Hi, and welcome to the presentation of Terranor 's Q2 Report. My name is Mark Sandberg. I'm an Analyst here at DNB Carnegie. I've got with me Michael Berglin and Inka Kontturi, who is CEO and CFO at Terranor . Warm welcome. I will let you present, and then I'll come back at the end with some Q&A. With that, I'll leave the word to you.
Thank you, Markus. Thank you for having us. Thank you all for listening in to this interim report for Terranor for the second quarter. Of course, starting the presentation goes without saying that this marks a new era for Terranor since we successfully listed the company at the Nasdaq First North in June. Very excited about that. It was an intense process, but here we are, Inka. Looking at the operations for the first and second quarter, of course, we are very happy to say that we are in line with expectations. We are actually above expectations. We will tell you more about it, but I think in a nutshell, that is the company presentation today. Presenting today is, like Markus said, my name is Michael Berglin. I'm the CEO of the company. CFO Inka Kontturi will help me today.
When we're not here presenting, of course, we are supported by a very experienced staff. We just highlighted the Country Managers, Per, Pasi, and Ivan, as part of the top management in the company. Looking at Terranor and the performance in the second quarter, like you know, Terranor , we are solely specialized in road operations and maintenance. That is what we are doing. The predominant customer is state and municipalities. Some 90% of the revenue is generated from state and municipalities. We operate in three countries, where Sweden is, of course, the lion part. Some 60%, close enough, is generated from Sweden. Looking at key figures in the second quarter, Inka will give you more details behind this as we proceed in the presentation. Revenues are up, and more important, perhaps, also adjusted EBITDA. The underlying performance of the company is progressing in the right way.
We will tell you some about seasonality in our line of business, but I can already now say that for quarter two, this is a strong quarter, but we also expect quarter three and quarter four to be even stronger. That is the trend of our operations and our business. Looking at the business that we operate in, road operations and maintenance, we expect or assume the overall market to be somewhere close to SEK 80 billion in the three countries that we operate within. Of course, big drivers in this market are naturally keeping roads open and safe, and everything that society depends on for us doing that. We proud ourselves of contributing an important to society service. On top of that, of course, I would say the green portion here making up for SEK 30 billion, that is also light infrastructure that we provide.
In that bucket, I would also say that the maintenance deficit that we experience in all three countries, but definitely in Sweden, that would go into that green bucket. Naturally, also increased traffic, increased heavy traffic, I would say, in all three countries, as well as the higher demands that we all have for safety on the roads. Those, I would say, are the big drivers in what we do and what we take to the market. Being a unique specialized company, one or two words about the competitive landscape. We have large competitors, of course, in all three countries, but few. I think what stands out with Terranor and needs to be underlined is that we are the only company that has chosen to be specialized in road operations and maintenance. The other companies you would usually see are also in perhaps house building or infrastructure.
To us, road operations and maintenance is the only thing. That is what we have chosen to be specialized into. To us, that gives us a great competitive advantage. I will say a few words more on that, I guess, here on the next slide. Looking forward for Terranor , the strategy is to utilize the advantage of being specialized. Of course, the large clients looking forward will be state and municipalities. Working so close to state and municipality enables good visibility because contracts are almost always at least four years. Sometimes they can be as long as six or eight years. Transparent, high visibility, and of course, goes without saying, working with state and municipality, credit risk, well, CRO, I would say. High visibility also in the cash generation. What we will do is that we will focus even more on tendering on the state and municipality contracts.
That is the backbone, the core of the company. From there, we would, of course, utilize our position. Wherever we win state contracts, we will also move into municipality contracts, building strongholds. I would point out Gothenburg or the western part of Sweden as being a very good example of that, where we are both in the municipality and in the state contracts. That is something that we are trying to do more of, and we're trying to do more of it in all three countries. When we are established in the state and the municipality contracts, we will also try and move in the value chain to also be, how should I put it, more of a one-stop shop service provider, being able to provide to all the needs from our largest customers.
The largest customer is the state in the three countries, and of course, Sweden making up for 60%. Trafikverket naturally being the big client for us. Looking at Trafikverket's needs in the coming years or the coming decade, if you want, I think there is a strong demand for a company like Terranor to also be able to provide more services that go towards handling the deficit, the maintenance deficit that the roads and everything that is surrounding through roads needs to be lifted, to be supported in a much better way than it has been historically. Looking forward, that is what we are aiming to do. We will be on and close to the road, but more of a provider of everything that our clients need. Seasonality, I told some about it. I guided for the third and fourth quarter, Inka, but please, if you would.
Yeah, so of course our operations, they follow the seasonality. We have two seasons, winter season and the summer season. Now we are in the summer season. We do more on the variable works, and the volume of the extra works is increasing in the summer season towards the year-end. We are closing the extra works to the year-end, and historically we can see the revenues increasing in the fourth quarter. The seasonality is important to keep in mind when we are evaluating our business performance on a quarterly basis. Looking at the growth here, our revenues have been expanding significantly, outpacing the market all the time. The revenues have been reached SEK 849 million, increase of 12% year-on-year. The growth has been driven successfully by tendering a new profitable contract, especially here in Sweden. Underlying earnings are improving.
Adjusted EBITDA for the second quarter was SEK 17 million, translating into the 2% margin, up to 1 percentage point versus last year. The main driver was the new profitable contracts coming into effect. In the second quarter, 40% out of the adjustments were the IPO-related costs. On top of that, we had IPO bonuses 35% and internal process-related one-offs 25%. We do know that the IPO-related one-off cost will affect also the third quarter as well, but this is just temporary. From the fourth quarter onwards, the underlying earnings power will be more visible. Operating cash was negative in the quarter, SEK -30 million. This is including the IPO-related costs. However, the fundamentals are remaining strong. Terranor has a track record of cash-generative growth, with historically more than 20% annual revenue growth on low capital intensity. The cash flow will normalize as the one-offs will subsidize.
Looking at the segments, Sweden remains the growth engine, delivering SEK 507 million in revenue with 2% of adjusted EBITDA margin. Finland generated SEK 154 million in revenue with a positive contribution from the municipality contract. Denmark delivered SEK 188 million in revenue with the profitability improving to 3% in adjusted EBITDA. All three countries contributed positively to the underlying profitability in the second quarter. Our financial targets are unchanged. Revenue growth of at least 8% on annual average, adjusted EBITDA margin above 5%, a dividend payout ratio at least of 50% of net profit, and net debt to EBITDA not exceeding 2.5%.
Thank you. It's back to me to summarize. Why invest in Terranor ? I would say that first and foremost because we are providing a service to society that is very needed. It is critical. If we do not do our work good, society basically stops. Underlying, we know that there is a large demand for more investments into our sector. We will continue focusing on the operations and maintenance. That is the base contracts. On top of that, we already now know that mainly due to political ambitions, there is a large portion of funding coming in in the next decade to handle the maintenance deficit. I think we have proven to be able to continue growth, but also continuous growth with underlying profitability increases.
Looking at what has been the driver for the second quarter as well as the first quarter, I would say that the contracts that we have taken on, the base contracts that we have won towards the state, especially in Sweden in the recent years, they show a totally different character in both profitability and our ability to deliver on the contracts, I would say. The way that the company has progressed and the way we are able to provide both services, but also the entire tendering process on what terms we win contracts now, it looks very much more favorable than it did in the early years of the company when it perhaps was more important to gain market foothold and win contracts.
I think that is, like to sum it up, the combination of working state and municipality, the big drivers into our market, and also Terranor 's ability of being the only specialized company in only doing this, I think those are the big important things to take away.
I have some questions for me, maybe dig into a little bit of the details.
Sure.
Looking at sales, you had revenue growth, and both Q4 and also Q1 have been more meager in terms of actual growth, and now you see an acceleration. What was the driver behind that? What was the reason?
Should I?
Yes, you can.
The short answer is the new contracts. Tender season last couple of years, actually tender season has been favorable for us in all times since we've been growing. What we see now is a shift where we also combine growth and profitability. That is the short answer. We win more contracts, so we increase revenues. To your question, one also has to factor in the seasonality. Since Q4 and Q1 are heavily dependent on weather situations, you would normally not see the increased revenue so clear and visible in those quarters. You would see it starting in late quarter two, picking up in quarter three. Quarter four will be the big kicker. Quarter one is always the lowest quarter in revenues and profitability. It goes to the weather situation because we are dependent. How much we snow plow, salt spread is dependent on weather.
Come to the summer season, it's more dependent on the maintenance work that is part of the base contracts, but also things that go towards handling the deficit. Making the roads better, stronger, of course, fixing potholes, but also all of the things that I think everybody can imagine that when we built roads 60 years ago, the way we use those roads now are very different. In the summer season, we also need to tend to all of those needs, making third and fourth quarter the highest in revenues.
You see, part of this is extra works coming into play right now.
Yes, both. It is both things in the contracts that are on more variable prices, and it is the extra work, for sure.
Looking at Denmark, where you had some progression during the quarter, you won four new state contracts.
We did.
You went, there were five of them that were up for grabs. You won four. You also won a municipality contract. Tell us a little bit more about this contract.
Thank you, Markus. Winning four out of five was actually the limit because there was a restriction that one contender could only win a maximum of four contracts. We were very favorable and due to, I would say, a successful tendering process. Maybe a word or few about the tendering process because being specialized, we have a lot of opportunities to track data throughout the 90 contracts that we are currently running, 90 somewhat. Of course, our tendering process now is built on data to a much higher degree than it was in prior years. I think that is also something that we see winning the four contracts in Denmark. It is the efforts from having the data and utilizing the data, but also, of course, how we can provide in the contracts.
Operations is also on a very high level now as the company progresses and being more able in doing what we do.
Looking at, because this is all public data once you want it, looking at the databases, it looks like the prices of the four contracts are actually up quite significantly. From what I've seen, and there might be some missing there, it looks like the four contracts that you won are actually larger than the five contracts that you had going into this.
You're absolutely right. Sorry, you were saying?
No, I'm just nodding.
Yeah, I was just nodding. No, you're absolutely right. The five contracts that we held earlier, we took them four years ago. We run them now for four years and we re-won four of them, meaning, of course, that there are some alterations, but I would say they are minor. More or less, we will be doing what we have done for the past four years, but we will, to your point, do it to prices that are much higher. We are talking 20%+ in average on all four contracts. Of course, looking forward towards the Danish situation, we expect underlying profit to increase. Yeah. I would say revenues are on the same level on those contracts. We are expanding in Denmark, looking into adjacent things. It could be road safety. It could be sweeping that, of course, is a major part of our operations in Denmark.
Denmark is more fragmented in the way that contracts are split up. In Sweden, we do more of everything inside the base contracts. Denmark in that sense also has a better ability to move into adjacent parts of the market. Yes, I'm very proud of VO. We are very proud of the way that the Danish operations have progressed.
The new contracts come into effect as of January, right?
Yes, true.
Maybe staying on the contracts, but changing regions. Looking at Sweden, where it is, you had the big deficit and you also made the big jump in terms of the number of contracts in the last tendering season. They start now in September. Should we expect the same kind of patterns from those kinds of contracts that we also saw in Denmark?
Yes. Clear answer, yes. That is my expectation, our expectation. I think the proof of it is looking at contracts that we won. Like I said, we've been favorable in winning contracts in Sweden. Late 2024, contracts always start 1st of September. We're talking about the state contracts now. We started up four new state contracts 1st of September in 2024. We have now almost run them a year. If I may be so blunt to say, trick of the trade in our line of business when it comes to the state contract, of course, tendering process, being able to get the right conditions in the contract. Then again, how you mobilize the contracts, how you start them the first year, because the first year sets the pace, the standard, because you would continue doing the same thing for another three years after that.
Looking at the four contracts we started autumn September 2024, all are above expectations. This year we won five new contracts that we will be starting up. We are in a good phase with the mobilization. Yes, we expect progress to be in the similar manner as for the contracts we started in 2024, meaning that the operations and underlying profitability will increase, allowing us to reach the target of 5%.
You had, because now you went from 18 to 23 contracts, you had a net gain as well, which has not always been the reason, the way it's been in the past, right? Where you kind of more have phased out projects which have not been as profitable. Is that the way to see it?
Yeah, that is also the character of the backlog continuously improving, where we leave contracts that were taken on, how should I put it, more challenging terms. Like I said, coming back again to the tendering process where we know the net cost, we are very much closer to understanding what it takes to run the contracts. Yes, we are seeing a change in the backlog, moving us into more green territory, if you would.
When is the next tendering season? Obviously, there will be upcoming tendering seasons and that will draw new announcements, hopefully, etc. When is the next tendering season?
Looking at the state contracts in Sweden and Finland, it always starts in December. It ends late February, early March. Super intense period for us, of course. Tender calculations start when the first tender season is done, we start looking at the next one because the visibility, we know what contracts are coming out every year for the next four or five year period. Looking at the municipalities, you have an over-the-year spread. Municipalities, we work with tenders all over the season. State contracts, Sweden and Finland, in the window of December to March. It will be very exciting. This year, like I said, we've been fortunate enough to win contracts last year and the year before. Naturally, we have high ambitions. This is a growing company and we feel we have a very strong offering to the clients.
Looking at profitability, I mean, we covered that, I think, but you had EBITDA growing in all segments. Both Sweden, Denmark, and Finland. That was, we were talking about extra works. We were talking about new contracts coming into effect. Is there anything else which you would like to mention in terms of the profitability drivers in the shorter term?
We touched upon the character of the contracts being on more profitable terms. That, of course. Secondly, I would say that the improvement, the continuous improvements of the operations. I think we are seeing strong evidence that the specialization is good because we, every quarter by quarter, we improve the operations. I think it's the two of them. On top, I would say the third one is the deficit, the backlog that needs to be invested. For us being, hopefully the natural speaking partner to our large clients, tendering to their needs. Those three, better tendering, better operations, and also an inflow of more funds to the market where naturally we should be the provider of those services.
I have a question from the audience. You have a dividend target of being above 50% of net profits. The question is whether you would consider to do buybacks instead of dividends. Is this something that you've discussed?
It is always something that naturally would be on the table and not ruling it out. Then again, we have communicated a dividend target. That is what we will stick to, but we're not ruling it out. I mean, it's ultimately up to the board to decide, but we have made a promise to the owners and the investors to adhere to the 50% dividend policy. That would be my natural answer.
Finally, maybe, I mean, you were listed in June. There's been a fast and tiresome process. It's been a lot of work with it. Now it's been summer. We're going to the fall. Maybe a couple of words about what the fall looks like, what the priority is, what is the focus for you guys during the fall?
It was an intense time, but in all honesty, it was an intense time for a part of the company. I mean, the majority of the company, if I were to say the part that really matters, they continue doing what they do on the roads towards the clients. What is important looking at the fall, of course, is mobilization of the new contracts, the state contracts, like I mentioned earlier. What you do the first year is very important. That is something that we will monitor very closely. Of course, being on top of our game when it comes to the tender season in Sweden and Finland is also very critical. I mean, this is what our operations is about. That is what all our colleagues have been focusing on, and they actually do focus on it every day. It's business as usual.
We have high ambitions for this year.
Maybe finally, out of curiosity, we were talking about the tendering season. You had the tendering season starting late this year in Sweden and then going on in, I mean, early winter. When do you start working with next year's tenders?
The minute we know if we have won or lost.
When do you start preparing for tenders?
I would say in general, we have five, six months between we win the contracts and we start it. In those months, we need to set up shop. We need to find a location. We need to find employees, people to run the contract, unless it's in a place where we are already based. That is what we do. We have a five, six months window to do that. Of course, you do not want to end up late because in September, contract starts. In some of the contracts in the northern parts of Sweden, winter comes soon. I mean, it starts snowing in October. It could be sooner. Who knows? We will see.
Michael and Inka, we're running out of time. Thank you very much for coming here to talk to us.
Thank you, Markus.
Thank you.
Thank you for listening.