Bilfinger SE

XETRA:GBF

Earnings Call Transcript 2023-Q2

[Thomas Schulz, executive]

Hello, everybody. Let us start directly with the key highlights. It was actually quite a positive quarter 2. Orders received, 1% plus, but especially with that what we had in quarter 1, quite a good growth for the first half of the year with more than 10%. Revenue increased by 6%, same is with the half year result where we are slightly higher with 7% growth. EBITA margin for the quarter, 3.9%, which is significantly above last year. Free cash flow, as expected, minus EUR 46 million. And regarding the market in all geographies in all industries, a positive development and a positive outlook. We are actually proud, proud in the name of all our employees, because the strategy and the strategy implementation shows first effect in the figures too, and we will go later on a little bit more into the details for that. Part of that is the Efficiency Program, which is well on track and will deliver that what we promised. The outlook for 2023 is confirmed.

If we then look to ESG, especially to the safety part. Safety is utmost important for all of us, and especially if you work on different plants in different countries with different conditions all day long. We, as Bilfinger, have a leading function here. We perform actually quite well and belong to the safe -- or the most safe countries -- not countries, companies on earth. But this quarter, we had a deterioration in the figures. We actually went up, which is negative in the safety measurement from quarter 1, no matter that in the TRIF we have an improvement in the first half of the year. Special measurements to improve the situation are already implemented, and we expect improvement throughout the year in that very important part of safety.

If we then look into the figures. Let us start with the order intake. We have a flat order intake development versus Q2 2022. But the truth is that we have quite a significant growth in E&M Europe with 6% and in Technology with 32%, but International is minus 23%. And the minus 23% is purely out of the phasing out and closing down of the construction project business in North America, which is part and fully in line with our strategy. Our book-to-bill towards the second half -- yes, the first half of the year is 1.14%, which is quite positive. If we look into the share of projects that's actually borne out of the good development in technology, it's in nuclear, it's in biopharma, it's in green technology, which means it's all over. And not to forget that Technology predominantly works in Europe, too.

If we then look into the revenue. The revenue has a growth of 6%, whereas Europe is 6% in growth, Technology 34% in growth and International, minus 9%. And if we look into that and seeing these figures, it's clearly again out of the restructuring and the phasing out of the construction projects and business in North America, which means it's in full line with that what we wanted to achieve. So we, as a management, are quite satisfied with the order intake development.

If we then look into that what we got as orders. Here is a selection of some of the orders, what we got. One is the battery production. We, as Bilfinger, is an EPCM, got the contract for the largest -- European largest battery system factory. It's in Gdansk in Poland from the well-known customer, Northvolt. Another part is here with ExxonMobil, and it's for more or around 140 natural gas plants to make the maintenance as a frame contract for, in Oil and Gas, a fairly long period of time of 5 years. The last one, what we would like to show is biopharma where we are very strong, especially in Continental Europe and now starting to get quite strong in the U.K., too. We got on multiple locations EPCM framework agreements and contracts as a 5-year contract to improve the R&D facilities of clients.

Out of that, we would like to go to the innovation because that's one part of our success. Besides the market, innovation is a big driver for being successful. And we are known for that and we are actually proud of that, too, that we use well-established innovation in other industries, combine them for the benefit of our clients to offer them, like in that case, up to 80% improvement in inspection time. It is, again, a drone-based control and inspection of insulation at any industry, any setup, what you can imagine.

Why is that so important and so innovative? Because in regular inspection, you have to make scaffolding and you have to go with quite a lot of people on -- into the plant, on the plant to check and to control. Here, we can do it fully digital with an own developed software flying over it and immediately identifying the spots and having them with little assess work, a direct improvement for our clients. This is another milestone to reduce CO2 for our clients and fits fully into our strategy of being #1 in efficiency and sustainability improvement for our clients.

Out of that into the Efficiency Program. The Efficiency Program is a program to reduce 750 positions in administration within the Bilfinger Group. We announced the program in November last year with the clear target: 750 positions out, the onetime cost EUR 62 million, and the full benefit is EUR 55 million in the full year 2024. Whereas we will take EUR 13 million from the EUR 55 million to invest into our own people in education and training, which is, in a time of labor shortage, especially of expertise, very important.

Let us look where we are today. At the end of quarter 2, we had 251 of the positions out of the company. The cost for it was EUR 3.3 million, and the improvement already at 30th of June was EUR 19.3 million. That means in the year 2024, we already have an improvement on the list of EUR 19.3 million, because, as I said before, it's a run rate and it's placed for the year 2024, where we will be over 5% EBITA. The ongoing costs, which are not in the provision and what we realized up to the end of the quarter 2 is EUR 3.4 million. If it comes to the people and the people development, FTE development, you will recognize that we are down roughly 1,300 people, and out of that, more than 1,000 in North America to that what we said in the order intake to phase out the construction project business, the older one. And the other part, quite a vast majority, is related with the Efficiency Program. Most -- more or less, all of the positions are outside Germany realized.

If we then go to the financial highlights, I would like to give to Matti, our CFO.

[Matti Jakel, executive]

Yes. Thanks, Thomas. Good afternoon, everyone. As Thomas said, quarter 2 was a good quarter. Looking at orders received, plus 1%, may look on the low side. However, as you remember from the first quarter, we had a significant growth there. And year-to-date, orders received are up 11%, which is far above what we have said as the midterm targets during the Capital Markets Day. We made good progress on profitability. As you can see, gross margin has increased to 10.4%, SG&A ratio has reduced to 6.5%. So in total, EBITA margin is up quite a bit at 3.9%. And free cash flow is below prior year, but as expected, with minus EUR 46 million.

If we look at the revenue. We see plus 6% organically, which has happened across all the businesses except the U.S. And here, it's not the entire U.S. business. It's one business where we have planned and we are executing a reduction in revenue in the installation and construction projects. We have seen quite a strong increase in Technologies, and I'll come to this on a later page. Profitability up to 3.9% compared to 3%, EUR 43 million in one quarter is a very good number compared to EUR 32 million in the second quarter of last year.

Gross profit increased to EUR 116 million, 10.4%, over EUR 107 million, 9.9%. Again, this is across the business. Particularly, we have seen an improvement in International as well. And the SG&A expenses, as I said earlier, down by EUR 3 million to EUR 73 million compared to last quarter, which is an indicator for a very good cost discipline throughout the organization. We have on a restricted basis only refilled positions that were very critical. All the others we left open or removed those positions, and we have made quite some progress on standardization and automation, which is also fully in line with our strategy.

This chart, which we introduced at the Capital Markets Day, mainly to explain the large swings that we had between 2021 and 2022. This year is much easier to read. Starting on the left-hand side with the EBITA and going through the financial results, taxes and others to get to the net profit. In essence, the higher EBITA really translates into a higher net profit, and the earnings per share come to EUR 0.79 for the quarter.

Free cash flow is below the very good prior year quarter. But if you remember, it's not shown here but we know it all, the first quarter in 2022 was quite weak. So we look more to year-to-date in that respect. And year-to-date, the free cash flow is minus EUR 73 million compared to minus EUR 57 million last year, and this is entirely attributable to an increase in CapEx, which went up by EUR 15 million. So that's where the net difference comes from.

So all in all, also seen on the right-hand side, we have made some progress on working capital. The DSO day is reduced by 2 days quarter-over-quarter. Despite increased revenue, the net trade assets are lower.

A bit more flavor on the segments. We have seen good growth and stable [ EBITDA ] margin in the second quarter in Engineering & Maintenance Europe. Orders received, up by 6%, also after a very strong first quarter, EUR 922 million was the first quarter, now EUR 694 million. Year-to-date, we have grown double digit in Europe as well. Revenue has grown by 6% to EUR 751 million, and the EBITA margin is quite stable at 5.2%, which is above 5% obviously. Revenue split has not changed and the split between the industries has also remained quite stable: 40% in chemicals, petrochemicals, 25% oil and gas, 10% in energy and pharma, and biopharma and the others make up the rest.

International. Middle East has come in with quite a positive development. And as mentioned earlier, we are restructuring the U.S. business, parts of the U.S. business, and that's impacting our performance. However, orders received quarter-over-quarter are minus 23%, but year-to-date, we're still up at 10% and the revenue is, by design, obviously reducing from EUR 186 million last year to EUR 171 million in quarter 2 2023. The revenues from the installation projects are dropping off rapidly, as we wanted it to have. They are being replaced with revenues from maintenance work which, and that's very typical, we know it from Europe, comes in at a slower pace than pure project work.

On the profitability, minus EUR 2 million after minus EUR 1 million, so almost at the same level but better than quarter 4 and quarter 1 2023. Revenue split, also here very stable still. But with the reduction in projects, this should be moving more towards frame and service contracts in the near future.

A real highlight of the second quarter is how Technologies developed. We have a significant increase in orders received, over 30% more to EUR 225 million, a book-to-bill of 1.22%. The revenue is up over 30% [ as referred to ] EUR 185 million. So this all falls into line with our strategy for the projects in energy transition. Profitability, up to EUR 8 million compared to EUR 3 million, which is a 4.4 percentage against the revenue compared to 2.3%. So it's a full 2 percentage points better than quarter 2 2022.

With that, I hand it back to Thomas for the market development.

[Thomas Schulz, executive]

Thanks a lot, Matti. The market development is all over very positive. It's one of the times as a CEO where you really can look, "Well, good market for us." And I would like to go through each of our core industries in Bilfinger. If we start with energy, the whole world talks about energy transition. And what does it mean? It doesn't mean only to have new energy and new technology. It's actually quite a lot with by far the majority to improve existing assets and combine them with newly developed technologies. And there, we are [ building ] in all geographies, in all the industries where we are in quite successful.

On top of it, we have the nuclear power revival, and that revival is in North America, that revival is all over Europe, but Germany, and that gives us quite a lot of tailwind in that industry where we are not only participating to build new nuclear power plants where we are able and actually part of the mobilizing nuclear power plants as well as making waste treatment for what we call soft -- so-called soft waste material, which, for example, the mine site Asse in Germany where we help the client to handle this kind of low ray -- gamma ray material. Further, we see that the investments into new technologies like battery, like from Northvolt or carbon capture or hydrogen or any other new energy resource helps us to drive our order intake and our profitability. And we are able, with our strategy, to combine our different services into a solution partner we are very much like in the industry.

If we then go to the chemical and petrochem, this market is good, too. And it's in Germany, of course, quite a lot of challenging verbalization around it. But when you look into what we, as Bilfinger, offer, we help clients to get more efficient and more sustainable, and that's what our clients need if they expand like in North America and what they need if they actually decrease their capacity. In that area, we see ongoing investment projects, and we don't see any stop of it. Yes, it's a challenging market in Germany. But if we see North America, rest of Europe, it's quite a positive talk in the chemicals and into petrochem.

Then to Oil and Gas. Oil and Gas was underinvested for 10 to 15 years. And in the last 1 to 2 years, a lot of investments are ongoing in refurbishment, higher maintenance level on existing infrastructure. On top of it, there is a lot of efforts from all our Oil and Gas customers to improve their efficiency and especially sustainability. Here with LNG plants, hydrogen, transport, plants, carbon capture, it's all over electrification in the Oil and Gas industry. And we, as Bilfinger here are, again, very well positioned.

On top of it, the pharma and the biopharma industry has a very high demand, not only in the pharma sector, actually in all related industries. The industry tries to localize their supply chain significant more than they had before in the last 20 to 30 years. They look for standardized modular systems and plant setups. And we, as Bilfinger, are able to offer them that in North America, in Europe, in the Middle East. This good demand gets on top of it a good demand for future maintenance and service business. So all over, we see that the market for that, what we offer for that, what we have in our strategy is quite good for us not only short term.

Out of that, let us look into the outlook. You see here on the left column, the actual result for 2022. In the mid-part, our outlook, and on the right side, the year-to-date. Let us start with the revenue. We ended last year with roughly EUR 4.3 billion, and we have a guidance of EUR 4.3 billion to EUR 4.6 billion. And we are already close to EUR 2.2 billion half year. The EBITA margin, let us take the 3.2, where we have adjusted by special items versus a 3 point -- for the full year versus a 3.0 for the half year already, and we have a guidance of 3.8 to 4.1. We will result quarter 2 with 3.9%. We will be in that guidance, of course.

Free cash flow. This is guided on EUR 50 million to EUR 80 million based on the EUR 62 million, a little bit more than EUR 60 million in provision what we have for the efficiency program. Important to say in all these figures is that a lot of the improvement, what you have here, on one side with the market, which is quite good, as well as with the profitability is what we call an own steam. We explained that very detailed what we do with operational excellence, with the good performance on the efficiency program and with our repositioning of the company as the main supplier into efficiency and sustainability. Actually, as we see the market developing, we are an absolute good fit for that, what's going on in the market.

Out of that, the key highlights. Orders up 1% in the quarter, more than 10% half year, revenue up 6% in the quarter, EBITA of 3.9% in the quarter significantly above last year. Free cash flow, as expected, low with minus EUR 46 million. The market, quite positive in all industries and in all geographies where we act in. Very important, our strategy and the implementation show first effect in the figures, too. And here, again, a big thank you to all our colleagues around the world for a very, very good job to make that happen. Part of that is the efficiency program, which is absolutely on track and will be finalized at the end of the year as promised.

And with that, the outlook is confirmed for 2023. Thank you.

[Bettina Schneider, executive]

Thank you very much, Thomas. Ladies and gentlemen, we come now to the Q&A session. [Operator Instructions] Our first question comes from Gregor Kuglitsch, UBS.

[Gregor Kuglitsch, analyst]

I guess my first question is just on the range of guidance. Sort of I appreciate you don't want to sort of change your guidance all the time. But perhaps as we sit here in August, do you think you're more at the lower or the top end of that guidance range? Obviously, a bit of a spread on both on margin and on revenues.

And then the second question is on the cost cutting, which is making progress. And it seems like something like $20 million or so is now, I think, left the company in terms of actual costs. So I want to understand, in this year's numbers, how much do you actually think will be realized? And then consequently, what's kind of the carryover effect into next year, sort of assuming you crystallized some of the savings already in the P&L now.

And then maybe a third question on the U.S. restructuring. Can you tell us kind of how far we are there? How much revenue will drop out, kind of a little bit more detail? How far down the road are we in this sort of process of exiting sort of some of the higher risk stuff in the U.S.?

[Thomas Schulz, executive]

Thank you very much, Gregor. Regarding the guidance, we stay and that's what we said, the 3.8% to 4.1% on the EBITA and in the revenue, of course, and then the cash flow, too. Reason for that is when you look into the absolute figures, it's actually not a lot of movement between the 3.8% to the 4.1%, to be honest. We think the guidance is quite narrow in that. So we always would go from the midpoint of the guidance. Regarding the other parts...

[Matti Jakel, executive]

The Efficiency Program -- we started very late into the Efficiency Program late last year. So getting up to speed and having the design in place took a bit of time. We have seen a small effect this year. And what we expect as an improvement against 2022 P&L is somewhere in the mid- to higher single-digit euro number. And the full effect that we expect before reinvestment into training and education is EUR 55 million. And with the sort of ramp-up that is weighted towards the year-end, we feel quite confident that this will end up in a yearly run rate of EUR 55 million starting at the 1st of January 2022 -- 2024, sorry.

The -- your third question was around the restructuring in the United States. I think we have tried to explain, and hopefully it came through, is that this only affects a part of our business in the United States, which is the large installation projects that have been unsuccessful in the past. We have had large projects in the $100 million range, which we will not be bidding and performing in the future. And we are moving our business into the industrial maintenance business, very similar to what we do in Europe. We have a number of European-based clients with large installations in the United States that keep asking us to help them also in the United States. So we see quite some positive market movement there in our favor.

In terms of revenue, that's a bit difficult to answer, to be honest, Gregor. We know what's -- how the sort of the downward trend is on the revenue from the installation project. But the increase from the maintenance project, as I said, it doesn't come continuously. It takes a bit of time to get up there. So if you bear with me for another quarter, I may be better positioned to answer that question with firm numbers.

[Gregor Kuglitsch, analyst]

More follow-up on the efficiency. It seems like you're also incurring some costs, I think, EUR 3 million or something like that. Can you just explain what's going on there? I guess, it's sort of like running costs of -- I don't know exactly, but I guess you're not providing for that. So that's in the profit. So you're -- just to maybe clarify there for the mid- to high single-digit numbers, that's a net number? Or if you...

[Matti Jakel, executive]

On the cost -- sure, Gregor. The cost that we have shown of EUR 3 million is related to cost that we could not provide for, mainly consultant costs. The in-year positive effect was a gross number, so not a net number.

[Gregor Kuglitsch, analyst]

Okay. And the consultancy costs dropped away?

[Matti Jakel, executive]

Yes.

[Bettina Schneider, executive]

Thank you, Gregor. Next question comes from Christoph Dolleschal, HSBC.

[Christoph Dolleschal, analyst]

I've got a quick follow-up on the verticals because you said all verticals are doing well, but then we've seen rather weak numbers by the chemicals globally, basically whatever you looked at. Could you probably be a bit more precise there, which segments are doing well? Or do you generally also see the chemicals being a bit more hesitant in OpEx and CapEx?

[Thomas Schulz, executive]

Yes. The -- good question, Christoph. Thank you. The very important is to understand that we, as Bilfinger, are there if customers would like to outsource, if customers would like to increase efficiency, if customers would like to get higher level of sustainability. All these 3 items and targets are actually sitting for -- to expanding chemical companies like in North America and to, let's call them, shrinking ones and, how to say, reducing capacity like only in Germany as we see it. What does it mean? It means if a customer in Germany says, we would like to close down a site or we would like to decrease capacity on an existing plant, we get a longer-term contract to help clients to do so, to organize it in a way that customers are still being cash positive and earning some money with it, no matter that they decreased the capacity. Because it's not that you go into a plant and you push a button and then everything is half the capacity. You know that. So you need experts for that. The labor shortage helps us on that. The expertise shortage helps us on that. Our Bilfinger offering that we can do from engineering to all the kind of maintenance, everything, helps us a lot. Our standardization of digital products helps us. So we have relatively good order intake in an expanding market as well as a shrinking market. Of course, the shrinking market after several years will be then not the growth market for us any longer, too. We know that, but this is not within quarters where it goes away. We talk here midterm years.

[Christoph Dolleschal, analyst]

Just a follow-up in that sense. So basically, in this transition phase, so to speak, could you be actually saying that you're benefiting from, let's say, the weakness of the chemicals vertical? Because obviously, there's a lot of things going on, capacity adjustments, I would say, so that you're actually benefiting from that until all of that transition is done, right?

[Thomas Schulz, executive]

Yes. Of course, the word benefit in a shrinking market is not really a nice word, but you are completely right that customers need significant support if they reduce capacity as well as they need if they expand. And we see a lot of customers thinking or having clear plans to invest outside Germany and looking into capacity reduction within Germany. And we cannot only help and support customers then to downsize. We actually can help to increase capacity anywhere else

[Bettina Schneider, executive]

Next question comes from Eric Sharper, he did actually call from the chat. Thank you, gentleman, for the call. If the question hasn't yet, it has not been answered yet. Could you please elaborate on plans to refinance the June '24 bond in terms of possible actions and timing?

[Matti Jakel, executive]

Okay. Thanks for the question. We've already done quite a bit there. We emitted a promissory note loan in to the value of EUR 175 million as of June 30, 2023. We took a lot of time looking at the markets, the debt markets and decided to go out very early. And this was done quite successfully. So we feel very well positioned to then end the bond in June, or latest, in June of 2024. The difference between EUR 250 million and EUR 175 million, I think we can deal with easily, but we may still go out and replace it in full.

[Bettina Schneider, executive]

Thank you. [Operator Instructions] Next question comes from Craig Abbott, Kepler Cheuvreux.

[Craig Abbott, analyst]

Yes. Just quickly on pricing. I think -- I don't recall the exact split in Q1 any more, but I think there was a decent pricing element. And also on the cost side, I mean, in general, not in terms of the Efficiency Program but in terms of underlying wage inflation. Could you maybe just give us an update on both sides, what you're seeing in terms of pricing in general? And I know it's a very broad question across all 3 divisions, but on new contracts and what you're seeing on the underlying cost development.

[Thomas Schulz, executive]

Yes. The -- at first, of course, inflation goes on. That's clear. But of course, it slowed down. If we look into the overall inflation, what we think we have in the figures there, we talk between 3% to 4%. If it comes to the salary part, the remuneration part, which is for a people company like as we are quite important, there we see around 6% in the increase. If you compare that with our cost development, you clearly see that the operational excellence, the Efficiency Program is giving us tailwind in the cost development. And that is good. If we look into the pricing, we don't see in the market a reversal of that what we had in the last 1 to 1.5 years where we push for higher prices. We are not getting another movement in the other direction that now clients come and say they have to lower the prices. We don't see that. It's more that we are working more and more like partners together with our clients what to do to reduce the overall cost base of our clients, what we call the efficiency, which is 1 of the 2 main cornerstones of our strategy, efficiency and then sustainability. Why are we partner for that? It has to do with the broad offering, what we can show to our clients. With that broad offering, we are able to calculate for the clients the cost impact of better doing in maintenance or engineering or anything else down to the bottom line of the customer. That helps a lot to reduce the focus from a pure cost base comparison with maybe smaller peers in the market and highlighting more of the added value when we work on client side. I hope that answers the question.

[Bettina Schneider, executive]

Okay. [Operator Instructions] There are no further questions as of now. As I know some of you are on holidays, so if you would like to contact us later, please feel free to contact the IR team any time. With this, we would conclude this call. And yes, thank you very much for participating. Enjoy your holiday and see you and talk to you latest in Q3 in November. Thank you very much. Bye-bye.