Implenia AG (IMPN) Earnings Call Transcript & Summary

Good morning, and welcome to Implenia's Media and Analyst conference regarding our 2021 half year results. We are happy to have you here in our call. My name is Silvan Merki, Chief Communications Officer of Implenia. [Operator Instructions]. Before we start, I would like to first draw your attention to our disclaimer that you find presented here. One second remark, you will find our media release and the slides we are going to present today already published on our website, implenia.com. And now let us begin with our presentation. Let me hand over to Implenia's CEO, André Wyss. André?

Thank you, Silvan. Also, welcome from my side. As you know, we are transforming our company with an increased focus on complex projects and therefore, create and build how we live, work and move. Our goal is to achieve highest value for our customers with sustainable profitability levels for Implenia, and by applying our deep construction and real estate expertise. The results of the first half year in 2021 clearly confirmed that the transformation is on track with positive effects on the operating results. We achieved an EBIT of CHF 40 million. All divisions are contributing positively to this result. The order book increased to CHF 6.6 billion, and is of better quality and improved risk profile, thanks to our value assurance framework. The restructuring measures and ramp downs, especially in business unit, Civil, are well on track and have mostly been completed already. Implenia will continue with portfolio adjustments and externalization of asset-heavy activities in the second half of the year and beyond. The equity ratio increased versus full year 2020 despite seasonality. Both cash and equity is expected to show a positive trend for the second half year of 2021. Last but not least, we confirm our guidance. Now looking at the structure of today's presentation. I will start with a business update. Our CFO, Marco Dirren, will then walk you through the details of our financials. Afterwards, I will show you our outlook. Marco and I will be happy to answer your questions at the end of the presentation. So let's first have a look at our business update. Implenia achieved a solid operating profit in the first half year with a reported EBIT of CHF 40 million. This result was, like previous year, impacted by onetime effects. More details will be given during the finance update. Underlying performance is in line with expectations, amounting to CHF 22.9 million. The revenue slightly decreased versus last year to almost CHF 1.9 billion. Strict adherence to the value assurance framework leads to a more selective project acquisition with improved margins and the better quality of our order book, which increased to CHF 6.6 billion, due to significant project wins in the first half year as well as the acquisition of BAM Swiss. We continue with a strong and integrated offering based on which we aim to achieve our vision to become a multinational integrated construction and real estate services provider. Now let's have a look at the performance of each of our divisions. Our Division Real Estate achieved a solid EBIT of CHF 22.3 million, driven by the diversified project portfolio and participation in Ina Invest. This good result is in line with years prior 2020, which was an extraordinary year for real estate due to the Ina Invest transaction. The division continues to invest in and develop an attractive portfolio with a market value of over CHF 350 million as a trader developer in Switzerland and Germany. Together with an external partner, the division realizes its aspiration for standardized industrially manufactured real estate products. Lastly, the collaboration with Ina Invest is well established in the areas of acquisition and real estate services. The participation in Ina Invest has a book value of CHF 144.8 million. Also, our Division Buildings delivered a solid performance with an EBIT of CHF 16.2 million and increased profitability from its underlying business. Due to the focus on profitability and the strategic shift towards large-scale complex projects, the revenue decreased to CHF 854 million. The order book increased to CHF 3.1 billion, which was mainly influenced by the acquisition of BAM Swiss. With this acquisition, we are strengthening our expertise for complex projects, mainly in healthcare. Coming now to Civil Engineering, which reports an EBIT of CHF 10.2 million, a significant improvement versus last year. The business units, tunneling and special foundations are delivering good results for the division. In Civil, the restructuring measures and ramp-downs are well advanced and have already been partially completed. Overall, the Division Civil Engineering is now well positioned for future success, albeit still with a fairly low margin. Revenue increased to over CHF 1 billion based on a strong second quarter, especially in June and the strategic focus on large projects. The order book remained at previous year level of CHF 3.3 billion. Lastly, our Division Specialties achieved an EBIT of CHF 0.5 million versus a negative result of previous first half year. Revenues decreased slightly to CHF 96 million. The order book remained stable at over CHF 166 million despite the sale of 2 nonstrategic businesses, Tüchler Ausbau and Tetrag. Specialties will continue to develop and scale businesses with high potential and active risk out acquisition prospects in order to expand its planning and engineering capabilities. Further, the division continues to align its portfolio. And finally, our Innovation Hub is developing more than 70 promising innovations at various stages of maturity. Now I would like to show you some details on our organization, strategy execution and sustainability. The strategy we defined in 2019 with our 4 strategic priorities remains valid. Because of the necessary write-downs, we decided to sharpen and accelerate our strategic priorities, portfolio and profitable growth. With regards to portfolio, I would like to give you a bit more insight on how we apply our strategy consequently to our business portfolio. In other words, which activities are continued and accelerated and which are stopped. Our Division Real Estate remains a trade developer and expands its offering to scalable products and services. The Division Buildings focuses on complex projects in margin attractive segments and establishes new partnership-based models. Civil Engineering remains successful in tunneling with strong project wins and continued presence in all our markets, whereas subunit Civil and special foundation focus on Switzerland and Germany. Division Specialties is in the process to become an incubator for profitable niche businesses and drive the Innovation Hub for the group. Other areas that are not performing and have been unprofitable in the past with limited positive outlook has already or will be stopped. We made really good progress in selling and ramping down nonperforming and noncore businesses. In Buildings, we have closed down the unit Südbaden, and are transferring our activities in Austria to a better suited owner. In Civil Engineering, we have sold Ferry Docks in Norway, Instandsetzung in Germany, and closed unprofitable locations in the canton of Grisons here in Switzerland. In the Division Specialties, we have completed the divestment of Tetrag. Having said this, we are moving full speed ahead to execute on our transformation strategy. In Civil and special foundations, almost all market exits have been completed and ongoing projects are being finalized or handed over to the new owners. Based on the win of the tunneling project TELT Lot 3, France, will remain an important market for tunneling and related infrastructure projects. All in all, we made great progress on the adoption of our geographical footprint in a short amount of time and in line with our strategy. The second pillar of our strategic priorities is profitable growth. While our order book is of better quality, we improved risk management and transparency also during project execution. These are crucial to increase the operating performance sustainably and drive profitable growth in the future. We have seen first indications for their effectiveness already in the half year results. The process starts in the pre-project phase where we have today evidence that our precalculated gross margin improved by around 1 percentage point, respectively, 20%. Further, we apply thorough cost estimates and risk assessments jointly with legal, finance and the business. During the project execution phase, we have implemented ongoing project reviews with tight cost control and continuous feedback. Additionally, early warning indicators have been defined to spot irregularities on projects early. Claims and litigations are managed proactively throughout the realization phase. Last but not least, we launched a leadership development program with [ MBX, ISK and Datana ] to further improve the way we collaborate internally and externally. Before we go into the details of our financials, I would like to take the opportunity to highlight our USP in sustainability. Recent ratings from Sustainalytics, MSCI and EcoVadis show an ongoing improvement of Implenia in this area. We are very proud that Implenia has been recognized as long-lasting industry leader in ESG ratings and our continued effort in the last 10 years is getting rewarded. We are taking ESG very seriously and focus on safety culture, environmental protection and social commitment. All of our development projects are evaluated with our proven sustainability tool. One example of a sustainable real estate and buildings project is Green Village in Geneva. It consists of 6 new buildings and 1 modernization, all based on the philosophy of One Planet Living developed with WWF and Implenia. Let's have a look at the short video, which shows the project in more detail. [Presentation]

Because we believe we can continue to be at the forefront of change towards a more sustainable industry, we have set ourselves ambitious goals for the future. For example, we aim for a net zero emissions by 2050, and the reduction in our group-wide CO2 emissions by 15% until 2025. But also on our construction sites and with our customers, we are spearheading. Our latest innovation is a pilot for a hydrogen fuel cell solution that can replace diesel engines and generators on construction sites to become completely emission-free. This would be a major step for the construction industry to contribute to a more sustainable future. Now I would like to hand over to Marco Dirren, our CFO, who will walk you through the financials and guidance.

Thank you, André. Let me walk you through the financials of Implenia in the first half year of 2021. On the left column, we present half year 1, 2021 results, comparing them with half year 1, 2020 in the middle column and half year 1, 2020 without the Ina Invest transaction effects on the right column. Top down, I'll start from the EBITDA to the net result. EBITDA was CHF 96.2 million. Due to increased activity in the first half year of 2021, depreciation, including IFRS 16 is back on pre-COVID-19 levels. As mentioned by André, EBIT was CHF 40 million for the first half year, which is within our expectations and a mix of improved profitability and onetime effects. The results of last year were heavily affected by both the Ina Invest transaction and COVID-19. The financial result is in line with previous years. The corporate tax rate is back on normal levels before 2020. The reported positive tax result of last year was based on deferred income tax recognized based on the operating results of the first half year of 2020. Net result came in at CHF 22.4 million. Excluding the Ina Invest transaction of last year, this is a significant increase. Let me share with you the reported and the underlying EBIT performance of the divisions by presenting the reported EBIT on the left section of this slide, the onetime effect in the middle section and the underlying performance on the right section. Thanks to improved profitability and onetime effects, all divisions contributed positively to the reported EBIT of CHF 40 million. The underlying result of the division real estate is on expected level. Last year, the result of the division real estate was impacted by the Ina Invest transaction and the related shift of the underlying profit into the first half year. In term -- in absolute terms, the Division Buildings is on pre-2020 level and has increased its profitability. The Division Civil Engineering shows a strong improvement of the underlying performance. Civil engineering is executing the streamlining of its portfolio and the restructuring, which results in positive onetime effects of CHF 15 million for the first half year of 2021. These results underpin the sustainable improvement of the underlying performance and successful execution of our transformation. On this slide, I would like to walk you through the most important items of the asset side of our balance sheet. Here, we compare half year 1, 2021, with full year, 2020, and half year 1, 2020. In the half year of 2021, total assets further reduced to a level of CHF 2.9 billion compared to December 2020. The currently low level of cash and cash equivalents is due to seasonality effects and the ongoing transformation. Compared to full year 2020 real estate transactions remain stable. Other current assets, which include accounts receivables and work in progress increased compared to half year 1, 2020, due to a stronger second quarter of 2021. Goodwill was primarily impacted by the acquisition of BAM Swiss in May. Overall, noncurrent assets are at half year 1, 2020 level. Here, we show the equity and liability side of the balance sheet following the same structure as on the previous slide. Lower prepayments due to the revenue decrease in the Division Buildings reduced trade payables to CHF 758 million. Current liabilities increased by around 10%, mainly driven by the reclassification of the convertible bond from noncurrent liabilities to current liabilities. All in all, total liabilities add up to around CHF 2.6 billion. Our equity increased by CHF 21 million since the beginning of this year, and we expect the ratio to further improve in the following month. The equity ratio as per half year 1, 2021 is 11.1%. Looking at the development of the equity in the past, there was a pattern of a clear decrease in the first 6 months of any year. In 2021, we were able to break that trend with the increase in equity by 7% compared to December 2020, or if looking at the equity ratio by 80 basis points. Action to strengthen our equity have been and are a top priority. All actions to improve the equity shall ensure sustainable growth for the company and therefore, are taken with the required patience. With our strong underlying business and the execution of our asset-light strategy, we aim for a sustainable increase of the equity ratio to a level of more than 20% in the midterm. As previously communicated, there is an upside potential from our real estate portfolio, which is accounted for at book value instead of the significantly higher market value and the Ina Invest participation. Let's have a look at the consolidated cash flow statement comparing half year 1, 2021 with half year 1, 2020. As expected, free cash flow is temporarily at low levels, impacted by the seasonality effect of any first half year, hence, the ongoing strategy execution. The usual seasonality effect is around minus CHF 200 million to CHF 250 million. Additionally, there was the related cash outflow of restructuring and legacy projects announced last year. Write-downs and provisions accounted for in 2020 led to a subsequent cash out caused by 0-margin legacy projects and severance payments. Moreover, due to last year's partial transfer of our development portfolio to Ina Invest, the Division Real Estate temporary contributes with a reduced cash inflow. Based on the temporary nature of these factors, we expect a positive cash flow development for half year 2, 2021. Implenia is sufficiently financed to support its operational targets. As you are well aware, most industries have seen a substantial increase of material costs and encountered supply chain challenges. Let me share with you how we manage these challenges. We manage these challenges jointly by our project experts, the legal and the procurement departments who execute mitigation measures with the highest possible impact. This is part of our integrated operating model, which is applied to all project phases from offering and negotiation, up to the realization and warranty phase. Looking at the nature of our contracts, public clients contracts normally include inflation clauses based on the long duration. Private client contracts have a different nature. And here, we continue to work with framework contracts and hedging in order to act in the best interest of our clients. Further, we aim for dual sourcing and/or price index clauses. The material cost increase has only had a minor impact on half year 1, 2021 results. We will continue our mitigation efforts, taking advantage of the integrated operating model of Implenia. This leads us to the restructuring program announced last October and the key metrics to be achieved by 2023. The restructuring program way forward with the clear goal to achieve annual savings of more than CHF 50 million by the end of 2023 is well on track. Respecting our social responsibility, the FTE reduction towards the target organization has advanced according to plan. To achieve the target level of total assets, we see 2 key drivers. The cash conversion cycle in order to reduce accounts receivables and work in progress as well as the externalization of asset-heavy activities. To reach our target, the implemented measures will increasingly show the expected effects. Based on the solid result of our underlying business, progress of the sharpened and accelerated strategy implementation, hence, the current assessment of the material cost inflation, Implenia confirms its EBIT guidance. For 2021, we expect an EBIT of more than CHF 100 million, and our midterm target is an EBIT margin of 4.5%. And with this, I hand back to André for the market outlook.

Thank you, Marco. Before we move to our Q&A session, I would like to briefly provide you an overview of our outlook. The outlook remains positive for all Implenia relevant markets, despite the COVID-19 pandemic. Total construction output is expected to stabilize in Western European countries with annual growth rates of plus 2.2% for buildings. In Implenia's 2 large markets, Switzerland and Germany, especially Germany offers still significant untapped potential for Implenia. Also, the market outlook for Civil Engineering is positive with an annual growth rate of plus 3.3% until 2023, partially driven by economic stimulus packages and an investment backlog in infrastructure. Now I would like to briefly show you some highlights of our recent project wins of our divisions. Real Estate signed the purchase contract for the Marienplatz site in Darmstadt, which marks Implenia's entry into the German real estate development market. Marienplatz is currently used as a car park and will be developed to an attractive and sustainable urban living space. Buildings won several large and complex projects. With the acquisition of BAM Swiss, Implenia is now the sole total contractor for the Cantonal Hospital, Aarau. The future largest hospital in Switzerland. Civil Engineering won large flagship project with tunneling in international markets such as the high-speed railway line at the south end of the Brenner Base Tunnel, Fortezza-Ponte Gardena, along the Munich, Girona railway exits. And lastly, Specialties recently won projects by targeting solutions in industry niches, such as Facades. As part of the reconstruction of the Westdeutscher Rundfunk Filmhaus in Cologne, Implenia Fassadentechnik is realizing the complex new building. With our transformation on track, the expertise to manage complex projects and our long-standing focus on sustainability, Implenia is well positioned to become a strong and profitable company with a substantially improved risk profile. The operational measures have a first impact on results, and our order book is at the high level and of improved quality, thanks to the group-wide application of value assurance. With this, I hand back to Silvan.

Thank you, André. Before we answer your questions, a quick note that we will present our full year results on March 1 in 2022, and we will have our Annual General Meeting on March 29. If you have any questions after this event, please do not hesitate to get in touch through the usual channels. Thank you very much for your attention during our presentation. So with this, I can open our conference call for your questions. [Operator Instructions] The first question we have from Martin Hüsler, ZKB. What is your best guess for the free cash flow for the full year?

Thank you. Thank you, Martin Hüsler. I think I give that question directly to the CFO, Marco Dirren. Marco?

Thank you, André and Martin, for the question. As you -- as mentioned, we have been able to break the pattern of a negative free cash flow in the first half year this year. Usually, it's around CHF 200 million to CHF 250 million in the first half year. And we have -- and we expect a positive development in the second half year again, based on the normal seasonality. And we do expect that because of the underlying performance of the business, which has significantly improved as we have mentioned, and the majority of the cash drain from restructurings or legacy projects has already happened and -- but there will still be a slight impact going forward.

The second question by Martin Hüsler. You state that ongoing strategy execution is a reason for the cash drain. Can you please elaborate on that?

Yes, maybe I can say a few things. Certainly, the cash position is not satisfying, but it's temporary as the result of the transformation process of the company, and it is as expected. As Marco already said, the seasonality in the first half year is negative always in companies like ours is a CHF 200 million to CHF 250 million seasonality. The outflow from restructuring and legacy project expenses is around CHF 100 million in the first half year 2021 from this provisioned activities. We also have a fairly low cash inflow, as expected, from real estate following the Ina Invest transaction in 2020. This will change now over time again. So also this is going to change the pattern than in the future. Additional outflow not from underlying business, but extraordinary cash out like restructuring write-downs of the CHF 200 million, 2020 for projects that started before 2019. Very particularly, as you remember, in the sub-unit civil, and especially in Sweden. However, we expect a positive development now in the second half and we slowly come out of this situation.

The third question by Martin Hüsler. In half year 1, you profited from positive one-offs of CHF 17 million. What is your best guess for the full year? Is twice this amount a good estimate?

So the positive onetime effects, mostly from divestments are part of the transformation and also to some extent related to restructuring provisions. And it's almost entirely in Civil Engineering. You can expect in the second half also some of those transactions, but the split, we cannot yet assume because we don't know how this transaction all fall into place.

And question #4 by Martin Hüsler. Do you see any deterioration on payment terms of your customers?

Marco?

Thank you, Martin and André. No, we don't see any significant change in payment behavior so far, and which will be above and beyond our -- the normal deviation. So we don't see that at this time.

We have a question by Torsten Sauter, Kepler Cheuvreux. In our full year 2021 EBIT guidance of more than CHF 100 million. Can you quantify the split we should assume between recurring and nonrecurring elements, please?

Yes. Continued strategy execution will continue in the second half and maybe beyond, as we said, till 2023. We will also have onetime effects in H2 as part of the CHF 100 million guidance or larger than CHF 100 million guidance. It's not going to be necessarily the same split, as I mentioned before. It depends a bit how the execution of these divestments are going in the second half. And we can never really completely assume when they fall into place. We follow logic negotiations and not necessarily under pressure.

We have a second question by Torsten Sauter. Is it fair to assume that with respect to your cash flow performance in half year 2, seasonality should reverse CHF 200 million to CHF 250 million or more of half year 1 cash drain while the advanced payments on the EUR 1.07 billion Fortezza-Ponte Gardena railway tunnel project in Italy should add a high double-digit cash figure?

And I think that's a question for you, Marco.

Thank you, André. So we expect a positive development in the second half year of 2021, as we already mentioned. That follows a normal seasonality pattern, the improved underlying business. And we've had those impacts in the first half year, as you -- as we mentioned before. So advanced payments certainly do help to improve the cash flow. And we do expect, again, for Fortezza-Ponte Gardena is part of our underlying business. Certainly, such big projects help to improve the cash flow in the second half year. And the majority -- remember, the majority of the cash drain from restructuring and legacy projects has already been happened. And therefore, we expect an improvement in the second half year.

Then Torsten Sauter asked, when do you expect to sustainably generate cash? Is the low point behind? And why?

Marco?

Yes. Again, here, it's almost the same answer. So we improve our operating performance that will help to generate cash, and that is not only following the normal seasonality. The cash drain from restructuring and legacy projects has -- will still happen, but has happened over the majority. So -- And that will be overcompensated by the inflow from the operating business. And we see a positive trend for the second half year, but as well a sustainable positive trend in generating cash flow.

Torsten Sauter. Will there be further one-off gains in full year 2022, following from divestments and release of provisions?

Yes. As I mentioned before, we expect positive onetime effects from further divestments in 2022, in line with our strategy and what you also have seen on the chart, but probably to a lower extent as in the first half year. But we will see the split during the course of the year.

We have Holger Frisch from ZKB. In your cash flow statement, you made an adjustment for result from sale of noncurrent assets of CHF 37 million. Where did this come from? Can you give some details on this? And where did you book these in the income statement?

Marco?

Thank you, André. And so we have reported our M&A transactions over the first half year, so without giving any details. So the reported divestment is part of our strategy execution, which is well underway. And we do have in our ordinary course of the business, we do still -- we always have smaller transactions, which are not considered to be one-off effects and therefore, have cash and the P&L impact. So in the P&L, you will see this in revenue but also in income from our associates.

We have Christian Arnold from Stifel. Could you give us an update on your thoughts about the refinancing of the convertible bond due next year?

Marco?

As we are looking certainly into different options as it's now falling into current liabilities and not the noncurrent liabilities. So we do consider different options. And we are confident with our improvement of the underlying business that we can successfully refinance our bond next year.

Then Matthias Heim from Schweizer Radio SRF. How big is the problem of missing raw materials or building materials?

Yes, maybe I start and then I hand over to you, Marco. Implenia was able to take immediate actions and reach agreement with our clients. So, so far, we have limited financial impact. We have not yet seen major changes except some minor supply chain challenges in the first half year. But you can imagine that we intensified our planning process as probably others do, and we work very closely across the organization with finance, procurement, the businesses and so on. Maybe you want to say a few words to this?

So as André mentioned, we haven't seen any major impact in the first half year, and we are very confident that we can avoid any major impacts in the second half year, but that's according to the development of our planning process and the client behavior. So, so far, our procurement department, the business, we are working very heavily to intensify our planning process, which means that we are better prepared that we need to look more into the future. We have dual source strategy with our suppliers. And so that we are not falling into a shortage in our supply chain. Yes.

Again, Matthias Heim. In which areas is Implenia affected by delivery delays?

Yes. As I said, we already have -- we have not yet seen big delays. We have some small delays. And we certainly expect some exposure to material prices increases in 2022, most affected is division buildings. Public contracts are a bit less affected. So Civil Engineering to a lesser extent. Public clients normally includes inflation clauses and therefore, are way less affected. By far, most impacted material is steel metal with an increase of over 50%, but also plastic to a lesser extent. And as you know, some others like timber and others. But the best one is clearly steel and metal by 50%, and in the area of buildings.