Norva24 Group AB (publ)
STO:NORVA
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Earnings Call Analysis
Q3-2023 Analysis
Norva24 Group AB (publ)
In the Northern European market's sea of opportunities, Norva24, led by CEO Henrik Norrbom, emerges with strong Q3 results, robust growth drivers, and a strategic acquisition roadmap. The company's revenue soared by 29% with EBITA hitting a record 124 million NOK, a 43% year-over-year rise, and margins expanding to 15.7% from the previous year's Q3. This narrative is not just about ephemeral success, but sustained progress, with a growth model built for resilience and value creation in a market less affected by economic cycles.
Dean Zuzic, the CFO, articulates the financial vigor of Norva24 with revenues leaping to 792 million NOK and year-to-date figures up 31% at 2,296 million NOK. EBITA reflects a similar uptrend, with a 44% leap for the quarter at 123 million NOK. The cash flow from operations also reflects robust health, with 453 million NOK over the last 12 months and a steely focus on pushing cash conversion towards 90% in the coming 12-18 months. The balance sheet remains robust with plenty of room for growth, signifying strong operational and capital efficiency.
Norva24 is not just riding a wave of growth but is also navigating the challenges of inflation and macroeconomic pressures with strategic pricing. The company is capitalizing on its significant market position to push prices where possible and maintain profitability amidst market changes, reflecting an adaptive and proactive approach.
Norva24's history is studded with 45 acquisitions, and its pursuit of growth includes a targeted buy-and-build strategy which has seen four new additions this year, one in each of its four active markets. The latest acquisitions in Sweden and Germany not only enhance regional presence but also bring strong profitability and experienced management into the Norva family. There is a continuous effort to enrich the acquisition funnel, suggesting more announcements may soon bolster future earnings.
Looking ahead, Norrbom reassures that Norva24 is on course to hit the 4.5 billion NOK revenue target by 2025, with a midterm EBITA margin of 14-15%. Backed by a capable capital structure and a strong M&A pipeline, Norva24 is strategically positioned to continue its growth journey. The underpinnings are solid: an attractive market with untapped potential, strategic acquisitive moves, and a clear vision for driving profitability. And while winter weather can be a wildcard, so far, the season has been kind, laying the ground for a stable Q4 that relies less on the whims of the Nordic climate.
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Good morning, and welcome to the presentation of the strong Q3 report of Norva24. My name is Henrik Norrbom, and I'm the CEO. With me on stage, I have our CFO, Dean Zuzic; and our Corporate Development Officer, Stein Yndestad. Stein is also responsible for Investor Relations.
Okay. Before we start jumping into our strong Q3, I would 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 strong growth for many years to come. The underlying trends show strong growth due to some key drivers. The infrastructure we are present in is critical, it's old and has a huge investment debt. Climate change is also putting the system into 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. 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 an acyclic growth market with proven resilience throughout downturns. Last thing to the right, we have shown that we have a proven model for growth and value creation. Worth mentioning M&A will be very high on the agenda going forward.
Okay, Slide 3. Before going into the numbers -- the Q3 numbers, I want to present a slide with my reflections and beliefs that is important going forward. We need to continue to work with the price component in combination with proactive cost handling, high focus on improved utilization, maximized utilization of vehicles and personnel, improve low-performing units, work in a structured way to lift them up to the right profitability levels and make sure we have the right people in the right place and focus on growth both organic and M&A. These are 4 important areas going forward for Norva24.
Okay, next slide. Okay. Now on to the numbers. This is a very strong quarter. We see the strong revenue growth continue. Our revenues are up 29% in Q3. Even more satisfactory is the result of the increased pricing and utilization has had on profitability. It is a strong momentum through the P&L. Our adjusted EBITA was NOK 124 million in the quarter, which is an improvement of 43% year-on-year. This is our highest adjusted EBITA in the quarter ever. This resulted in a margin of 15.7%, up 150 basis points on Q3 last year.
Looking at the operational highlights. We see positive development in all markets with Norway as the profitability driver. Germany is still growing at a very high rate while margin being somewhat softer in the quarter. Sweden is showing good growth and a slight improvement on margins. Denmark has continued the strong improvement and the playbook for improvement is working. This fall, we also just signed 2 acquisitions, 1 in Sweden and 1 in Germany. All in all, a really strong quarter with 29% growth and a record NOK 124 million of adjusted EBITA.
Now let's go through the countries. We have changed the slide there, perfect. Starting with Norway. The growth and profitability in the Norwegian operation is at high level. Even on the back of 9% organic growth in Q3 2022, we see an organic growth rate of 12% this quarter. This, combined with higher utilization, has a very positive impact on profitability. The margin improvement year-on-year is 530 basis points up in Q3. I mean, we did have some short-term positive impacts from the storm Hans, but this only meant a few percentage points on the growth and almost neutral on the margin of the quarter. But it really puts the state of the underground infrastructure on the agenda, which will of course have a positive impact on the UIM business going forward.
Okay, next slide. Germany is our largest market with 37% of the group's revenue, and the growth is still strong mainly on the back of acquisitions. Of course, currency also plays a role in the numbers presented. This will vary over time. But adjusting for the currency impact, the growth is still more than 30%. Margin is below Q3 last year partly due to M&A, but compared to Q2, the margin is up 150 basis points. The majority of our branches in Germany show positive margin development, but unfortunately, we have one company that is underperforming. And here, we have a plan in action to improve performance.
And let's see, yes, we have Sweden there. Perfect. Next one, Sweden up. Here, we see an organic growth of 7.7% in the quarter combined with a solid EBITA margin. Margin is 16.3%, up 20 basis points compared to last year. In general, we see better utilization and the lower activity level we saw and communicated in Q2 in the Stockholm flashing market has picked up and is now back to more normal levels. These branches are now producing solid margins again. Worth mentioning about Sweden, we have a strong M&A pipeline in the market and we actually closed an acquisition in Malmo just 2 weeks ago.
Okay, change slide again. So the Danish operation. It is really good to see the positive development in Denmark. The improvement plan starts to pay off. Profitability is up 350 basis points in the quarter, and we see the strong development in recent quarters continues. Also worth mentioning, we did an acquisition in Denmark in Q3 which will strengthen our position in the region. Denmark is actually the market where we cover the greatest share of the country, and this enables us to serve nationwide customers in a really good way.
Last slide for me before handing over to the P&L. Looking at the longer time series, we see excellent growth achieving since the IPO. The IPO -- the last 12-month revenue prior to the IPO was NOK 1.9 billion, which has grown by 60% to more than NOK 3 billion now. Year-on-year in Q3, it's 29% up. This is the result of 7.8% organic growth and 14.2% organic -- acquired growth. With this growth, we are on the path of reaching our 2025 revenue target of NOK 4.5 billion.
Strong improvement on margin through the year, uplift of 350 basis points year-on-year. This is the result of achieving -- result of actively working on increasing prices and utilization of personnel and equipment. As you can see on the quarterly EBITA chart, there are seasonal variations as Norva24 is mostly working outside and is affected by season and weather. Normally, we see a lower activity and efficiency level in Q1 due to the winter weather in Norway and Sweden in particular. But last year, we also had an early winter in Q4, which impacted our efficiency and margins in that quarter. Knock on wood, we have not had much winter so far this fall.
Now it's time for me to hand over to Dean to run us through the P&L.
Thank you, Henrik. So let me run you through the numbers, the P&L balance sheet and say a couple of words about our cash flow. As you've already heard, Q3 has been a very strong quarter for us. We experienced strong growth and efficient operations resulting in improvements in all KPIs, EBT, EBIT, EBITA and EBITDA.
To start from the top, total operating revenue is up 29% for the quarter from NOK 612 million to NOK 792 million and 31% year-to-date from NOK 1,747 million to NOK 2,296 million. Total operating expenses increase is in line with the increase in revenues, up 28% for the quarter from NOK 466 million to NOK 598 million and 33% year-to-date from NOK 1,371 million to NOK 1,826 million. We are especially pleased to see that our personnel and vehicle operating expenses increased less than our revenues, showing efficiency gains in operations. This leads to an EBITDA increase of 33% for the quarter, up from NOK 146 million to NOK 195 million and 25% year-to-date, up from NOK 376 million to NOK 470 million.
Depreciation is up 19% for the quarter from NOK 60 million to NOK 72 million and 21% year-to-date from NOK 175 million to NOK 212 million. This leads to an increase in reported EBITA of 44% for the quarter, up from NOK 86 million to NOK 123 million and 29% year-to-date up from NOK 201 million to NOK 258 million. Amortization is technical. It stems from the PPA allocation from acquisitions. While net finance is up significantly, as you can see, but that is because of net agio increases following the weakening of the Norwegian currency.
This gives us an earnings before taxes for the quarter of NOK 88 million, which was up 27% from NOK 69 million last year and NOK 210 million year-to-date, up 24% from NOK 170 million last year. After adjustments for M&As and restructuring costs, EBITA for the quarter came in at NOK 124 million, up 43% from last year's NOK 87 million, NOK 266 million year-to-date, up 28% from NOK 208 million last year.
Slide 11. Again, we can show you a strong balance sheet. Our net debt of NOK 1,276 million in Q3 represents a net interest-bearing debt EBITDA of 2.1x, which gives us significant headroom up to our covenant of 4 and significant headroom for continued growth. Goodwill of NOK 1,669 million at the end of Q3 shows an increase due to acquisitions in 2023. However, impairment has shown us ample headroom, meaning that there is no imminent danger for write-downs. Lease liability of NOK 850 million is related to the right of use assets, which refer to financial leasing of vehicles and property. Noncurrent loan of NOK 641 million is primarily the bank loan.
Slide 12, over to our net debt structure. We tend to stress this in all of our presentations. Most of our debt is related to IFRS 16 leases that need to be capitalized. These lease liabilities amounted to NOK 850 million at the end of Q3 with leasing payments over the next 12 months of NOK 212 million. Our total net debt was NOK 1,276 million at the end of Q3, of which approximately 70% are capitalized IFRS leases. Depreciation of the leased assets are included in the total depreciation of -- in the profit and loss statement.
Net debt. Our net debt, excluding these lease liabilities, amounted to NOK 426 million as of the end of Q3. Of the NOK 1,100 million in our credit facility, NOK 500 million were unutilized and still available. This, combined with cash flow from operations, gives us significant financing capacity for continued M&As.
Slide 13. Once again, we can show you a strong cash flow from operating activities. It came in at NOK 453 million last 12 months, resulting in a cash conversion of almost 74%. We are, however, not satisfied with our working capital buildup in Q3, and focus going forward will be put on further improving cash conversion through a reduction of working capital. Our goal is to increase cash conversion to 90% over the next 12 to 18 months as we work on improving invoicing and collection.
And at the end, let me just give you a recap. The numbers are showing strong growth in revenues, up 29% quarter-on-quarter. Strong growth in EBITA and margins, EBITA up 44% quarter-on-quarter; margins at 15.7% in Q3, which is up 1.5 percentage points quarter-on-quarter. We have a strong balance sheet with NOK 500 million of unutilized credit facilities, strong cash flow and focus on improving cash flow further through better working capital management. This gives us sufficient capacity to continue our M&A journey.
So now I can hand over to Stein, which can give you an update on the M&As.
Thank you, Dean. Very impressive Q3 numbers, I must say. Acquisitions is a key component of our buy-and-build strategy. We have made 45 acquisitions in our history so far, and we made 4 acquisitions this year, 1 in each of our 4 markets. Our funnel is developing and we are constantly putting new targets on the list and taking the ones where we have concluded it will not happen off the list. The funnel is richer today than it was 3 months ago, and we expect more announcements in the coming months.
Almost all of our transactions are done in bilateral deals, where we seek out the targets, we introduce ourselves and we engage in a dialogue. For such dialogues, we involve our country management and give support from the central headquarters on the M&A side. We already -- and we are benefiting from the companies that are already part of Norva24, where the founders have a good understanding of where to find quality companies within their markets. And as Norva becomes more and more known in the industry, we also do experience an inflow from companies going into sort of a generational shift and where there are no natural takers among the descendants of the owners, and then Norva is a great buyer of these operations.
So these are the latest 2 acquisitions that are now part of the Norva family, 1 company in Sweden and 1 in Germany. These are 2 markets where we are focusing particularly on the M&A going forward, given the rich pipeline of these markets and also the fact that these are the 2 largest markets we are operating in. In Norway, we have around 30% market share, and in Sweden and Denmark, we have around 10%, and in Germany, we have a market share of around 3%. So there is still a lot of potential for growth.
ControTech, which you see here on the left side, is a very strong player in the great Malmö area. We have acquired ControTech to strengthen our market position in the region, where we already have a good presence in Malmö and Helsingborg. The company has revenues of close to SEK 35 million and a very strong profitability. Niclas, who is the General Manager, will stay on board and will continue to run the operation.
On the right hand, we have Baier Rohrreinigung, which is a similar case where we will strengthen our presence in the regional market and develop the cooperation that currently exists between Kanal Turpe and Baier. The company has revenues of close to EUR 4.5 million and solid margins. Andreas Baier will stay on as manager, and this is something we experience in most of our transactions, that the manager stays on. Today, we have more than 60% of the sellers still working with us in the role as general manager of their operations. And the ones who have left us along the way stayed with us on average 2.5 years, which gives us plenty of time to plan and organize for an orderly succession.
Just to underline, we have high activity and a strong pipeline, and we expect to announce new transactions in the coming months. I'll hand it over to Henrik to wrap it up.
Okay. Thank you, Stein. Before I summarize and give some key takeaways, I want to underline that we are on track to deliver on our financial targets: NOK 4.5 billion in 2025, 14% to 15% EBITA margin midterm, and we have a good capital structure to support the journey. Okay, finance slide out before we take the Q&A.
Key takeaways from this presentation: Record numbers, solid growth and improved margins. We are uniquely positioned in an attractive growth market. We have strong M&A activity and pipeline, and we are on track to deliver on our growth profitability targets.
Thank you. Now we can open up for Q&A.
[Operator Instructions] The next question comes from Dan Johansson from SEB.
I have 3 questions. I'll take them one by one, if that's fine with you. Maybe I'll touch a bit on the topic of price increases. You spoke a bit about that, Henrik, and the importance of that. What do you feel about Norva's ability to maintain prices and increase them further now to combat potentially even higher costs going forward now, given a bit of a weaker macroeconomic situations. But on the other hand, of course, you have a very important service that needs to be provided. Just touch a bit on that topic and your feeling about price increases clearly going forward.
Let me start there. Pricing, you always have to look at this. And we, of course, have a different structure of all our contracts and so on. Some contracts are harder, some contracts are easier. But what we're working heavily with now is the awareness out there to also use our strong market position that we have because we need to push prices, we need to have awareness in the organization that we need to maximize the price component to not be stuck in, as you say, the macroeconomic environment we're living in with the inflation and so on. We are talking about it constantly with our organization. And so far, everybody is on board and we have been successful, but it's not stopping here. We will continue to do that, and I see it definitely are possible.
Sounds good. Just on perhaps a bit on current trading. I know that last year had a bit of challenges related to the very cold weather that occurred a bit earlier in Q4 already last year when it's typically more of a Q1 phenomena, and now we're sort of in mid of November. Is it more of a normal season so far this quarter? Could you say something about the start of Q4 here?
Absolutely. Thank you for that question. Probably if you are a Norwegian or a Swedish, you saw that a couple of weeks ago there was some snow coming, nothing that disturbed our operation. We had a little bit snow early in Oslo, but it went away. So far, as I said in the presentation, knock on wood, we have had a good start of Q4 from a weather perspective. So normal situation so far, that feels good. Last year, as I mentioned, Q4 2022 was winter coming really early in Sweden and Norway for -- in particular then, with a lot of snow. So far everything looks good. But I follow the weather forecast.
Sounds good. Hopefully, it can be warm for a bit more. And maybe last question from my side before jumping back into the queue. And it's a bit on -- you touched quite a bit on the M&A side of things. You've done 2 acquisitions now quite recently but perhaps you want to do a few more before year-end. Looking at sort of where you are in process, can you give some more granularity on what sort of sizes are on those type of companies? Is it just smaller bolt-ons, are you looking a bit on a bit larger companies as well? Could you say something about that?
What we have stated is not Q4. We have said that we see that we have a good possibility to close something in the next coming months, several months. There is a mixed picture there. There are small, medium sized and also a little bit bigger ones and a lot of interesting discussions going on. But I cannot say more than that. But a lot of the agenda goes to the M&A activities and ongoing discussions.
The next question comes from Jacob Edler from Danske Bank.
Congrats on the strong results. I just have a couple of questions on my side here. First of all, just talking a bit about the extreme weather you had here in Q3, you stated the direct impact was relatively marginal. I think you stated NOK 3 million on the profit side. But would you say was it fair to say that this has driven a general higher activity in the Norwegian and Swedish market, although the direct impact was rather minimal? I'm just trying to grasp how sustainable the margin profile is within the -- in particular, the Norwegian operation. And then I get that, in Q4, we'll probably see some tailwinds from weather, knock on wood.
Yes. I mean, absolutely. It's a good question and just isolated. Because we foresee that we should get these questions about the storm Hans. We have done an estimation of NOK 8 million in revenues and, as you see, NOK 3 million on EBITA for the Norwegian business. But it's so hard to calculate. When we have extreme weathers, there will be a flow afterwards. And I think the upside, as I also stated here in the presentation, is that there is a buzz in media, it is a buzz in society. Municipalities feel that, oh, maybe we need to put more money in here because we end up in a quite tough situation where we have flooded streets out there when the extreme rainfall hits us.
So it's more of there are definitely volumes that's somewhat driving afterwards. But it's more of that -- we're working in an infrastructure with an extreme investment debt. And when that infrastructure put pressure on it with these heavy rainfalls, things are happening. I think there is a lot of buzz extreme, particularly in Norwegian and Swedish media around the situation. And of course, that is good for Norva24. I don't know if my colleagues want to add.
I can add a bit. I mean, the only closest example we have of this is 2 years back with landslides in Germany, if people remember that. And what it led to was, it leads to increased awareness. It also leads to regulatory bodies waking up, changing regulations, demanding more maintenance . So I am very surprised if we do not see some of the same development in Norway and Sweden, too.
Perfect. Very clear. And another question I have is just, we talked a bit about price increases here in another question. But you have pretty sizable chunk of your business coming from public contracts, and those are typically linked to price indices, and those typically come through on the 1st of January every year. Are you able to give any flavor on how these look heading into, let's say, January '24 if you're able to?
We can give you some. I mean, in Norway, it's pretty easy as a lot of these are -- some of them are basically linked to the CPI index. And usually, it is October, that is used as a benchmark. So you have the numbers yourself. The other ones are related to the other indexes we use, some kind of a transport diesel index. And we do see that the price increases are in line or around what the actual inflation is.
On the other hand, if you look at, one of our major cost components is the cost -- people on one side. You do know what the wage increases are and they are in line with what we've seen on the CPI side and the development on diesel, which has fallen. It's much cheaper this year than what it was last year. So there are also gains on the cost side related to the price developments.
Cool. Just, I think, the last question I have is just on tangible CapEx. It's been a bit higher during the last 4 quarters compared to historically. Is this a change of strategy, in that you're purchasing more vehicles as supposed to leasing? Or how should we think about this line item going forward?
You should think of it as a seasonal variation. It is not a result of changed strategy. The reason why you see increased CapEx now was that vehicles that were ordered earlier were delayed in their delivery to us. And we book CapEx when we get them. And this was kind of an aftermath of the COVID with supply systems that were very slow.
And would you say most of those delayed orders have already now kind of come through in Q3 or...
Most of them have come through. You might see a few in Q4 too, but basically, most of it is done.
[Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.
I have a question here. It is from Jacob Pasion. What is your M&A strategy going forward? And do you think you will do any acquisitions during 2024?
Absolutely. I mean, as stated in the presentation as well, we are -- we will have M&A high on the agenda. We have a strong pipeline and activity. It's always about timing. We have a lot of ongoing interesting discussions, as we speak. And also stated in the presentation, hopefully, we can close some of them in the coming months. So in 2024, no exception, we will continue that M&A growth journey, definitely.
Well, that was it. That was the last question so far.
Okay. Thank you all.
Thank you.
Thank you.