Norva24 Group AB (publ)
STO:NORVA
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Good morning, everyone, and welcome to today's earnings call where we will walk you through the Q2 Report and the Underlying Performance. There will be time for Q&A at the end of the session.Next picture. With me today, I have Dean Zuzic, and Sture Stolen, our CFO and Head of Investor Relations, respectively.If we move to the next slide. Here we see a snapshot of the development of Norva24 over the last 8 years. We started in 2015 with 10 branches in Norway, revenues of NOK 146 million, 230 employees and 10 branches. Today, we are present in 4 countries. We have 1,650 employees. We have revenues of NOK 2.8 billion in the last 12 months, and we have 76 branches altogether.Next slide, please. Overall, we still see good market development. We had revenues of NOK 800 million in the quarter, up from NOK 609 million last year. That's a 31% growth year-on-year. This growth is impacted by currency fluctuation. But even when adjusting for the currency effect, the CAGR of the year is still above the level we need to be at to reach the NOK 4.5 billion of revenues in 2025. The currency adjusted organic growth for the quarter is 4%, and that is below what we normally see in our industry and we expect to get back to more normal levels going forward. If you look at the 2 years altogether because we did have a very strong Q2 last year, the growth rate is above 6%. Growth from acquisitions in the quarter was 19%. And when we look at our cash flow, that was very strong in the quarter at NOK 133 million, up from only NOK 33 million in Q2 last year. But last year, we did have some important IPO effects in the quarter. We normally see softer cash conversion and cash flow in the first half of the year and then with a stronger cash flow in the second half, and this is something we expect to happen this year as well. The cash conversion was 85% in the quarter, which is a strong level given that it's in Q2 or the first half of the year. Our EBIT of the quarter was NOK 68 million, and our adjusted EBITDA was NOK 83 million. That's a 7% year-on-year growth compared to last year. As mentioned, we are ahead of our revenue target for 2025, but we also have a mid-term margin target and we are trailing that target somewhat. And we are initiating initiatives [indiscernible]. We did experience very strong growth in Q2 last year, given that, that was a COVID catch-up period. And looking at the growth this year is very much impacted by the strong growth we saw last year. And if you do take those 2 years together, we see a CAGR of 8.4% in Q2. In the quarter, we've seen some uneven utilization of personnel and equipment. And these are the 2 major cost items of Norva24 and is, of course, impacting the profitability. And given that it is behind where we should be, we are implementing actions in several areas to remedy this. The German operation had a currency adjusted organic growth of 11%. So there is continued strong demand in the German market. Norway, as mentioned, had very strong growth last year with 20%. So the 2% growth we see this year needs to be seen in that retrospective. Over the 2 years, the growth in Norway is on average 11%. So there is a good activity level and a good growth in the Norwegian operation. The growth in Sweden is not something we're happy with, and we are working with the Swedish management to improve growth and profitability. Denmark is continuing to deliver on the turnaround, and we are seeing the impact also in this quarter. The improvement seen in Denmark have led us to be more active on the M&A area in Denmark. And we did a smaller transaction in New Zealand in July. We'll get back to that a bit later. Our M&A pipeline is good, and we expect this to be a strong M&A year.Next slide, please. The Norwegian operation is running well. We have been able to maintain the revenue levels we saw last year, which was a record level. But the margin is not satisfactory. Also in Norway, we've seen this uneven utilization among branches, impacting margins and impact initiatives are taken also in the Norwegian operation to improve profitability. Gravco, the acquisition we did in January has been successfully integrated into Norva24 and we see margins in Q2 higher this year compared to last year. Norway now has 34% of the group's total revenues, and it has been passed by Germany as the largest entity in the group. This was inevitable, and we did expect it to happen this year, but it did happen now in Q2.Next slide, please. The German operation is delivering strong growth. Revenues are up by NOK 125 million or 72%. Organic growth was 11% in the quarter. In Germany, most of the operations had improved margins. But we do have 2 entities where margin dropped quite significantly. One of these has been impacted by a change in legislation regarding inspection and remedy of pipes in the [indiscernible] area. That took us somewhat by surprise and led to a low utilization in that operation. We do not expect this to have a long-lasting impact on our German operation. One thing that is very satisfactory is that you'd see the large acquisition we did in Q3 last year is seeing very strong growth and good profitability this year. And it has strengthened our position in Berlin and increased our density in that area. As mentioned, Germany is now the largest part of the group and consist or makes up 36% of revenues in the group last 12 months.Next picture, please. Revenue in Sweden is up by NOK 14 million or 12%. Organic growth is minus 1%, and this is not satisfactory. Overall, we see good market development in the quarter, but utilization has been somewhat uneven across the branches with very high utilization in some branches and modest or even weak utilization in others. And for some service areas, we have experienced high utilization and to such an extent that we've had to use sub-contractors to a larger extent than earlier, and this has impacted our margins negatively. It should be noted that this is not something we see as a permanent shift. So we haven't moved personnel and equipment to new places. If it was a more of a permanent shift, that would, of course, happen. In Stockholm, there seems to be a somewhat more cautious approach to our services in some real estate associations, where, for instance, janitors currently are trying to fix problems on their own. For instance, clogging, they would do more on a manual basis, but it's not going to fix the problem. It's just going to postpone it a bit. And we do believe that we'll get back into those tasks quite soon as well. This is maintenance work that needs to be done anyway. We have a new CEO in place from April 1. And one of his main tasks days is to improve profitability.If we move on to Denmark, we're very pleased with the development we see in Denmark. Denmark still has the lowest margin of the group but it has a decent growth and good profitability development. Revenues grew by 26%. And while currency adjusted growth was only 3%, we have to look at the 18% growth we had last year. In addition, I think it's important to note that growth has not been the main focus of the Danish operation. We're looking much more at profitability and we have gone through the portfolio and looked at the lower margin contracts and some of these have been renegotiated and some of them have been terminated. So that has of course impacted growth in a negative way, but still it has impacted the profitability in a very nice way. The purchase of Toms Kloakservice will increase our density in the region of [indiscernible] and it should be also supporting our current operation there and both improved density, utilization and profitability in the region. We're combining these 2 operations very quickly in the same location.Dean, over to you.
Okay. Thank you, Stein, let me just run you quickly through the numbers.The headlines are good good growth in, I mean, revenues, somewhat softer margins and a very strong cash flow in Q2.If we look at the revenue side, we have a growth of 31% in total, split in the different elements, 4% organic growth. We have 19% acquired growth and the remainder, which is around 8% is due to the currency effect of the weakening of the Norwegian kroner since we report in NOK. Revenues came in at NOK 799.4 million for quarter 2. If we look at the development in EBITDA, we do have a 7% increase from approximately NOK 77 million last year to NOK 82 million, adjusted, NOK 82.7 million adjusted this year, we do have adjustments of around NOK 5 million. Basically, most of them related to the hiring of our new CEO, which Stein has already mentioned, will start on September 18. Adjusted EBITDA margin, 10.4%, which is down from 12.7% last year. Part of the reason can be attributable to the fact that we are in an inflationary environment. We have said we are inflationary resistant, and we are. But however, there is a lag in around 30% to 50% of our revenues on there's a lag in price adjustments from everything from 3 to 12 months. We have a strong cash flow during the quarter.Next page, please. If we look at the cash flow development from operating activities, you can see that it's been very, very strong. The last 12-month figures compared to both last year and the year before that show that we have had an increase in cash conversion. In total, we are above 80% this year. Last year, it was weak due to special effects related to the IPO and it shouldn't be compared to what we see this year, but we do see an increase with 2 years, I mean, back. So cash flow, which we do have a lot of focus on is developing in the right direction. We are very happy with the cash inflow we had during Q2.Next page, please. If we look at the P&L figures, I'll just go through the top line figures. We have mentioned revenues came in at NOK 799 million, up from NOK 608 million last year, an increase of 31%. Our total operating expenses have increased somewhat more. They are up by 36% this quarter. Most of that related to the increased use of sub-contractors. As Stein has mentioned, we have had uneven utilization in the company where some of our units have had very high activity and have had to use subcontractors to get the work done, while some of our other units have not had an utilization that was high enough or as planned. Some of the reasons are legislative as Stein has already mentioned. Our EBIT, as I said, it came in at NOK 78 million, which is an increase from last year, but a level that we are not satisfied with. The adjusted EBITDA was NOK 83 million from NOK 82.7 million.If we move on to the next slide. We do have a strong balance sheet. Our net debt is just below NOK 1.3 billion, including the right of use asset. I'll come a comment that on the next slide. That brings us up to 2.3 times net interest-bearing debt over adjusted EBITDA. We have a long-term target of 2.5 times, so we are below that. If we look at our bank facilities, we have a net interest bearing debt of adjusted EBITDA of 2.2 times, which is well below the 4 times, which is the bank covenant. That being said, it shows that we do still have ample capacity to do acquisitions, both through the debt facilities that we have in place, but also through the operating cash flow that we do generate through the business that, as we have said, has been extremely strong this year. Of other balance sheet items worth mentioning, we do have an increase in goodwill this year from NOK 1,508 million to NOK 1,689 million, most of that driven by the acquisition of Gravco that we did in Q1.We can move to the next page. As we have said, of our total net debt of NOK 1.3 billion, 70% is related to the IFRS 16 rules related to how we need to book the rights of use assets. They are amounts to the -- our lease liabilities amount to NOK 855 million. Next 12 months, leasing payments are NOK 214 million. Adjusted for the IFRS 16 leasing liabilities, our total net debt amounted to around NOK 439 million, which is a very comfortable number, given our strategic plan that we have. Of the NOK 1.1 billion that we have in bank debt facility, NOK 520 million, which means almost half is unutilized per June 30.Stein, back to you.
Thank you. On the M&A side, acquisitions is an important part of the growth of Norva24. To reach our target of NOK 4.5 billion in 2025, we've stated that we need to do something around NOK 500 million of revenues per year. But this will vary from year-to-year, and we need to maintain a rigorous and diligent approach both to valuations and the quality of targets that we pursue. Looking at the funnel from the outside, you know there are not that great movements in the numbers, but underneath, there is something happening. This quarter, we have 26 opportunities engaged in discussions, up from 24 last year, and we have 15 opportunities under advance discussion down from 18 last year. One of those are shorter than Toms, which we acquired. And we also have ongoing due diligences that we are expecting to materialize into transactions this fall.
So next page, basically just to repeat on our financial targets, which are still the guiding principle for the company. We have said that our goal is to reach NOK 4.5 billion in revenue by 2025 or during 2025, the growth to come from all organic growth and from acquisitions. Profitability target is 14%, 15% adjusted EBITDA margin. We stick to, I mean, that, and we do have plans in place to, I mean, reach it this in spite of the decrease we've seen in Q2 now. Our capital structure, our goal there is to keep the capital structure flexible. We have a long-term net interest-bearing debt over adjusted EBITDA goal of 2.5 times. We are at 2.3 times now. And this is including the lease liabilities, but we do have, as I said, temporarily, we would allow an increase up to what our bank debt covenant is of 4 times, if we find the right acquisition candidates. And the fifth element in our financial targets is -- in medium-term financial targets is related to dividends. We have said we do not expect to pay out dividends medium term. And the reason for that we would like to use all free cash to do M&As to reach the NOK 4.5 billion sales target.
Just to wrap it up. We're on track of our vision of becoming the foremost consolidator in the European UIM market. And this is not only related to becoming the largest player, but also the lighthouse in the Underground Infrastructure Maintenance, which other players are looking to.Thank you. I'll hand it over to Sture to be in charge of the Q&A.
Yes. Thank you very much, Stein and thank you, Dean. We will, as usual, open-up for questions, and we will take questions from the phone lines and from the chat. And we will start with the phone line. Do we have anyone on the phone line, please?
[Operator Instructions] The next question comes from Karl-Johan Bonnevier from DNB Markets.
On this challenge you have had in the quarter on the uneven utilization rates and your decision not to take any, say, short-term measures that, have you seen it already starting to balance out now in during Q3 or how do you see that evolving? And then the need for it may be a rebalancing going forward?
I think it varies among the markets. I think for instance, like the Stockholm market is we don't see sort of a big shift in that area. Some other areas, like we mentioned, the sort of the [indiscernible], we have seen that company pick up in sort of the short period that has been in July and August, we've seen a pickup there. But I think it's too early to say that it's sort of on the right path.
And then continuing, you mentioned in your earlier remarks saying that on the margins, you are behind, obviously, the targets you are looking for getting up to 14%, 15% or considering initiating measures to balance this and bridge this. What kind of measures can you say start off and how quickly could they have an impact?
The most important for us is, of course, to increase the utilization. So really sort of basic operations that we get that better in place. But then there is also a number of initiatives taken in each country. So it's a fairly long list of elements that they are working on. Some companies have a focus on some areas, procurement, for instance, while others have other focus areas. I mean, it's been initiated over the last months, and we are implementing new measures. Hard to say how soon it should be. But I mean in Q4, we should definitely see an impact from this. Not saying Q3 is not going to see impact, but I think it's going to be more minor in Q3.
And when you look at deployment of new equipment, I see that you are running at a higher CapEx level in the recent quarters than you have done historically? Is there any opportunity to rebalance that as well, so the cash EBITDA margin could see a quicker recovery than maybe the adjusted EBITDA margin.
I think the equipment is a bit of a -- it takes quite a while from ordering until it is in place. So I think you're not going to see a shift in that in the next couple of quarters. What I can say is that activity levels, I mean, it's been a very special August period here with extreme weather, both in Sweden, but most in Norway. And that means we've seen fairly good activity levels in quite a few operations in the last weeks, and that should improve utilization or that is improving utilization.
I shouldn't say excellent to that, but it sounds promising for your operation.
[Operator Instructions]
Okay. Thank you, operator. We do have some questions from the chat. So we will take those now, and then we'll come back to the phone and see if there's any follow-ups on there.There's a question here on the volume development in Norway. And with only 2% organic growth and the fact that we have some price increases, did you lose volumes?
Yes, volumes in Norway is down. As you say, 2% organic means with the price increases we have implemented that volumes are down in the quarter. But it is important to see that Q2 last year, we had growth of 20%. So Q2 last year was a very, very strong quarter, and we are matching that on the revenues, but not quite on the volumes.
Exactly. So the average growth is around 11% over 2 years.
Yes. Correct.
Okay. There's another question on some more guidance on the acquisition pipeline, particularly this year. If we can give any more flavor to that?
I think it's, I mean the funnel is being processed, and we are working on this at full speed. The thing is I'd rather not give too much on this because we need to, I mean, the 2 ones we have in due diligence, I'm very confident will happen. So far, I mean, once we do enter due diligence, usually, we very high likelihood, we do complete those transactions. The ones where we haven't entered into due diligence is more -- we have a long list of targets. We do some probability assessment of where and when it would land. And it looks as if 2023 should be good. But I don't want to commit to any size or any markets on that yet.
Okay. That concludes the questions from the chat. We have one question from the phone. So we'll turn back to the operator.
The next question comes from Dan Johansson from SEB.
One follow-up here on the extreme weather we experienced now in Norway and Sweden during Q3, I guess. Could you say something if that has any impact on your operation? I mean, is it more difficult to perform sort of your ordinary talks or is it more of a positive contributor that it creates a lot of ad hoc assignments. Could you say a few words on that?
I think we should see this as, I mean, it's a very severe situation for the countries. But to Norva, it is something that creates quite a bit of activity. And the storm and the roads that has been sort of blocked off, et cetera, has not impacted our operations in any extent. We have operations very close to the center of the flooding and there might be some negative impacts. But overall, this has led to quite a bit of activity in our operations.
If I can add a comment to this. I mean we've seen that when the same happened in Germany a couple of years ago. I mean following these occasions, there is always a lot of focus on pipes and the pipe infrastructure and has maintenance been done well. And when there is focus on our market, it usually does lead to increased activity going up. We saw that a couple of years ago in Germany too.
So you both have the sort of the Hans effect, but you will probably also see some long Hans effects here.
Okay. Quite interesting to follow. So I guess you see more of a medium-term effect as well, perhaps like you saw in Germany that demand will continue a bit stronger when you try to fix, I guess, the sort of problems in society.
Okay. We actually have quite a few more questions on the chat here. One question is on the M&A and the interest rate and the macro environment. Is there any impact on the acquisition multiples? And what are the multiples currently? And is there any impact on financing or financing costs?
I'll leave the financing cost to Dean. But when it comes to the multiples, I think we've stated that our sellers are not too focused on internal rate of return, net present values, et cetera, which are heavily impacted by the interest rate. So our discussions is much more about what is the company worth I need or I want and I think and I've seen. So it's not heavily impacted by the change of either risk premium or risk free rates or anything like that. Dean, on the financing costs.
On the financing cost, it's a pretty easy answer. Yes, when interest rates go up, we get higher costs. Our margins are the same on the debt facilities that we do have, but the base rate increases, and that will cost us more.
Okay. A bit further on the M&A side. There's a question of why has the M&A sort of activity or CapEx slow down? Is it more competition among acquirers or any particular improvements?
I think it's a little bit of a random walk is maybe a bit of a strong word, but sometimes you close the deal, sometimes you don't. So it's not sort of a pattern we're seeing. But just the last 6 months, very few transactions have gone through.
But we are committed on sort of.
I mean we are committed on the NOK 4.5 billion. To reach the NOK 4.5 billion, we will need significant M&A. As stated, we've sort of -- you need something around NOK 500 million per year for the next couple of years. And that's something we will believe we will deliver on.
I think it's correct to say Stein that, I mean, we do have a pipeline that can bring us to the NOK 4.5 million. How much of this will get done is yet to be seen.
And finally, here on the M&A side. Can you describe a little bit of your team setup and structure and which countries you have people working on M&A and so on?
Yes, we can do that. I mean we're a fairly slim organization. It is the people working on M&A are, of course, all the country managers had M&A as an important part of their agenda. But when it comes to the execution of transactions, it is me as a Corporate Development Director, it is our Head of M&A located in Germany. It is one resource part time in the Norwegian or the group organization with Dean and myself. And there is [indiscernible], our previous CEO in Sweden is also helping on M&A. And that is really the M&A setup and the team we have currently. Yes.
Okay. And there's another question here more on the demand picture. There's obviously a strong acyclical aspect to Norva's business, but are you seeing customers sort of delaying assignments? And is that one factor explaining the uneven utilization.
We believe it is. I mean the reason why this legislation in Germany was put on hold or suspended is that there is an EU regulation related to energy efficiency in -- well, in EU and the German houses needs to improve their energy efficiency. So a lot of people are installing heat pumps, et cetera. And I believe the German government wanted to relieve people of some of these sort of public burdens on the things they have to do that cost quite a bit of money. So they have said that the legislation is still in place, but you don't need to document that you have inspected it or that you have remedied it. We believe that the trend is towards more inspection, more fixing and more documentation of these leaks. And this is what we have seen lately. But right now, it's a situation where it's been lifted, I believe, temporarily.
I mean the pipes are -- excuse my language is like being in your [indiscernible], to stay warm during a winter halfway because the pipes, they are still there. They're not getting them in younger and they need to be maintained. If you don't do it this year, you will have to do it next year. And of course, situations with extreme weather and so on, flooding and so on, will put focus on -- I mean this, we saw it in Germany a couple of years ago or you can expect the same in the Scandinavian countries now I would assume.
Okay. I think that concludes the questions from the chat. And it seems that we have no more questions on the phone line. So I'll leave it back to Stein for closing remarks.
Well, as we said, we are on the path of reaching our targets. We'll continue working on this. One other element is that we will have a new CEO on board in September 18, which will strengthen the team and strengthen the capacity of the group.I think that's the concluding remarks from me. I wish you all a good day. And if you have any questions, do reach out to us. Thank you very much.
Thank you.
Thanks.