Bilfinger SE

XETRA:GBF

Earnings Call Transcript 2021-Q1

[Bettina Schneider, Head of Investor Relations]

Good afternoon, and welcome to Bilfinger's conference call on the first quarter of '21. My name is Bettina Schneider. And with us today in the line are Christina Johansson, CFO and Interim CEO as well as Duncan Hall, COO. Christina and Duncan will now present on Bilfinger's business development in the first 3 months of the year. [Operator Instructions]With this, I hand over to Christina Johansson.

[Christina Johansson]

Thank you, Bettina. Ladies and gentlemen, welcome also from my side to our conference call on the development of Bilfinger in the first quarter of 2021. I'd like to start on Page 2 where I would first like to give you a short overview of the key figures reflecting the encouraging performance of our company in quarter 1.In most of our markets, we are experiencing an increase in activity level in our upstream oil and gas activities in the North Sea. However, there were still COVID-19-related logistical restrictions. Orders received were almost stable organically. And again, we reached the EUR 1 billion level with a very robust European engineering and maintenance business. In North America, we have been awarded a sizable project that I will come back to in a minute.Revenues were down by 5% organically against the prior year quarter when sales, however, had not yet been materially affected by the COVID-19 pandemic nor by the substantial oil price reduction in March 2020. Only from April, we had a significant impact on the revenue last year. In current year, the E&M Europe and Technologies segments regained a solid level. In E&M, international project business was still modest, but in line with our expectations.With a positive EBITA adjusted of EUR 11 million in the first quarter, Bilfinger is demonstrating its increased cost agility it has built up during the past year. We see this as encouraging evidence that we are getting closer to one of our goals and less seasonal earnings profile, which our operations achieved, thanks to more agile capacity management, especially in the first months of the year when revenues are typically lowest.Reported free cash flow also improved significantly to minus EUR 28 million after minus EUR 93 million in prior year first quarter. This improvement is due to successful working capital management measures that already made a very much progress last year and continued in the first quarter. On that basis, we are happy to confirm our 2020 outlook today and expect further progress during the year.We would now like to provide you with a short overview of the market developments in our 3 business segments, and I will hand over now to Duncan Hall, who will give you some insight here.

[Duncan Hall, COO & Member of the Executive Board]

Thanks, Christina. Good afternoon, everybody, and I hope you're all safe and well in these challenging times as they continue.So it's great to talk about a really good start to the year across the board on safety, efficiency and orders. Our workforce agility that Christina briefly mentioned really supporting much improved Q1 utilization, but we'll come on to that a little bit later.In our markets, starting with E&M Europe, we are starting to see recovery. Some of the investments are underway and developing, but we are seeing a significant increase in shutdowns as well, which keeps our resources very busy. We'll see a very busy '21 and '22 associated with shutdowns as events were moved out of 2020 into those periods of time. In energy and utilities, the drivers are still there. And actually, these markets have not been seemingly impacted by any of the pandemic. In fact, with stronger government and corporate push into these areas, we're actually seeing momentum continue, if not increase, within the green energy investment areas.In Oil & Gas, whilst it has been challenging and offshore still have some restrictions, but we'll see those ease up in the North Sea in the latter half of the year as vaccination takes an impact. There is consolidation of the supplier market, which works very much in our favor. We have very clear integrated services that people want to purchase, and we're seeing those opportunities come through to [indiscernible] at the moment. The gradual recovery is there. We're starting to see plants now in half 2 for catch-up maintenance work and backlog within those environments.If we move into International, a similar theme, where North America, the pipeline is starting to emerge for projects as business opens back up. And again, expansion and modernization in the Middle East continues. What's very positive is with the new President in the U.S., we're starting to see increased interest in public spending into infrastructure and also green energy investments focused around the renewables. And we have businesses that can capitalize in those areas. Similar to Europe, we see CapEx and OpEx within Oil & Gas start to increase towards the back end of the year as confidence in oil price stability continues.If we shift into Technologies, not to talk about energy transition again, but focus a little bit on nuclear. The investments are continuing there as we expected with also new opportunities emerging and coming through in different territories, which is very good.In pharma and biopharma, very good mix of modifications and new work is emerging. And we're making good progress in getting into maintenance work as well, where efficiency is now becoming more and more important in these industries as well.I'd now like to just give you a few examples of where we have won work and also why do we win work. So part of our DNA and part of our whole how do we win, what's our culture is safety. And safety and efficiency go hand in hand. And here's a great example in Germany of 17 million manhours since we had a last -- sorry, last lost time injury, difficult to say, even in native language.How do we achieve that? Well, that's a lot of commitment. It's leadership and it's visibility. It's sharing, it's learning, it's interactive, safety days out on the plant, safety awareness training, making sure we have the right tools and equipment to do the job. And more importantly, in recent times as well as adapting to the environment that we have and using digital tools to really efficiently prepare and execute the work and then learn from that experience. And it's not just in Germany that we see the successes as well, the group at the moment is in a run of 10 million manhours without a lost time injury across the group, which is 61 days. We last year had a period of over 100 days, and we're hoping to get up to those levels again.If we now look at some of the work we've won. Christina referenced earlier a major project in North America, and this is secured with our key customer for Bilfinger, INEOS, who we work with worldwide. And this is a major order intake in triple-digit, millions of dollars, a significant construction period of time over 17 months. We're less than 10% into the project now, but it's had a good start.What is the work? Well, it's installation of pumps, compressors, steelwork as well as electrical work for ourselves, we are also self delivering the scaffolding in this particular area. And that was a big appeal for the customer. They did not want to be subcontracting and managing a lot of interfaces across different suppliers, so they selected us to do this for them. And that integrated offering really offered savings in both management time and risk to the customer. If you want the comparison, it's very similar to the successful Linde, Braskem project that we executed over previous years.The last area, if you remember well, we talked in the past about insulation, and this is an example of a heat efficiency program at one of our key sites and customers [indiscernible] We work there with over 200 personnel on a regular basis and for many, many years. This is about renewal of insulation, significant carbon savings, heat savings, really getting rid of a lot of the corrosion damage. And why are we highlighting this? Well, in the past, you may recall that the insulation business is a challenging business, yes? It's tough margins in there. But here is a very good example of how we've combined this with other elements of our work of scaffolding, a little bit of inspection as well to improve the value that we can get out of the service.A good example of this as well that we also do is the corrosion under insulation program that we use. So this is a very good example for us of our strategy in action, combined services, delivering to customers and starting to provide value for them and for us.Okay. That's all I've got to say on those areas, and I'll hand you back to Christina.

[Christina Johansson]

Thank you, Duncan. I'm now coming back to Page 10, with the order development of our group in the first 3 months of 2021.Orders received amounted to EUR 1 billion with a slight organic decrease of minus 1%. The figure remained at a very good and solid level. This was due, in particular, to a robust development in European markets as well as to the major project award in North America. Organically, the order backlog grew by 11% to nearly EUR 2.8 billion and exceeded both the figure for the prior year quarter and the figure at the end of 2020. The book-to-bill ratio stood at a good 1.2.Turning to Page 11. Group revenue decreased organically by 5% to EUR 833 million. We have to mention here that the prior year quarter, EUR 915 million had still been largely unaffected by the COVID-19 pandemic that was just emerging at that time.The positive adjusted EBITA of EUR 11 million in the first quarter of 2021, prior year was minus EUR 11 million, corresponds to a margin of 1.3%. This improvement was due to favorable effects from efficiency enhancement programs as well as from improved capacity management.Reported EBITA was also positive at EUR 9 million after minus EUR 20 million in quarter 1 2020. This also reflects the significant reduction in special items to minus EUR 2 million related, in particular, to the harmonization of our IT landscape.Following the increased expenses for restructuring measures we had in 2020, we anticipate only smaller amounts for this in 2021, in total, around minus EUR 20 million for special items. Here as well, we see that we're getting closer and closer to one of our important targets to close the gap between reported and adjusted EBITA.Coming to gross margin on Page 12. At 9.4%, the gross margin improved considerably against the prior year quarter as did gross profit, which grew to EUR 79 million. Adjusted SG&A expenses further decreased to EUR 70 million and it was below our sustainable level of EUR 75 million. This was due to continuing low-level travel expenses and some other COVID-19-related effects. The underlying run rate for SG&A now per quarter is between EUR 73 million and EUR 75 million. The adjusted SG&A ratio measured against revenue to 8.4%.Turning to our segments and starting with E&M Europe on Page 13. The segment was almost at prior year level, showing again a highly resilient and agile maintenance business. Orders received exceeded the prior year figure as the result of 8% organic growth and reached EUR 675 million. Significant growth rates were recorded, particularly in Northern Europe and the U.K.Revenue was almost stable in organic terms. It decreased by 2% to EUR 561 million. Our European maintenance business remained robust, although there was a decrease in revenue as a result of COVID-19-related logistical restrictions in upstream oil and gas activities in the North Sea. The book-to-bill ratio in the first quarter was 1.2. The segment's adjusted EBITA increased significantly to EUR 16 million coming from EUR 4 million in the prior year quarter. This corresponds to an improved margin of 2.9% compared to 0.7% a year before.Regarding the outlook for 2021. In E&M Europe, revenues will grow significantly against the backdrop of the normalization of our business environment and associated catch-up effects in the next quarters. Despite an increasing recovery, however, revenues in the upstream North Sea Oil & Gas business will not yet reach 2019 levels. The adjusted EBITA of this segment in 2020 at EUR 69 million is expected to improve significantly.Then looking at the E&M International segment on Page 14. Here, revenue and earnings are still under pressure. Orders received increased organically by 13% to EUR 161 million. Development in North America was supported by the already presented INEOS project in Texas. In the Middle East, orders received were in the same range as in the prior year. Revenue decreased organically by 28% to EUR 110 million. Adjusted EBITA was again negative at minus EUR 5 million. The adjusted EBITA margin was minus 4.7%.The strategic measures we introduced coupled with a number of sales initiatives are paving the way to a return to positive development in this segment. The outlook for full year 2021 remains unchanged compared to previous year's figure of EUR 521 million, significant revenue growth is expected at E&M international. In North America, in particular, we are assuming an increasing number of projects that will again lead to growing revenues in the second half of the year. We also expect a significant improvement in adjusted EBITA to a positive result compared to minus EUR 21 million in 2020.Last but not least, coming down to Technologies on Page 15. Orders received in this segment decreased organically by 59% to EUR 115 million. Here, we have kept -- we have -- sorry, we have to keep in mind that the prior year quarter showed an exceptionally high order intake due to major contracts, including for the Hinkley Point C nuclear power plant in the United Kingdom. So first quarter last year, we had a number of large projects that makes the big difference. Revenue grew organically by 18%, reaching EUR 130 million in quarter 1. This emphasizes our growth aspiration for the full year 2021. The segment's adjusted EBITA was positive at EUR 3 million, coming from minus EUR 5 million in the first quarter of 2020. With that, the encouraging trend seen in the second half of 2020 is continuing. Accordingly, the adjusted EBITA margin improved to 2.4% compared to minus 4.3% in the prior year quarter.The outlook for 2021 in Technologies, we anticipate significant year-on-year growth in the revenue that was at EUR 498 million in 2020. This is due to the high order backlog and the strong development of the nuclear power and biopharma markets. EBITA adjusted will improve to a clearly positive result after a minus EUR 11 million in the full year 2020.Turning then to Page 16. Net profit of the Bilfinger group in the first quarter of 2021 reached a positive figure of EUR 10 million compared to minus EUR 24 million in the respective quarter. This was also due to the improvement in EBITA. In addition, the now final assessment of the value of the preferred participation note for Apleona led to a further write-up of EUR 7 million, which was recognized in the financial results of quarter 1.In quarter 1 2021, our adjusted operating cash flow was balanced at 0 after a clearly negative figure of minus EUR 72 million in the prior year period. Reported free cash flow also improved significantly to minus EUR 28 million due to successful working capital management initiatives.Looking at the liquidity development on Page 17. Net liquidity, including IFRS 16 liability was at minus EUR 103 million at the end of the first quarter 2021. The proceeds from the PPN for Apleona in the amount of EUR 458 million were transferred to our bank account yesterday. This increases our ability to proceed on growth opportunities, both organically and through M&A activities. Compared to the prior year quarter, net trade assets decreased in absolute terms to EUR 432 million. DSO further improved against quarter 1 2020 by 8 days to 78 days. DPOs were 71 days, a slight decrease compared to previous figures.On Page 18, I would like to confirm our outlook for full year 2021. We expect a significant growth in revenue and a substantial improvement in adjusted EBITA. Adjusted EBITA margin will return to the pre-crisis level of financial year 2019 of roundabout 2.4%, although revenue in 2021 is expected to be still significantly below 2019. We also anticipate a substantial improvement in the group's reported EBITA due to significantly lower expenses recognized as special items. We currently assume around EUR 20 million total for IT and some smaller remaining restructuring.Free cash flow is expected to be positive but below the prior year level despite a substantial improvement in EBITA. Reasons are increased working capital requirements as a result of the planned revenue growth. In addition, there will be some cash-out effects for restructuring measures implemented in last year and also a normalized level of capital expenditure.That brings us to the end of Duncan's and my presentation. Thank you for your attention. We now look forward to take all your questions.

[Operator]

[Operator Instructions] We're now not sure whether we have a technical issue or whether there are just no questions today. Of course, you all know, if you have any questions, please don't hesitate to contact the IR team -- no, sorry. Now the refreshing was successful. We start with Stephan Bonhage.

[Stephan Bonhage, Research Analyst]

I have 3 questions. The first one is, if you already have more concrete ideas on how to use the cash inflow from the Apleona sales. I think you mentioned some M&A opportunities.My second question is if there's any progress in the search for a new CEO? Or what is the current status here?And my third question is on your strategic measures in sales initiatives you mentioned in the conference call for the Oil & Gas business and E&M International, can you give more light about that? And maybe you can also give a general assessment of the prospects in the Oil & Gas business this year? How strong should be the recovery, especially in the second half of the year?

[Christina Johansson]

Thank you. We will try. I suggest I start off with the first 2 questions, and then Duncan will proceed. So when it comes to the Apleona proceeds and how to use them, yes, I mean, there are traditional ways how we can use this money. Obviously, Duncan and myself and the executive board believe that we will be able to present good margin for acquisitions, that would also then support the way forward for Bilfinger. We have some ideas in this M&A strategy and we will try hard to also convince our supervisory board to spend the money, at least a part of it, on additional acquisitions to support the growth of Bilfinger, not only organic growth but also M&A growth. Yes, we have a clear strategy here. Looking at the CEO search, that's obviously a topic for the supervisory board and not for the executive board. But we are obviously aware that the supervisory board is working on a final solution for the CEO role. And I'm sure that they, in a couple of months' time, will come up with a decision. And in the meantime, Duncan and myself continue to drive as much as we can in this team to make sure that the strategy will continue to be implemented.Duncan, do you want to answer the questions around sales initiatives in North America?

[Duncan Hall, COO & Member of the Executive Board]

Will do. I mean it's about E&M International, but as Christina indicates, that's largely North America from a revenue domination. Securing INEOS project was critical, and it's come at a very good time for us, and that's already in execution, as I mentioned, which is good. Also, we introduced new management in there, some people will know late last year with a stronger focus on maintenance, and we've won a lot of nice mid-scale maintenance projects, which takes out some of the instability in the project environment in the midterm.Our P&G business, Procter & Gamble business is flourishing. There's a very high demand for that business, and that's continuing to go through and build through, which is very good, as is the demand for the infrastructure business within the U.S., which is coming from the recovery act that's being instigated across there. So we see good signs and very much in line with our strategy around deemphasizing the project aspect of our North America business, investing more in maintenance and frame work time contracts.Your second or fourth question, sorry, it's second for me, in Oil & Gas in half 2. It's a very simple issue from an oil basis, offshore basis, which is probably the point of the question there. We're good in here by what we call POB, which is personnel on board. Throughout the pandemic, the number of POB spaces on the rigs has been reduced for social distancing reasons, et cetera. That has started now to increase as vaccinations come, and we're far more able to control the issues. And we're already now starting to see rock-solid plans come in place for picking up maintenance work that couldn't be done in the last 12 months to be planned materials ordered to be executed in half 2. So we're expecting a pickup to catch-up from some of that delayed work. The gas market, that continues to flourish, whether it's hydrogen, whether it's traditional gas areas, continues to be a strong market for us.

[Operator]

[Operator Instructions] Now Craig is back.

[Craig Abbott, Head of Mid and Small Cap Research, Germany]

Well, my CEO -- a question on CEO successor has been answered to others. One is maybe not an issue for Bilfinger, but we've seen some pretty significant supply chain disruptions in many industries as a number of suppliers have been caught out on capacity. And I just wondered if there are any potential risk to Bilfinger's ability to source key products to execute on any of your orders in the next -- in the coming months or quarter?And secondly, if you can maybe just give us an update, please, on the Hinkley Point project.

[Duncan Hall, COO & Member of the Executive Board]

I'll take these, Craig, and apologies to everybody for the challenges. We all get now and again in these more remote times. On supply chain, there are 2 aspects of this, let's go really positive first. This is a great opportunity for Bilfinger because we will see supply chain shorten, and there are opportunities here, not just in life sciences but in other areas. And certainly in our stronger European business, supply chains come back closer to Europe as there's less of a link towards some of the far east supplies that we've had. From our perspective, we have not seen any impact on our supply chains to date. There is challenges, but we have not seen any to date.When it comes to Hinkley Point, on a very positive note, on that basis and linking in Brexit as well, we have delivered the first pipe across the channel. So we fabricated it. We've had it delivered. We fabricated it. We've done all the quality packs, and it's now in the U.K. awaiting installation. From an order perspective, as you know, last year, we secured the substantial orders and now EDF are calling those down on us, and we are executing work. And that will happen progressively over this year and years to come. And we still expect peak revenue to be in '22, '23, but we have no worries about work continuing to ramp up and having very good order coverage to cover that in the coming years. So continues as expected, peak revenue, 22%, 23%, as we've always said.

[Operator]

Next question comes from Eric Lemarié.

[Eric A. Lemarié, Research Analyst]

I've got some questions, please. The first one, Duncan, you mentioned this is a better situation in the north, if I'm not wrong, because now you're more able to deal with all the social distancing issues. But regarding this constraints due to the pandemic, have you any idea when this restriction will be 100% lifted? This is my first question.On M&A, could you maybe more specific on what type of targets you are looking for? And maybe what type of businesses or maybe in what type of geographical zones?And the last question on energy efficiency. You mentioned energy efficiency in your slide, I think it's Slide #8. And do you have -- or maybe can you share with us how much of your business is related today to energy efficiency?

[Duncan Hall, COO & Member of the Executive Board]

Okay. Thank you, Eric. I wish I could give you a specific date like August 16 or something like that, but we are seeing progressive reduction of restrictions, let's say that. We now have some rigs already back to full capacity with testing regimes. And with the success of the vaccinations, we expect it to proceed very quickly.On the Norwegian side, actually, which is where we see the greater restrictions at the moment compared to the U.K. side, will be a little bit later in coming back. So that's more likely to be back-end of the year; the U.K. side, more front-end of half 2. And we expect to see that come through. We'll see a peak then to catch up, but then it will stabilize down to a more stable level going forward. If you do remember in the slides, we did talk about consolidation of where now customers, as usual, are looking to how do they better utilize and be more efficient. And there's some very good opportunities at the moment, which we're working on with our customers to deliver that with our combined service offering that we already have.I'll very briefly take the energy efficiency one. It's a very difficult one to say what do we have right now. What we do have is a range of significant opportunities in the energy transition area, where we are working with customers on either small-scale technology or larger-scale technology to reduce their carbon footprint as well as our own. And we're continuing to see that move very quickly forward in not just the hydrogen areas but also carbon capture. And battery technology and battery investment is a specific area that we've seen some great success in over recent months, where we are now probably the leading supplier in terms of the rush to the market to build battery plants to build them, not the technology, to build them.Christina?

[Christina Johansson]

Yes. When it comes to M&A, I think, first of all, looking from our front, given that we have a very strong market position in Europe, we are #1 or #2, in our region. Obviously, here, we are looking for more bolt-on acquisitions in specific areas where we see that we can create additional synergies of growth. One example could be an acquisition in the Nordics, where we can strengthen our position beyond where we are today. It could also be biopharma that is one of these markets that we see great opportunities to grow beyond the position we have today.In U.S., as Duncan mentioned, we are trying to get a bit more of a balanced portfolio, which means that we have less dependence on large projects, and we are increasing our maintenance footprint in U.S. And in that process, in U.S., it could be interested for us to make one or another acquisition in the maintenance area to increase the speed in this. But in addition to that, we also need to keep in mind that outside of these things there are also things happening. And in Europe, right now, we see that a number of companies where we are partly meeting as competitors are for sale. And therefore, there will be a certain consolidation happening in Europe. And of course, we want to be in a position here to also be involved to see how we get out of this, and there might be one or another interesting target here for us. But as always, the price has to be reasonable, and we want to have companies that are already profitable to be integrated in the Bilfinger group.

[Operator]

[Operator Instructions] Okay. There are no further questions as of now. As I said, please contact the IR Department, especially in case there were technical problems also from your side. But as of now, we conclude today's call. Thanks for participating. We wish you all the best and will speak to you again latest in August. Bye-bye, and thank you.