Friedrich Vorwerk Group SE (VH2) Earnings Call Transcript & Summary

Warm welcome to CEO, Torben Kleinfeldt; and CFO, Tim Hameister, who will 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 your.

Thanks a lot for the introduction, and also a very warm welcome from my side to the Q2 earnings call of Friedrich Vorwerk Group SE. My name is Torben Kleinfeldt, CEO of Friedrich Vorwerk Group SE. My 25-plus years of experience in our business. I think I can say that I've not seen such interesting times in my business lines as we have at the moment. And that's why I would really like to start today's earnings call with market update and then later on hand over to Tim, who will introduce himself later on as well. And I think he has probably the best news of today with our financial figures of Q1 and Q2. And I will finish the earnings call with a short update on current projects and current trading. So yes, as we've heard a lot about the electrical grid in the former earnings call, I would like to focus on this earnings call on the pipeline business. So natural gas, hydrogen and of course, district heating because there's a very fresh update from the German government. On the TSOs. So the natural gas operating TSOs, which are the same entities as we build up the hydrogen grid in Germany have just applied on 23rd of July at the German government for the permit to build the -- what is called the start grip of the hydrogen network. You can see on this slide, the first start grid of hydrogen that will be finished in Germany by 2032. The grid will compromise of almost 10,000 kilometers of mostly large diameter pipelines. 40% of that new hydrogen grid will be new built pipeline. Roughly 60% of the start grid will be converted pipeline. So converted from natural gas to the use of hydrogen. Investment for the total start grid of hydrogen will be roughly EUR 20 billion over the next 10 years. And we have already started on the first conversion projects for Gasunie this year. So the structure towards Denmark has already made ready for hydrogen and this finally converted from natural gas to hydrogen. So we will see a lot of work coming up here over the next years in the pipeline division, and it will definitely keep us occupied with our pipeline and construction divisions until middle of the 2030s. But not only in natural gas and hydrogen, we'll see a lot of work coming up but also in the field of district-heating. As you have heard, Germany has passed the law to decarbonize the building sector, mostly in the big cities of Germany. And the best way to do this is accept using heat pumps and using a lot of electricity, of course, using district heating and bringing industrial off-heat or heat that is produced by regenerative sources and bring a totes force by means of district heating grids. So you can see in the graph on the left-hand side, the studies by Prognos, which is the rough investment volume for the build of a new district heating grid. So in the 2020 to 2030, that's an estimated volume of roughly EUR 40 million of investments in district-heating and is estimated to almost double in the next decade. So this will be a lot of work, especially for our crews that are familiar with -- in the construction -- inner city construction, handling pipe work to be occupied at least until the 2040s. So this time, as I said, a different market outlook with no electricity, but we'll come back to some electricity projects later on. And I would like to hand over to Tim for the financial performance of the first half year.

Yes. Thanks a lot, Tom. And I would also like to welcome you to our earnings call on the second quarter figures. We are very pleased to be able to present such encouraging figures to you today. And to start off, let's have a look at our strong revenue development for the year. In the second quarter of the year, we achieved revenue growth of 27% to EUR 117.4 million, thereby delivering the strongest quarter in the company's history. Key driver of this revenue growth was the ramp-up of our flagship project A-Nord, which already made significant contributions to both revenue and earnings in the second quarter. [indiscernible] will provide a more detailed project update later on this. In addition, our recruiting activities were particularly successful in the second quarter, enabling us to record a significant increase in the number of employees as well as a substantial increase in revenue per employee of around 18% compared to the previous year. For the first half of the year, this means a growth of 17% to total revenues of EUR 194.1 million. The trend in the segment development here that we've already seen in recent quarters is still continuing and is leading to a shift in our revenue mix. Projects in the natural gas segment now account only for 37% of our revenue while the share of our electricity segment doubled to 30% compared to the previous year. However, this growth is not exclusively attributable to A-Nord. Our transformer station project, for example, also contributed revenue in the double-digit million euro range. Slight increase was also recorded in the Clean Hydrogen segment, where the first small subprojects of future hydrogen core grids are already being realized at the moment. All the more pleasing, however, is the exceptional growth in profitability. We already initiated the turnaround in profitability in the first quarter and have now continued this trend in full steam in the second quarter. With a 121% EBITDA increase from profitability growth has outperformed the revenue growth significantly. We increased EBITDA to EUR 17.7 million in the second quarter, which corresponds to an EBITDA margin of 15.1%, an increase of more than 6 percentage points. In the same period, we increased EBIT from EUR 3.6 million to EUR 12.6 million and therefore, once again achieved a double-digit EBIT margin of 10.7%. Accordingly, EBITDA for the half year amounted to EUR 24.4 million with a margin of 12.6%. EBIT has almost tripled to EUR 14.5 million, which corresponds to a margin of 7.5%. As already announced in the last earnings call, we've now completed all legacy projects from the years 2020 and 2021 in the first half of the year, most of them even in Q1, so that these projects no longer have a negative impact on profitability, as you can already see in the Q2 figures. Instead, we worked with a large part of our workforce on new orders from the year '23 and '24, which were secured significantly better conditions, which leads me to our order intake, where we have once again demonstrated our competitive market position. Order intake in the first half of the year rose from EUR 318 million to EUR 408 million, leading to another record order backlog, EUR 1.2 billion as of June 24. This significant increase in order intake is mainly due to the order for the realization of the land cable connection in the BalWin3 and LanWin4 offshore connection projects with an order volume in a clear 3-digit million range. Another major order comprises the realization of further parts of the so-called South German Natural Gas pipeline, SEL as part of a consortium with an order volume in the high double-digit million euro range for the consortium as a whole. However, the electricity segment now accounts for more than 80% of the order backlog and will therefore be the key growth driver in the coming years. Then a look at our balance sheet. Our balance sheet, which remains very strong and relatively unchanged compared to December '23. We've continued to invest also in the first 6 months in noncurrent assets such as the drilling equipment, cable pulling and cable pushing equipment. And with roughly EUR 10 million CapEx in the second quarter was somewhat higher than in the previous year due to [ product-life ] but we are still planning to reduce the CapEx in relation to revenue in the short to medium term. For seasonal revenue, working capital again increased compared to the [indiscernible] year. However, working capital management, which was one of the key priorities in the last 2 years, has already achieved positive results. And therefore, our net debt has been reduced quite significantly compared to June 2023. And of course, as in the previous years, a clear positive operating cash flow is expected for the '24 financial year. So based on these excellent developments in the second quarter, we've adjusted our forecast as follows: We now expect revenue of more than EUR 410 million, which corresponds to growth at least 10% compared to '23. And in terms of profitability, we now expect earnings at the upper end of the 11% to 13% EBITDA margin range, which would put us almost 5 percentage points above the previous year. And with that, I hand back to Tom for the business update.

Thanks a lot. I would say good news from your side and also some good news from the project. We'd like to start up with our major pipeline projects this year, called the [ SEL ] project, basically compromising also new pipeline system connecting the area of Stuttgart towards the area of Munich. We have been executed -- executing the first lot SEL1 this year. This is a stretch of 24 kilometer, 48-inch pipeline. That has been executed in the consortium between Friedrich Vorwerk, Bohlen & Doyen and the Habau group. On the project has almost come to an end for this year. So the main building in [indiscernible] are finished. We are still busy with the high end and with the reinstatement of the track so that the SEL 1 project will be more or less closed by the winter. Besides that, we have been awarded the SEL 2 project compromising of 3 lots with an average of 11 kilometers each will be executed as it looks maybe starting already this year and main activities in 2025. SEL 2 is only a 14-inch pipeline. So it's one dimension smaller than the pipeline we are constructing this year. But since we have 43 kilometers to go next year, I think we will be able to also run or newly developed welding system on this project, and we are looking very forward to it to continue to work on the next spread of this pipeline, which, of course, saves us a lot of transport costs because the main construction equipment is already bundles can be just shifted from SEL 1 to SEL 2 without any further transport costs. And second project I would like to focus on is our BalWin3 and LanWin4 project that comes from the cable side of also from the electricity side of our business and the project has been awarded by the customer Nexans. So the car producing entity Swedish product with Bonding will be responsible for the onshore the whole project. It's a 45-kilometer cable stretch, which runs the BalWin3 and the LanWin4 project more or less in parallel. This year, preconstruction phase has already started. So we are busy with working out or procedures that are necessary to do the latter. Construction also make definite plans about the horizontal directional drillings, which will be a major part of this project. and construction will probably start in 2026 with commissioning of those 2 tables in 2031. But besides this new table project, also our existing corridor A-Nord project has really kicked off. So we are, at the moment, working with 4 major crews on this project. And as it looks at the moment, the customer is able to supply a sufficient way of way to keep all crews occupied for the rest of the year. And I think, which will lead us to an estimated revenue distribution as we have shown before with revenue more than EUR 100 million on this project for this year and peak of the work in 2025 with prop revenues with over EUR 200 million in 2025, just on the A-Nord project. And please remember this A-Nord project has more or less a cost and fee project with a major bonus and malus. The bonus will be paid on time costs and quality. And of course, the same is true for the malus, we are not staying in the estimated budget and not staying in the agreed time. As you can see, we require a lot of human resources for all of our projects, not only for the cable project, but also for the pipeline projects. And I think all the measures we have taken in our human resource department are now paying out. We were already able to gain employees, so grow the number of employees by 7% in the first half year of 2024. I think the June -- July figures are already pointing in the -- also in the right direction. So we might be able to gain more than 10% new employees by the end of the year. And I think most of the efforts we did especially to get foreign employees on board from outside EU and also from other EU countries as we paid out and we are able to staff most of the projects on personnel. And of course, as always with the old machinery. That's it also from my side. We'll be ready for your questions. And yes.

Thank you so much for the site presentation. And yes, we are now ready to go to the Q&A session. [Operator Instructions] And we have first hand raising. And from someone that is dialing by phone. Could you please say your name and then ask your questions. You can also use the chat if you want to ask a question. We don't have any further questions. So we're going to give it a little bit of a couple of seconds. There's another one, Lasse Stueben from Berenberg, you should be able to speak now.

My main question would be around sort of how to think about your revenue distribution in the second half of the year. I mean you had a good first 6 months, you raised guidance. So I'd just be curious to know, is it mainly going to be electricity that's driving the revenue growth in the second half of the year? Or are there some other bigger projects maybe in -- as far as I know, I think your district heating projects, the larger ones that are pretty much finished. But just to get a feel for revenue distribution between the segments in H2, that would be useful.

As for the main growth driver in the second half of the year will be in detail electricity segment. As I said, we have now as of June, a backlog of 80% electricity projects. However, you are referring to our distributing projects, for example, in Hamburg. There are still a lot of work to do also for this and the next year. So this will be also a significant revenue contribution in the second half of the year. But again, as you see the revenue mix in the first half of the year, the trend in the direction of electricity will be still there in the second half of the year.

Okay. And then maybe just a similar question on profitability, I suppose. You've seen a very -- I guess, the first phase of A-Nord has really been quite profitable. So I'm just wondering how that kind of looks going forward? Should we see Q2 as a reasonable level to expect going forward? Or how should we think about the phasing of the profitability, particularly in the bigger projects?

I mean, especially the Fay North, Torben elaborated on this. This is a fixed fee plus a fixed cost [indiscernible] contracts. Therefore, this will bring a lot of stability also going forward into the profitability. We did not reflect any bonus payment something like this in the figures, which will be only determined at the end of the project. So therefore, we just show the base margin over the next 2 years. And in terms of the group margin, I would expect that the margin of the first half will also be a good assumption for the second half of the year.

Yes. Thank you so much. Lasse Stueben, for your questions. We have another question from the chat from [indiscernible]. Please expand on the potential opportunity, the fair value sees in the DH segment.

Would you please repeat the question?

So the question is, please, can you expand on the potential opportunity, the fair value uses in the DH segment? I think I...

What is meant with the DH segment? District heating, okay. Well, we do see numerous projects coming up in district heating, especially in the big cities where our branch also is located. So we are definitely focusing on cities like [indiscernible] Hamburg, Bremen and also Hannover announced as the first big city in Germany, that all new buildings need to have a connection to the district heating group. So there is already work going on in Hannover, we are executing for enough city this year. That's a tunnel, the design [indiscernible] needs to cross this project we are currently working on in Hannover, but we already know from all of the customers in the big cities that our other projects are coming up with also a very big venturing to be installed over the next years.

And we have another question. Could you please give us a feel for order intake in Q3?

As always, the order intake is a bit chunky in our business. So we never know what the large order intake is in Q3, Q4. So I think it is very hard to get an exact figure for Q3, but we are very sure that until the end of the year, there will be more order intakes coming in. In especially pipeline construction. So first, natural gas and hydrogen, but also from the electricity side, both projects and also transformer station.

Thank you so much. We received another question. Have you got capacity to take on more large projects? Or is the focus mainly on executing existing projects for now.

I think we are confident to take on other big projects. We do see that we are able to win more employees, not only from the blue collar side, but also construction management and project management. I think we were able to attract some employees that were occupied in the general building construction, engineering construction, which is a down market at the moment in Germany. So that might be good for our business, and we are confident to take on new projects as well.

Another question. What is the target net working capital level for the end of this year.

Yes, as we have some kind of seasonality here in the business, especially in terms of net working capital. Our aim would be to have the same level of net working capital as we had at the end of '23, even with higher revenues in '24. This is mainly done to set working capital management is a priority still and is mainly done by negotiating more kind of prepayments also in the pipeline construction contracts.

We received another question from [ Gordon Kunen ], and you should be able to speak now. Thank you so much for raising hand.

First of all, congrats to the very good figures. My question is on the A-Nord project. As I saw you smile in your face when you're talking about the A-Nord and the compensation scheme, et cetera. And I understood that you just book until is finished the base margin, as you said. Is it up to now? I know it's 2 years to go. I'm more likely that you will earn a bonus than a malus? What is your point of view on this topic?

Well, I think at the moment, concerning the time line, we are right on schedule. So all crews are being occupied, right of way has been handed over to us. So our crew is able to continue with this progress on right of way. I think we are definitely on the safe side concerning the timeline of the project. And I think also the budget for the work is still in the greenfield. So I do expect to earn maybe not the full bonus, but we are very sure that we will not end in the malus [ regime ]. Except anything changes dramatically on -- in the field of right of way.

Otherwise, it's fair enough. It's 2 years to go. That's fine for me.

We received another question from the chat. If I calculate correctly, the full year revenue guidance implies a 4% to 5% year-over-year growth in the second half of the year. Can you provide a bit more color on this, especially in the context of the very strong first half of the year.

Well, traditionally, the second half of the year, our business is always a bit stronger than the first half of the year since first half of the year, obviously includes the January and February, which are very, let's say, bad months in our business due to weather conditions outside. And therefore, we typically have between 5% and 20% revenue increase compared from H2 to H1. And given the order backlog, the record level, the EUR 1.2 billion, we are very confident that we'll be able to meet at least the EUR 410 million in revenue for the full year.

Thank you so much. And then I received another question from Seth from [indiscernible]. What share backlog is from low-margin legacy projects? And when do you expect to have these projects fully phased on paid out?

Yes, the good news here is that we have -- as of June, we have completed all of these bad margin legacy projects and has now a very good composition of our order backlog before the project wins we announced in the recent months.

And Vinci released recently that they will work on the [indiscernible] project. This project was mentioned in your pipeline opportunity. Should we understand that you will not be involved in this one.

No, we have been asked by Silke Hertz, which is one of the big tiers of electricity here in Germany, for 3 lots in the area of [indiscernible], which is directly in front of our doorstep in our Halle branch. So we are at the moment in the automation stage of the project ending in the first offers, I think, end of August. And then we'll see how negotiation phase goes on and if we will be involved in [indiscernible].

Could you please elaborate on what percentage of a not do you expect to complete during Q3? And could you remind us of the key projects you'll be working on throughout the year.

Yes. As Tim already elaborated the major district heating project in Hamburg, will still go on for this year and also for the next half year or for the first half year of 2025. So that will occupy a lot of our intercity construction crews for another year. then, of course, the SEL projects, SEL 1 and SEL 2 will keep us occupied. Also please keep in mind that we were not able to complete the reinstatement of the [indiscernible], where we are still busy probably not only this year, but also we'll probably not be able to finish the reinstatement this year. So we will need to go back to [indiscernible] also in 2025. And then, of course, we will also ramp up another crew for not construction beginning of September. So these are, at the moment, a major project we will be working on until the end of the year.

Another question. Within a growing market, how are your market shares developing compared to 2 years ago? Thank you put some light on this case.

It's always hard to say what our market share is because we are active in very different areas of the market. So if you look at the natural gas business, we did the exercise once during the IPO period, we estimate our market share in Germany to be roughly 25%. I think this is pretty much unchanged over the years. Looking at the great development projects we are executing, I think this is always a good measuring point for our market share. For the electricity, the market is huge. So the latest redevelopment plan accounts to an investment of more than EUR 300 billion. But of course, it includes inverter stations also above ground power life. So to get an exact market share in the electricity market is I think very hard to say because we are only active in the broad tables and also in transformer stations. But it is very hard to estimate what the market share before would be in the electricity market.

And we received another question. Could you please tell us, do you need to further increase new workforce or shift resources to annual project in the next months as sales increased strongly compared to 2024.

Well, in the end, it will be a combination of both. There will be new employees being employed on the non project, but we will also shift existing resources to A-Nord so that we have a combination of good and experienced crews and new employees on that project. And I think for this, we can make sure that the works will be executed in time and also in the quality required by our customers.

There's another question from the chat. [Operator Instructions] [indiscernible] would like to know EBIT margins seem to be very thin, but the segment is around 30% of the total revenues. How do you think about the segment strategically? What is the merit for the business as a whole?

I think the question is referring to the district heating -- take opportunity segment?

Yes. Exactly.

We have to consider looking at the segment reporting that at the moment and the adjacent opportunities there, no earning contributions from joint ventures, which we do have in all other 3 segments, which have a positive impact on the EBIT margin level. But basically speaking, we are very happy with the projects we have currently in the adjacent opportunity segment. And we are quite confident that also the EBIT margin in the next year will grow further. And we'll get to the levels of our other segments since we do not see any systematic margin difference between the segments at the moment.

Yes. Thank you so much, Tim. And we received another question from Lasse Stueben again. You should be able to speak now.

Just a follow-up. Could you just shed some color on sort of the liquidity position in the balance sheet? I know it's not unusual in Q2 and also in Q3 because of the working capital seasonality, but it would just be good to hear sort of what headroom you have in terms of liquidity, should there be more working capital requirements in the third quarter?

I actually expect that the working capital position will decrease in the third quarter, improving the liquidity situation. Apart from that, we also have headroom of roughly EUR 50 million in case it's needed, but I don't expect that we'll need to use these credit lines.

Thank you so much for the answer. And no further questions have come in, in other ways. A couple of seconds more before we draw on today's earnings call to your close. And no further questions have come in. So thank you so much for my side. Thank you so much to the leadership team for the entire presentation, answering the questions. And also to you, for your attention, should further questions arise in the future, please don't hesitate to contact us or the leadership team. And with this and then I give the word for some final remarks to Torben Kleinfeldt.

Yes. Thank you very much. also. Thank you very much, everybody, for listening today. I think a very interesting times lying ahead for our company and led to be part of it at this stage. And I think we'll have some further good news at the end of the year. So staying with us, and have a good week. Bye-bye.

Bye.

Goodbye.