Friedrich Vorwerk Group SE

XETRA:VH2

Earnings Call Analysis

Friedrich Vorwerk Reports Strong Q3 Growth and Improved Profitability

Friedrich Vorwerk achieved impressive growth in Q3, with revenues increasing by 32% to EUR 145 million, driven by the A-Nord project and exceptional hiring, which saw a 14% rise in employees. The company tripled its EBITDA to over EUR 25 million, and the EBIT margin surged from 2.1% to 13.7%. Year-to-date, revenues reached EUR 339 million, reflecting a 23% growth. The company raised its revenue guidance to EUR 430-460 million for the year, targeting an EBITDA margin of 14%-15%. They also expect free cash flow of at least EUR 30 million for 2024, leveraging a strong project pipeline and favorable margins.

Strong Revenue Growth Driven by Flagship Project

In the third quarter of the year, the company reported a remarkable revenue increase of 32%, reaching EUR 145 million. This growth was primarily driven by the flagship A-Nord project, which is expected to boost the company's capacity further. For the first nine months, total revenues amounted to EUR 339 million, reflecting a 23% year-over-year growth. Notably, electricity revenues equaled those from natural gas for the first time, indicating a shift in the company’s revenue composition.

Profitability Hits Record Levels

The company's profitability also saw a significant boost in Q3, with EBITDA tripling from EUR 6.8 million to over EUR 25 million. This led to an impressive EBITDA margin increase to 13.7%, up from just 2.1% in the previous year. For the first nine months, EBITDA totaled just under EUR 50 million with a margin of 14.7%, confirming the robust operational health of the company.

Positive Cash Flow Results and Improved Net Cash Position

The company showcased notable cash flow improvements, achieving a net cash position exceeding EUR 30 million by the end of Q3, following an increase of more than EUR 40 million in just three months. The cash flow outlook for the fourth quarter remains optimistic, as this period traditionally yields the highest operating cash flow due to the settlement and invoicing of ongoing projects.

Exciting Project Pipeline with Strategic Selectivity

Despite a challenging project environment, the company reported an order intake of EUR 109 million in Q3, primarily from smaller projects. The order backlog remains strong at EUR 1.2 billion, enabling the company to be selective in acquiring new projects, enhancing margins and operational efficiencies. Future large contracts are expected to be awarded in the upcoming months.

Future Guidance and Growth Objectives

Reflecting the company's strong performance and future outlook, management raised its revenue guidance for the second time this year. They now expect revenues between EUR 430 million and EUR 460 million for the year, alongside an EBITDA margin projected between 14% and 15%, up approximately 6 percentage points year-over-year. The target remains aligned with a long-term vision of achieving EUR 1 billion in sales by 2030, alongside sustaining a double-digit EBIT margin.

Strategic Focus on M&A Opportunities

The potential for mergers and acquisitions remains a critical part of the company's strategy. The company is exploring opportunities mainly in smaller specialized firms, targeting expert knowledge in cathodic protection and electrical engineering. A shortlist of five companies is currently under consideration, although concrete moves are not expected until at least mid-2025.

Employee Growth and Operational Sustainability

In Q3, the workforce expanded by 14%, surpassing the annual target of 10%. This growth was aided by hiring measures and benefits enhancements aimed at attracting top talent from a struggling construction sector. Management expressed confidence in maintaining this growth level and sustaining margin improvements due to operational efficiencies.

Outlook for Upcoming Projects and Market Dynamics

The company is involved in pivotal projects in the hydrogen transport infrastructure, including a massive hydrogen core grid set to expand over the next decade. The necessary investments for the grid are estimated at nearly EUR 20 billion, with ongoing efforts to develop CO2 transport grids as well. These initiatives suggest a strong pipeline for sustainable energy projects, positioning the company favorably in a rapidly evolving market.

Earnings Call Transcript 2024-Q3

[Operator]

[Audio Gap] we delve into the third quarter of the financial figures of 2024. I'm delighted to welcome the CEO, Torben Kleinfeldt; and CFO, Tim Hameister. We'll start with the presentation shortly. After the presentation, we will move forward with the Q&A session. And with this, let's start. Mr. Kleinfeldt, the stage is yours.

[Torben Kleinfeldt, executive]

Thanks a lot, and also a very warm welcome from my side to Q3 earnings call of Friedrich Vorwerk Group. Very short introduction from my side. I guess most of you know us both anyhow. So my name is Torben Kleinfeldt; CEO of Friedrich Vorwerk Group, within the company since 22 years by now. In the energy infrastructure business for almost 30 years. And I will run you through a part of today's presentation. First of all, I will give you an update about the latest development of our markets. After that, hand over to Tim for the actual financial figures of the third quarter and the year-to-date. And then I will take over for a short outlook of upcoming projects. And of course, after that, we will be ready for your questions.

So let me please start with a very short market update. As you all know, in Germany, Germany is looking as the main country within the European Union to develop the hydrogen economy. And therefore, government agencies and also the German government has decided to set up a hydrogen core grid. This has been already been approved in late summer by German government. So the core grid for hydrogen transport within Germany will compromise of roughly 9,000 kilometers of large-scale pipelines, of which 44% will be new build pipelines and 56% of the core grid will be converted pipelines. So pipelines that have been used over decades for the transport of natural gas and will be then made ready to be able to transport large amounts of hydrogen.

At the moment, investment volume in this core grid will be shortly under EUR 20 billion and development of the grid has already been started in the north of Germany and will probably continue until 2032. Friedrich Vorwerk as a company group is already involved in the first projects for Gasunie Germany with the conversion of a pipeline running from the area of Bremen towards the Danish border.

Besides that, and please, the next slide, we will not focus on tables. The market update this year but we are looking at what we could call the CO2 core grid. So Germany is not only looking at getting new forms of energy into the country but also is trying to get CO2 out of the country. Therefore, it is planning to set up a CO2 transport grid. The first plan has been just plotted and it was compromised for about 5,000 kilometers of CO2 pipeline to capture roughly 20 million tonnes of CO2 per year and bring it to locations where it can be deposited underground, for example, in old oil or gas wells. Also here, investment volume for the CO2 grid, which will cover most of Germany, will be roughly EUR 14 billion. And yes, this is, so to say, the second wave of pipeline projects. The development of this grid will be planned in the early to mid-1930s (sic) [ mid-2030s ].

So this is for us as companies group, a very nice outlook, not only for our cable division but also for our pipeline construction division. Also, we all know once pipelines are newly constructed or converted from natural gas to hydrogen, it is also necessary not only to build the pipelines but also to construct new compressor stations, new pressure letdown stations. And this, of course, will also add to the investment volume and also to our market, which we can cover within our companies group.

So that's for the market update, and I would like to hand over to Tim for the Q3 figures.

[Tim Hameister, executive]

Thank you a lot, Torben. I would also like to welcome you to our earnings call on the third quarter figures. And I honestly think we can summarize the third quarter with a clear sense of conviction under the headline, we delivered. We have delivered in terms of growth. We have delivered in terms of profitability. We have delivered in terms of cash flow and we have delivered in terms of our recruiting success. So let's have a look at the third quarter in more detail.

Following an already strong second quarter, we were able to further accelerate our growth in the third quarter and increased our revenues by 32% to EUR 145 million. The key driver for growth in Q3 but also for the year as a whole is, of course, our flagship project, A-Nord, where we further increased capacity over the summer. In addition, the ongoing and remarkable recruiting success played an important role in the continuous growth. By the end of the third quarter, we had already exceeded our annual target of 10% employee growth and therefore, increased the number of employees by actually 14%.

In the first 9 months, we generated total revenue of EUR 339 million, which corresponds to growth of 23%. As you can see from the chart on the right, our electricity segment is unsurprisingly the main reason for this, achieving the same level of revenue as natural gas for the first time. Electricity still accounts for around 80% of the order backlog, meaning that the segment reporting will continue to develop accordingly in the next quarters. This high-quality order backlog led to a significant improvement in profitability in Q3. We more than tripled EBITDA from EUR 6.8 million to more than EUR 25 million and thereby achieved an absolute record result. This is even more noticeable in EBIT, where we increased the EBIT margin from 2.1% to 13.7% and we're able to return to the pre 2023 transition year profitability levels.

And the natural gas and electricity segments, in particular, contributed to this as we achieved very good project results across the board. Accordingly, EBITDA in the first 9 months totals just under EUR 50 million with a margin of 14.7%. EBIT increased from EUR 7.1 million to EUR 34.4 million, thereby delivering a double-digit EBIT margin again. Apart from the so-called EWA pipeline we just published this morning, no major projects were awarded in Q3, meaning that the majority of the EUR 109 million order intake in Q3 was attributable to small and medium-sized projects. Nevertheless, a number of large contracts are due to be awarded in the coming months, as Torben will report in detail later on.

Without the special effect of our flagship A-Nord project, growth in order intake would have amounted to around 25% in the first 9 months and around EUR 1.2 billion, the order backlog remains at a very high level and gives us the opportunity to be very selective when acquiring new projects. As I said at the beginning, we have also delivered in terms of cash flow. We've improved our net cash position by more than EUR 40 million in the last 3 months and already had over EUR 30 million net cash at the end of the third quarter. And as you know, for seasonal reasons, we generally achieve our highest operating cash flow in the fourth quarter, which is still to come.

This fantastic development is mainly due to the following reasons. Firstly, of course, significantly higher level of profitability plays into our hands. Secondly, we've been able to improve payment terms in many project contracts. And finally, we've improved our internal processes and systems to ensure even more timely invoicing, especially on the large-scale projects. And based on this very strong performance in the current year, especially in Q3 and an upbeat outlook, we raised our guidance already for the second time a few weeks ago. We now expect revenues in the range of EUR 430 million to EUR 460 million and an EBITDA margin of 14% to 15%, which corresponds then to a margin improvement of around 6 percentage points year-on-year.

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

[Torben Kleinfeldt, executive]

Tim, thanks a lot. And yes, I would actually start with our newest project. It's a pipeline project, the so-called Etzel-Wardenburg pipeline. Customer here is Open Grid Europe. And the project is again taking place in the very northwest of Germany. It's a 48-inch pipeline connecting the caverns, the cavern system of Etzel to the compressor station of Wardenburg. We at Friedrich Vorwerk won the second lot with a length of 24 kilometers in a joint venture, again, with our subsidiary, Bohlen & Doyen and the [indiscernible] Group. Order volume here is very high double-digit million euro range. We have already started executing this project very shortly after the project has been awarded.

So we are setting up our site offices and first people are already doing preparations for construction roads. So we are ready, hopefully, to tackle the main part of the project once the weather clears in 2025. And this will give us a very good outlook for our welding and also for our civil works within pipeline construction for 2025 because please remember and we have plotted here on the right lower corner of the slide, we have already been awarded the SEL2 project, which is supposed to be executed also in next year.

So we will have to split our pipeline capacities between SEL2 and also the EWA project. And the EWA project will actually be the first project where we are planning to use our newly developed welding system and hopefully have a good quality of wells and also a good progress in the front-end welding for the 48-inch pipes. Yes, the EWA pipeline is not only a natural gas pipeline because for the first years of operation, natural gas will be the main focus of transport but this pipeline will also be constructed in an H2-ready way. So it can be used later on for hydrogen transport without any technical changes to the pipeline system.

Yes. And besides that EWA pipeline, maybe to give you an outlook what our estimation department is working on at the moment because there are a lot of very large-scale projects being tendered at the moment. And for a lot of these projects, we are into a very active tendering stage. That is true not only for natural gas but also for electricity, where we are currently working not only on offshore connection projects like the LanWin2 project for the cable constructor Nexans, but also we are working on a lot of lots that have still not been tendered out for the SuedLink projects. So currently, we are working on lot 3, 5, 6, 7 and 8, which all are executed very close to our main office in Tostedt or in the region of Hanover.

Also, SuedOstLink is putting some more lots on the market. We are especially interested in the 4 lots, which will be constructed very close to our branch office in Halle/Leipzig area. So we are active in these tenders also. And we do think that most of the and Sued and SuedOstLink projects will be decided, maybe not in December but for sure, in the first quarter of 2025. So we might see some further order intakes in the field of electricity as well. Looking at the pipeline work at the moment, besides the EWA project, which we have just currently won, we are tendering for the WAD project, which is basically the extension of the EWA project. Customer here is also Open Grid Europe. The pipeline will be a 40-foot pipeline and -- 40-inch pipeline and the length will be a total 90 kilometers divided in 3 lots.

So I think our chances of winning maybe 1 lot is here also quite feasible. And also for our current customer, terranets bw, where we are active on the SEL project, there are further projects coming up, which will be tendered out very shortly. So the extension of SEL, SEL3, SEL 4 will be up for tender in the next month and also the so-called SPO, so the Spessart-Odenwald-Leitung, which is very close to Frankfurt am Main. And besides these OGE projects, we are also tendering currently for Gasunie Deutschland with ETL 182 and ETL 179, all running from the new LNG terminal in Stade towards the south. So those 2 projects are also very interesting for our company since they are more or less in our backyard of our headquarter in Tostedt.

So this is a very nice market outlook, I think, for the cable and pipeline construction. But also in terms of plant construction, we are looking at very large projects and actually also projects in hydrogen because since the German government has decided to set up the core grid for hydrogen, of course, we need hydrogen. So we need electrolyzers to fill these pipeline systems. And besides our own small lighthouse project at Bohlen & Doyen, we have just delivered 1-megawatt electrolyzer to [indiscernible]. And we are working currently in the engineering phase for a 20-megawatt pipeline electrolyzer system in the Netherlands.

But as you can see on this slide, without mentioning any names that also here in total, Vorwerk, is at the moment involved in electrolyzer projects with a total capacity of almost 300 megawatts.

As Tim elaborated, we really have delivered this year. So I think we had a very good run, not only in terms of our financial performance but also in terms of hiring new people. You can see on this slide that we were able to step up our employees to almost 2,000 employees in total. So all the measures we have taken in recruiting capacities and also in benefits for our work staff, I think, have paid out and we are back to target and have a 10% organic growth within our company group. So that's, I think, a very good outlook also for the growth in the future and we hope we can keep this up over the next years.

Yes, that's it from our side. Thank you very much for listening and I think we both are ready to answer all your questions.

[Operator]

[Operator Instructions] And we have our first question from Lasse Stueben.

[Lasse Stueben, analyst]

Just 2 questions, please. The one is on the margin profile. I mean, clearly, very good margin in the third quarter. Is there anything in terms of like positive one-offs or anything else we need to consider in that margin? And I guess my question is, how sustainable do you see that margin profile from the third quarter? And then the second question would just be on the hiring. It looks like you added almost 120 people in the third quarter. So just some additional detail around how you've done that and what your kind of outlook is for -- is that the kind of pace you're expecting for the coming quarters? Or will you slow down a little bit just to integrate those people?

[Torben Kleinfeldt, executive]

Tim, do you want to take the first one and I'll take the second question?

[Tim Hameister, executive]

Yes. Lasse, thanks for the questions. Regarding the Q3 margin levels, I can confirm that there are no major one-offs. So this is the operating margin profile from the projects we have in the order book. And we also think that this is very sustainable. I mean, we have achieved even higher margin levels for many years, except the '23 transitional year. And therefore, we feel pretty confident that this development will be sustainable also in the next years.

[Torben Kleinfeldt, executive]

And maybe if I may add, also, I think we have almost no projects with negative project margins at the moment. So I think I've really never seen such a solid project lineup as we have at the moment. So yes, that's very, very nice at the moment. In terms of hiring, of course, we have taken numerous measures, especially setting up our -- stepping up our HR department. We have rolled out a lot of benefits to our employees. And of course, it's, I think, not only our own measures that led to the fruitful numbers but also we got a bit of tailwind from basic construction industry, which is, of course, a bit down at the moment in Germany. So we felt we were able to recruit a lot of engineers from building construction and other fields of general construction. And also, of course, that paid out with blue-collar workers, which are also pouring over from general construction. So both of the measures, I guess, helped us a lot to in the end, see these numbers within our company group.

[Operator]

And also thank you so much for the questions. Is there a follow-up question, Mr. Stueben? Or was this?

[Lasse Stueben, analyst]

Good for now.

[Operator]

We received another question from the chat. If you could please elaborate on this. What will happen to all the projects, [indiscernible] decided after elections and new government, which might be led now by the CDU?

[Torben Kleinfeldt, executive]

Yes. We thought about that. But what we are looking at, at the moment is the first wave of electricity lines. So SuedLink, SuedOstLink, A-Nord, these projects are cemented. So it doesn't matter if we see a change in government. We know that all the cables for these projects are already purchased. Most of them are already in stock with our customers. All public permits are in place. Most of the private permits are actually in place. So these 3 projects together with all the offshore connection projects will never be touched by a new government. I'm very sure about that. We will have the second wave of large cable projects in front of us starting in the years, I would say, '31, '32 onwards. So these projects are not as mature as the first wave of projects. We have no definite permits for these projects. Also, procurement has not started.

So these projects could easily be turned around, for example, without using underground cables but aboveground power lines. So for these projects, everything is still possible but that would have an effect from 2035 onwards. I don't think in my feeling that the new government in Germany, even if it's a pure -- even if it would be a pure CDU-led government, they will probably not go back from switching from cables to aboveground lines. I mean we have seen what happened in Bavaria. They also made clear decision there. So I guess in terms of energy grids, the new government will probably stick with the plans as they are right now.

Same is true for the hydrogen grid that has been already decided. And I do not think that these plans will be turned around because all permitting has already been started for the core grid. For the conversion projects, works have already been started. So I guess this will also be a project for a new government in Germany. We'll see what happens to the CO2 pipeline grid. Of course, the new government could either push it or abandon it. I'm not sure. We hear the discussion here and there in Germany that we might go back to nuclear. But in the end, even if we would fall back to some nuclear power stations, I think it would not change the overall setting of the grid, which would directly influence our company.

[Operator]

We received another question from the chat. Could you provide any guidance around when you expect to see cash flow from operations covering CapEx spending?

[Tim Hameister, executive]

Well, if you are looking into the full year figures, we will, of course, have a free cash flow. So the -- I would expect free cash flow of around at least EUR 30 million for the full year '24. So this is due to the seasonal effects. We have the buildup of the working capital during the summer. But in November, December, all of our projects are settled and invoiced, which is leading to a very high cash in the next weeks.

[Operator]

And then we have another question from the chat. Could you elaborate, please, a bit more on the backlog? How aggressively are you trying to acquire new order permits, especially in view of the backlog that's already pretty high? Would a higher backlog even be desirable? Can more orders even be met considering your capacities?

[Torben Kleinfeldt, executive]

Of course, we are still interested of getting new projects on board. We know that we sometimes have slip in existing projects, which are already in the backlog. So it's always good to have some fallback alternatives in other projects where we can allocate our resources. Also, I think at the moment, on some of the large projects, we see quite interesting margins. So we would really do some cherry picking and follow these projects where we do get a feeling that we are able to accept good margins and add this to our order backlog.

We are also very confident that we can be on track for the next year, so 2025 and 2026 in terms of acquiring new people. So I think we can come back to our organic growth of more than 10% a year. And also, we still have some M&A targets in the pocket. So if we were able to acquire new companies with a lot of engineers and a lot of blue-collar workers, it would, of course, be nice to integrate these new resources in projects where we know we have very favorable margins.

[Operator]

Thank you so much. And we received another question from the chat. Could you give us more details on how things stand today with the bonus model system of the A-Nord projects? Are any bonus payments reflected on the current figures? Or will the bonus payments only be integrated into the figures at the end? When can you finally say how the project has gone?

[Tim Hameister, executive]

Well, so far, the project is going well on track and there are no bonus figures reflected in the current figures as the bonus will only be determined at the very end of the project, so probably end of 2026. And before that, there will be no bonus within our P&L statement.

[Operator]

And we received another question. Could you elaborate on the M&A opportunities you see?

[Torben Kleinfeldt, executive]

Well, I think not much changed. M&A is going in 2 directions. First, smaller specialized companies. We're still looking for cathodic protection, E&I, smaller companies, which maybe have some specialties we have not on board at the moment and cannot offer to the market, which is especially in E&I, quite complicated at the moment because this industry, which is still very much occupied. And again, larger units where we can source a lot of blue collar and engineering resources for our large cable and pipeline projects.

And we have a short list of, I would say, 5 companies we are looking at, at the moment in different stages. And yes, you never know how M&A goes, either you win or you lose, there's no in between. So it is, of course, always hard to say if something will work out, for sure not this year. And my guess is, it's not in the first 2 quarters of 2025.

[Operator]

We haven't received any further questions. So we're going to wait a moment. [Operator Instructions] We received another question from the chat. Would you lever up the balance sheet in case you proceed with one of these opportunities?

[Tim Hameister, executive]

Well, given the very strong balance sheet we have, there are all options on the table dealing with larger M&A acquisitions. But I don't want to decide for 1 option today This will depend on the specific transaction.

[Operator]

And could you give us a little bit more color on where do you see Friedrich Vorwerk in midterm 2030 in terms of sales and margins?

[Torben Kleinfeldt, executive]

Tim, do you want to take this?

[Tim Hameister, executive]

Well, we had the vision during IPO that we will have like EUR 1 billion in sales in 10 years, which would be beginning of the 2030s. I think this target is still in reach with the very positive development we've seen in recent quarters. And we also said, of course, we want to sustain with the double-digit EBIT margin and this will be also the target for the mid- to long term.

[Operator]

Thank you so much. We haven't received any further questions. So I would like to draw today's earnings call to a close. If you have any questions in the future, please don't hesitate to contact us or the leadership team. And thank you so much for your attention. I hand over for some final remarks now to Mr. Kleinfeldt. Thank you.

[Torben Kleinfeldt, executive]

Yes. Thank you all for listening. I think we had a very good year behind us. I also hope that we have a fantastic fourth quarter in this year. Hopefully, the weather is on our side. As you know, mainly our grids projects, so cable laying and also pipeline laying, strongly depends on the weather. I mean we are able to work in all-weather circumstances but of course, production will be higher if we have less rain. And so let's hope for good weather. But I'm very sure that we can definitely reach the targets we have set for our company this year.

And we are looking at a great project pipeline, not only what we have in the order books right now but also what we see on all of our markets today. And for the staff we have on board, I think we are capable of tackling multi -- many large-scale projects at one time. So I'm very fascinated for 2025. I think also 2025 will be a very good year for our company and yes. So good to have you all on board on the investor side and hope you stay with us and speak to you on the next earnings call then.