Norva24 Group AB (publ)
STO:NORVA
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Earnings Call Analysis
Summary
Q2-2024
Norva24 experienced a robust Q2 with revenues up 17.3% and an adjusted EBITDA margin improving by 220 basis points. Organic growth, discounting currency effects, was 9.2%. The company’s ambitious acquisition strategy added NOK 380 million in annual revenues, including key purchases like Vitek. These activities support Norva24's goal of reaching NOK 4.5 billion in revenue by 2025. Challenges persist in Germany due to underperforming units linked to the construction industry's fluctuations, but corrective measures are in place. The firm remains confident in achieving midterm EBITDA margins of 14-15%, emphasizing prudent capital allocation and efficiency improvements.
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Good morning, and welcome to the presentation of the Q2 report of Norva24. I hope everybody has had a fantastic summer so far. My name is Henrik Norrbom, and I'm the CEO. With me on stage, I have our CFO, Stein Yndestad.
Before we start jumping into the Q2 report, I would once again like to take the opportunity to share my reflections on the Norva24 case.
We start from the left. This is a market that has experienced and will experience robust growth for many, many years to come. The underlying trends show strong growth due to some key drivers. The infrastructure, where we are present in is critical, is old and has a huge investment debt. Climate changes are putting the system under severe pressure, which will require more preventive maintenance going forward. For example, the cleanup of the heavy rainfalls. We have all seen the flooded streets when extreme rainfall hits. And we also saw this under Olympics in Paris, where heavy rainfall causes sewage to go into the river and competition is being postponed for this reason.
We recently also have had similar situations in Oslo and Stockholm where the sea was polluted by sewage and was recommended not to swim in for a period. This is all related to the huge investment debt in the infrastructure. Going forward, the market is huge and far from consolidated. The market we are currently serving is estimated to be close to NOK 40 billion. That means that we have a market share of less than 10% but are still the clear market leader in Northern Europe.
We are operating in a large and acyclical growth market with proven resilience throughout downturns. Last theme to the right, we have shown that we have a proven model for growth and value creation. So far this year, we have signed a handful of acquisitions, adding close to NOK 400 million of annual revenues, and we still have a solid pipeline.
Before going into the Q2 numbers, I want to present the slide with our key priorities going forward, the same priorities as we had in our last earnings call. We continue to work with a price component in combination with proactive cost handling, high focus on improved utilization, maximize utilization of vehicles and personnel. Improve underperforming unit, work in structured way to lift them up to the right profitability levels and make sure that we have the right people in the right place. And focus on growth, both organic and through M&A. These are 4 important areas going forward.
In addition, also high focus on our agenda is on capital allocation and working capital. Okay. Now on to the group numbers and the highlights. We continued the growth journey, and we are proud to be able to present 5 acquisitions from the turn of the year, which lifts our turnover by NOK 380 million with a strength in margin. Included in the NOK 380 million, we have Vitek with more than NOK 120 million of revenue. We expect to close Vitek during Q2, but the process has taken more time due to the competition authorities having looked into this transaction.
Tuesday, we were told that the Norwegian Competition Authority will continue to review of the acquisition of Vitek. In Q2, we have announced 3 acquisitions: Nordic Powergroup, Vitek and Högtryckstjänst. Two of these were closed during the quarter. Finding the right targets and closing the right deal is important for us, and we are in no rush and take the time we need. And there is still a lot going on behind the scenes. We are satisfied with the quarter, with a growth of 17.3% with approximately 2.6% more working days in the quarter. As Easter in Q1 this year, while it was Q2 last year. If we look at the first half of the year, this effect is utilized and then we have a growth of 13.5%. Currency adjusted organic growth is 9.2% in the quarter and 5.6% for the first half of the year. Year-to-date, we have 1% fewer working days than in 2023 and our organic growth is approximately where we have indicated that the long-term trend should be.
Looking at operational highlights. The margin in the quarter is up for the 3 Nordic countries compared with Q2 2023. But it might be more useful to compare the first 6 months given Easter coming in Q2 last year and in Q1 this year. In this period, we had a 50 basis points improvement. In Germany, we have a unit that unfortunately has underperformed throughout 2024 and this is what has dragged us down -- dragged down the margin in Germany. I'll address this further under the slide on Germany. Sweden is picking up speed and the margin improvement is broad-based, but I -- but I'm very happy to see the unit which dragged down the margin last year. It's now up to good growth and much stronger margins.
Denmark is continuing the organic margin improvement and benefiting from Nordic Powergroup being consolidated for 40 days in the quarter. Now let's go through the segments. Starting with Norway. Overall, the growth is impacted by the number of working days. In Norway, we had 3% more working days in the quarter and 15.3% organic revenue growth. For the first half year, organic growth was 8.6%, which we think is a good growth level. On profitability, we see a 220 basis point improvement in the quarter. We have signed 2 M&A transactions in Norway. This year, Vitek is the largest, potentially adding more than NOK 120 million of revenue.
Next on Germany. Germany achieving 5.2% total growth and an adjusted EBITDA margin of 11.3%, a margin reduction of 190 basis points over the quarter. This is a disappointing result, but it does not give the right impression of the development in the German operation. We have one unit that has underperformed in both Q1 and Q2, and this is the unit where we announced we had some work postponed from Q1 into Q2 and Q3, we have had some issues here and the likelihood of these projects materializing in Q3 and Q4 is still unclear.
In general, Norva24 has very limited exposure to the project business. But in this unit, project business accounts for a fair part, and this is more cyclical and tied to the weak construction industry in Germany.
We have made management changes in this company, early Q3, replacement process is underway. The positive thing in Germany is that when excluding this company, the other units have a nice margin increase both in the quarter with a margin improvement of 90 basis points and 70 basis points in the first half of the year. And I'm also pleased to announce that the larger underperforming unit in 2023 has been turned around and have a very solid margin increase.
Next one, Sweden. I'm once again very happy to see the development in Sweden with total growth of 18.4% in the quarter and 10.4% organic currency adjusted growth. So a strong performance in Sweden. The pickup we see in revenues and utilization rates does have a solid impact on our profitability. For the quarter, the margin is up 750 basis points. And for the first half year, the margin is up 570 basis points. Most of the improvements are organic, but inclusion of Contratech also play a role in the margin improvement.
During the quarter, we acquired Högtryckstjänst, which we closed mid-May. This operation fits nicely with the other operations in the southern part of Sweden. The Danish operation continued to improve. Denmark had a revenue growth of 55.4% in the quarter and 34.4% year to-date. Nordic Powergroup contributes a lot to this growth despite it being only consolidated from the 21st of May. The organic growth in Denmark -- in the Danish operation was double digit, both in Q2 and in the first half of the year.
Profitability is up by 660 basis points for the quarter, and the majority of this increase is coming from Nordic Powergroup. But there is also a solid organic margin improvement in the Danish operation. We continue to grow, and we have added more than NOK 500 million of revenues from Q2 2023 and close to NOK 1.1 billion from Q2 2022. So the target of NOK 4.5 billion for '25 is within reach. Also regarding profitability, we see solid growth. Our EBITDA is up to NOK 376 million on a 12-month rolling basis and up from NOK 275 million 2 years ago.
Okay, I hand over to you, Stein, to go through the financials.
Thank you, Henrik. Before we go to the financial section, I would like to summarize the M&A activities so far this year. Acquisitions are a key component in our buy-and-build strategy. Almost all our transactions are done in bilateral deals where we seek out targets, introduce ourselves and engage in a dialogue. As we see on the right-hand side of the slide, the pipeline is still solid, and we believe we will achieve the revenue volumes required to reach our 2025 target of NOK 4.5 billion of revenues. We have signed 5 deals with an aggregated revenue of $380 million this year in all Scandinavian markets. We are in advanced discussions with several German targets, and this may materialize during the second half of the year. But as we have stated earlier, we are in no hurry, and it is very important to maintain prudence in these acquisitions and secure the right capital allocation.
The acquisition of Vitek has been reviewed by the Norwegian Competition Authorities. And they notified us that they will continue its review on August 13. Thus, it has not yet approved the acquisitions. Comments to the Norwegian Competition Authority will be submitted by Norva within 15 working days.
Now on to the financials. Overall, we are pleased with the performance of most units during Q2. Revenues for the group are up by 17.3% and organic growth is up by 9.2% when adjusting for FX. And we see an adjusted EBITDA margin increase of 220 basis points for the quarter and 50 basis points for the first 6 months. On the cost side, we see most cost items increasing less than revenue. Personnel is up 18% versus the increase of revenues of 17.3%. But we also see operational service expenses and personnel expenses as a percentage of revenues together to see if our production has had good efficiency. And here, these 2 elements give a 40% basis point margin improvement for the quarter. Vehicle operating expenses are up by 12% in the quarter but also contributing to the improved margin with 70 basis points. We have benefited from the reduced fuel prices and especially from the reduced taxes on fuel in Sweden.
For Sweden, this contributes to 120 basis points on the EBITDA margin. For the other market, the impact is much smaller. For the group, this is 20 basis points on the margin. And other operating expenses is increasing by only 6%, contributing to a 90 basis points improvement. Combined, this results in a 270 basis points improved EBITDA. Depreciation is at the same level in relation to revenues this Q2 and last year's Q2. So the reported EBITDA also has a 270 basis point improvement. The adjusted EBITA is 12.6% for the quarter, which is an improvement of 220 basis points. Net financial costs were NOK 27 million in Q2 versus an income of NOK 10 million last year.
The swing here of NOK 37 million is due to a currency gain of NOK 30 million last year and a currency loss of NOK 4 million this year. The increased interest cost is up only NOK 6.1 million, from NOK 16.8 million last year to NOK 22.7 million in the quarter. This gives us an earnings before taxes for the quarter of NOK 79.4 million, up 2.1% from last year, where we had NOK 77.8 million. The tax rate was 28%, but the tax rate is expected to be at the same level as the last year's going forward.
Again, we can show a strong balance sheet. Our net debt of NOK 1.6 billion at the end of the quarter, representing a net interest-bearing debt over adjusted EBITDA of 2.4x based on statutory numbers and 2.2x on pro forma numbers. Goodwill of NOK 2.009 billion at the end of Q2 shows an increase due to the latest acquisitions with impairment tests showing ample headroom, i.e., there is no imminent danger for write-downs.
The lease liability of NOK 993 million is related to right-of-use assets which refers to financial leasing of vehicles and the property rentals according to IFRS 16. The noncurrent loan of NOK 811.7 million is primarily the bank loan. The right of use in property plan and equipment increased by 12.6% over the last 12 months, while our revenues on a 12-month basis have increased by 18.3%, indicating that we have approved -- improved our efficiency. And our investment of NOK 137 million for the quarter, that includes both PPE and right-of-use does not represent the level for the year.
So far this year, we have taken on leases and bought equipment for NOK 225 million, and we will see a reduced investment level in the second half of the year. Our investment in machinery and equipment should be around 8% in the long run. Over to our net debt structure. Most of our debt is related to IFRS leases that needs to be capitalized. These lease liabilities amounted to NOK 993 million at the end of the quarter. Our total interest-bearing net debt was NOK 1,635 million at the end of Q2, of which approximately 60% are capitalized IFRS leases.
Leasing payments for the next 12 months amount to NOK 266 million. Depreciation of the leased assets is included in the total depreciation in the P&L. Net debt, excluding lease liabilities, amounted to NOK 642 million at the end of the quarter. Of the NOK 1.1 billion credit facility, NOK 227 million was unutilized and available at the end of the quarter. This, combined with the cash flow from operations give us significant financing capacity for M&As. We have an offer in place from the banks for an increase of the financing facility from NOK 1.1 billion to NOK 1.85 billion, which also then includes 2x 1-year extension options at similar terms as the current facility, the one that we established prior to the IPO in the fall of 2021.
So that means that we should have funding secured until Q4 2028 once signed. Yes, our cash conversion is impacted by M&A this quarter. This quarter, we have included Nordic Powergroup, which has their high season in Q2, leading to a very significant buildup of accounts receivable at the end of Q2. This has, to a large extent, been paid by the end of July, but it does impact working capital at the end of Q2. Our operating cash flow of NOK 530 million last 12 months is up by 17% on the previous 12-month period and with a cash conversion of 70%. This reduction towards last year is heavily impacted by the M&A done and then particularly Nordic Powergroup.
At the end, just to recap the financial results. It's a good growth in revenues, up 17.3% year-on-year. Margin is up 220 basis points in the quarter and 50 basis points for the first half year. We've had good M&A activity for the year, and there is a solid pipeline. There is a strong balance sheet that has enabled larger M&A deals over the last month, and there is still room to continue the growth.
Handing over to you, Henrik.
Okay. Thank you, Stein. Before I summarize and give some key takeaways, I want to take -- I want to underline that we are on track to deliver on our financial targets. NOK 4.5 billion in 2025, through organic growth and acquisitions, 14% to 15% EBITDA margin midterm, and we still have a good capital structure to support the journey.
Next slide. Final slide before Q&A. Key takeaways from this presentation. We deliver on our M&A agenda. We come from a quarter with solid revenue growth of 17.3% and good organic growth of 9.2% with a margin improvement of 220 basis points. In addition, we are uniquely positioned in an attractive growth market and show resilience in a tough economical climate. And we are on track to deliver on our growth and profitability targets.
Thank you. Now we open up for Q&A, but just give us a couple of seconds so we will change location to another room for the Q&As.
[Operator Instructions] The next question comes from Dan Johansson from SEB.
Yes. Henrik and Stein, are you already set or should I wait a bit for my question.
No. We are set. It was just a couple of meters here.
Yes, good run. All right. I think I have list of questions. I'll take them one by one. Maybe starting on Denmark, which looked quite impressive in the quarter and close to double-digit margins now on a rolling 12 months basis, and I guess that's going to come up a bit further now when you have Nordic Powergroup in the group for the coming months as well. As you see it, so Denmark will be able to deliver on the level in line with your financial target in not too distant future in a couple of years or so? Or is that too optimistic of a view, you think?
Denmark is on the right. They grow and they develop. And as you've seen in the quarter by quarter, they get better all the time. Of course, we get an extra boost here of a fine company that we bought. So -- and as stated, double-digit now. We pushed Denmark and they have good trajectory so far in the, so to say, the underlying old Danish thing for buying Nordic countries. So when they will be up on the other levels that we can wait with, that definitely have the right trajectory to soon be there.
Okay. Sounds good. And maybe following up on the organic growth in Denmark as well. I think during the IPO process, Denmark was, according to the market study come to the lowest growth prospects, but now you're growing, yes, quite nicely in the double-digit. Is that performance mainly market share gain? Or is the Danish market in general also growing a bit more perhaps than what that market study suggested?
No, I think we do outgrow the market. I think we are taking market share in what you could call sort of the organic part of the Danish operations. So that's probably correct. We are outgrowing the rest of the market. But I think that market research might not also -- might not be that accurate. And I think there is good room for growth pretty much in line with the other markets in Denmark as well.
And then you see Nordic Powergroup, of course, contributing a lot to the growth of the Danish operation, and they are in themselves also growing a lot. So it's not only that we're bringing a large part on board. But they've had a very strong performance in Q2 this year. And well, I'm not going to say too much about the future. But I mean, they're a very eager group of entrepreneurs, doing a lot of good work.
And you see -- I mean, you can do the calculation and see what kind of margins they are actually contributing with as well.
Yes. Sounds good. Maybe a final one for now at least on cash flow, I think you touched upon some aspects, Stein. But obviously, I think you mentioned in the report here that you're addressing working capital levels in Denmark and Germany and I was just curious if there's anything structural -- in the structure of this market in terms of the type of customers and services you performed, is the working capital level difference compared to Norway? Or is it more internal inefficiency and perhaps the fact that these companies are not fully integrated into the Norva model.
No, I think there is a small cultural element in both Germany and Denmark. But that's -- looking at the numbers that we're presenting today, we can make big changes on this. I think it's important to see that the Q2 numbers are very much impacted by the fact that we got the Nordic Powergroup into the group in late May. So we actually get their full accounts receivable into that calculation, but only a very small proportion of their revenues and profits. So that really has an impact on the net working capital. I think we had about NOK 60 million to the net working capital in the quarter, and that's something we'll see altered in Q3. So it's very much about our own performance. We need to improve our routines in both of those markets.
And I think that's not something that's happening in Q3, but we're implementing the ERP tool in Germany year-end. And I think that will also be a tool that should help us significantly in the German market.
[Operator Instructions] The next comes from Karl-Johan Bonnevier from DNB Markets.
Yes, Henrik and Stein, first of all, congratulations to a good progress in Q2. And just when you look at Q2 last year, you then at the time, had a lot of utilization kind of challenges, would you talk about this quarter being a more normal kind of quarter in that respect when you're looking at how you've been able to utilize the workforce and the equipment?
I mean I think so. It's -- there were some challenges in Q2 last year. But this year, it has been more stable, but also it's 1 year ago, and we have worked hard with lifting up the organization, looking like in Sweden, for example, we have a broad-based increase in margin and performing good all over. We have also managed to turn around a couple of companies that were -- that was a little bit -- it took us down in Q2 last year. So I think we in a positive journey, there were some, I know, present in Q2 last year, when I wasn't present. We had some issues there in the bigger cities regarding in households and so on, where it was a little bit of postponed work. We haven't seen that. It has been more a normal summer, I would say.
Excellent. And listening to your comments about Germany, Henrik and the project business you have there, is it fair to believe that this will be a burden also in the second half that, that might be more of a '25 kind of recovery? Or do you see it being sold during the second half of this year?
Yes. I mean of course, we will try to solve it as soon as possible. It's very linked to construction industry in Germany that is shaky and nervous and because we have one project, but -- now coming from the construction indices before Norva24, I know it's tough these days to be in the construction. When do the projects, when do they dare to start and so on. And we have the timing issue here from -- coming from large projects phasing out, and it was meant that this was one we should take over. So when it will start to materializing, it's still unclear as stated in the report as well. So I will not promise when the volume will come. But we will try, of course, our best to turn it around during the autumn.
Excellent. That sounds fair. Stein, I see the provisions jumping quite a lot in the balance sheet. Is that earnout related from the acquisitions you've done? Or is there something else happening there?
I mean, the Nordic Powergroup, there is a large proportion of the provision there, which is the earnout to Nordic Powergroup founders or owners. And that's split in two. So one part will come in Q3 most likely once we've settled the numbers here. And then the second part is coming in a few years. So that's a large proportion of the increase. That's mainly the increase.
Excellent. And just one final, looking at what kind of we have for the time line for closing the Vitek acquisition with say, extended process? Is that now also more a question for '25 or is it something that could materialize in the second half?
As stated also in the report, we just get to notice that they need more time to look into the case. We have 15 working days to answer on their questions. But we have -- I feel confident that we will close it during Q3.
There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.
Yes. I have received some questions on the web here. Number one, you mentioned a tailwind of 2.6% from extra working days in the quarter. How does that look in the first half? And -- well, so Q1 and Q2 combined.
I mean, exactly. A good question. Because looking at the first half year, we actually had a headwind of 1%. So we should see it from that light. Even though it was a tailwind in this period.
And question number two. You say the M&A pipeline is rich. Do you also have larger targets in the advanced discussion bracket?
I mean, absolutely. We have both small, medium and large targets under advanced discussions. So with a rich pipeline and a lot going on, as stated also behind the scenes. But we take our time and want to be prudent and really work with the right capital allocation.
Okay. Another question. Now that we're close to 2025 and going the M&A run rate the 2025 target of NOK 4.5 billion seems much clearer now. My question is more towards the EBITA margin target of 14% to 15%. If you can now define your midterm period and your course of actions towards achieving that target.
Yes, when we set the targets prior to the IPO, we differentiated between the revenue target and the EBITA target. The reason for that is the EBITA target is so dependent on what we acquire. So that's in order not to limit ourselves too much on the M&A side because there could be some very attractive deals out there with a lower margin than ours that we do not want to sort of exclude from our opportunity list. So that's one of the reasons we didn't say 2025 for that as well.
So what we've indicated earlier is that was a midterm target. So we're more talking about 2026, 2027 when it comes to sort of achieving that. And that is still very dependent on what we buy in the future as well. The last year or this year, most of the transactions have been margin accretive. So that's a positive when it comes to the target -- reaching that target. In our specific actions here, it is very much about bringing lower performers up into the right territory.
So what we -- we describe our companies with a margin below 15% as underperformers, and we have specific action plans on how to bring them into the right territory. And we see that those initiatives are working. I mean we've lifted the margin in the large Swedish entity that we've had some issues with the last couple of years by more than 15 basis points not 15 basis points -- 15 percentage points from Q2 last year to Q2 this year. And we also see in some other large entities, for instance, in Norway, a very significant jump in margin and also in the German entity that we've -- the initiatives we've initiated have worked.
But we still have some units which are not at that level, and that's sort of the key to bringing the group into the right territory is bringing those companies in the right place. And it is very much about working on pricing and utilization, that sort of the first step and then you -- it comes to sort of being more -- being very cost conscious as well. So it's first, getting the pricing right, getting the utilization right and then starting to work on the -- more details on the cost side.
And then we have a question related to the German underperforming unit. I see that you guys talked about corrective actions in the unit. Could you enlighten us on the actions taken and the time line you estimate for the business to be back on track? You also highlighted that the margins would have been 70 basis points, excluding that unit. Could you also provide more information on the scale of the unit and the organic growth of Germany, excluding that unit.
I think you already answered the first part of that question. But when it comes to the scale of that unit, it's about 20% of the German business. And the German business without -- or excluding this entity would have had an organic growth, very similar to what we've seen in the Scandinavian market. So sort of double-digit organic growth for excluding that unit.
Let me see. I also have this one, yes. There was a lot of heavy rainfall in Q3 last year that contributed to a strong quarter. Should we see that as a headwind for Q2 -- Q3 2024?
I can take that one. No, I would say not because if I remember right, we talked about this heavy rainfalls in last year. But it only contributed with 1% of total revenue, and if I remember right, 2% of the revenue of EBITDA. So I would see in the light of that, we should not see that as a headwind into Q3. Q3 was a very strong quarter. But we also have good speed in our machinery, and we'll definitely try to meet a strong Q3.
Yes. Another question related to weather is congrats on a solid quarter. Can you shed some light on the activities so far in Q3? As to my understanding, it has rained a lot during July in Oslo.
I think it has rained both in Oslo and Stockholm and other cities. Normal weather, of course, heavy rainfall is good for our business, but I don't see it has sticked out. It has been a normal summer and we have had heavy rainfalls and flooded streets and so on, quite normal. And as stated also from last year, we had that huge thing up in Norway. But once again, it only contributed with 1% on the revenue side and 2% on EBITDA. So I don't see it as a headwind, more of a normal year.
The last question that I have so far is on the subcontractor activity level. Please provide an update on the subcontractor activity level in the period.
I think it is higher than it was in Q1, but 16.2%, which is sort of the share of revenues that subcontractors had in Q2 is a very -- it's a very normal level. I think on average, we were some 16.5% the last quarter -- last 4 quarters. So it's I would say it's a very normal level. It will vary somewhat over the quarters. Q1 is maybe a quarter where we have less work to do and more capacity to do things on our own. That might be -- or that is the reason why that was lower in Q1.
Those are all the questions that I have received.
Okay. Then we wrap up, and thank you for listening, and have a fantastic day.
Thank you.