Norva24 Group AB (publ)
STO:NORVA
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Good morning, and welcome to the presentation of the Q3 report of Norva24. 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 Q3 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 years to come. The underlying trends show strong growth due to some key drivers.
The infrastructure where we are present in is critical, it's 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 after heavy rainfalls. We have all seen the flooded streets when extreme rainfall hits. Recently, we have seen the extreme weather hit Spain, but also we have seen examples from the Nordic countries. The consequences for society is problematic and related to the huge investment debt in the infrastructure.
Going forward, our market is huge and far from consolidated. The market we are currently serving is estimated to be close to NOK 50 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 downturn.
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. The latest acquisition was Rör & Ledningsinspektion, which is a good supplement to existing operations in Stockholm.
Before going into the Q3 numbers, I want to present the slide with our key priorities, the same priorities we had in our last earnings call. We continue to work with the price component in combination with proactive cost handling, high focus on improved utilization, maximize utilization of vehicles and personnel, improve underperforming 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.
To support operations in this, we have developed a playbook in close cooperations with the operations. Here, we facilitate the analysis and benchmarking to understand where the largest improvement areas are in relation to efforts and probability of delivering on the margin improvements. This is done through an action-based improvement loop with frequent follow-up.
And least, we focus on growth, both organic and through M&A. These are four important areas going forward. In addition, also high in our agenda is our capital allocation and working capital.
Okay. Now on to the group numbers and the highlights. We continue the growth journey, and we are proud to be able to present six acquisitions from the turn of the year, which lift our turnover by NOK 400 million.
Included in the NOK 400 million, we have the Vitek deal signed in April, which has not been closed as the Norwegian Competition Authority has prohibited the acquisition. This has been appealed, and the decision is expected late January 2025. I want to underline that we do not see that this will impact Norva24's ability to do more acquisitions in Norway.
We are satisfied with the quarter with a growth of 22.7% in revenues from customer contracts. Total reported revenue growth grew by 18% in the quarter. Currency adjusted organic growth is 5.4%.
Looking at the operational highlights. The margin for the three Nordic countries in the quarter is down 50 basis points compared with Q3 2023. Norway is down from a record level of 23.6% last year to 20.1% this year with a solid organic growth of 7.3%. Sweden maintained the margin of 16% with strong organic growth of 10%. Denmark continued the positive development we have seen lately, total growth of 85% and a margin improvement of 540 basis points due to the acquisition of Nordic Powergroup.
Germany, despite the challenging market conditions, the Germany operations had an adjusted -- currency-adjusted organic growth of 3.9% in the quarter, but with a margin reduction of 280 basis points. The margin development is affected by low activity in one underperforming unit in combination with low activity levels at a couple of other entities due to the tough market conditions in Germany. I'll address this further under the slide on Germany.
In Q3, our operating activities generated a strong cash flow of NOK 243 million, up from NOK 132 million. Overall, we are okay with the Q3 performance. Now let's go through the segments.
Okay. We start with Norway. Most Norwegian entities experienced revenue growth on the back of an excellent quarter last year, resulting in a solid organic growth of 7.3%. Year-to-date, organic growth was 8.2%. The previous year was impacted by larger assignment and work related to the extreme weather. The EBITDA margin decreased by 340 basis points this quarter from last year's excellent levels, but a margin above 20% is good.
Next slide. Germany, achieving 3.9% total growth and an adjusted EBITDA margin of 11% and a margin reduction of 380 basis points over the quarter. The margin development is affected by low activity in one underperforming unit in combination with low activity levels at a couple of other entities due to the tough market conditions in Germany with negative GDP growth expected also for 2024.
As communicated in August, large projects that were postponed in Q1 and Q2 has so far not materialized, and we are questioning if these projects will materialize. We are, of course, adjusting our workforce accordingly. In general, Norva24 has very limited exposure to project business, but in this underperforming unit, project business accounts for a fair part and this is more cyclical and tied to a weak construction industry in Germany.
We dismissed the manager of this company early Q3. A new Experience Manager has been signed and will shortly be in place. This company will be under transformation in the coming quarters. Our performance in Germany is disappointing.
Something positive in Germany is the well-needed business platform. We are in the phase of going live with our new business platform in the first entity in Germany. The first part of the business platform is a field service management system being launched these days, and the final part, which is the ERP, will be live as soon as the December reporting and annual accounts have been finalized.
Then a broader launch to the rest of German entity will start. This should, over the coming years, support operations in a good way, enabling better utilization of equipment and personnel. It will also help us scale the business in a better way.
Okay. Next slide, Sweden. Sweden continue to perform well with strong currency-adjusted organic growth of 10.1%, the impact of acquisitions, leading to a strong growth in total operating revenue at 29.3%. The organic margin for the quarter has broadly in line with last year. Year-to-date, the margin has improved by 385 basis points, so a strong development in Sweden.
Denmark. The Danish operations continue to improve. Denmark had a revenue growth of 85% in the quarter and 51.6% year-to-date. Nordic Powergroup contributed a lot to this growth despite only being consolidated from the 21st of May. The organic growth in the Danish operation has -- was just above 0 for the quarter and 5.9% year-to-date.
Profitability is up by 540 basis points for the quarter, and the majority of this increase coming from Nordic Powergroup. Year-to-date, the margin improvement is 520 basis points, and there is also a good organic margin improvement of 70 basis points in the underlying Danish operation.
We continue to grow, and we have added close to NOK 500 million of revenues from Q3 2023 and more than NOK 1.1 billion from Q3 2022. Also regarding profitability, we see growth. Our EBITDA is up to NOK 385 million on a 12-month rolling basis, up from NOK 290 million 2 years ago.
Okay. Final slide for me now. I will hand over to Stein to go through the financials.
Thank you, Henrik. Before we go to the financial section, I would like to touch on the M&A activity so far this year. When we presented our Q1 and Q2 figures, we were happy with the deals signed and the pipeline. We have now signed six deals with an aggregated revenue of NOK 400 million this year, all in Scandinavian markets, including Vitek.
As Henrik mentioned, the Vitek deal has been -- was signed in April and has not been closed as the Norwegian Competition Authority has prohibited the acquisition. The decision has been appealed to the Competition Appeals Tribunal where a decision is expected late January 2025.
Last quarter, we mentioned we are in advanced discussion with several German targets and that they may materialize during the second half of the year. We've now placed one of the larger targets in that advanced phase on hold due to performance issues for that target.
This is something we've done from time to time on previous cases as we need to be comfortable that the financial performance of the target match the valuation that we have agreed on. When or if this target will resurface is not clear. And we are pursuing other targets continuously.
The current pipeline is sufficient to bring us to the revenue target of NOK 4.5 billion in 2025. But as we've said before, we are in no hurry. It is very important for us to maintain prudence in these acquisitions and to secure the right capital allocation.
Okay. Let's go to the financials. We're satisfied with the quarter and revenue growth of 22.7% in revenues from customer contracts. During the quarter, we have a revenue adjustment related to a potential reversal of previously recognized revenues of EUR 3 million. The reported total revenue growth was 18% for the quarter, and 15% so far in 2024.
The cost development is quite aligned with our growth in revenues from customer contracts. Two items have increased more than revenues, and this is personnel cost due to the fact that we had a very high utilization last year and the other one is operating cost. Here, we see a significant part of the increase is coming from M&A activity.
Vehicle operating expenses is up by 17%, which is less than the revenue growth. So this contributes positively to the EBITDA margin. We have also benefited from the reduced fuel prices and especially from the reduced taxes on fuel in Sweden. Depreciation for the quarter is up to 9.5% of revenues which is 40 basis points higher in the quarter compared to last year, and it's 30 basis points year-to-date.
At the bottom, we see the adjusted EBITDA is 14.2% for the quarter. This is a margin reduction of 140 basis points. Year-to-date, the margin is 11.5%, down 10 basis points compared to last year. And we also mentioned this large entity in Germany, which is underperforming. If we were to take out the impact of that, the margin would have been 14.8% in the quarter and 12.3% year-to-date, which is an 80% hike of our margin.
The net financial costs were NOK 5.1 million in Q3 and NOK 22.2 million last year. The reduction here is coming from a recognized earn-out gains of NOK 17.7 million, which is due to the reversal of the earn-out accrual for the underlying -- for the underperforming German branch.
We also have a currency loss of NOK 10.6 million due to the weakening of the Norwegian krone. Interest cost is up by NOK 3.9 million in the quarter from NOK 22.2 million last year to NOK 26.1 million this quarter. This gives us an earnings before taxes for the quarter of NOK 72.9 million, which is down from last year and the tax rate is 33%. Going forward, we should expect the tax rate to be very close to 25% for the group.
Next slide. Okay. We can show a strong balance sheet. Our net debt is NOK 1.6 billion at the end of the quarter, representing a net interest-bearing debt over adjusted EBITDA of 2.2x based on the statutory numbers, and 2.1x based on pro forma. Our goodwill is NOK 2.79 billion at the end of Q3, and that has an increase due to the acquisitions we've done. And in terms of the goodwill, we've done impairment testing, and there is no imminent danger of any write-downs here. So there is ample headroom here.
Our lease liability is NOK 1.016 billion, and that is related to right-of-use, which refer to financial leasing of vehicles and the property rentals. The noncurrent loan of NOK 894 million is primarily the bank loan. Right-of-use and property, plant and equipment increased by 17.6% year-on-year, while our revenues from customer contracts increased by 22.7%.
Our investment in the quarter ended up at NOK 91 million, and that is down from the level we saw in Q2, and this investment represents 9.4% of our revenues. Our investment in machinery and equipment and rental contract should be around 8% to 9% of revenues, but we're currently seeing a higher level, driven by two factors.
We're winning new contracts, which needs increased capacity, and we also see a stricter requirement for carbon-neutral vehicles, meaning electric for the smaller ones or gas-powered vehicles for the larger ones. And this is requiring some new investment on our side.
But what we're doing here is when we replace a car with a gas truck, we're able to relocate that vehicle to an area outside of these no carbon zones. But for the time being, we're seeing a slightly higher investment level due to this. Although the gas cars are more expensive, we should also see this reflected in the pricing and revenues going forward.
Over to our debt structure. Most of our debt is related to IFRS leases that needs to be capitalized. These lease liabilities amounted to NOK 1.016 billion at the end of the quarter. Our total net debt -- our total net interest-bearing debt was NOK 1.597 billion at the end of Q3, of which approximately 60% are capitalized IFRS leases.
Leasing payments for the next 12 months is NOK 267 million compared to NOK 266 million last quarter, and depreciation of the leased assets are included in the total depreciation in the P&L. Net debt, excluding lease liabilities amounted to NOK 580 million at the end of the quarter.
Looking at the multicurrency facility. We have NOK 1.1 billion credit facility. Of that, NOK 855 million was utilized at the end of September. The loan facility has since then been increased from NOK 1.1 billion to NOK 1.85 billion. And we also have prolonged it for 2 years compared to the current facility. And this has been signed now in Q4.
Over to the next slide. In Q3, our operating activities generated NOK 242 million in cash flow -- NOK 243 million in cash flow, sorry, up from NOK 132 million last year. Year-to-date, this has been NOK 396 million, up from NOK 309 million last year, and we have started initiatives to reduce our working capital in Germany and Denmark.
Although we see some encouraging signs on the net working capital this quarter compared to last quarter, we have not reached the targets that we've set for those two markets. Our operating cash flow of NOK 640 million last 12 months is up 42% on the previous 12-month period, and with a good cash conversion of 90%.
And at the end, just to recap the financial results. We have good growth in revenues from customer contracts, up 22.7%. Our adjusted EBITDA is up by 7.1% year-on-year, very strong cash flow and very strong cash conversion in the last 12 months, and we have a strong balance sheet to enable the M&A journey we are on. So there is still ample room to continue to grow.
Very good. Handing over to Henrik.
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 through organic growth and acquisitions, 14% to 15% EBITDA margin midterm, and we have a good capital structure to support the journey.
Next slide. Key takeaways from this presentation. Financial wise, we come from a quarter with strong total growth of 22.7%, organic growth of 5.4%, adjusted EBITDA up 7.1% on the back of a strong Q3 2023. Strong operational cash flow, up 84% in Q3 and up 28% year-to-date. Other takeaways, we are uniquely positioned in an attractive growth market and show resilience in a tough economic climate, and we are on track and ready to continue the journey.
Excellent. Before we open up the Q&A, I want to advertise that we will have a Capital Market Day on the 19th of March next year in Stockholm to present the updated strategy and evolution of Norva24, our strategy for 2025 to 2030. Save the date, warm welcome. Now we open up for Q&A.
[Operator Instructions] The next question comes from Dan Johansson from SEB.
I think I have two questions to start with, I'll take them one by one. Maybe starting a bit on Germany and you have an ambition there to reduce your exposure to these construction-related projects going forward. Is that going to impact your organic growth rates in the short term you believe? Or can you sort of replace that business with other types of business and sort of maintain the growth view you intend to have there?
Thank you for the question, Dan. Of course, this is -- I mean this is isolated to this company, as you say. And as I also stated in the Q2 report that we want to transformate yourself out from this kind of more risky business. This is not the core UIM that we're working with. This company is an odd bird. Of course, we will need a couple of quarters to transformate that.
I foresee that we will have a little bit of organic decrease from this company, yes, but not in Germany as such. But when we now restart that company, transform it, we have a new manager in place. Of course, it will take a couple of quarters before we are up and running. We are in full phase of making sure that we have new volumes that can take over from that old volume but volumes that are core UIM. But it will take a couple of quarters.
Yes. No, totally understand. And maybe on the group margin here, it's about flat now year-to-date, but you had a little bit of a weaker Q4 last year. So you still think you're able to expand the margin now for full year 2024? What's your view on that?
I think, as of today, I would say, yes. But I do remember we were here a year ago and on the back of a weak 2022, and winter had not set in. So we expected 2023 Q4 to be a strong quarter. October, November were strong, December was really, really poor. But to answer your question, yes, we do believe we would be able to overperform compared to last Q4.
The next question comes from Robert Redin from Carnegie.
I just wanted to ask on these German projects again. I mean they've been a sort of problem area, call it, for you all year, right? But -- and now you booked this NOK 36 million sort of reversal of previously booked revenue in Q3. Are there any other such large projects in that German subsidiary or others in Germany or elsewhere? Are there any risk that we could see more of this? Or was this it?
No, no. I mean this is isolated to this company. And of course, when we took over and we have had our country management in place since early Q3 to investigate the situation. And it's linked to this project business isolated in this company. And the reversal that you mentioned is related to this project business that we have here. Once again, I repeat myself, this is an odd bird. We have not this exposure in other entities in Germany.
All right. And in this individual subsidiary, this was also in terms of large sort of projects that could be delayed or questioned?
This is the largest project that company has had. And we've been through the portfolio and we feel comfortable that this is it.
[Operator Instructions] The next question comes from Avinash Mundhra.
A couple of questions, please. The first one is on Vitek. So does -- if the public court decides not -- if in case they decide not to vote in favor of Norva, will it derail your NOK 4.5 billion target of next year, that's the revenue target? Does that somewhat take you back by NOK 120 million of revenues?
Yes. It was a little bit hard to hear you there, Avinash. But what I heard was if we are not successful in the appeal, will that mean we will not have the NOK 120 million of revenues or -- if that was your question, yes. If we are -- if we lose in this appeal tribunal, we will have to make up our mind if we take it to the next level or if we accept it.
Right now, I think we feel that we have a good case. We haven't been able to communicate that well enough to the competition authorities or they haven't been listening. But we do believe we have a good case for the tribunal. And if we do not succeed there, we'll have to evaluate what to do. But of course, if we are successful in the tribunal, we believe the case would be -- or the transaction would be closed during February next year.
Okay. Sorry for the line not being very clear. I just wanted to know how hard it will be for the NOK 4.5 billion target that you have for next year, if it is turned down?
Well, then it makes it more complicated given the fact that we would be, well, short this NOK 120 million, but I wouldn't say it makes it out of reach. As I said in the presentation as well, we have a good pipeline, but it's more about the discipline and the patience that we're willing to demonstrate here because it is important for us that we do the right acquisitions.
So it's -- NOK 4.5 billion is an important target for us, but it's not something we would do everything to achieve if it's not the right transaction. So we need to make good deals and not just look at the volumes.
Okay. My last one is on Denmark. So I just wanted to understand a bit more as to why the Denmark organic growth has been so weak in the last quarter, please?
I think it is quite a bit about the performance they had last year. They had a good Q3 last year, and that's not been -- that's not something we've been able to meet this year. And yes, so I think it's -- we're not really seeing a weakening of the Danish operation in total. And you also see that, although margin is fairly flat in Q3, on the back of a fairly good Q3 last year even for Denmark, we see that there is a solid margin improvement year-to-date.
Yes. I mean underlying Danish market, we are close to double digit there. Of course, it seems that it softened out a little bit, but there's a lot of actions on the table to improve the Danish operations. And I know that -- the Danish management are really on top of that question. So we foresee that it will start increasing again.
The next question comes from Jenna Xu from Berenberg.
Just kind of circling back to the NOK 4.5 billion revenue target. So I see that consensus currently has around, I would say, NOK 4 billion for 2025. That will mean -- like just going through some of the mathematics that will mean probably around NOK 500 million of acquisitions.
And to -- if I'm not wrong, most of the acquisitions that have been done this year, I would say, are in the NOK 20 million range with the exception of Nordic Powergroup and Vitek, of course, which is still pending.
So just kind of like doing the mathematics of it, we need to make up NOK 500 million of revenues to get to that NOK 4.5 billion target. Does that mean that the potential pipeline is full of acquisitions that are on kind of the higher end of the revenues? Or how should we think about this?
It's the same answer we've given before. I mean it's a wide variety. And you're absolutely right. The transactions we've done this year, are mainly smaller transactions. But if you look at the average, including Vitek though, you're at NOK 60 million to NOK 70 million for those six transactions. So -- and that's also sort of the composition in the pipeline.
There are some larger assets in there and even in the advanced phase as we mentioned. Right now, we put that on hold due to the performance. I mean we did agree on the price, evaluation, and then we see performance is not quite where it should be. And then we haven't been able to bridge that gap. And so we've said, let's put that on hold, and see what we see in the next coming quarters.
This is something we've done on previous transactions as well, and that's been a good approach. But you're right. Also, the organic growth would bring us to something fairly close to NOK 4 billion. I understand that math and we do agree with that. So it would require sort of very close to NOK 500 million next year, and that is, of course, a challenge.
Okay. Thank you for the clarification. And if I'm not wrong, you mentioned it was the German, the possible German acquisitions that were in the pipeline before for H2 that has been postponed. Is that right?
Correct.
There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.
I have a question on the web here. Corporate cost was a bit lower this quarter than normal. Is this mainly related to holiday or something else? Should we expect the same kind of burden in the German -- in Germany on margins from this underperforming unit? Seasonality in Q4, would you say October and November to date has seen similar weather conditions year-on-year?
Okay. Let's start from the top. I think the corporate cost is a bit lower this quarter, partly because we were using a bit of subs and external consultants last year, and that was pulling it up. I think the levels we're seeing today is at the fairly right level. And then we'll maybe need to do some more investment into some corporate capacity given that we're a fairly slim organization today, but it's something we'll get back to later.
The same kind of burden on German margins from this underperforming unit. I think it's -- there is a new manager coming in shortly, and we expect that it will take some time before he really is able to grasp it fully, and there might be a burden on margins, but it should not be the same -- by any means same level as we've seen in Q4 and Q3.
Yes. I mean of course, due to we are not starting this, I also mentioned it in Q2 report that we have one contract, but we don't know when they will materialize, and if they will materialize. We have adjusted our workforce accordingly to that, to, of course, not to have lower cost in that company.
Regarding the weather question here, I would say, October, November, everybody that's living in the Nordic countries have seen quite favorable weathers. So I mean no snow and no cold yet. We are sensitive for that. So let's see what December have to bring. But favorable weather so far, October and November so far.
Yes. The final question on the list here is how much project business do you have in Germany?
Yes. We have answered it quite already, but it's not -- once again, it's not the German problem. We have this odd bird, this company that we're talking about, unfortunately, underperforming, that have a chunk of project business, but it's very isolated, of that EUR 100 million of revenues in Germany total, it's couple of percent.
Less than 5%.
Less than 5% is related to project business related to the construction industry that is very weak in Germany right now.
That's it. Okay. Thank you all.