Bilfinger SE

XETRA:GBF

Earnings Call Transcript 2022-Q1

[Bettina Schneider, executive]

Ladies and gentlemen, a warm welcome to our conference call on Bilfinger's Q1 '22 figures. My name is Bettina Schneider, and I will meet you through this call. With me here in the room are Thomas Schulz, our new CEO; Christina Johansson, our CFO; and Duncan Hall, our COO. After the presentation of Christina and Thomas, all 3 executive Board members are happy to take your questions. [Operator Instructions] and the conference call is being recorded. [Operator Instructions] Last comment, as we have our AGM today, we ask for your understanding that we will conclude the call latest by 9:00, but we're happy to take your questions in the next days.

With this, I would like to hand over to Thomas Schulz, CEO of Bilfinger.

[Thomas Schulz, executive]

Good morning, everybody. Let's start directly with the overview. We had a good start to the year, which underpins the positive full year expectation.

The market, the customers' demand is especially driven by higher energy prices and change in the energy mix. If we look into the figures, 10% organic growth in order intake, 14% organic growth in revenue and an 0.9% EBITA margin which was stable despite provision for the Russian phaseout situation. On the cash, based on seasonality and higher working capital demands at the beginning of the year, we ended on a minus EUR 76 million. The outlook for 2022 is confirmed. Revenue with significant growth and EBITA with significant operational improvement.

And now we go to the markets. Let's start with the chemicals and petrochem that stands for 30% of our revenue based on the year 2021. The overall trend is, yes, flat to good. We have larger investments expected going forward, especially associated with renewable carbon and reduction in batteries. But when we look into, we have overall an increasing demand for sustainable industrial services especially where we as Bilfinger are strong in the combined services, there, we see an increase in demand.

You see on the slide on the right side, an example of that, what we do here, it's for INEOS and InnoVen where we do on 3 production facilities in Norway, a comprehensive turnaround with 800 workers for 8 weeks. There, we can play our full potential with our numerous different trades and competencies like inspection, insulation, mechanics, et cetera.

Next market is on the energy and utility, stands for 20%. Here, we see definitely a good strength. Where is it coming from? It has to do with the clear increase in demand discussion, actually push of the societies into green energy, renewables, hydrogen, carbon capture, all the climate chain related drivers are driving that very much into the positive. Not to forget really not to forget is the nuclear power where we clearly can say we have a revival. And the reason for that is, of course, the net zero strategy of a lot of areas, not only in Europe.

If we then look into what we do as Bilfinger, you see on the left side an example out here, out of beautiful Mannheim, where we do the commercial heating support and that is clearly in the sustainable services what we offer. It's an electrical and automation service for very district heating projects within Europe.

Out of that, I would like to go to the oil and gas on the next slide. It stands for 20%. Overall trend is flat. But we clearly see, based on all the things regarding Russia and the Ukraine war, and the push for more sustainable solutions that this area is recovering. We see a demand at the moment, mainly verbalized for LNG terminals and gas storages. We see the demand for more exploration of alternative oil and gas resources, definitely outside of Russia.

You see on the right side, an example of what we do there. It's the major North Sea framework agreement which goes over minimum 7 years, where we have more than 400 skilled workers from Bilfinger working on maintenance, modification, improved operation services for [ free ] U.K. offshore platform.

Out of that, into the pharma and biopharma market, which is 10% of us on the next slide. Overall trend quite positive. And it has actually multiple reasons. At first, we have a mega trend that comes out of the COVID and the more health-related focus of the societies around the world with the wish to regionalize, to localize more of the different productions. On top of it, of course, the wish and the demand to improve existing setups and not to forget to make them more sustainable, too.

Out of that, you see on the left side, an example of what we can do here. This is a service for U.S. biopharma production plant where we have a package for 4 production lines consisting of bioreactors and seed train. The execution is this year up to the end of next year. The value is roughly EUR 30 million. This is an overview about -- this was the overview about 4 markets and examples of what we do. Out of that, I would like to give to our group CFO, to Christina.

[Christina Johansson, executive]

Thank you very much, Thomas, and also good morning from my side. I will start on Page 8 with the order development or order intake of the group. Orders received grew by 10% organically to EUR 1.1 billion. This marked the highest single quarter since quarter 2 2019 and was driven by a significant rise in orders from our European markets.

We have seen very good demand in framework contracts, especially in the U.K. and Nordics regions as well as for projects with biopharma clients in technology. The order backlog saw organic growth of 11% to more than EUR 3.1 billion compared to EUR 2.8 billion 1 year ago. The book-to-bill ratio of 1.16, again, underpins the INEOS growth ambitions going forward, although there will remain always a certain volatility quarter-by-quarter. It's a really good start of the year when it comes to order intake.

Turning to Page 9. The revenue grew by a strong 14% [indiscernible] to EUR 961 million. We generated a [indiscernible] EBITA of EUR 9 million, which [indiscernible] our EBITA margin of [indiscernible]. As Thomas already mentioned, [indiscernible] Ukraine, we defined it as not to accept any new orders from Russia, existing contracts will be phased out. We associated restructuring costs [indiscernible] we return to segments [indiscernible] adjustments and special items of approximately EUR 10 million. Obviously, this was not [indiscernible] and we are riding our earnings outlook from 2022. Here, [indiscernible] determine expectation on the mark. -- however, the guidance was significant increase in EBITA is concerned.

As expected lining operational earnings development was [indiscernible] gross margin continued to show a good increase, which can be seen on the following page. [indiscernible] include [indiscernible] gross profit, which grow significantly to EUR 95 million [indiscernible] low amount of EUR 39 million in prior year first quarter.. [indiscernible] quarter [indiscernible] and no impact of the delivery or -- it did have some impact on markets.

SG&A expenses of EUR 74 million remained at the level of the current quarterly run rate [ EUR 75 million ]. SG&A ratio [indiscernible] revenue of circa 0.7% compared to [indiscernible] in the prior year quarter. [indiscernible] further [indiscernible] ratio [indiscernible] sustainable [indiscernible] by increasing revenue without increasing the SG&A expenses by the same rate.

I'll now briefly comment on the [indiscernible] statement segments. We start on taking over with E&M, the largest area. In the segment has got significant growth [indiscernible] oftentimes look fairly positive. Inventory increase in [indiscernible] A lot of that referring to strong demand in our framework contracts.

Let me turn [indiscernible] to Technologies EUR [indiscernible] million and we hope to be a ratio was [indiscernible] season stacking compared earlier in this year [indiscernible] especially in the Nordics. [indiscernible] EBITA decreased by EUR 3 million to EUR 13 million due to the restructuring cost or accounts in liability [indiscernible] for the Russian [indiscernible] as incurred in this segment.

As commented before, we have not been able to compensate from this effect with on earnings underlying operation down in [indiscernible]. However, full year 2022, as you [indiscernible] we expect [indiscernible] revenue had a very strong recovery last 2021 as well as [indiscernible] against [indiscernible] in EBITDA. As I said, restructuring expenses are also [indiscernible] in the last [indiscernible] to last year.

Looking at the international segment on Page [indiscernible] you can see the good [indiscernible] North America and Middle East. [indiscernible] in order [indiscernible] which were at EUR 163 million in quarter 1 2022. [indiscernible] reflect our changed strategy towards more service business [indiscernible] increase [indiscernible] of order and major [indiscernible], which we believe is a more sustained of how [indiscernible] professional [indiscernible].

Revenue grew by a strong 25% organically to [ EUR 150 million ] coming from [indiscernible] quarter of EUR 110 million. Cost [indiscernible] EBITA improved significantly to minus EUR 1 million compared minus EUR 7 million in quarter 1 last year.

If I look at the [indiscernible] strategic realignment [indiscernible] 2021 is starting to show the area. The EBITA margin improved accordingly to minus 0.5% compared to minus 0.6% last year in quarter 1. 2022, we are taking price to enter significant growth in revenue. Due to higher capacity utilization, we also expect a significant improvement of the EBITA to at least breakeven.

[indiscernible] on Page 13. What did we see the increase by 50% organically to EUR 173 million leading to a book-to-bill ratio of 1.4. The increase was reported [indiscernible] to [indiscernible] as well as [indiscernible]. Decreased by 5% organically to EUR 124 million, reflecting the more [indiscernible] business [indiscernible] segment.

The segment EBITA over [indiscernible] loans [indiscernible]. Full Year 2022 will expect a significant growth in revenue and [indiscernible] we can keep in EBITA [indiscernible] EUR 90 million [indiscernible] growth in '21.

[indiscernible] Page 14, [indiscernible] minus EUR 6 million. [indiscernible] minus EUR 7 million. This results in the prior year quarter was a EUR 2 million [indiscernible] include the EUR 10 million equivalent to special items from the sale of [indiscernible] as well as [indiscernible]. In addition, tax charges increased of 0 to [ EUR 9 million ] in the absence of [indiscernible] positive impact from tax refunds in quarter 1 2021.

Operating cash flow and free cash flow were below the prior year [indiscernible] quarter. Cash flow increased to minus EUR 76 million as significant growth in revenue [indiscernible] declining net in the third quarter to an increased [indiscernible] capital project, a trend that is expected to improve as the year progresses.

Looking at the [indiscernible] development on Page 13. That's including the higher price [indiscernible] quarter [indiscernible] million [indiscernible] increased defined on a EUR 23 million. [indiscernible] on our [indiscernible] and end of quarter 4 2021 [indiscernible] of 57%, a new [indiscernible] to achieve this good level at the end of the year. And that requires [indiscernible] and now [indiscernible] our net income from we [indiscernible] capital improvement also in quarter 2 [indiscernible]

[indiscernible] Thank you very much for your attention.

[Thomas Schulz, executive]

Thank you very much. So the 2022 [indiscernible] like you can see our result was for the full year 2021 and will be expected to be for 3 areas of [indiscernible] 2022 [indiscernible] revenue and significant growth, either from operational improvement and free cash flow should be [indiscernible].

[Bettina Schneider, executive]

[Operator Instructions] Your first question comes from Gregor Kuglitsch, UBS.

[Gregor Kuglitsch, analyst]

First question, maybe your first impressions will need to be [indiscernible] that's obviously so maybe give [indiscernible] first impressions. My next question would be just to clarify on the guidance, you're saying you still expect significant growth, I believe, despite the extra EUR 10 million charge that you're now booking. Can you just remind us what you mean by significant whether it's sort of a numeric range? What threshold is growth insignificant or significant?

[Thomas Schulz, executive]

Yes. Let me start with that what to be done. Yes, I think what to be done is actually not so much with us. It's actually more with the markets. We all talk about sustainability, climate change, the impact of energy transition. We need less talk, we need more activities. We can act. And they are the second observation, what I can give. We have a highly motivated, multi-competent organization throughout the areas where we operate. And the offering portfolio, what we can give to the industries where we operate in is really, really good.

The demand is there. Faster decisions would give us an easier planning possibility. And with that, of course, a better financial outcome, too. I'm quite positive and that's what I see in Bilfinger. I'm quite positive and that's what I see in the demand in the different industries.

Crisis times is time where customers are looking for outsourcing more and more. We are prepared to take that. So out of that, overall, very positive. And I think a big thank you to Duncan and to Cristina and all the employees. Based on the work that was done in the last few years, the improvement is significant and maybe not that visible in the market yet. But good job done, and we will go on to do so. Tina?

[Christina Johansson, executive]

Yes, Thomas. When we speak about significant growth, we obviously speak about the revenue line. We still are confirming what we already said at the Capital Markets Day in February. We are expecting this year versus last year, a significant growth. And I think in public, I have also said that we want to get back to similar organic growth rate that we saw pre-COVID in the year '17, '18, '19, which was around about 6%. .

We now obviously also need to take into account that we suddenly are living in an environment with inflation which also will have some impact most likely on the top line. But coming back to what we said on the significant growth for this year in February, the same confirmation and then might -- the inflation will have some additional impact on that.

So I think also what we now showed in the quarter 1 is confirming that guidance very well. As we are actually not only better than -- significant better than last year in quarter 1, also slightly better than we maybe expected in the first quarter.

When we then talk about the EBITA and EBITA margin, I think it is the same guidance here as well. We are expecting this year to have an improvement beyond what we did last year and the improvement is operational improvement. As you remember, we had some positive one-off effect in last year's results by selling off property. And we are expecting that we will be able to make up and be at a similar level, but pure operational performance. But the EUR 10 million that we now have provided for the outpacing of Russia, that obviously was not known to us last year. So that needs to be taken into account. But that has -- of course, it's not operational performance. That is restructuring costs. That I think not only we, but a number of other companies also need to now live with and try hard to compensate for. But I don't want at this point in time. I think we also don't know exactly where this journey, this geopolitical journey will take us. We would do everything we can to make up for the EUR 10 million, but I can't promise it today.

[Gregor Kuglitsch, analyst]

Okay. Sorry, just to be clear. So last year, you did EUR 137 million adjusted EBITA, including property profits. You're saying you will compensate the EUR 30 million of lower property profits or a similar number to that. And then, I guess, what happens with the EUR 10 million or so is a little bit unclear, but is that the right way to think about it?

[Christina Johansson, executive]

Yes, I would say so. If you take the number we presented last year and then take the EUR 10 million into account, I think that is our guidance, which means then that the consensus that is presently around is on a little bit too high. .

[Bettina Schneider, executive]

Okay. Next question comes from John Campbell, Bank of America.

[John Campbell, analyst]

I wanted to ask if it's possible to get an update in terms of your opinion on inflation, what you're seeing. I think in Q3, certainly of 2021, you mentioned you were seeing some supply chain delays, some cost inflation. But generally, your business had a certain degree of clauses. Given that it's now Q1, is there sort of any incremental update on that? Is it affecting your business? Do you feel reasonably confident that Bilfinger can continue to mitigate the challenge?

[Duncan Hall, executive]

John, it's Duncan here. Yes, as we said last year, we have, in most of our framework contracts, clauses around labor inflation that have matched the wage rises, and they're continuing to be passed through to our customers and frameworks for labor.

On projects, most of ours are short term, and we build that in when we are bidding the project. So most are less than 12 months. So on labor, whilst it's not overly comfortable because rises are also happening after we've got those increases, so we still need to compensate for that going forward, we're not seeing a massive issue. On supply chain, we're continuing to see stress problems around the electronics industry. Again, that's not isolated to ourselves and a bit more with steel, obviously, with the impact from Ukraine. Both of those, again, we can cover with indices and with open book pricing policies with our customers. Again, it's not easy, but our customers fully understand the situation, and we're working with them closely to make sure that doesn't impact.

Our greater concern is the delays that the supply chain brings, which doesn't impact our profitability, but it does delay revenue in some circumstances which Christina referenced in Technologies a little bit where we had a slightly lower revenue in Q1 due to some minor supply chain issues on our customer side, not on our side. But we'll see that come back as that recovers certainly in the electronics industry going forward.

So yes, we confirm we're seeing the clause is being used, but it's not easy. Let's say that. It's not easy. It's a tough environment for ourselves and a lot of our customers.

[John Campbell, analyst]

One quick follow-up, if I can as well. Given that the macroeconomic environment has changed a lot since February in terms of economic growth prospects in Europe, is that -- are you seeing an impact of that so far in terms of your discussions with customers in terms of their willingness to continue or any potential possible delays? .

[Duncan Hall, executive]

Actually, John, we're possibly seeing the opposite. We're seeing customers now recognize that supply chains need to be shortened, not just post-COVID in the biopharma and pharma areas, but also in the energy areas where people are accelerating their energy transition plans. And with Thomas around where we've got lots of opportunities and we now need to see these come through to fruition, but we are starting to see that.

In the Nordics, you've seen we've seen good order intake which is by far the most advanced area from energy transition as people want to be more localized on their energy requirements. They're starting to see this and accelerate it. Oil and gas is obviously seeing a slight resurgence with the price as well. So the markets in Europe are holding very well for our market areas.

[Bettina Schneider, executive]

The next question comes from Stephan Bonhage, Bankhaus Metzler.

[Stephan Bonhage, analyst]

Can you hear me?

[Bettina Schneider, executive]

Yes, we can.

[Stephan Bonhage, analyst]

Two questions. One is related to the potential oil and gas boycott we are discussing in Europe. Maybe you can give a quick comment on your assessment. How this would impact your business or your customers? .

And the second question is related to the EUR 10 million restructuring expenses related to your Russian business. Maybe you can give a small impression on what business we are talking about, what have you done there?

[Duncan Hall, executive]

Okay. I'll -- it's Duncan again here, Stephen. I'll continue on the oil and gas team. Obviously, we're reading in the press as you are around the forthcoming boycott that will happen on Russian oil and gas. We're not seeing a major impact. Some of our German refineries obviously do take Russian oil, which you are fully aware of, and they are securing alternative supplies as we speak.

From our perspective, what that brings us is actually some modification work to ensure those refineries can take a slightly different mix of oil with actually a slightly different sulfur content. So we will actually see a continuation of our work. Those refineries will keep on working all the way through. On the gas side, it is not a high maintenance business from a gas position. So we're not expecting any impact there at all from our business.

[Christina Johansson, executive]

Good. Talking about the Russian phaseout and approximately EUR 10 million that we have provided for in March in the segment in Europe. Most of that is related either severance payments, laying off people. We started off with around about 250 people in Russia pre the war in Ukraine started. And we have, as I said or as said before, we have decided not to take any new orders on board. We are trying to help our clients to finalize the orders we have. In some cases, also negotiating how to finalize it. And we have already started in March, April to lay off people as the workload now month by month will be lower.

So the severance payment for these 250 people is a major part of the EUR 10 million. The other major part is obviously what we are expecting that we will write off on the working capital. There are some positions here where we see that it will be very difficult to get the money paid and also some fixed assets that needs to be written off. So that is the best guess right now. And we will obviously try to turn all working capital in Russia into cash. But given that we are dealing mainly with Russian local customers, I think we will have to accept that in a couple of cases, we need to write off. So these 2 items are then the around about EUR 10 million that we now have provided for.

[Bettina Schneider, executive]

[Operator Instructions] There are no further questions right now. As you all know, you're welcome to contact the IR team after this conference or in the next days. But thank you, as of now, very much for your participation. Stay safe, stay healthy and see you all soon. Thank you very much and good bye.