Bilfinger SE

XETRA:GBF

Earnings Call Transcript 2023-Q1

[Bettina Schneider, executive]

Good afternoon, ladies and gentlemen. A warm welcome to our conference call on Bilfinger's first quarter results 2023. My name is Betina Schneider, and I will lead you through this call.

[Operator Instructions]

The conference call is being recorded. With me here in the room are our Group CEO, Thomas Schulz; and our group CFO, Matti Jakel. After the presentation, you will have the opportunity to post your questions via phone or via chat in the webcast. With this, I would like to hand over to Thomas.

[Thomas Schulz, executive]

Thank you very much, Betina. Hello, everybody. I welcome you all to for our quarter 1 statement for 2023. Let's start it was actually quite a good start for the year. We had an order intake received with a growth of organically 26%. The revenue increased significantly by 12% organically. Our EBITA margin like-for-like to the quarter 1, 2022 slightly increased to 2.1%. Overall, we have a quite positive market development. In all areas, in all industries and in all regions. Our free cash flow improved quite significant to minus EUR 26 million.

In the quarter, we had our Capital Market Day set to further develop strategy and midterm goals. And the efficiency program, what we announced in November last year is on track. The outlook for 2023 is confirmed. Before we go into the figures, we would like to highlight, of course, our safety track record as we always -- it's part of our sustainability setup in the company. And you see here on the slide, on the upper part, our development in the TRIS. And when you compare our [ 0.73 ] based on 1 million working hours to the 1.39 in quarter 1 last year, this shows a clear improvement in the right direction.

The same is on the LTIS. Here, we show an 0.16 versus 0.23. It is clear that our target for all our colleagues and the people around us is regarding accidents and any risk, 0. But it's quite a long way to go, and I'm very happy, and we are very proud about our own organization to deliver these good developments and figures for the first quarter especially when you see which kind of volume return.

Next thing is about our orders and our revenue. Our orders increased significantly, and it's 24% reported and 26% organically from 1.117 to 1.385. We have a 36% project share in that order intake. The book-to-bill improved to 1.31. When we look into that quite good start into the year 2023 on the order intake, there is -- there are some bigger projects in the quarter realized into the order intake, and we have so-called inflation-related price adjustments, which together were a part of that good growth in order intake.

If we then look into the revenue, there, we grew 10% or 12% organically from EUR 961 million to EUR 1.53 billion, which is the same as in the order intake quite a good development. We had that revenue increase in all segments. And 1 of the reasons short term while the development was so great, was a mild winter, which enabled us to start the work on the different sites a little bit earlier.

Out of that, 3 examples of our orders, what we achieved in the first quarter. One is in Kuwait. It's about water treatment, where we help the client Ministry of Electricity and Water regarding their filtration system.

Another one is energy transition project in the city of Munich in Germany where we install, design, delivered and of course, maintain high efficient to zone heat accumulators. This is another step for the city regarding their agenda for energy transition, and we are still seeing a part of it. The third 1 is a carbon capture project out of Heidelberg Material and Orca carbon capture in Norway, where we helped to insulate and to install the piping and all the surrounding regarding a CO2 capture facility on a cement plant. We are each quarter showing 1 thing what we bring to the market as an innovation because we, as Bilfinger, on a lot of sites in a lot of different industries and are able to combine existing technology into 1 big package for our clients to improve efficiency and sustainability.

This time, it's about a mobile acoustic camera system, which works with Sound and Sonic to help to detect possible leakages in piping systems before anything pops up. This system, this innovation helps clients with the work of us of Bilfinger to avoid any unnecessary shutdown emergency shutdown based on the leakage, it helps to safeguard the environment against any hazard material coming unexpected anywhere out of the pipe work. And it helps in that case, the Swedish customer and Swedish customers to save up to 30% of the costs on compressed air. That's another example for us in efficiency and sustainability improvement for the industries and customers where we work on.

If we then look into the efficiency program, what we announced in November last year, we promised that we will report each quarter in detail how far we are with the program. And as we said, the beginning of such a program shows relatively small realized figures. That's the nature of such a program. So remember, the program is targeting to reduce the administrative service level and structure and complexity in the Bilfinger Group. And with that, we have to let go 750 FTEs. The EBITA improvement, what we target with that program is EUR 55 million, roughly 1/4 of it, around EUR 13 million, we put up after the program is up and running for reinvestment into education and training, which is 1 of our strategic pillars, what we showed on the Capital Market Day in February this year.

When you look on the right side in the reported year-to-date effect and the quarter 1 effect. As I said at the beginning and as we said in November as well as on the Capital Market Day. By nature, the program is starting slow, but with the real effect we already have a run rate of around EUR 2 million at the end of quarter, 1 for the EBITA improvement. Out of that, we go to the financial highlights to Matti, Matti Jakel, our Group CFO.

[Matti Jakel, executive]

Thank you, Thomas. As you can see, we had, all in all, quite a good start into the new year 2023, and the numbers are really supporting the strategy that we adjusted and presented during the Capital Markets Day in February. The increase in orders received in order intake is on a very broad basis, covering all regions and all businesses. We received new frame contracts. We received new customer projects, particularly in the energy transition field. We were able to put through inflation-related price adjustments and the expectation on a number of our frame contracts was increased due to good activity on our client side. The revenue increase of 12% follows on from quarter 4 and the mild winter helped us quite a bit to get started earlier than usual and the new projects that we did win in Q3 and Q4 of 2022. We're started without any delays in the execution that's also quite positive and helped increase our revenue. Gross profit slightly increased to EUR 100 million and a stable margin that also increased by [ 0.1 ] percentage point. In Q1 it is also supporting our plans that we have communicated a bit earlier in the year.

Free cash flow, very positive only minus [ EUR 26 million ]. Yes, it's negative. But for the first quarter, this is a very good result, and our SG&A ratio reduced to 7.4% below the prior year level.

A quick look on the P&L. And the sort of top half I just explained. On the bottom half, you can see the net profit is positive. It's a real profit, plus EUR 7 million compared to quarter 1, 2022, which was impacted by the provision for the phasing out of the Russian business. But it's always a good time when the first quarter ends with the profit in our business. On the gross margin, what you see is, in absolute terms, a slight increase, relatively speaking, 9.5% after 9.9% in the prior year quarter.

I will explain this a little more in detail when I come to our segments. SG&A increased in absolute terms from 74 to 78. Two factors play a role here. On the one hand side, inflation on labor costs which is coming through from last year, but we also spent EUR 1.9 million on costs in the efficiency program, where we were not able to take provisions last year. So everything is expected.

On EBITA, 2.1% in the first quarter of this year following from 0.9% if we correct for the special item for the phasing out of the Russian business. It was 2.0% in the first quarter of 2022. So a slight improvement, again, supporting what we have laid out in our plans earlier this year Cash flow. The operating cash flow of the free cash flow both improved from minus EUR 76 million, the free cash flow to minus EUR 26 million in the first quarter. And this is certainly due to some good working capital management that you can also see as a proof on the right-hand side, net trade assets only increased slightly from year-end to EUR 440 million compared to prior year, it's even greater reduction from EUR 523 million at the end of March 2022.

One thing that should be mentioned here is that the free cash flow does not include as yet any payouts from the efficiency program. As Thomas alluded to before, the program is starting slow, so we will see those impacts coming through in the second half of this year. Now a little bit more flavor on to our segments. E&M Europe, our largest segment. Orders received grew by 25%, respectively, 29% organically. As I said earlier, this is really across all regions and all businesses that we are covering in Europe with that segment. The revenue increase of [ 8% ] respectively 10% also across all regions. So we do see a good business level activity across all our businesses. My winter always helps in our business when activities can start a bit earlier.

Profitability of 3.6%, also solid margin generation in all regions. We had a bit of a strike action in Norway and U.K. you lose 1 day or 2, and that has a bit of an impact, not so much on the revenue, but it certainly has impact on your profitability. Last year, we were at 3.5% and if we correct this for the special item of Russia. So our largest segment is underway in a very stable manner in the first quarter, which we believe, is quite good.

E&M International. Orders received remained on a high level. If we look at quarter 3, quarter 4 and now quarter around EUR 220 million, EUR 240 million mark. We won some interesting projects. One was explained earlier. The [indiscernible] contract, plus also an interesting contract for a chemical client in the United States as well as for U.S. government, where we received a nice contract in the first quarter of 2023.

Revenue up against last year, first quarter, but certainly, as you can see, down from quarter 3 and quarter 4. Not a surprise, this is the planned phasing out of the pure construction business in the United States. We still have a few legacy projects to deal with. They are also the reason for the loss in the first quarter here. We are phasing out those projects is typically quite difficult, and we run into a planned underutilization as we complete the work and we are redirecting resources include and on top of releasing resources in the U.S. we released in the first quarter, 800 employees because of our phasing out of those projects and changing our position in the United States from construction projects to service and maintenance contracts.

Technologies. Here, we see quite the opposite. Orders received plus 10%, plus 11% here. So the strong trend that we have seen in the last few quarters continues on almost the same level. However, if you look at revenue generation, that has increased over the last 3 to 4 quarters consistently to the level of EUR 180 million. We have won a number of projects last year in pharma, biopharma and energy transition. This continues this year. But you can see that the revenue generation has really picked up. This also includes higher revenues from Hinkley Point. And the nice thing about this is that the higher revenue is being converted into profitability leverage. This quarter, 3% profitability in technologies versus pretty much breakeven 4 quarters ago. So also this year is a good development we're comfortable there and very confident that this is going to continue. And it really supports the repositioning of Bilfinger into that segment.

Back to Thomas.

[Thomas Schulz, executive]

Thank you very much, Matti. For the market, the market is for us in the development, how we see short term and midterm, no change, quite positive. And when we talk about the market, it's not only about the industries, it's about all the regions where we are in 2. We see high demand for efficiency and strong increasing demand for more sustainable solutions, what we at Bilfinger can offer quite a lot and what we do. When we look into the 4 major markets where we are in, energy and energy transition, in particular, is a big, big boom and a lot of demands are there. And it gives cross all ideas, what you can imagine, and of course, the focus is on new technologies. But for us, the focus is to help clients on existing installations too, which still makes the biggest part of the business.

And for that, we see for quite a long while, a very positive outlook. Nuclear is on the revival. When we then look into the chemicals and petrochem. Of course, there are in Europe, some -- yes, dark clouds for our customers regarding energy prices, regulation and so on. But for us, it's Bilfinger. It is, in best way, positive that we can help our clients in these difficult times to be more efficient, to be more sustainable, to be better in the position to forecast their own cost and technology development. And that is a big benefit for our clients and explains quite a big part of that by our order intake at the beginning of the year was quite so good.

If we then look into pharma and biopharma, the increase in healthcare demand, the localization of supply chain is a very positive environment for us, especially when you look into the offering of Bilfinger into that industry part because we offer standardized midsized or smaller plants, building up risk-free and very fast and bringing our clients fairly quick into revenue and profit.

The last part here is on oil and gas. There is quite a lot of investment ongoing in brownfield infrastructure because it was under-invested for a long, long period of time. And we, in our areas, no matter if it's in the north of U.K. or in Norway or in U.S. or in the Middle East. We are well positioned to help clients to be significantly more efficient in it. But on the other side, all the blue ship and all the big oil and gas companies are investing a lot into new technologies and new more environmental-friendly energy resources. If it's LNG, hydrogen, carbon capture, you name it.

And as you saw in our -- some of the examples what we do over the last few quarters, we are well positioned in all these areas, too. So we have the customer contact for decades. We have the technology knowledge, we have the people on the local side. and we are experts in these new technologies. That whole package in the market development. We are building a benefit quite a lot from it, and we don't see a change in it.

If we then look for the year 2023, first and main message is the year is confirmed. And what you saw in the figures in the quarter 1, no matter if it's the order intake, the EBITA margin, the cash flow is exactly in line with that, how we forecasted the full year 2023, which means we are on the way to deliver EUR 4.3 billion to EUR 4.6 billion in revenue, 3.8% to 4.1% EBITA margin and the free cash flow of EUR 50 million to EUR 80 million.

So the EUR 50 million to EUR 80 million in the free cash flow, there's, of course, the EUR 60 million cash out out of the efficiency program. What we didn't see anything yet in the first quarter. But our improvement versus last year in the cash flow in quarter 1 shows that our efficiency and process improvements on the cash generation actually shows quite good results. All over, we are satisfied with that outlook, and we are satisfied with that performance. To sum it up, orders received increased organically by 26% in revenue, 12% our EBITA margin stable, slight increase to 2.1%. We see in all regions, in all industries, quite a positive market development, our free cash flow better, still negative, but better than last year, significantly better. We had a Capital Market Day in February where we rolled out the further developed strategy and midterm goals, what we, of course, will achieve. The efficiency program announced in November is well on track and the outlook for 2023 is confirmed. And with that, I give back to Bettina.

[Bettina Schneider, executive]

Yes. Thank you very much, Thomas.

[Operator Instructions]

The first question comes from Craig Abbott, Kepler Cheuvreux.

[Craig Abbott, analyst]

My question is just to come back on one of your opening comments regarding -- you mentioned inflation price adjusting effect in both your order intake and your revenues in Q1. And I was wondering if you could give us some color on how much that effect was for both revenues and order intake, but particularly the order intake, given that there's also a multiplier effect related to the framework contracts, if I'm not mistaken.

[Thomas Schulz, executive]

Yes. The -- thanks a lot, Craig. In the order intake, we can say that around 3% is the effect in the order intake. So instead of having 24% growth, we would have 21% growth. In the revenue, it's a little bit less, it's around 2% in the effect. So we would be there on 8% or 10% reported versus organic without that inflation.

[Craig Abbott, analyst]

Okay. I thought the impact might have been higher on the order intake.

[Thomas Schulz, executive]

No, it is actually not higher in the order intake. The -- we have to say that when we look through the inflation impact in our group, of course, we have quite significant differences between the countries. And of course, it makes a big difference if you get it in 1 country with less inflation impact, more orders than in other. And the first quarter actually showed only these relatively when we look into the media with all the communication about inflation, relatively low impact, both on order intake as well as the revenue.

[Bettina Schneider, executive]

The next question comes from Gregor Kuglitsch, UBS.

[Gregor Kuglitsch, analyst]

I've got a kind of similar question, and maybe the answer is, I think there were 3 effects, right? There was a large orders, inflation you just quantified and then the reappraisal of your framework contracts. So maybe you can quantify the third bid so that sort of reappraisal of framework contract. Because the reason I ask this question is if I now just sort of go back and add up the 4 last quarters of order intake, it's EUR 4.9 billion, I think, you took in, in the trailing 12 months. And obviously, your revenues guidance is -- sorry, 4.3 to 4.6. So I guess the question is why why wouldn't the revenue start matching that sort of trailing 12-month order intake, maybe not quite this year, but sort of maybe into next year?

So that's sort of the first question. The second question is just on the on the cost cutting. It seems like -- I don't know if that's in line with your expectations or not, I guess, it seems a bit slow in terms of people actually leaving the organization. And maybe you could just sort of give some perspective on that and help us out a little bit when we should start thinking about basically cost benefits, maybe, I don't know, in Q3, Q4? Or when do you think it starts flowing in?

[Thomas Schulz, executive]

Yes. The -- let us start with the efficiency program, actually. We said from the beginning in November that in such a program, when you take white collar people out and target in that and to improve processes and setups and complexity in the structure that it takes a few quarters, a couple of quarters to show real in effect. This is the fourth time I do it, and it's the fourth time to say. And when you look into the headcount development of the group, you will see that we actually had in the last few months, more than 800 people out. That's what we do generally, and that was related with the U.S. business, where we go down with 1 specific old construction business and of course, then letting the people go.

In the efficiency program, the start is that you negotiate that you look into, that you set it up, the targets and then over the time, you calculate that through, and when the people last, not when they are informed when the people left and when they are off the payroll, you show the figures. And based on having white collar people, that takes, of course, a little bit longer than you have it on blue collar. That's actually the benefit. We are with the progress, very much satisfied.

If it then comes to the -- and I have to say, when you look anywhere in companies in similar efficiency improvement programs, this is not a cost-cutting program to make that clear with decomplex processes, structures, services. And with that, we let the people go. Otherwise, we think we have only a [indiscernible] effect if it's pure cost cutting and the cost would come back in 1 or 2 years. And we will not have that. We canceled services, we take things out, and they will not happen again. And with that, we keep then the lower cost level.

If we then look into the order intake, what you said? Yes, of course, it is difficult to argue in the first spot. But when you look into the order intake would be generated. Yes, you are right. It's a run rate over EUR 4.8 billion. There is some project business in it, roughly 35% to 36%, which normally takes a little bit longer to realize into the revenue, it's one part.

And the other part is, don't forget, we are serious on letting the business goal, which is not profitable and not what we want to have in North America, and that will, of course, lower the top line and revenue when that business is phased out. And we don't renew it. So you have an effect on 1 side regarding project business, which takes longer. And on the other side, the business in North America, which is unprofitable and what we phase out, both together gives then the picture regarding the -- as you would call it, more conservative revenue outlook.

[Bettina Schneider, executive]

. Next question comes from Michael Kuhn, Deutsche Bank.

[Michael Kuhn, analyst]

Few ones. Maybe starting with the gross margin. There is a reference in the quarterly report that you said the decline is due to the repositioning in the U.S. Can you maybe isolate that effect? And give us an idea how the underlying gross margin development in the prior quarter was.

Then secondly, and that is also regarding the efficiency program you mentioned that you're satisfied with the progress, and you mentioned that most of the programs should be expected in the second half. So is that really hockey stick like or will we see quite some pickup already maybe in the second and the third quarter.

And then lastly, as the CMB is already a couple of weeks back now, do you have any current thoughts on use of financial resources, you're obviously targeting higher profits that will also result in higher available cash. Anything to share on M&A dividend, et cetera, that would be interesting.

[Matti Jakel, executive]

Okay. Michael, on the gross margin, and maybe I'll give a bit of an elaborated answer here, not just on the U.S. In Europe, gross margin is really on the same level as we had in quarter 1, 2022. On technologies, same year. Profit of gross margin has stayed on the same level. But with the higher revenue, we made more profits there, as I said earlier. On international, the gross margin last year was around 7% in the first quarter now it is 4%. So you can see that this is the impact that we have from the -- from the phasing out of that business, we have less than 10 contracts that we are nearing completion. They're all between 90% and 100% complete. So that is something that's happening in the first quarter, second quarter of this year.

The underutilization is something that we are addressing. As I said earlier, we have released 800 people in the U.S., that's fairly simple. When they finish they have 2 weeks' notice, and you can time this so that you have no additional costs with you. However, the revenue is missing to cover then your fixed costs. And that is how this sort of goes together and there is the composition there.

[Thomas Schulz, executive]

Then on the efficiency program, again, the -- I think I explained that the best with a comparison with a cost-cutting program. You announced the cost-cutting program, then you sit together with the respective, let us call them, institutions, workers' council and so on based on the country where you are in. And then normally, you take 1, 2 months, and then you have a cutting target and to lay the people off. The effect when you do that in administrative organizations is that you get these kind of costs creeping back into your cost base latest after 2 years because if you don't take service out if you don't be complex management structure, process, way of working and so on, then you don't do anything else than to increase the labor, the workload on the existing people after the cutting. And the reaction of the organization will be that they start to recruit back or by the services outside, which means your cost base is coming back.

And that is exactly what we are not doing. We looked into and we sat and we see that, that we are too complex, build up that we have too many internal services, admin services -- and that is what we cancel and take out. That process is ongoing or close to be completely finished, what has to be stopped and out. With that are people related and they will then leave the year. And based on white collar and a bigger part in Germany, you have to calculate significant longer layoff times, termination times than in the blue-collar area. So if you add that up, such a program shows the biggest improvement in the third and especially at the end of the fourth quarter. That's the reason why we said from the beginning, the run rate of the full effect will be at the end of the year achieved. And that's the reason why we are satisfied -- quite satisfied with the progress of the efficiency program. And with that, we know that the cost will not come back. Services cancel, that's it. Then regarding the capital allocation.

Matti gave on the Capital Markets Day, quite a view on it. what we will do with the money.

[Matti Jakel, executive]

Yes. Nothing has changed in the first quarter or in the last, let's say, 3 months since the Capital Markets Day, which is now 3 months ago, Funding our growth is the first priority. Second priority is an increase in growing dividend year after year. if and when there is a good opportunity for M&A, we'll do that and sort of optionally there would be share buyback. That view has been consistent and nothing has changed there. The first quarter was good from a cash flow perspective, but it's a bit early to call the shots and rethink any of that priority set remains in place as we presented it.

[Thomas Schulz, executive]

And on the M&A, to be specific, we said that on the Capital Market Day, too, and we don't change our opinion. We are looking for M&A in areas of our core competence. And competence means in that way, we are not interested in business or technology or competence, what we don't have in-house at all. Why is that the case because as we showed with the market development in our core markets and demands from our clients as well how we performed, not only in the order intake in quarter 1, we see a huge business in front of us what we can capture. And it is always better, means more profitable, better for the return when you try to capture that in the area where you have your biggest competence. And that is what we look in M&A for.

The second thing with M&A is, of course, there is a lot available, but we know exactly what we are willing to pay. And it's the total cost with integration with everything, which is for us a guiding principle. The shareholder return, nothing else. And if there is only EUR [ 0.01 ] difference between the seller and us, we would not go for it. And I'm serious in it.

And the last thing in it is we have a clear target set for the group, what we want to achieve in 2024 with the 5% plus on EBITA and the 6% to 7% in the horizon 3 to 5 years. And that is so important for us, and we think we are on a good way to do that.

[Michael Kuhn, analyst]

Excellent. Then one short follow-up, as that was also mentioned in the SG&A cost, I think there was close to EUR 2 million charge, where there had been no provision built before in the context of the efficiency program. So in some way, that would qualify as a nonrecurring cost, if I got that correctly.

[Matti Jakel, executive]

Yes because that's clear. We have spent some money on outside consultants, and that is not something you can put into a provision but this is something that's nonrecurring, nonrecurring matter.

[Bettina Schneider, executive]

Next question comes from Christoph Dolleschal, HSBC.

[Christoph Dolleschal, analyst]

Yes. I have a few follow-up questions, if I may. The first 1 is on the tax rate and what was just asked. Is it the EUR 1.9 million non-provisionable item that basically distorted the tax rate in Q1? And is it fair to assume that the tax rate for the full year is going to be around 27%.

[Matti Jakel, executive]

Christoph, no, that's not the case. We have a few countries, amongst others, Germany and the U.S., where we don't activate tax losses, and that is the reason why we have a higher than usual tax rate.

[Christoph Dolleschal, analyst]

Okay. But it will normalize then over the course of the year, yes?

[Matti Jakel, executive]

Difficult to say. I would say it will normalize over the course of not 1 year, but probably several years. It really depends on when we can start activating tax losses carry forward.

[Christoph Dolleschal, analyst]

Okay. Then some more, like, say, strategic ones or another follow-up, first of all, on the order intake and the revenue bridge. Can you basically set your expectations for '23 in basically in H1 and in H2 part? Because I mean, I think your order intake was much better than at least the Street expected and probably also yourself expected. And despite your explanations on why revenue is lower than order intake with regards to the U.S. Are you basically being more cautious on H2 than H1 because my simple math would have been the say, extra in order intake that you booked on top of your expectations should probably also be put onto the guidance. Is it because you're now careful in H2.

[Thomas Schulz, executive]

So the -- no matter that we had a good order intake in quarter 1. We are not changing our outlook for 2023 on the revenue. It could have been that the larger orders are coming in the second quarter and not in the first quarter. So out of that, I would not overrate the 26% too much. It shows definitely our strong market position. I have to say that. It shows definitely our strong market position. If it comes to the revenue and the revenue recognition, what we saw in the quarter 1, which grew with 10% reported quite well, too. The mild winter help there, too. Because if you have a very strong cold long winter, then you have weeks where you're -- where you are not able to make all the work on the sites as you would like to do. So you can't invoice it.

This time, we had a mild winter. That, of course, supports [indiscernible] revenue. So out of both, we see still the maximum of our revenue recognition for 2023 on EUR 4.6 billion [indiscernible]. If we would see a change maybe then for the year after, we would report it, but we don't. And no matter that we're beating consensus in all the areas it is actually from our point of view, exactly as we expected the quarter 1.

[Christoph Dolleschal, analyst]

Okay. Then another follow-up on the United States or North American business. If I understood you correctly the phasing out of the nonprofitable business is near completion. You said there's less than 10 contracts and they're like 90% completed. So we are approaching the end of it. The problem with that is underutilization. So I was wondering what the plans going forward or the options to put it that way are -- is it that you're, for the time being happy with the capacity and say, okay, well, are you going to grow into these capacities again? Or is there also plans to probably adjust capacities? And what kind of a timeframe are you going to be giving yourself for that?

[Thomas Schulz, executive]

Yes. The -- what I can guarantee you is we will not adjust capacity. We will exit that business. We were over a very long period of time, not profitable, and we will be not profitable. That's a fact. And as Matti said, we had 800 people leaving the company in North America out of that business already in quarter 1, and we will go on to do so as the projects are phasing out. It's not a business we have to be in -- it's not a business we want to be in. So it will be not a business what we will have in the future. And the reason for that it takes time as we actually said, as we calculate it into the guidance for the year 2023, this is already in the guidance. What happens -- it has to do with the project business. We have, of course, to finalize the projects before you can exit the business completely. And that is what we do. If we have a contract, we fulfill. But we expect the same from our clients.

[Christoph Dolleschal, analyst]

And so when is it likely going to be, say, the phase that is complete by 1 -- the last contract with the last week or...

[Thomas Schulz, executive]

Yes, we said that by far, the majority is done in 2023.

[Christoph Dolleschal, analyst]

Okay. So then one last one because also inflation was in revenue and order intake, obviously, lower than I think at least myself and supposedly how I understood the question and the cost of our direct use was lower than we expected. I mean the main reason, obviously, I think the main inflation element that goes into your into your calculation is probably personnel costs. So I was wondering your views on personnel costs developing beyond 2023 because 2023, I think everybody has like 5% to 6%, say, there's no cost increase in the numbers. So what is your planning for the next couple of years, are you looking at similar rates? Or are you looking at, say, normalized rates then as of '24, let's say, 2% or 3%?

[Thomas Schulz, executive]

I think it is a very good question. And you can imagine, as a people company, this is 1 of our main areas as we look into and forecast how the development is. not to make it too complex. Of course, we have significant wage increase differences between the countries, significant, which is what you can actually read in the different reports for each country. But on the very positive side, we have most of our contracts, escalation clauses in so that we can forward the wage increase towards our clients. And based on the shortage of competent labor in the market, we have more or less no hesitation on the customer side, not to be in these discussions and to look that we get a good solution. Why is that actually the case.

The case is that we offer and efficiency, competence and efficiency improvement competence, where we easily can calculate to the client, that if we are on the site and doing our job, the advantage on the bottom line for the client is significantly bigger than any inflation -- wage inflation development what we have in these different countries. And we do that and happy to say that in that industry, part where we are on our way, we have good support from our clients.

[Matti Jakel, executive]

Maybe let me add there. The 5% to 6% cost increase is in our budget for this year in 2023.

2024 and later, we have assumed sort of back to normal due to 3, 2 to 4 percentage points for the time being. We'll be seeing how that develop and evolves.

[Bettina Schneider, executive]

[Operator Instructions]

Okay. I think that's it for today. Don't hesitate to contact the IR team if there are further questions later on, and thank you very much for participating, and we wish you a pleasant day. Goodbye, and talk to you soon.