. When it comes to Regions Norway, we see a positive development on all the parameters shown here, and we also note a pleasant increase on the EBIT margin to 4.7% for this year. That is still not as good as it should have been because this unit here has a lot of projects write-downs in 2018. But beside that, we see that it's a very positive development on all other aspects. When it comes to the international activities, we see that it is a reduced EBIT compared to last year, and here, we have various activities in various countries starting on by the positive development that is Poland and in -- and also Iterio in Sweden, where we have increases compared to last year. On the other hand, we have the subsidiary in U.K. that is still operating on a good level, but lower compared to last year. And we have some challenges in our operations in Singapore in Asia, where actually it's accounting for a loss in 2018. When it comes to LINK arkitektur, here also the total is reduced when it comes to EBIT compared to last year. The activities in Norway are improving compared to last year, while Sweden and Denmark are lagging behind compared to last year. Denmark had a positive development for the fourth quarter, so they have managed to take benefit of the reduced manning that was made in earlier this autumn. But Sweden is actually facing more challenges towards very end of the year, and manning reductions will be implemented here going forward. Then a few comments on the operating revenues here shown by business area, in the normal way we present it. We can see that by far the building and properties area is our biggest. It accounts for 44% of the revenues and have a good increase compared to last year of 14%. When it comes to transportation, it is even bigger increase of nearly 25% and also increasing its relative share of the revenues. Another point is the water and environment that also have a nice increase compared to last year of nearly 30%. I will also like to mention the cities and society, although it is on a modest level we see a very pleasant increase of almost 37%. So then a few comments on our cash flow. We have a solid cash generation from operation counting NOK 440 million this year. And then, we have a positive contribution from change in working capital, as we had increased trade payables compared to last year, and we also have a very good development on work-in-progress that is hours not yet billed to our customers, where we were able to reduce that, especially through fourth quarter compared to third quarter this year. The trade receivables increased in line with the increased revenues that we have. When it comes to investments include only ordinary asset replacement, this year a bit higher than we normally have due to both purchase in the north of Norway that is -- will be used for drilling activities on the geotechnical side. With this development of cash, we have been able to decrease our level of interest bearing debt, so that is reduced here to a very good level. And I also like to mention that we will propose a dividend payment of NOK 1.5 per share and that means an increased allocation of the dividend of 64% compared to last year of 51%. So then, I leave the word back to Lars to -- for his comments on the outlook.

[Lars Opsahl, Executive Vice President of Regions Norway]

We have earlier shown you the big worry about the bigger increase in our wage list and we have in the billing rate -- running billing rate. We now see the first sign of better performance in that. We have increased -- decreased the difference of 1.3%, and we see that the billing rate is coming up, especially in the later part of 2018 and especially in the fourth quarter. That is the change after fourth -- 4 years of consecutive decrease between the billing rate and wage, which is the wages about 70% are our cost basis. So that is something we follow very closely, and at the moment, we see a better trend then we have previously. If we look at the market, we see a good market, positive market within all our business areas, especially the transportation business is now coming in very, very good after some years of waiting for the pipeline. So our pipeline is very strong, and we follow the pipeline, and we prioritize the projects we go for. Even though there are still strong competition for large projects, but we feel that the price level is -- and the rates are coming up.We feel we have a very strong and professional capability, and the increased backlog will drive us further. With the results we have, we have to intensify the improvement in profitability, and we continue our improvement program and intensify it. The main issue is the project execution and to limit the write-downs. The sales are at a good level, but we are very, very concerned, and we work very hard with the quality of the sales. And we try to pinpoint our sales within the good markets and the market with a good profitability. The billing ratio is at an acceptable level, and we will maintain it and hopefully improve it even further. On the efficiency gain, we have pinpointed cost items where we will improve. And on the portfolio review, we will look at the units, which are not come -- given the results that we will have. So we will look at the underperforming units in a close way. So by that, we conclude the information on the fourth quarter.

[Mirza Koristovic, Head of Investor Relations & Finance]

Thank you very much, Lars and Anna. So we are now going to the Q&A session. There were no questions from the web. So operator, please take us through the Q&A session on the call.