Friedrich Vorwerk Group SE

XETRA:VH2

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and a warm welcome to today's Earnings Call of the Friedrich Vorwerk Group SE following the publication of the Q1 figures of 2024. I'm delighted to welcome CEO, Torben Kleinfeldt and CFO, Tim Hameister, who will give us the presentation on the results shortly. Afterwards, we will move over to our Q&A session in which you will be allowed to list questions slightly to them. So having said this, Mr. Kleinfeldt.

[Torben Kleinfeldt, executive]

Thank you very much. And also from our side, a very warm welcome to the earnings call, first quarter and 2024. As always, a short look on our agenda for today. I will first give you a short market update with some really astonishing figures on the energy transition in Germany and in Europe that have just been published a couple of days ago after the short market review and update. Tim will take over and present you the financial figures for the first quarter. And after that, I will give you a short update on our business activities as far as they are interesting, at least for most of you.

So let me start with a market update. Recent research being published by EY on the cost of the energy transition in Germany. To conclude this study, there will be EUR 1.2 trillion being spent between 2030 -- by 2030 to 2035 on the German energy transition. Of course, not all of those EUR 1.2 trillion is applicable to Friedrich Vorwerk as a market, but it is in part that will be invested in the transition grids, the distribution grids will be addressable here for Friedrich Vorwerk.

Looking at the figures and some of them might look quite familiar, transition grids. So most of our activities are taking place in transition grid. So where energy is being transported over long distances -- combined natural gas and electricity grid will be investments of roughly EUR 250 billion during the next 10 years. But also in the distribution grid and especially here, the EV mobility and also heat pumps will require large investments in the distribution grids to at least get the electricity and maybe later on also hydrogen into the households with the big cities.

And talking about cities, of course the best way to decarbonize the cities like Berlin, Hamburg, Dresden and other big cities here in Germany just repeating the way to go because heat can be generated centrally with very low CO2 emissions and can be brought to the households within the district heating grids. Also here, we are already active in this market today. We see a total market of EUR 70 million over the next 10 years. But also green gases like biomethane will be a growing market. And already today here, we are delivering roughly EUR 40 million to EUR 50 million biomethane upgrading plants per year to the market, not only in Germany, but also in France, Italy and other European states.

And we'll get to the last figure on this study, building up of the H2 core grid, which has just been announced by the German government will also be investments of roughly EUR 20 billion over the next 10 years. All of that will be applicable to Friedrich Vorwerk. And actually, if we see the projects later on the following slides, we get to know that Friedrich Vorwerk is already active in some of the H2 core grid projects.

But looking at the electricity transition market in the first place, which is altogether, our largest market at the moment, the newest development plan has just been published by Bundesagentur. This plan look ahead up to the year 2045, with investments of roughly EUR 320 billion and not only including 5,000 kilometers of new electricity lines, but of course, also large transformer stations and inverter stations to transform the power from AC to DC and vice versa.

So looking at the hydrogen projects. And of course, at the moment, still very important public funding for all of the hydrogen projects that are being kicked off in Europe. The EU has just announced that they released a total funding of 100 projects in the EU of almost EUR 7 billion. This is dedicated to more than 30 projects in all member state countries. And of course, German government is subsidizing these projects as well. Some of them are directly related to the buildup of the H2 core grid. And as you see on the right side of this slide, most of the projects will be run by the customers. We already know today from the natural gas business. So we see here in Open Grid Europe by Thyssengas, Gasunie and others. And by looking at the project names, for example, the HyperLink project being run by Gasunie, we are already active in this project today, changing out a lot of equipment more than an existing natural gas pipeline to make it hydrogen-ready. And this new dedicated pipeline will then be able to transport hydrogen between the big cities of Hamburg and Bremen once it is established.

And looking at the whole start grid. So the foundation grid for hydrogen in Germany, Mr. Habeck has just published it about 2 months ago in the Bundestag, the total start grid, -- so the initial grid of hydrogen in Germany will run for roughly 9,700 kilometers. Of that 9,700 kilometers, roughly 40% will be newbuild pipelines and 60% of that total grid will be converted pipelines from natural gas towards hydrogen. Both of the projects are, of course, a very nice market for Friedrich Vorwerk and running in total investment volumes of almost EUR 20 billion. It will secure work for our pipeline divisions up to the year 2032.

So as we see, I think in all sectors of our business, great market opportunities coming up. And I would like to finish for this section and hand over to Tim for the financial performance in the first quarter.

[Tim Hameister, executive]

Yes. Thanks a lot, Torb. I would also like to welcome you to today's earnings call on the first quarter figures. And we have to start off, let's have a look at the revenue development across the year. So in the first 3 months, we achieved revenue growth of 5% to EUR 76.7 million. Despite some challenging weather conditions, mainly in terms of a lot of rain, the overall season in week 1. We were able to achieve this growth, thanks in particular to a high contribution to revenue from our new flagship project A-Nord, where we were able to resume the work already in February after a short winter break as part of the preparatory works.

In addition, the proportion of our subcontractor services was also significantly reduced in the first quarter compared to the same quarter of previous year, and therefore, a larger proportion of the value add was generated by our own resources, which ultimately led only to a moderate increase in revenue but had a positive impact on profitability on the other hand side.

Accordingly, EBITDA increased by 21% to EUR 6.8 million in the first quarter, which corresponded to a margin of 8.8%. Adjusted EBIT rose by 55% to EUR 1.9 million in the same period. The increase in profitability here is mainly due to the gradual completion of the much discussed legacy projects, which are growing out of the order backlog. These projects now only account for roughly 3% of the order backlog as at end of March. It should also be noted here that in the figures that we have accrued a part of the remuneration level 2 of our major project A-Nord as a contract liability in order to prevent potential negative one-off effects from the [indiscernible] system in the next years. However, in the current project progress, there are so far no signs that we are heading towards this modest area.

In terms of order intake, we've once again demonstrated our competitive market position, although order intake was down on the previous year, which was characterized by 2 major projects in our electricity segment, we nevertheless achieved an order intake of EUR 121 million, which is attributable to various small- and medium-sized projects. This primarily relates to plant construction projects in the electricity and adjacent opportunity segments, so transformer stations and biogas, [ heating ] and upgrading plants.

In addition, numerous refurbishment and service projects, including also some framework agreements were acquired or renewed with the result that the order backlog more than doubled compared to previous year, also thanks to A-Nord, obviously. The electricity segment now accounts for 80% of the order backlog and will, therefore, be a key growth driver in the coming years.

On the next slide, we've included a new chart showing the backlog to sales ratio on a 12-month rolling basis. At the end of the first quarter, this figure was already at 2.8%. And in view of the project pipeline, both for electricity and natural gas, respectively, hydrogen, which we have presented in some of our last calls. There's certainly potential for further significant increase in order intake and order backlog this year.

On the other hand, the workforce is still the limiting factor for growth. Nevertheless, our various recruiting activities are now slowly beginning to bear fruit with the result that we've already increased our headcount by 3% compared to the end of the year. And also, April went very well from a recruiting perspective.

Our guidance for the full year remains unchanged, with moderate growth of at least 2% to over EUR 380 million in revenue. At the same time, we expect also further improvement in profitability in the next quarter so that an EBITDA margin of 11% to 13% is expected. At the upper end of this range, this would put us almost 5 percentage points above the previous year, while the adjusted EBIT margin is expected to increase at a similar rate.

And with that, I would like to hand back to Torben for the business update.

[Torben Kleinfeldt, executive]

Thank you very much. And besides all the interesting projects that mainly have been kicked off during the month of February and March. We were also successful on the side of M&A activities. We were able to finish a small M&A deal for a very specialized cathodic protection service provider called Seyde & Coburg. Seyde & Coburg is very close located to our new branch office close to the German Capital Berlin in Ludwigsfelde. And this is a good combination together with Korupp with [indiscernible] both own projects in terms of cathodic protection, but also provide cathodic protects and services and upgrading systems to existing grids which is especially necessary when voltages in the high-voltage DC lines will be ramped up and has influenced on existing pipeline infrastructure.

But not only that, we have also started our major pipeline project for this year -- project is called the SEL. The client is terranets BW. So BW stands for the federal country of Baden-Württemberg. That shows that we are not only active in the north of Germany, but can also be active in the south of Germany.

So this project is located very close to the city of Stuttgart and the first lot has been awarded to us and our joint venture consisting of Friedrich Vorwerk, Bohlen & Doyen, PPS and Austrian Habau Group. The pipeline compromises of the spread of 25 kilometers just north of Stuttgart diameters 48-inch. Speciality of this project is that the pipes are made of a very heavy wall thickness due to the later use of for hydrogen, which requires a very specialized welding system so that front end welding and the tie-in welding can be executed on this project.

And talking about pipeline welding, Friedrich Vorwerk already looked into the next generation of welding equipment. We did found a new company called 5C-TECH to develop and improve existing welding technology. This welding technology, as you can see, consists of a welding buck with a double torch system. So increasing basically the speed of the bud welding by 2 because you are doing 2 weld passes at a time. But also we are using a different kind of wire and a different kind of welding process to deliver higher quality welds for later hydrogen products.

And as we saw on the slide before, there will be almost 10,000 kilometers of hydrogen core grid coming up. So I think this development comes at the right time and can be supplied to the future hydrogen projects of our company's group.

But not only in pipeline construction and then the transition grid we are active, but also in terms of electricity and not only in cabling, but also in setting up large substations Bohlen & Doyen and Friedrich Vorwerk was able to acquire the substation of leading in, which is located in Lower Saxony, so very close to our existing branch offices in Tostedt and [ Großes Moor ]. This project is very similar to the project we have executed back in 2021, where we completed the substation in the Lower Saxony City of Stade. Also here, project volume will run for more than EUR 25 million and is planned to be completed by the end of the year. So this is also a very nice project from the electricity market and in the field of energy transition.

So that would be it from our side. I think -- we made it to be ready with our small presentation in 15 minutes, and that will give us a lot of time later on or now following this presentation for your questions. And we'll, of course, try to answer them all of them.

[Operator]

Wonderful. Thank you so much, Mr. Kleinfeldt and Mr. Hameister for the presentation. We will now move over to our Q&A session. [Operator Instructions] And we've already received the first question. So the first one is what will be the key factors driving up the EBITDA margin throughout the year?

[Tim Hameister, executive]

Yes, one of the key aspects, of course, is to finish all of the so-called legacy project. As I said, they are still roughly 3% of these projects still in the backlog, which should be all finished in the course of this year. And then, of course, we will try to focus on -- have a good performance in our new project, which we acquired this year and also last year, which now imputes, of course, higher anticipations regarding cost inflation and stuff like that.

[Operator]

Wonderful. And then we have another follow-up question from another participant concerning the EBITDA. It's a very long question. So what accounts for the large difference between the EBIT percentage and EBITDA percentage. Do you expect this difference to remain the same in coming quarters for the year? Historically, you targeted a 15% plus EBIT margin. This has been shifted to targeting on EBITDA margin. Long-term, what should we think your normalized EBIT margin should be considering it once was guided to be 15%?

[Tim Hameister, executive]

Well, the difference -- the growing difference between EBITDA margin and EBIT margin, I assume that was the question, is, of course, a result of the high investments we made since 2021 when we use the proceeds from our capital increase to make the company ready to tackle all these large-scale projects, which we have just discussed. As I said in one of the last calls, now with all the major investments have been made, we will gradually reduce CapEx again so that we will also see in the next years that the difference between EBITDA and EBIT will be smaller again.

For now, we focused on forecasting mainly on the EBITDA margin for the just called reason -- and of course, we will try to further improve our EBITDA margin and our EBIT margin in the next years. But please keep in mind that we also have some shifts now in the contract structure. For example, with our flagship project A-Nord, where we do have a lot less risk for us in this contract structure, which typically comes along also little bit smaller margin on this contract.

[Operator]

All right. And then we have another question, which is really long. Thank you for highlighting the incredible growth prospects for the energy transition. Your order book is impressive. However, your current growth rate is low partly thanks to the challenge of adding engineering talent to your firm. This has been a challenge for some time. What do -- what can you do to bring one more engineers and better capitalize on the growth opportunity?

[Torben Kleinfeldt, executive]

Well, first of all, to make it clear, it's not only better of engineers that we need to get on board for the project overhead, so project in construction management, but it's also a matter of getting blue-collared workers on board. So for example, machine operators welders, fitters all the very skilled personnel blue-collared, which is necessary to execute these projects within high-pressure gas pipelines, high-voltage cables. So this is not a very easy task. It is a bit different from the regular building construction market, where companies used to employ very low qualified workers from outside Europe and integrate them in their projects. So this can be done within our company as well, but only to a very limited extent.

We are actually trying to source personnel from outside Germany and outside middle of Europe. So we set up a small division to bring new and blue-collared workers, for example, from Romania, Turkey, Spain and the Spanish overseas areas, which I think is already paying out if you see the figures increase in personnel. We had in the first quarter and also in April. I think we just have to work very strong on the group recruitment topics to get personnel on board here. And we do see in terms of engineers and in terms of construction managers. We see a bit of relaxation on the market due to the building construction area is not running very well in Germany at the moment. Of course, these people also have to be adapted to our way of working and also being aware of the crucialness of our projects.

[Operator]

All right. So another question is how do margins compare in the various business areas in the current backlog?

[Tim Hameister, executive]

Well, in principle, there is no systematic margin difference between segments. This is more like an individual project related question. And I mean what should be factored in is, of course, the contract such is a fixed price contract. This is a cost-plus contract? How large is the volume? How's the competitive landscape, all these facts are relevant for the margin in the end. But this is not to be evaluated at the different segments usually.

[Operator]

Thank you. Then by now, we have one question from the chat box left. So if there's still any topics you would like to discuss, please let us know. So in the meantime, we have virtual hand rise from Lasse Stueben. So Lasse, please go ahead and unmute yourself.

[Lasse Stueben, analyst]

I have a question on the backlog. Can you give us a feeling for -- I assume the vast majority of the EUR 600 million from A-Nord is still in the backlog outside of what you've already completed at the end of last year. So removing that to the remaining EUR 500 or so million, can you remind us of the duration of that backlog? Is that -- is most of that revenues already this year? Or how should we think about the phasing of the remainder of the backlog?

[Tim Hameister, executive]

Well, as a rule of thumb, the last years, roughly 80% of the current backlog was translating into revenue in the next years. This ratio has a bit changed also excluding A-Nord since we now have also larger projects on board with a duration of 2 or sometimes even 3 or more years. So at the moment, we do have, I would say, like 5 or 6 large-scale projects, which run up to until 2027 in one case. However, looking at the revenue guidance for this year, at least 90% of that revenue is -- or will be translated from the existing backlog.

[Lasse Stueben, analyst]

Okay. Makes sense. And then just a question on, again, kind of the margin quality of the backlog. You've mentioned the kind of base margin for A-Nord is slightly lower than some of the projects in the past. Again, on the remaining projects, I mean what is the kind of margin we should be looking at here? Is this sort of going back, given the legacy projects that are coming out, should we be seeing these go back to sort of double-digit EBIT margin? Or any color here would be great.

[Tim Hameister, executive]

So obviously, since as you mentioned A-Nord, which has a lot lower base margin. And we'll have a high proportion of revenue this year. The other projects should be at least at the level of 13%, 14% EBITDA to make up our guidance in the end for the full year. But also there are some projects that should have way higher margins when we are able to have a good operations on these projects.

[Lasse Stueben, analyst]

Okay. And just to be clear, on the remaining works on the LNG projects, I saw there's still like you sort of recultivation works, et cetera, happening this year. Is that happening at a better margin because it's you're no longer using third-party services? Or is that still going to burden the result this year? Is that the kind of 3% you were talking about?

[Torben Kleinfeldt, executive]

In general, the recultivation work is, of course, lower qualified work. So usually, the margin on this work is a bit lower than on the rest of the project. So the recultivation work on the possible projects will definitely have an impact on the overall margin this year, yes.

[Lasse Stueben, analyst]

Okay. And the 3%, is that still relating to the plant construction project? Or is that still from the LNG projects or something else entirely?

[Tim Hameister, executive]

It's mainly from the plant construction projects and some smaller projects are also relating to that.

[Operator]

So another question from the chat box is, who are your main 3 competitors? And maybe you can clarify why?

[Torben Kleinfeldt, executive]

Looking at the several activities we are active in, like plant construction, pipeline construction, cable construction. Of course, we do see different competitors in each market. Looking at the energy transition projects for cables and pipelines, we mainly meet the same competitors in both markets, so both electricity, natural gas and hydrogen -- from Germany here, we have a strong competitor from Southern Germany, MAX STREICHER Group but also there are Italian players on the market, also companies from Belgium. We frequently meet on the market, but we have not seen any new competitors turning up for the latest project in the field of hydrogen and natural gas.

For the cable projects, of course, large general construction companies turn up on the market like Max Bögl and STRABAG which we have always seen on cable projects. And of course, plant construction is a totally different competitive environment. We do meet MAX STREICHER here as well, but also the Ludwig Freytag Group from Oldenburg, which is active in those projects. And of course, PPS Pipeline Systems, our long year joint venture partner, which we are sharing a lot of projects with.

[Operator]

All right. And another question, can we expect the material cost ratio of 45% from Q1 also for the next quarters?

[Tim Hameister, executive]

The Q1 figures include a lot of material costs related to the A-Nord project, which are needed and the set-up phase of the projects. So for example, all the materials for the construction of the temporary roads and also already a lot of [indiscernible] pipes. So also, together with the higher revenue shares of the next quarters, this ratio should decrease by a few percentage points in the course of the year.

[Operator]

All right. And the last question, Bohlen & Doyen and Vorwerk are 2 companies with an overlapping service portfolio, how do you decide which projects or task you work on with which companies? Is it to do with different services, regional differences or simply availability? Are the efforts on merge the 2 companies? Or why does this not make sense?

[Torben Kleinfeldt, executive]

Well, first of all, Friedrich Vorwerk as the core company traditionally focuses on the pipeline project and plant construction or large plant construction projects in natural gas and hydrogen. Bohlen & Doyen has a very strong footprint in the cable business, transformer and inverter station business. So projects from electricity markets tend to show up in the Bohlen & Doyen P&L and all the gas and hydrogen-related projects more on the Friedrich Vorwerk side, which is always true for the bigger projects, but not especially for the smaller projects, which can be quite mixed.

In the end, of course, this is the major fact to decide where the project goes because sometimes both of the companies are being asked to hand in offers -- but this decision is made by the estimation Board once a week. And then of course, it has a local factor when we speak about service contracts. So all service contracts we offer to our customers, which are located in the Northwest of Germany tend to go more to Bohlen & Doyen because they are closer at the client, and they have shorter times on site and other projects, which are more to the west and to the east will be executed by Friedrich Vorwerk branches.

We have decided to keep the name Bohlen & Doyen because it is -- it has a very strong image especially for the employees at the Wismar branch. And also, it does attract a lot of new employees in the Northwestern region of Germany. So people always say we have green blood in our veins because Bohlen & Doyen is Sweden and Friedrich Vorwerk is Orange. So we want to keep this name, especially to attract new employees.

[Operator]

Thank you so much for answering. So this answer concludes our earnings call for today. Thank you, everyone, for your attention and your interest in Friedrich Vorwerk. So if further questions arise at a later time, please feel free to contact Investor Relations. And we thank you also to you, Mr. Kleinfeldt and Mr. Hameister for the time you took and for the dive into the presentation and the results. So from my side, I wish you all a lovely remaining day and hand over again for some final remarks.

[Torben Kleinfeldt, executive]

Yes. Thanks a lot for listening today. Stay with us. I think we will be coming up with further very interesting projects over this year and also probably with some long-term contracts, which we can probably finalize this year. And see you latest for the Q2 figures and the earnings call. Have a good week, and thanks for listening again.