STRABAG SE

VSE:STR

Thank you very much. Good morning, everybody, from Vienna. Thank you very much for attending our call this morning.

As usual, we think that you have our presentation in front of you and I would like to start with Page #3 giving you the key figures for the first quarter regarding output and order backlog.

Our group has generated an output volume of almost exactly EUR 2.6 billion in the first quarter of the 2018 financial year and this translates into an increase of 7%. This time, this upwards trend has especially been driven by the German Transportation Infrastructures business.

Our order backlog even developed more positively. It increased by 10% and reached another record high of over EUR 17.6 billion on the 31st of March, 2018, which means that it is surpassing the EUR 17 billion mark for the first time in our company's history. Contributing to this positive development once more were numerous new large orders in our largest markets, above all, Hungary, Poland, and again, Germany.

Let's have a look at Page #4 and our results figures. It is true that the limited capacity for construction in winter results in significant seasonal effects on the development of earnings and other financial figures of STRABAG SE in every year.

The first half of the year typically has a negative effect on results, which is then overcompensated by positive results in the second half of each fiscal year. As a result of these seasonal effects, the quarterly comparison in our eyes makes little sense.

This year, the earnings before interest, taxes, depreciation and amortization, which means the EBITDA, improved slightly in the first quarter, which means a plus of 2% and amounted to almost exactly minus EUR 50 million. Depreciation and amortization was down by 4%. So that's the EBIT, which means earnings before interest and taxes, stood at minus EUR 139 million, which means it ended up 3% less deep in negative territory than in the first quarter of last year.

We now come to Page #5. Our net interest income stood at minus EUR 3.3 million, which is compared to minus EUR 14.3 million in the first 3 months of the previous year when higher negative exchange rate differences had pushed the net interest income down. The income tax burden was in positive territory with EUR 27 million and thus provided some relief.

The earnings attributable to third-party shareholders amounted to plus EUR 1.4 million this year. Last year, the minority shareholders still had to bear a loss of minus EUR 3.4 million.

Overall, our net income after minorities remained stable at minus EUR 116.7 million. With 102,600,000 outstanding shares, this corresponds to a earnings per share figure of EUR 1.14 per share, which is exactly the same as in the first quarter of 2017.

Let's now have a look at our balance sheet, which is given on Page #6. The balance sheet total fell back below EUR 11 million -- EUR 11 billion, sorry, from the 31st of December, 2017 to EUR 10.6 billion at the end of the first quarter.

The picture was coined by the higher trade receivables, which increased especially as a result of the reclassification of the real estate project development as required by the first-time adoption of IFRS 15.

I may recall that we have given some details regarding this reclassification necessity in our annual report 2017 on Page #D60. It means, after all, that we have to reclassify real estate development projects, which have already been sold to the final investor or buyer from inventory into trade receivables and you can clearly see the swap on the balance sheet asset side because inventories went considerably down, whilst trade receivables increased in a respective manner. After all, this is the basic change which has to be commented upon on our balance sheet in the first quarter.

With regard to our cash flow figures, I would like to draw your attention on Page #7. The cash flow from operating activities, at minus EUR 144 million, was nearly unchanged with a change from just 2%. It was cash flow from investing activities, however, through higher investments in property, plant and equipment decreased by 12% and amounted to minus EUR 90 million.

The payment for the acquisition of the minority shares of our now delisted German subsidiary, STRABAG AG in Cologne, Germany, influenced our cash flow from financing activities, which reached hence a value of minus EUR 84 million after only minus EUR 25 million in the first quarter last year where we didn't have such a specific event.

We now have a look at the 3 operational segments, which are classified according to geographic standards. The first and the biggest single segment of our group is, as you know, North + West, which comprises our construction activities in Germany, the biggest single market of the group, and the Benelux states in Poland and in the Nordic countries. In this segment, the output volume increased by 14% year-on-year in the first quarter. This can be attributed to the high order backlog in Germany at the end of 2017 and the relatively good weather in that country.

The winter months brought virtually no restrictions in Germany, especially in building construction, but also in the Benelux countries. The relatively low growth of the output volume in Poland, however, in comparison to Germany, was evened out by the decrease in Denmark.

Our revenue increased by 9%, while the EBIT figure decreased barely noticeably. The weather conditions in the 2 largest markets of the segment, namely Germany and Poland, had effects, which almost compensated for each other.

The order backlog grew by 13% over the level of the 31st of March, 2017, which corresponds to about EUR 1 billion in absolute figures. Contributing to this growth were increases in Poland, Germany and to a slightly lesser degree, the Benelux countries.

Regarding the outlook for the full year, the segment North + West is expected to slightly surpass last year's record output volume in 2018. The German building construction and civil engineering business should continue to contribute positively to both output volume and earnings. The ongoing tense situation on the subcontract and supplier market, however, is being countered by binding these parties at an early stage before the contract with the client is finally concluded.

It has to be admitted that Transportation Infrastructures business in Germany got off to an excellent start in 2018. The economic environment there is characterized by sustained low interest rates, high tax revenues and the years-long investment backlog in public infrastructure in Germany.

It is expected that the high output volume posted last year can be maintained at least, especially as a large portion of the planned output has already been acquired and the order backlog is stronger than it was at this time last year. Labor, however, remains a limiting factor for an expansion of the business.

In contrast to this situation, the situation on the market in Poland is becoming a little bleaker. The industry has experienced a shortage of qualified staff of construction material and of capacities in general to attend to the enormous demand in this country. This led to price increases last year in the double-digit percent rate for labor cost, contribution material -- construction materials and subcontractor fees. However, the order backlog for us is at a very high level and so has already secured the output volume for the ongoing financial year, which enables a greater selection of the projects for which bids are to be made in the future. The output volume in Poland is expected to exhibit strong growth so that earnings should continue to be generated at an attractive level.

All in all, the situation in North + West on the results side remains more or less unchanged, while we saw a very positive development on the output side and the order backlog.

We now come to the second-biggest segment, which is South + East, comprising all our construction activities in Austria, Switzerland and the CEE region. The output volume in this segment reached EUR 644 million in the first quarter of 2018, which means it remains largely unchanged in a year-on-year comparison. Minor increases and decreases in the individual markets balanced each other out.

The revenue sank by 4%. The seasonally negative EBIT, however, more than doubled. This is attributable to the fact that the staff had already been increased in response to the high volume of orders, especially in Hungary, but the output volume failed to grow in the first quarter due to the bad weather conditions.

Moreover, the winter-related losses had been relatively low in the first quarter last year. On the other hand, the order backlog registered a significant jump of plus 22% over the level of the 31st of March, 2017 and grew to EUR 5.1 billion. This development is attributable, above all, to transportation infrastructure projects in Hungary that had already been acquired last year. The trend in the other markets of the segment was more inconsistent.

Regarding the outlook for the full year, the output volume is expected to continue to grow with attractive margins in 2018. The combination of high demand and lack of skilled labor has led to increasing cost, however, in most of the markets. Political risk in several countries are also on the rise.

The situation on the home market of Austria remains positive. New large building construction projects in the cities are continually restocking our order backlog as similar projects reach completion.

In the Czech Republic and Slovakia, the margins have been falling now for several years. The construction climate is getting tenser, as has been expected.

In Slovakia, tenders are mostly for transportation projects with EU cofinancing, including several railway projects.

In the Czech Republic, the focus is on building construction for the automobile industry as well as commercial centers and office buildings for industrial clients.

In Hungary, the greatest challenge in the coming months and years will be to work off the higher order backlog, which we currently have. The entire Hungarian construction industry is currently in an unusually active phase.

Russia is feeling the impact of the new U.S. sanctions, which have led to a devaluation of the ruble and a general sense of insecurity on the market. Project financing is expected to become more difficult, which would have a negative effect on the demand for housing construction services from STRABAG.

An estimate of the medium-term demand situation for industrial construction in this country is not possible at this time.

Let's now have a look at the third and last segment, which is International + Special Divisions, comprising facility management, real estate development, our global tunneling activities and our concession business.

This segment closed the first quarter with a year-on-year plus of 5% in output, attributable especially to large projects in the Americas, which means South America. With a plus of 14%, the revenue grew significantly more strongly than the output volume. This development is attributable to the sales of real estate project developments.

The EBIT nearly made it out of negative territory with minus EUR 0.5 million compared to minus EUR 38 million in the first quarter last year. Here too, these sales of real estate project developments had a very positive impact, as did, among other things, the fact that earnings were no longer burdened by a large international project as they had been the year before.

The order backlog decreased by 8%. This development is due in part to last year's reduction of the order volume at the Italian transportation infrastructure projects Pedemontana.

In Asia, on the other hand, new large contracts have been added to our order books. A noteworthy new order, for instance, in the first quarter of 2018 is a contract in the United Kingdom to build an approximately 13 kilometers tunnel section for the underground transport system at the Woodsmith Mine.

Regarding the outlook of the segment for the full year, it should be possible to achieve an output volume at a comparable level of that of 2017 and to post at least stable earnings in the segment International + Special Divisions, thanks to the absence of further burdens of the Alto Maipo project in Chile.

Difficult technical conditions at this hydropower project and the withdrawal of a contractor at another lot led the client, AES Gener, to conclude a new construction agreement with our Chilean subsidiary, STRABAG SpA, on the 19th of February, 2018. This agreement had been pending the bank financing and became effective on the 8th of May, 2018.

With this contract, STRABAG took on another construction section of this large project, adding approximately EUR 800 million to the order volume for a total order backlog of about EUR 1.5 billion for Alto Maipo as a total project.

It is well understood that this addition to our order backlog has not yet included in the figures for the first quarter, but will be shown once we are reporting about the second quarter.

All in all, International + Special Divisions is the segment with the highest improvement, especially on the results side, but I have to underpin that this might not be significant for the full year, as we are just talking about the first quarter of 4 quarters 2018.

The Real Estate Development business, in general, on the segment should continue to make very positive earnings contributions as the ongoing low interest rates are responsible for a generally good framework for this business field.

Although the market concession -- for concession project remains a difficult one, the income from existing PPP projects, which means public-private Partnerships, should help our Infrastructure Development business to another significant earnings contribution.

In tunneling, new markets are not a focus at this time. Besides its core European markets, our group is also especially active in tunneling in Canada, Chile and Singapore at technically very challenging projects.

In the field of Property and Facility services, the signing of a contract with a service provider, ISS, from Denmark, has eliminated a factor that had been the cause of uncertainty. As reported already, effective the 1st of July, 2019, the facility management services for Deutsche Telekom and subsidiaries in Germany will no longer be provided by the companies of the STRABAG group, but by ISS. On the 10th of April, an asset purchase agreement was concluded with ISS, which means that the employees affected by the change will receive an offer from ISS to continue their employment there after the 1st of July, 2019.

This agreement will enable a socially acceptable transfer of the employees. In light of this solution, together with the continued stable order situation at Deutsche Telekom and the volume of new orders for our facility management activities, the earnings developments in Property and Facility services is expected to remain at an attractive level for our group.

All in all, we can now come to the outlook for the full fiscal year on Page #11. As you can see from the headline, we confirm our outlook for the full year because we have seen a similarly good start to the financial year in 2018, as it has been the year before. I wanted, once again, to underpin that the first quarter, however, does not allow any reliable conclusions for the full year, but the figures, above all, the new record order backlog of EUR 17.7 billion at the end of the first quarter, again reinforced by the new order intake, especially for Alto Maipo, reinforce our decision to confirm our existing outlook.

The output volume should increase at least to about EUR 15 billion and the EBIT margin is expected to again reach at least 3% on sales. So far then, the 2018 financial year is going according to plan.

Thank you very much for your attention, and now I'm very much looking forward to your eventual questions.

Thank you very much, Mr. Kretlow, for the questions. Well, with regard to the EU Cohesion Funds, we have a certain midterm visibility, which means that there is a regime now running until 2022 and in my eyes, the obligations and the budgets are there as allocated for the countries 1.5 years ago. The midterm point with the EU Cohesion Funds, in my eyes, is basically the Brexit question. Because of the fact that one of the major net payers or net contributors to the EU budget is leaving the union, we have to prepare for a considerable decrease of the EU Cohesion Funds. This is a midterm point and that might be even enhanced by the fact that probably other countries are seeking for more support than they did in the past. And that, after all, might, as a matter of fact, of course, affect our activities in the CEE region as long as it has taken advantage from EU cofinancing. That might be true for Poland, Hungary, Czech Republic and Slovakia before all because the other markets are either outside of the European Union or they are of less significance. On the other hand, we have also private business in those countries, but this is very different from country to country. We have good private bases, for instance, in Poland, but also in Czech Republic with regard to the automotive cluster there, whilst our business would be more influenced probably in Hungary where the vast majority of our projects is public infrastructure. But as said before, I do not expect a short-term development on that side. That will be a midterm question, which will -- to be answered after the year 2022. With regard to price increases on the costs side, it is true that our value-added in general on transportation infrastructures is more deep than it is on the Building Construction and Civil Engineering side, but I'm afraid that cost increase influences will be more or less the same in both segments of construction because on the one side, for instance, Building Construction and Civil Engineering, the prices of our suppliers and service providers are on the rise. And with regards to the Transportation Infrastructure side, it is the wages and salaries factor which is a basic cost element. And with regard to the fact that we have just seen a labor agreement with the trade unions in Germany entailing a price -- or a wage and salaries increase of 5.6%, this is a clear indicator that also our activities based on own value-added will be under pressure margin-wise because of price increases on the wage side. However, the 5.6% have to be seen in connection with the time horizon. They have been completed for 26 months, so they will provide for a certain stability on the wage side for more than 2 years. But in the first stage, we have to swallow those price increases as well, and that's basically both factors contribute to the fact that we are always taking the position that it will be very difficult to further considerably increase our margin. And hence, our guidance is always aiming at a positive stability of the margin, which means, again, at least plus 3% EBIT on sales.

Well, I'll tell you, Mr. Lion, let's start with the Chilean Alto Maipo project. It is true that, of course, we have built considerable provisions. I kindly ask for your understanding that we never give specific figures for one single project. And it is also true that, as I have pointed out before, we have now a giant project to work off, which means about EUR 1.5 billion have to be built over a long period of time. The project will be lasting until the year 2022. This is still a long, long way to go. I can make at least one clear statement. We do, by no means, expect further negative burdens from this project. But to which extent and at which point of time we might be able to release built provisions will very much depend on the further progress of the project and the further project risk. And as I pointed out before, there are still about 4 years to go and hence, I do not dare to make a statement with regard to a certain specific, at least positive inference of the release of Alto Maipo-related provisions in the nearer future at least. With regard to the ISS contract, I can make a much more clear statement. I have to underpin that ISS would take over all the personnel which have been working on the Deutsche Telekom account from us in order to be able to do that themselves in the future. That means as from the 1st of July 2019 onwards. It is also true that the deal, which we concluded with ISS, did almost exactly confirm our estimate in the year -- in the years and balance sheet of 2017. So this is a confirmation of what we had foreseen in our balance sheet, and there is no further provision release to be expected from the ISS contract. That was just a confirmation of we had foreseen for, for the case. With regard to the further development of our Facility Management, as you have probably followed our press releases regarding this activity of the group, and as you can see already from numerous reports in the first 4 months of the year, our STRABAG Property and Facility services group was able to acquire many new customers and this is now the first task which we have set for the management there. Of course, we have to get more independent from Deutsche Telekom as in the past because it was the biggest single account of our FM activities. I think we are on a good way there and we shall not forget that the switch to ISS will only take place in more than one year's time. So there is still some time left for us to get even more independent from that single account. All in all, I do not expect a material effect on the group's figures, neither on the output figure, nor on the result figure from the change, which we will be seeing only in the middle of next year.

I wonder whether we will be in a position to really fully compensate the Facility Management activities going out from Deutsche Telekom in that period of time. It is true, we are talking about something more than EUR 0.5 billion in turnover for one year. And this is a very big account, but I believe that we will be able to more than compensate that outgoing figure in the whole group, which does not necessarily mean that it will be compensated by Facility Management output, but by -- for instance, by Construction or Real Estate development output. In my eyes, we have probably done 1/3 of the tasks for the time now. But it will be a flexible process because this year, we will be still seeing 100% of the Deutsche Telekom turnover. Next year, we will be seeing 50% and it is only 2020 where we will have to live without Deutsche Telekom output in Facility Management. And even if we do not fully compensate this outgoing figure in the Facility Management segment, we will, however, more than compensate it in the whole group.

There is still a long time 'til the General Assembly on the 15th of June, Mr. Remis. But to be more serious, we are currently in intensive talks with our core shareholder, Rasperia, from Cyprus in order to try to find a mutual agreement on that problem. But of course, we also have a plan once we would not be in a position to come to such an agreement and we will definitely take all necessary steps in order to avoid eventual damage for the group, which might stem from encountering secondary U.S. sanctions. That will definitely not take place. After all, a clear answer to your question, we have not yet found a basic solution, but we definitely have a plan once we will not be coming to a mutual agreement.

Well, other than with margin, I do not really see a given glass ceiling with regard to our top line development. I think as long as we see a single-digit growth rate, this is still a development, which we are able to manage because it might well be that we get contracts in markets where we do have resources available. For instance, the contract which we won 2 years ago in Colombia was such effect where we were entering a new market, and hence, of course, there the scarcity of resources is not comparable to our home markets in Austria and in Germany. So as long as we can realize single-digit growth rates as, for instance, we predict for this year with a plus of 5% on the output side, this is still manageable and this is a -- let's say, an organic growth, which, I think, we still can perform. On the other hand, of course, bigger growth rates would be possible if we would take, let's say, more or less each and every contract which we could get, and hence, that we limit ourselves to single -- to medium size single-digit growth rates on the top line, is already an indicator that we take steps to even select more strictly what we're taking in.

I probably couldn't state it better, Mr. Remis.

The profitability of our raw materials business or of the group as a whole?

The profitability definitely increased over the past years because the prices in -- generally were going up. The overall volume is a little more -- with regard to third parties -- is a little more than EUR 0.5 billion a year. And it is also true that the increase of the profitability has also been fostered by the fact that we also ask our own operational units to pay the market prices to our raw materials operation. So they have to swallow the high cost as well in order not to give such margins in to the market. I might -- I may, however, remind you that there are also some raw materials, which we do not have in our own network. The biggest single factor is bitumen, which is a product of petrol refineries and there, we have seen very considerable price increases in the past, considerable means probably a plus of 70%, 7-0 percent, over 1 year, which we have seen 2 years ago. And currently, we also see a very strong increase in such -- in prices for bitumen. The good thing in that negative development is that it is a development which is true for everybody in the market. So it's not a relative competitive disadvantage.

Well, thank you, ladies and gentlemen, for your interest. I'm very much looking forward to talking to you again on the second quarter in 3 months' time. Bye-bye.