Bilfinger SE (GBF) Earnings Call Transcript & Summary

Welcome to Bilfinger's Annual Year-end Lunch. My name is Martina Borger. And today, I'm joined here by Thomas Schulz, our Group CEO; and Matti Jakel, our Group CFO. Thank you very much for joining us today. You should have received some nice Christmas cookies from Bilfinger from Germany. We sincerely hope you enjoy them. We will now start with a short presentation reviewing the year and then open the call for a Q&A session. As with our quarterly calls, you can ask your questions via phone or via chat during the webcast. [Operator Instructions] The event will be recorded. With that, now over to Thomas.

Hello, everybody, and a very warm welcome to our year-end lunch. Let us start directly with a highlight setup, how we see the year 2024. Overall, it was quite a successful year for our Bilfinger Group. We see that we are very well on track to achieve our midterm targets, and we see our markets, the business what we can do, is quite stable to positive and overall geographies and industries. The outlook what we gave is EUR 4.8 billion to EUR 5.2 billion in revenue and a 4.8% to 5.2% in EBITDA margin. The cash flow developed up to the end of the quarter 3 very positively with more than EUR 100 million and was 5 quarters in a row positive. We will give -- especially Matti, with our CFO, will give a deep dive into de-risking, what we understand with it and highlighting that. And we will give some information regarding M&A, especially with the strong focus on U.S., Middle East and, of course, bolt-on for Europe. And as you most likely saw yesterday -- or 2 days ago in the evening, we announced a share buyback. Before we go into more details for the year 2024, a recap of our strategy, because what we want to do is in our strategy, what we do is our strategy. It's actually not that complicated. We have 2 main directions: the so-called operational excellence, which means we make us more efficient, and the positioning where we offer more of the great products what we have to our customers in existing areas and industries. And our target is clearly here to be more and more an industrial service solution provider to be. And we see in a time where some markets expand and some markets decline, a very good business for us as the Bilfinger Group. The midterm targets for '25 to '27, you can say midpoint the year 2026, is over the time from '23 to that time a 4% to 5% CAGR. We will achieve a 6% to 7% EBITDA, and we will have a cash conversion ratio of more than 80%. Out of that, it is important to understand that we offer to our clients efficiency improvement and, with that, a better sustainability. As more successful we do that, as more our customers earn money, as more we will earn money. That's actually the whole business model, what we run. If we then look into the industry development, you see on the left side, production index. Based on the fact that industrial service industry is not actually established with own KPIs as an own industry, we give more and more KPIs data into the capital markets to compare our performance with that what we see in our different markets. On the left side, you see 4 graphs starting with 2019 as an index, and it's about the production index for Chemical and Petrochem, for Oil & Gas, for Energy and for Biopharma. And what you see is that Biopharma is the absolute positive development in the production index. And Biopharma is roughly 10% of our top line, and the growth drivers there are significantly in localization and the reduced -- significant reduced time to market of our customers. As an example, a new product, a new medicine, new anything before corona needed up to 10, 15 years to go into production. With corona, with the, yes, let's say, speed up of that process, our clients are faced with to build more production sites significant faster than they imagined before the COVID crisis. Then we have the other graphs, and you see that most of them are actually running around the level or slightly below that what we had as a pre-COVID activity. Let's start with the Chemicals and Petrochems, 25% of our top line. We see here significant regional differences as a booming part in the Middle East on a lower absolute number. But especially in the U.S., quite big, not that high percentage, but a very good development for the future. On the other side of that food chain is Germany with a significant drop in the production index in chemical industry, close to 20% minus versus pre-COVID. Then Oil & Gas, you -- we all know we get -- the world gets a new U.S. President and with his wording, "drill, baby, drill," Oil & Gas, the conventional energy resources, fossil ones, will have a bigger revival than we maybe could imagine. And that will be for us actually quite good because we help them to get more efficient and more sustainable, 20% of our top line. Last, what I would like to talk is about Energy. We see everywhere an increasing energy demand with a big political wish and actually social wish to go more for green energy. And we pick out always nuclear, and that the greenest energy resource, what we have out of the old times, and that's a clear revival part. It makes roughly 20% of the business, what we have. On the right side, you see how these markets, which you see on the production index, is not the greatest, in the development besides Pharma & Biopharma versus pre-COVID time, you see how the market is for us as the Bilfinger Group. All these areas are outsourcing. They outsource more and more of the industrial service. And we, as Bilfinger, with that big offering, are in a prime position for that. So the outlook in all industries, as you see with the arrows, is up, and that explains the stable to positive development. Then we look more detailed and that what we have. We inform the capital markets with the so-called opportunity pipeline, where we put index always 2 years back, all the opportunities which are in the market, which are existing, where we partly bid on it, where we partly are successful or not and peers are taking it. When you look in the third quarter this year, July to August, September, you see it's the blue sticks on the right side, it's 110 down to 102 versus 2022 in the same time. So where we can bid on, how the industry invests and so on is actually not that big up. But for us, with -- as a solution provider, actually quite a good time, and we can bid more and more with our package and get actually market share out of the last few years. And that is what you see with the orders received. We had, versus last year, an increase organically of 18% in the order intake and 31% with our M&A. Important to know is that with the whole strategy, what we operate through since '22, beginning of '23, we de-risk already in the tendering process. That means we are very selective with whom we work, where we work and especially what we offer. That, in general, reduced that potential what Bilfinger was bidding on before, but increase the de-risking part makes us more repetitive and more stable. Out of that, I would like to give to Matti, our CFO.

Yes, Thomas. Thank you. Good afternoon, ladies and gentlemen. We are well on track to achieve our midterm targets. Revenue growth, as Thomas explained again before, we're looking at 4% to 5% per annum on average. From '22 to '23, we achieved 7% organic growth. From '23 to '24, we're looking roughly about 2%, 2.5%. If we assume the midpoint of our guidance, EUR 4.8 billion to EUR 5.2 billion, and that is what we communicated at our Q3 announcement that we are targeting the midpoint of our guidance. For the midterm targets, '25 to '27, we said the composition of the growth is 2% market growth and 2% to 3% self-propelled growth. And in addition, we would see inorganic growth through M&A. And if you look at the average of '22, '23, '24, we are right around the midpoint of 4% to 5% revenue growth. In terms of profitability, we have made very good progress. If you look at the trajectory, 3% was the base that we found in 2022, 4% in '23 and 5%, again, the midpoint of our guidance for 2024. So we are on a good way and a good track to achieve the 6% to 7% in the midterm. Also, the components of the margin progression efficiency program, there's a tick mark that was completed last year, and we see the effects in our improved margin this year. Operational excellence, 1 to 2 percentage points, also effects showing in 2024 and then positioning another percentage point in our profitability. Also, we're seeing a few successes in 2024 already from the positioning. Cash flow. EUR 105 million in the first 9 months of 2024 is a real great achievement for the organization. Typically, we were much, much lower in the previous years, but free cash flow has been very stable and consistent in 2024. So also here, we are on a good way to achieve 80% cash conversion rate in the midterm. Earlier this year, at our Capital Market Days, we introduced, I wouldn't say, a new target, but an additional midterm target supporting the free cash flow and the cash conversion, which is net trade assets divided by revenue. We came off of a ratio of 12%, have improved slightly in 2023, but we're making very good steps in 2024 out of the free cash flow to achieve our self-set target of 8% or lower in the midterm. So also here, another proof point that the strategy is working. We've discussed de-risking a number of times during our quarterly and year-end announcements, and we felt it was the right thing to do. To give at least some proof points, a little bit of a deep dive, on the left-hand side, margin progression is a result of the de-risking. As Thomas explained before, we are a lot more selective on the contracts where we want to engage ourselves. Profitability is first, which is not so easy to explain to engineers. Engineers are really keen to make great things, yes. And the CFO likes great results. So you can see, the CFO has had some influence here, pushing gross margin up from 9.5%, 10.5% to 11% in the first 9 months of 2024. That's a result of many, many activities around taking risk down, avoiding losses, being early in the development phase of contracts, of projects with the client. Phased approaches, I believe we have explained it, I don't know, last quarter or the quarter before, where we are working with our clients to go through planning phases, design phases, engineering phases. And only finally, when everything is clear would we take the installation of the project, instead of going full-fledged when things are not clear. So I think that's a proof point here. We talked about the business in the United States. We do not share or do not disclose in our segment international detailed numbers on the regions. But since this business has been talked about quite a bit, we said we would show how we have reduced the U.S. installation business that has been a source of losses, a source of concern and risk as well. And we reduced it by 95% from '22 now to 2025. So there's one last contract that we will be completing in the first half of 2025, and then that business is gone. Another aspect of risk is your supply chain. And also, we have done some good work there in reducing the number of our A and B suppliers. A and B suppliers typically cover 30% of the spend volume. And we've reduced that number by roughly 20% from 2022 to 2024, having a more solid supplier base, long-term relationships, framework contracts and so forth, which really helps ensure that our suppliers, subcontractors are very good quality and help us achieve the margins and profits that we estimate when we bid for contracts. So 3 examples, proof points how de-risking is generating better profits. M&A. Let's now looking further into the future. On the left-hand side, we have clearly defined selection criteria. First and foremost, shareholder return and earnings per share accretive. Then from a quality point of view, all targets need to strengthen our core. We're not here to go out for experiments. It's not the fact that we are looking to buy businesses that we don't understand and that we don't know and then have to rely on the acquired management. No, we want to buy a business that we know how it works, and we want to strengthen our core, be it core services or be it core markets and industries and geographies. There needs to be an interesting and attractive top line and bottom line contribution. We are not really eager to buy turnaround cases. We want to see businesses that perform, and we are looking to acquire management that have a performance track record. Also in terms of positioning, it should enhance our positioning, so not only adding 1, 2, 3, but really helping position ourselves better with the clients, allow us to offer solutions rather than individual services. And obviously, ease of integration is very important. We have seen in the past how long it takes when you buy businesses that are tough to integrate for whatever reason, be it cultural or be it from a business mindset. We look at ease of integration, so that the criteria that we have set up before really are working. Now in terms of target areas, obviously, the United States, a very interesting market. That's indicated by the dark blue section of the circle market, very interesting, very strong. Our offering right now is, let's say, medium, but our share of wallet in the U.S. is really on the low side. And hence, there's potential for larger acquisitions. The Middle East, our share of wallet and offering is we rate it as medium, but the market, very strong. So again here, we see a potential for larger acquisitions. Europe, there is the focus on bolt-on. We have a high share of wallet in Europe. We have a very detailed and wide-ranging offering. And the market, as we have heard before, is not as strong as Middle East and United States. So we rate it as medium. So this typically indicates that bolt-on acquisitions are the right thing to do. Capital allocation is and remains unchanged. First and foremost, we look at dividend growth, we look at organic growth, then we look at M&A. And lastly, and we said this a number of times before, share buyback is part of the toolbox. And given the very good cash flow in 2024 and quite an attractive share price level, we decided to announce a share buyback. The share buyback will start in January, latest by the end of January. It is for EUR 50 million in total or 1.1 million shares. Whichever hurdle is achieved first, we will then terminate the program. So all of this is based on a sound financial policy to achieve investment-grade rating. We are very well on track to get there this year. We got the positive outlook. So we do expect to make the final step and surpass the final hurdle, hopefully, next year. On that basis, I return back to my group CEO. Danke.

Yes. Then we go into the group outlook for 2024 again. And what you see here is, of course, revenue, EBITDA and free cash flow. And when you look on the a little bit gray colored part of the slide, this is the performance and the target set for this year. We are well on track to achieve our outlook in revenue. We are well on track to achieve what we promised with the 5% EBITDA margin, which was, by the way, promised already in 2016 to achieve, and the free cash flow, which develops in the direction as we would like to have it. All in all, we follow that what we announced in very much in detail with our strategic levers to achieve our midterm targets, where we, of course, as you can hear and as you can see in the financial figures, if you track us for a little bit longer time, are more than convinced to achieve that. And where you see that our way of dealing with the Bilfinger Group in -- related to the competence and the customer relation we have are well on track to support our customers in efficiency improvement. And the real important part in that, where we have a very volatile end market between an expansion market like Middle East on one side and a market very much under pressure like in Germany, we are very well aware of that and quite attractive in both special situations and everything in between, which makes it us, from an end market customer point of view, possible to achieve that and, of course, then any time thinking about the next step. So out of that, for the year, quite successful year 2024, and it will be a successful year in 2025, too. And we will achieve our midterm targets, which is for us actually the main discussion what we have. The markets for us are quite positive, stable and quite positive. I know this is a little bit more difficult to communicate, but we help customers to perform in recession areas, too, and we are well positioned for that. We, of course, confirm our outlook. Cash flow goes in the right direction. We are well on track with our de-risking. M&A is very high on our agenda. And we went back -- actually, we don't have it on the slide, but we are very proud of that. We went back into the MDAX in Germany after quite a while. In March already, share buyback. So all in all, good year 2024. Now Martina, Q&A.

Thank you very much, Thomas. [Operator Instructions] Let me look for the first question. It seems that currently, there's no question yet. So please be reminded, we would love to answer your questions here. [Operator Instructions]

Seems to be we explained everything very well.

Assuming there is no -- I see a question. Thanks very much. So the question is from Gregor Kuglitsch from UBS on the chat. You seem to be signaling potentially larger M&A in the U.S. and Middle East. How big is large? And what type of enterprise value sizes are we talking about? For 2025, do you already expect to be in the 6% to 7% margin landing zone? Or should it be 5% plus?

Yes. The -- of course, we look for Bilfinger terms for a larger M&A in U.S. As we've showed, the -- that market is very, very important for us for the future development, growth potential. And the market in itself contains a lot of European customers who actually demand from us to go with them and to offer the same systems what they know here in Europe. And it's on one side, European clients. On the other side, U.S. clients having assets here in U.S. -- in Europe and would like to copy the system what we offer into U.S. When we look into the amount of what we can bid or how big the size will be, the -- I look to my CFO, you know our balance sheet. We have, as you would say, quite a lot of firepower. But it is always our intention to be, if it comes to balance sheet, quite conservative and not going into any territory, which we would see as a kind of a risk area. Anything to add on that?

Yes. I think we go by revenue size rather than enterprise value sizes. And here, we're really looking at several hundred million U.S. dollars from an enterprise -- from a revenue point of view to really add to our platform in the United States and really extend our footprint there, be it geography or be it with the clients, but on our core services. So that is how we have structured our search.

When it comes to the question for 2025, when we came out in February 2023 with the midterm targets, we actually put a relatively wide range for the end of that midterm time, '25 to '27. And the reason for that was very difficult in these days to -- yes, to read the end market and how it develops. '25 would have been a possibility for 6% to 7% if it would have been by far more supportive for us, and '27, if there would be significant bigger problems than we already see in -- with Ukraine and so on. So what we communicate is actually the midpoint to 2026, and that is for us the target, 6% to 7%. If it comes to 2025 specific, we can't guide today for 2025. Otherwise, Martina would be very angry with me.

Thank you very much, Thomas and Matti. We have another question on the chat from Gerard O'Doherty from Bankhaus Metzler. Could you outline the recurring nature of your recurring revenue across the various business? And is that changing over time?

Yes. Recurring business are, for example, service frame agreements where we get an order over a period of 8 years. And then after 7 years, the renegotiation starts, and then we get, in a lot of cases, the same package again. And we are on some of the sites, on quite a lot actually, for a very, very long period of time. That's our recurring business, what we have. This is service related, low risk. That is where we have clients to have an optimized, efficient -- efficiency-improving maintenance, turnaround all work what we do there on site. You can say that we have roughly 75% of that business is quite of that nature. Then on top of it, and this is important for Bilfinger when we go to our clients, but important for you, too, roughly 80% what we do with any client, no matter if it's in nuclear, in biopharma, no matter if it's Hinkley Point or vegan cheese or if it's on the chemical side, it is actually the same. 20% of that, what we do, is industry-specific. That gives us quite a big flexibility and gives us an opportunity to develop a product, what we then actually use in all industries. That's the nature of that recurring business. It is a good stable growth, what we see. It gets more and more digitalized, with the wish to get digitalized from our customer side, which helps us, too, because we have by far more digital products. And it is from a profit, from cash flow, quite a positive business in our portfolio.

Thank you very much, Thomas. We also have now a question on the phone line, which comes from Caroline Gauthier from Edmond de Rothschild.

I would like to come back on the organic growth sales. I'm not sure you gave your expectations for this year within the guidance of EUR 4.8 billion and EUR 5.2 billion. What is the organic growth rate expected? And do you see for this end of the year a slowdown in the activity, nevertheless? And the second question would be regarding the incident, the accident in the U.S. Could you make an update on it? And do you think that you will need to put a provision for this accident? Thank you.

Are you thinking year-end revenue? Or...

Yes. Thanks, Caroline. The -- if I understand your question right, the question was, are we seeing a slowdown in revenue towards the end of 2024? Is that correct?

Yes.

Yes. Actually, we don't see a slowdown in the fourth quarter. If you look at our guidance with the EUR 4.8 billion to EUR 5.2 billion and we're targeting the midpoint, then the fourth quarter is developing in the same way as we have seen it before. So not really seeing a slowdown. There is regional differences, obviously, as Thomas said before. But also, if you look at our order intake with a growth rate which is higher than 5% organically, we don't see much of a slowdown there.

Sapelo. The Sapelo Island incident, we have no new news. We have no claim on the table. Nothing actually changed since the last announcement. We didn't build up any provision because we can't build up a provision against nothing, no claim, no nothing. What we see with the Sapelo case are to wrap it up a little bit. It is an incident of a gangway where we were a contractor in that whole group of companies involved, customer side as well as sub-suppliers. And the gangway was for 3 years in operation. A lot of things happened in between, and the authorities in U.S. analyzed what happened during the installation as well as during the operation over 3 years or more than 3 years of that gangway. And that will take a while. If we have any new news, we will come as quick as we can to the market to inform. And the -- at the moment, we can't build up a provision because we don't see anything. Next question?

Yes. Thank you, Thomas. So the next question, again from the chat, Volker Glaser from MPPM. The dividend payment was EUR 1.80 for 2023. What can we expect for 2024?

Thanks, Volker, for the question. It's a bit early to talk about dividends, as you well know. We said dividend growth is part of our capital allocation policy. And with growing profits, obviously, there is the opportunity and the possibility to have your dividend grow in line. Last 2 years, we had -- we paid out 60% of our adjusted net profit, so I cannot tell you where we will come out for 2024. But I think, if you look at all the indicators that we have given so far, you can make your own assumptions.

Thank you, Matti. We have further questions on the chat, so it's now going a bit better, which I really like. Thanks for being so active. We have a question on the chat from Youssef Lboukili, I hopefully spelled the name right, from Amiral Gestion. I understand it's hard for you to commit to a 6% to 7% margin in 2025 given the low visibility. But do you at least expect an increase year-over-year in the margin ratio? And there's also a second question from Youssef, so I'll also read that out. On the opportunity side, you show an opportunity pipeline slightly higher than last year. However, your order intake has been outperforming this opportunity pipeline. How do you explain it?

Yes. The -- at first, the commitment to 6% to 7%, we already gave beginning of '23. We will achieve that. Regarding the year, you know I'm not allowed to guide now on 2025. But it will be -- I make it like that. It will be not like that, that we finalize the year, as we said, with the midpoint of the guidance, the 5%, and then nothing happens. And then in '26, we are above 6%. There will be, of course, a step in between, which we showed in the last 8, 10 quarters that we deliver steady, very solid, sustainable, profitable growth for the Bilfinger Group. Then on the opportunity, it is important to understand the opportunity pipeline graph. In a way, this is the total opportunity index where we put and do partly bid on. That's for us important to measure how successful our strategy works predominantly with the positioning. We see that our order intake is above, partly significant above, that what you see in the growth or development of the opportunity pipeline, which proves actually the strategy, what we have, that the solution provider to offer more products to the client to help them to increase efficiency works out very well. And there is a little trick in it, and the trick is out of when you try to improve efficiency, it is always better to look over a longer part of the value chain on the client. There is more efficiency improvement in it than if you only sell bits and pieces independently. On top of it, customers are trying to save cost. And when you ask for an industrial service provider to come on site and you split it in 5 different packages, you have to ask 15 companies. You have to check 15 companies if they are able to do so, compliance with everything. If you go to 2 who can offer the whole, you reduce the work, you reduce interfaces, you reduce the so-called interface risk between different providers on a site. And that is where we, as Bilfinger, with more than 30,000 people, are able to offer customers the competence and the people flexibility. That explains why we have quite a good order intake development overall. I would never look only into 1 quarter, but overall, versus that what we see in the opportunity pipeline, which proves our strategy from our point of view.

Thank you. We have further questions in the chat. So the next question is from Tobias Sittig from Panthera Investment. Have you had any update on the Sapelo gangway collapse regarding the cause of the tragedy? Or any time line when the results of the investigations will be out?

No, we don't. Nothing moved towards us. We support the authorities, as we said already in October. And if we have a change, if anything happens, what is important to communicate, we will do so. As you know, we decided to be as transparent as possible in that case. They will work on it. We have nothing more on the table.

Thank you, Thomas. And there's still further questions in the chat. So the next question comes from Raphael Lucet from Moneta Asset Management. Do you see any more price pressures from your clients during the negotiations, given there's still inflation pressures on salaries that you have to offset?

No. Actually, we are a little bit in a kind of an interesting time. All customers are under pressure, but some are really under pressure to expand and to do more. And some are under pressure to reduce, to shut down, to lower production on different sites. So the question is more how can we do that in a way that it's in the expansion mode, on a high quality, quick, fast, in a way that the OpEx of the future for that asset is under control. On the other side, if it comes to recession areas, there, it's about how to do the reduction of production on a site in a way that our end clients are back into cash positive and higher profitability than they were before. The discussion about pricing is actually with our clients not that big thing. And inflation, it's not that big thing. We are open in that. We explain why we need more money, why we have to charge more and how our wage cost development is. We are completely open in that, and we have no issues with that to increase prices towards our clients.

Thank you. There's another question on the chat, which I'm pretty sure Thomas here will like. It's from Youssef from Amiral Gestion again. If it would be possible to restart nuclear plants in Germany, could you play a role in that?

At first, it is possible definitely to make that fairly clear. And of course, we will take then a part. If possible, we can quote on it. But we quote on it, and we work with it if they would really go on or starting to demolish because nothing is touched so far. So from that point of view, I'm completely -- or we are completely in line with the International Atomic Agency, not with the German government or the former German government, but with that agency, which clearly says not a problem to restart again. They don't see really technically any issue with it.

Thank you. So this has been the last question. There are no more questions left, and this would then also conclude our Q&A session. The Bilfinger team here wish you all a Merry Christmas and a Happy New Year. And we thank you very much for the lively participation today. Thanks a lot.

Thank you.

Thanks a lot.