Bilfinger SE

XETRA:GBF

Earnings Call Transcript 2022-Q2

[Bettina Schneider, executive]

Good afternoon, ladies and gentlemen. I would like you to welcome to our conference call on Bilfinger's Second Quarter Results 2022. My name is Bettina Schneider, and I will lead you through this call.

First of all, I'd like to inform you that all participants are in a listen-only mode and that the conference call is being recorded. With me here in the room are our CEO, Thomas Schulz; our new CFO, Matti Jakel; and our COO, Duncan Hall. After the presentations of Thomas and Matti, all 3 executive Board members are happy to take your questions. You will have the opportunity to ask questions via phone or via chat in the webcast.

With this, I would like to hand over to Thomas.

[Thomas Schulz, executive]

Thank you, Bettina. Hello, everybody. Nice greeting here out of Mannheim's headquarter for building in Germany. We had a quite solid quarter 2 2022. We see and we have a positive momentum in all market segments and actually in the geographies, too. We have a 4% order intake growth and a 9% revenue growth. And our EBITDA margin is 80 points up, which means from 2.2% to 3.0%. Our cash flow this quarter is positive, coming from a negative minus EUR 43 million to plus EUR 19 million.

Our outlook for 2022 with a significant increase in revenue and EBITDA stays unchanged. And that is, of course, based on a positive market in energy transition, efficiency demand and sustainability demand. And with that, I would like to go into a news regarding our strategy that we launched the process with internal experts to further develop our strategy of Bilfinger. And before I go into that detail, I would like to describe a little bit the market where we already act in a quite big part of it in. It's the market to help customers building new sustainable technologies as well as having existing infrastructure to get more efficient. And that market is growing. And we foresee that will grow for quite a long time.

The demand is out of all industries in these areas quite big. And we see that this demand is a sustainable, profitable demand in the future. We are building up already in some parts, quite well positioned. But we are not in all parts quite well positioned, and we are not offering that everywhere, but we have the competence, we have the motivation and very important, we have a lot of trust of our customers where we already proved that we can add value in efficiency improvement and sustainability improvement throughout the industries. That is what we clarify more what we focus more with a clear target to offer the whole value chain, what we have as building into the efficiency and sustainability market.

The project started in July this year and should run up to latest February, beginning of next year. And the aim is to be the #1 as a solution provider for efficiency and sustainability improvements in all markets where we want to act in. This is important for us because whenever a customer with an existing plant or with the demand for new technology, and I will come into more details what it means, has that wish to succeed the name Bilfinger should come up. That positioning of #1 should be, of course, related with growth minimum in line with the market, if not more. And where we see the 5% EBITDA not as the maximum target actually as a figure what we always should deliver and more.

If we out of that go a little bit into a detailed view of the different markets out of that further alignment of our strategy. First is about chemicals and petrochemicals. It makes roughly 30% of our top line out of our revenue and the trend all over is stable. What does it mean? It means we see large investments going into CO2 reductions, new battery factories and so on. There is quite a big demand out there for that. At the same time, very important to know and to recognize is we have around the world an existing infrastructure. And these customers have a significant demand for doing more with less, what you can call simply efficiency improvement, but always in the future view to make it more sustainable to fulfill upcoming new governmental regulations around the world regarding climate change fulfillment Paris Agreement, et cetera.

This part is an important part in our competence and our innovation. And on the right side, you see one of the contracts, what we were awarded with is from our customer, Kemira in Sweden, where we as building are responsible for the maintenance and special services to make that plant more cost efficient, more sustainable, faster and more speedy with that what gets produced. That is one of the core competencies what we have in building up.

If we then look to the next industry part, it's energy and utilities. It's 20% of our revenue line. The trend overall is positive. And it's positive not only on that, what you all know regarding green energy. If it's hydrogen, biomass carbon capture, all these things are already coming more and more. They started years back with small investments and we see the investments getting bigger and bigger and customer demand on us getting bigger and bigger. But it involves already existing plants to adjust and to get -- for example, when you look into oil or gas when it comes out of, let's say, Russia and you would like to have another supplier, let's say, out of the Middle East, then it's not enough to push a button and to change the gas. It's actually important that you adopt the technology and the setup on that infrastructure on that existing plant. And we as building have that competence.

Not to forget in that area is, of course, the revival of the nuclear power in most of the countries in the world. And of course, for some of the countries, we would like to reduce the nuclear power, we have similar offerings to demobilize and on top of it, to make waste handling, and we announced several of these deals, what we got in the last few months and years, and we see for these 3 areas, quite a good market, too.

On the right side, we give one example of such an energy and utility projects. And it's actually a special one. It's from the city of Munich, where they are able, together with our help, our support, our technical competence to switch from a district heating system into a district cooling system. That means for governmental offices, industrial offices instead of having single small cooling devices, air conditioning devices, the city of Munich offers then a system to do that as a district cooling. That will save up to 70% of the energy and reduce up to 70% of the CO2, which we would be normally produce. And we, as Bilfinger has a key role in that project.

If we then go to the next industry where we act in, it's oil and gas makes roughly 20% of our top line with a bigger part of the oil area. And it's not only about the construction and expansion of LNG terminals and gas storages, which is, of course, at the moment, especially in Europe, highly debated and highly visible in the whole society, it is about giving the customers help and support to upgrade existing plants, existing on and offshore platforms where the investment, especially in Europe in the last 10 years roughly, we're a little bit lagging behind. We are able in these kind of maintenance and turnaround situations to offer customers an ongoing cost improvement and sustainability improvement with that what they do.

When we look into an example, it's actually from our North American business, it's with our dear customer, Shell in the Gulf of Mexico, where we are responsible for several years to make exactly that cost efficiency, sustainability efficiency in the maintenance contract on the oil platforms happen. If we then go into the fourth area, it's pharma and biopharma, which stands for 10% of our revenue line, the overall trend is quite positive. It's a combination of a lot. It's not only about vaccines. It's actually about a lot of bigger health care spend what we see for the next years, most likely decades to come.

Because alone up to the year 2030, there is the expectation from the United Nations to grow not that the population grows 900 million people and roughly 400 million people go into a wealthier stage of living, which means the consumption of global or health care will increase. On the other side of that megatrend is the deglobalization, the result out of the pandemic, where governments, where societies are scared to have another pandemic event and not getting vaccines and not getting masked in any other material.

These 2 megatrends are supporting that what we have as a growth and which is part of that what we call to be the #1 in efficiency and sustainability for Bilfinger. And we can offer here innovation, innovative solutions and services to help clients to perform faster, quicker in smaller plants, highly efficient. As you know, normally, big plants are the efficient ones. And here in that area, we, with our competence, have to help customers to have the same efficiency, if not better in smaller plants.

On the right side of the slide, there is one example. And it is -- as it is typical for that area, we are not sharing the name of the customer based on the IP rights and the innovation part behind it. But we are an essential part together with our clients to develop biopharma processing equipment for that plant to be fast, efficient and, of course, with that, very profitable for our clients, which is then very profitable for us.

If we look into that whole package, you see that the target area for our group where we already act in a lot of areas is the efficiency and sustainability improvement for that where we act in. This is a sustainable, profitable growth market with a very long growth and profit outlook. And we will get our fair share out of it, and that is to be the #1.

And with that, I would like to give to Matti, our CFO.

[Matti Jakel, executive]

Thank you very much, Thomas. Good afternoon, ladies and gentlemen. Let me walk you through the financials for Q2 2022 for Bilfinger. All 4 KPIs, orders received, revenues, EBITDA and free cash flow have improved over prior year quarter. The Q2 numbers reflect, as outlined by Thomas, the positive market environment and the good positioning of Bilfinger. The orders received increased by 4% to EUR 1.1 billion, which is a solid development over the last 5 quarters. Again, we see a nice and balanced mix between smaller and larger orders.

Order backlog grew by 11% to EUR 3.2 billion at the end of June 2022. The revenue surpassed the EUR 1 billion mark in the second quarter of this year. It grew by 10% to EUR 1.08 billion, and the EBITDA improved by 50% from EUR 21 million to EUR 32 million in this quarter. Our profitability improved by 80 basis points to 3.1% from 2.2% last year. We had no special items this time, which is a good sign. Gross profit also improved to EUR 107 million from EUR 95 million, 9.9% in this quarter. The SG&A amounted to EUR 76 million, a ratio of 7%, which is attributed to the increased revenue.

Turning to our segments, Engineering & Maintenance Europe. Revenue increased by 9% to EUR 725 million with a good profitability of 5.2%. Hence, the EBITDA is at the prior year level of absolute EUR 38 million. We had a very busy turnaround season in the Nordic countries, and we do see increased activities in the North Sea oil and gas. Engineering & Maintenance International, a nice uptick of our revenue, 30% in absolute terms but also double-digit organically. The absolute number was certainly helped by the U.S. dollar.

What we see here is that the strategic alignment that was initiated last year in the U.S. continues to show effect. We have a better contract mix and the EBITDA improved quite considerably to minus EUR 1 million in the second quarter of 2022. Last segment, Technologies. The book-to-bill ratio of 1.2x reflects the high activity in pharma and biopharma market. The revenue remained stable around EUR 140 million mark. We have seen a few delays in project delivery, nothing of concern. Therefore, we expect quite a nice pickup also in the second quarter of 2022.

EBITDA margin at 2.3% is certainly not there where I would like to see. But again, it's a solid performance for building. Net profit also 50% up from last year at EUR 19 million versus EUR 13 million last year. Free cash flow positive plus EUR 19 million, up from minus EUR 43 million last year. This is due to our higher earnings and a reduced net trade assets. We do certainly expect quite an increase in the third and also in the fourth quarter for the full year. So all in all, I'd say this is a solid performance in Q2 by our 30,000 colleagues.

Finally, net liquidity decreased by EUR 204 million. No surprise, we paid our dividends of EUR 196 million in May. Also worth mentioning here, DSO at 76 days and DPO at 69 days at the end of the quarter.

With that, I turn it over to Thomas for the overall outlook.

[Thomas Schulz, executive]

Thanks, Matti. So if we look then in the overall outlook, we, as said at the beginning, confirm the outlook for the full year. That means a significant increase in revenue, a significant increase in EBITDA and the free cash flow on the level of the year before. All in all, stable outlook, no change to before we see the end markets quite positive if it comes to OpEx or CapEx.

And with that, I would like to give back to Bettina for the Q&A.

[Bettina Schneider, executive]

Yes. Thank you, Thomas.

[Operator Instructions] Okay. First questions coming in. Mike Kuhn, Deutsche Bank.

[Michael Kuhn, analyst]

Firstly, on the strategy process that you have initiated, obviously, it's early days, but I think I would be interested in what could be the potential results of that process. Could it be, let's say, selective divestments? Is it accelerated M&A? Is it the change in internal structure? So maybe a few more details on what the potential scope of the outcome of the strategy process could be. That's the first one.

And then secondly, also, when talking about the strategy process, you mentioned the 5% margin. And it sounded rather like you see the 5% EBITA margin as a floor going forward than as an aspiration. So I think a few more details on your thinking on the margin in the medium term would be interesting.

[Thomas Schulz, executive]

First is the strategy process. Don't expect here a big reorganization or anything like that. We do as building in a lot of areas, in a lot of regions and in a lot of business already that what helps customers to get more efficient. And efficiency means to do more with less. As an example, if we do [ escape forwarding ] in isolation, we help customers within days and weeks to reduce their energy cost and with that in the longer term, of course, the CO2 footprint, too, if they use total energy in it. That kind of calculation, that kind of offering we can do already today to the clients.

Can we do it everywhere? No. Can we do it in all the areas we would like to play in? No. But we have quite a good base and that is what we will develop further. So that the target is -- and we will achieve that to be the #1 in efficiency and sustainability improvement in the markets where we act. And we see here in the industry, one of the biggest growth rates, not only in Europe, actually worldwide, and we believe strongly that one of the main products in the future, what Europe will sell into the world is actually based on efficiency and sustainability. And we have already quite a good position. This is not new. This is actually a further development of the strategy, it's streamlining.

Then regarding the 5% EBITDA margin. The 5% EBITDA margin in our understanding is not a target that we achieved 5%. We see it that we always have to have 5%. And of course, the target that is mid- to long term for that because it's a result out of that strategy, what I just talked about and of course, the resilience of the company, cost structure and so on.

[Michael Kuhn, analyst]

Okay. So let's say in the medium term, we should think about 5% plus and probably not plus a few bits, but probably plus 5 and a bit more.

[Thomas Schulz, executive]

Yes. We have medium-term targets, which were announced quite a while ago, and they were on 5% for the year 2024, and that is what we keep.

[Bettina Schneider, executive]

Next question comes from the chat. Nico Lochner from Solventis is asking when do you expect new orders for the construction of new nuclear power plants.

[Duncan Hall, executive]

Nico, it's Duncan here. So just a quick recap of what we've already got remember. So we're well into the Hinkley Point construction now. We've got over GBP 500 million of orders there, we're starting to call off. We've actually already just received recently our first orders for the EPR2 program within France, where we've got a double-digit million engineering order on the books already, and we're starting to work on that.

Obviously, size [indiscernible] would be of interest, and we are continuing discussions there with the customer. We have been there for 6 to 12 months and on a very similar scope to that we are doing on the Hinkley Point already. I would not expect meaningful orders right now, we'll get some planning orders in the next 6 to 12 months. And then within the next couple of years, we'll start to see the larger orders come through. But that's not always in our control, the funding needs to be fully secured. Hope that answers your question. If not, give us a follow-up.

[Bettina Schneider, executive]

Thank you, Duncan. Next question comes from HSBC, [ Christoph ] [indiscernible].

[Unknown Analyst]

Yes. Three questions, if I may. First one is on technologies. I've seen that you've reduced the guidance within technologies, reasoning that there is a more selective approach to new orders. And I was just wondering whether you could please elaborate a bit more on that. What kind of shift is there going to be? Then on international, the orders are rather weak with minus 7% organically. Could you also please elaborate on where that comes from?

And last but not least, on energy transition. Also, there orders only rose at a moderate level, at least to my understanding, despite that there is a big need to adjust the European energy infrastructure. So the question is why is that? Is it already a first impact on an upcoming recession? Or is it companies that are not yet really to approach the topic in general?

[Duncan Hall, executive]

[ Christoph ], Duncan again here. I'll try and catch up on some of those questions there as I'm reading through. So technologies. Let's talk about the orders, yes, we are being far more selective for 2 reasons. One is we want to get good margin orders and resources are not a lot of them out there. So we need to make sure we're working on the right projects with the resources we have. And right now, our resources are working on a lot of biopharma projects. We have seen some good order intake on that, and we're going to see those coming through into revenues at the back end of the year in half 2. But those are nice double-digit size of orders with good margins that we see coming through.

The larger orders that we've secured previously in technologies, they're not there at the moment. There's no great recession issue. They're just taking a little bit longer than we used to see a couple of years ago. As people go through the challenges that we're all seeing, they are a bit more careful upon when they place the orders Engineering is starting to come, and that's followed then by fabrication and construction.

Within international, actually, I'll take the opposite view. I agree with your math on the organic position on the orders, but this is also part of the shift in our strategy here. So previously, if you remember, we were very, very exposed to large construction tenders, which on how we take orders in, that would be a triple-digit order intake for us in one go. What we've been is very, very successful winning framework contract. And we only recognize 12 months in advance on those contracts. So we have a very, very good order book with a far longer term than we used to see that is far more sustainable for us, and you're starting to see that within the results already.

Energy transition, actually, again, very, very strong. It depends how you categorize the various elements of energy transition. We're still very strong in the insulation market. The example that we used within the Munich district heating and district cooling is a very good one as well. But also, we're starting to see more of the CO2 energy efficiency areas start to come through. They are on the smaller end, but they start to develop, especially in the engineering piece, yes.

So we have a strong order backlog. If you see it overall, we're in a very good place to go forward with a good order backlog, not only for half 2 but also into 2023. Happy to take a follow-up if you've got one.

[Bettina Schneider, executive]

Thank you, Duncan. Next question comes from Stephan Bonhage, Bankhaus Metzler.

[Stephan Bonhage, analyst]

Two questions from my side. The first one would be on the topic staff cost, which should be your biggest cost block. Maybe you can share here your view and forecast on the magnitude of staff cost increases this year and maybe also already next year?

And my second question would be on the EBITDA performance in E&M International. We now have a series of negative quarterly EBITDA result. And I want to know when can we expect a positive EBITDA in International already in Q3? Or should the positive EBITDA figure be more back-end loaded and you expect the profitability coming in Q4?

[Thomas Schulz, executive]

Yes. Stephan. Here Thomas. Thanks for the question. At first, regarding the staff cost, actually, the move in the staff cost this year is not significant. That's number one. But I would like to raise the following: the flexibility of a company like us having the main business or, if not all, through people is, of course, especially on the corporate cost and administrative costs, very important. We did a lot of improvement in the past, but more has to come in that way. We have to get more flexible in the cost structure.

If -- and that, by the way, to say it quite open, makes us more resilient for whatever comes in the future. And management's task is to have a company that's flexible in the cost structure that you are not have to fall in panic if something goes negative or you have a big problem to recruit if you see it gets positive. And with -- regarding the EBITDA and E&M International.

[Duncan Hall, executive]

Yes. Stephan, Duncan again here. So let's talk in halfs, we're expecting half 2 to be a positive EBITDA performance with E&M International. And the reasoning behind that is a lot to do with the North American business where we're trading out those lower-margin construction projects that we're doing. The largest one we have on the books will be finished in Q3, maybe early Q4. And then that larger one, that's it. That's done.

And then we'll start to see the impact of the richer mix of the framework contracts that we have and the small capital projects that we're also executing with those framework customers. That's the value that we have. If you remember, that's a lot of what we do within Europe where we have framework customers that we also add on small capital projects, where we're very successful in delivering good, solid margins with minimal risk. I hope that answers your question.

[Bettina Schneider, executive]

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

[John Campbell, analyst]

I've just got one. I was reading, as I understand, your outlook for 2022, which you reiterated. As I understand, it assumes that there's no significant disruptions in gas and energy supplies for your customers. I wanted to ask how comfortable do you feel with this view. And maybe could you help us understand your exposure if the supply outcome of gas were to be unfavorable?

[Thomas Schulz, executive]

Thanks a lot for that question. At first, it is very, very important to understand. If gas would be not that much available or full stop, you can't switch off the plant with a pure button push. That's not the case in the industry. You have to run it down. It's actually like a half turn around what you have to make to bring a plant then into an idle situation so that when gas comes or another supplier comes in that you can restart and adjust it again because there's a hell of a value behind. Customers will not allow that. We earn money on that.

We are very well positioned to help customers with that. Any change in the supply, in volume, you have to adopt your plant. That is where we earn money on it, too, because we can help customers to work with less or with more volume coming in and through. And very important, all our clients are working on substitution if the risk would appear that we have no gas out of Russia, if the risk would appear.

That would mean that we are again on the site to help clients to change to adopt the plant from one gas supplier into another one because gas is not gas. If you get gas out of Russia, it's different than Middle East. It's different than Africa. It's different than LNG and so on. And that's typical in mining industry that you have that situation, and we earn on all these 3. So to connect us with a full stop of gas supply that we then have a hell of a problem is actually not the case as we see.

Of course, our customers change some of them then from CapEx investment into more crisis management, but crisis management cost money, too. And you need experts to do that. And you are normally not an expert, if you run for decades the plant with a normal gas supply. If you then have to make a quick shutdown and a change, then you need the experts. And on the back of the people who can do that is the name Bilfinger.

[Duncan Hall, executive]

I mean just to add, again, John, exactly as Thomas was saying, switchover costs are a great opportunity for us into the refineries if people are switching over to different oil, that's great. And if on the gas front as gas scrubbing technologies and skills that we use have put to full effect there as well.

I think more importantly, though, as well, if there is a turn down, so somebody runs at 80% or 90% of their process capacity, those pumps, those motors, those [indiscernible], they still continue to turn. They still need to be maintained. And that's our core service that we continue to deliver on those. And that's a great opportunity for us, and we'll continue to develop maintenance services into those operating plants.

We are not seeing any customers telling us they're expecting to shut down. They know there's going to be some stress, but also they want to keep on running because the markets are very good. So they want to keep on making as long as they can. So we continue to be optimistic with them and work with them to save as much as we can through efficiencies and cost improvements. Thanks, John.

[Bettina Schneider, executive]

Okay. [Operator Instructions] Okay. I think there are no further questions. So we conclude this conference call for today. Do not hesitate to contact the IR team in case you need further support. And thank you very much for your participation.