PORR AG (ABS2.DE) Earnings Call Transcript & Summary

Hello, everyone, and a very warm welcome to today's Austria on Air Conference as a special roundtable session. This session is dedicated to the PORR AG, and we are truly delighted to welcome Head of Investor Relations, Lisa Galuska, who will share insights with us in just a moment. So without further ado, let me hand over to you, Lisa. The stage is yours.

Thank you, Judith. Thank you for introduction and also a warm welcome from my side. I'm here in Vienna. It's not -- actually, it's not that warm anymore. Winter is starting to show its first outreaches here. I'm happy to share some insights on PORR, especially for all of you who hear about the PORR for the first time. There will be some new impressions, and I'm happy to welcome you all to this presentation. And with that, let's start right into it about what is PORR. PORR is an Austria-based international construction company with a production output of more than EUR 6.7 billion, so nearly around EUR 7 billion of output and with Austria as the main home base. As of the end of last year, order backlog stood at a little bit above EUR 8.5 billion. However, with our current half year figures, which have been published at the end of August, we now stand at an order backlog of roughly EUR 9.5 billion. So a major increase also compared to the end of last year. Our EBIT stood at EUR 158.4 million, as of 2024. And this comes down to an EBIT margin of 2.6% for 2024, and we expect that to improve in '25 to an EBIT margin of 2.8% to 3%. Roughly, I have around 21,000 colleagues, and I'm happy to present their services here. So what makes PORR so special in the construction industry? Well, PORR is one of the few -- very, very few construction companies to cover the whole of the construction value chain out of one single source, meaning we do not only do the construction, we also take up responsibility for design and engineering, which comes obviously before construction. Then the setup of the whole construction site, the logistics, sometimes even under procurement and then the construction itself. And a little bit about operations is also one point of our offer and then afterwards, renovation and/or demolition. Renovation and demolition at the same time, obviously doesn't work, so either renovation or demolition. That's the main -- our main focus here. Speaking of focus, we also have to speak about the countries in which we operate. Austria is our stable backbone market with a share of around 45% to 50% of our production output coming from Austria. Some years ago, meaning in the 2010s, just to give you a brief overview of the history, PORR has been mainly an Austrian construction company. From that on, we expanded via various M&A activities in the years 2014 especially to 2017 throughout Europe. And now we hold a strong market position in all of our home markets, especially in Poland and Romania, where we are among the top 3 of the competitors. Why is that so important? And why do I mention that? Well, in construction industry, basically, you have to have 3 basic points. First, you have to know your customers, you have to know your market, meaning you have to get well known to your customers, make references with them and get them educated so they can make good decisions and most important of all, timely decisions in the market. Second, you also have to know your subcontractors, your suppliers. Without them, construction wouldn't work. And third, construction is and will remain a people business. You have to have the right people and the right personnel at the right time to be successful in construction. And that is why it is especially important to have a major market position in the home markets. So Poland and Romania as our main growth markets at the moment, we are among the top 3 players, sometimes even it depends on the statistics you're looking at. We are the second strongest company in the market. And in Germany, we are also among the top 5 to top 10. Germany is our second most important market where we especially do much industry construction -- industrial building construction and our production output -- share of our production output coming from Germany is around 20% to 25%. Poland and Romania together with Czech Republic and Slovakia also account about -- for about 1/4 of total construction output. Coming to the opportunities we see in the markets. I already mentioned the CEE countries as the major growth drivers in the construction industry. Especially in Poland, we now see a strong and continuous influx of European funding, meaning from the EU recovery and resilience facility as well as from the next-generation EU budget. This does not only go into civil engineering, but also in infrastructure building construction, for example, in health care buildings. In Poland, we are now at the moment, working on 5 -- a total of 5 health care or health care-related infrastructure projects. For example, we are expanding a medical technical university. We are expanding an oncological hospital and so on. So that is one major driver in the Polish construction industry. Speaking of infrastructure, we obviously also have to mention civil engineering. Civil engineering in Poland comes in the form of the CPK, the Central Polish Communication Airport, which will be built near Warsaw. At the moment, we already got the first order for that, which is the CPK tunnel near Lodz, how you spell it in German. And the total, the total meaning all of the infrastructure related to this Polish airport, which includes not only obviously the terminal and runway facilities, but also the connecting facilities in terms of road and railway, has a total investment potential of EUR 30 billion to EUR 35 billion. In -- besides that, the railway operator, meaning the PKP PLK of Poland also announced an investment program, which runs until 2029 of around EUR 45 billion to EUR 50 billion, which is only dedicated to various railway projects. There, we also gathered one order in August, actually, so not that long ago, 2 major orders in August for 2 -- for the modernization of 2 railway lines with a total value of around EUR 400 million. In Romania, it's also the railway infrastructure and also the road infrastructure are the main topics there. In roads infrastructure, we are now responsible for the ongoing -- have ongoing responsibility for the Lot 5 of the Sibiu–-Pitesti Highway, which is actually the first highway to go through the Carpathian mountain. So you don't have to drive all the serpentines up and all the serpentines down again. But no, the Sibiu–-Pitesti Highway is now going through the mountains for the first time. We did -- we were responsible for the Lot 1, which is already finished by now, and we are now working on the Lot 4, where we have around 40% to 50% of completion. Another project that we recently got in Romania is the railway modernization and also expansion. So we built a second track there from Caransebes to Craiova. So another major proof for the ongoing infrastructure demand in Central and Eastern Europe. In Austria, we see improving demand, slightly improving demand in residential construction. We expect that to pick up very soonish, but more on that later. And also the ongoing programs from the OBB, the national railway operator and also from ASFINAG, the national road operator. Speaking of national programs, we also have to -- obviously have to mention the German investment program, which is now in everyone's thoughts, in my opinion. This should last around 12 years. And we do not -- and I really emphasize this, we do not expect anything of these contracts to come into the market in this year and 2026 at the earliest, but we count on impact or we expect the first impact on our P&L on bottom line and top line in 2027 at the earliest. So this is something that we see as longer-term growth potential. However, in the short to medium term, we expect Romania and Poland as the major construction drivers. Before, I mentioned previously the residential construction. For us, residential construction is in -- let me put it like that, some kind of a beauty sleep now due to the high increases or -- the high increases in interest rates, but we are prepared as soon as the activity in residential construction is picking up again. How do we do that? We developed a modular or systemic residential construction projects for the markets of Austria and Germany for now. And we expect that to be -- to deliver production costs -- construction costs below EUR 2,000 per square meter. So that is something that we have put in place and have set up to be a highly competitive player in the upcoming future as soon as residential construction is picking up. Truth be told, there are already some smaller signs in the small to medium-sized cities in Germany and Austria, where we already have some, I would say, order intakes of the lower double-digit million euro range somewhere. So we already see some kind of momentum in the residential construction sector, but that needs to be determined whether that is sufficient to be continuous in the future. I already talked about railway tunnels, about railway order intake on railway prospects and road prospects. Tunnels and bridges are also a major part of the German infrastructure package as well as the energy transition. The German government already told or already announced that around -- out of the EUR 500 billion, EUR 100 billion will be dedicated to sustainable infrastructure. In our view, that also accounts for energy transition projects such as the SuedLink and the SuedOstLink power line, where the green energy from the wind from the Northern Sea and the Eastern Sea come to the center and to the south of Germany. And we already have there 2 ongoing projects for SuedLink and SuedOstLink and expect more to come. Speaking of more to come, I already talked about health care, where we see not only we, but also Euroconstruct where this forecast comes from, sees a growth of 6.5% in 2025. And we -- they also forecast ongoing growth around 4% in 2026. Data centers is also a major growth opportunity. However, there may be that the restriction of the energy providers or the energy needed for the data centers to be operable. EPC here now on the far right side of this slide stands for engineering, procurement and construction, where we stand ready as a preferred partner for various industrial companies and well-known brands as well. So this is just a small overview of our service portfolio. Where do we go from that on? I already mentioned our EBIT margin, which is typically low for the industry in 2024 of 2.6%. For this year, we expect an EBIT margin or the Executive Board sees an EBIT margin of 2.8% to 3%. However, we set ourselves high targets for 2030 with a range of 3.5% to 4%. Where does this come from? This also comes from a Deloitte report. And this Deloitte report is from the all over -- maybe you've heard of the Global Powers of Construction. And there it says that around 3.7% is the average of our peer group. We want to keep up with our peer group and to close the gap there. And I already mentioned 2 of the 4 -- one of the 4 bullet points here, markets and products. So market position and the position in the right products are the first keys for improving the margin. Another one is lean construction. And what does this mean? Lean construction is reducing the waste of anything unnecessary, meaning no waste of costs, no waste of time, no waste of material, no waste of resources, no waste of human resources. So this is something where we see the future in construction and where we also see major efficiency gains for the upcoming years. The third bullet point in improving the margins is a decrease in overhead costs. Truth be told, we saw major inflationary increases in the overhead costs in the last few years from -- to be exact from 2023 and to the beginning of '24. I think all of us experienced this inflation as well. Nonetheless, we can pass on. Please bear in mind that we can pass on the costs, the direct costs that are related to one or another construction site can be passed on directly to our customers. However, the overhead costs stick with us. So we have to put on -- we have to put in place a new group-wide cost control program to bring down the overhead cost from 7.6% of revenue to a more reasonable level. Last but not least, we revamped our risk management system. We have -- truth be told, I will show you the chart in a few seconds. We had some major issues in 2019, 2020. After the strong growth in the years in the [ '10s ]. We experienced -- we had to pay the price for the growth. We had to pay the price for gained market positions. And with that, we experienced some losses and some not so good years. And therefore, we set up -- in 2021, we set up a new gate system in the risk management. We now have established 6 so-called milestones during the acquisition and construction phase of each and every project with a value of more than EUR 20 million. So during each of these milestones, the total figures or the absolute figures are compared with the planned figures. And as soon as there are any divergences, we can counter them and we can set countermeasures or just refrain from the acquisition in total. So we take a step back from the tender. We are now at an order backlog of EUR 9.5 billion. We can step back from a tender without further ado and can say thank you, but no thank you. The figures just don't sum up for us, and we are not at the target margin. So that is next to the other 3 points I just mentioned, one of the major drivers for our improvement in our margins. I already talked briefly about the difficult times in the years 2019, 2020, you see them here in our earnings per share and also in our -- unfortunately, also in our share price. So during the years 2017, 2021, we were not able in a position to -- we were not in a position to fulfill the expectations of the market and had to suffer major losses there. In 2021, we then set up the so-called PORR 2025 future program to improve not only the efficiency and our revenue earnings, but we also improved the trust in our share price. So from 2021 onwards, where we did a capital increase of EUR 12 per share, our market -- our share price increased to now at EUR 28, EUR 29. You see here the takeoff started not as many of you may think, in March 2025 when the infrastructure package of Germany came into market, but it already started somewhere in autumn 2024, when we managed to gain further trust and rebuild the trust in our earnings forecast. So now we are here again at a more reasonable level, but still not good at the value as our peer group, for example. Coming to my last -- coming to my second to last slide, to be honest, a brief talk about our dividend policy. We always strive for a payout ratio of 30% to 50% of EPS. Last year, we came around at 40% of EPS. So we expect that to be at a payout ratio at this round again. Of course, dividend yield with the high increase in our share price has to be compared to the end of last year at 5.1%. Now this is -- now coming to my last slide for today, our broker coverage. We -- nearly all of our analysts give us a target price higher than the current market price. And what I also want to mention here, just recently, I think a few hours ago, Jefferies published their initiation report with a price target of EUR 37 and a buy recommendation. To be honest, this presentation is old for 3 hours now, so sorry about that, but just to get you on the latest information on PORR here. And with that, I want to thank you for your attention and want to hand over for the Q&A session and Judith, thank you.

Thank you very much for this insightful and engaging presentation, Lisa. Ladies and gentlemen, the turn is yours now as we move forward to our Q&A session. [Operator Instructions] And we will start with some questions we have received before the roundtable. What is the one thing that you are most proud of for PORR?

Well, the one thing I'm most proud of actually happened pretty much exactly 1 month ago when we -- when it was announced that PORR would be included in the ATX, in the Austrian Leading Index. So since 22nd of September, we are now part of the ATX Index. And with that comes a higher share of visibility in the international markets. And for a construction company like PORR, this is really a milestone in the capital markets.

And what are the biggest competitive advantages for PORR?

I already tried to mention some of them actually. But first of all, the major point is we are -- our unique selling proposition, we are a one-stop shop in construction, meaning to cover everything from design and engineering to -- up to construction up until the renovation and demolition. So in fact, we want to close the value chain to get to a value cycle. And that is something that I think not many of our construction companies can do.

[Operator Instructions] I have one more question. Do you think about the market entry in the Ukraine?

At the moment, for -- Ukraine is not the market for us. I already explained the 3 major points, meaning suppliers, customers and personnel, people business for us to enter a new market. And we not want to -- we do not want to take any adventures now into an unknown market where you cannot come up with the right compliance. They might come up with compliance issues and so on. So at the moment, no, but thank you.

And where do you have the most order backlog from?

The most order backlog comes from our biggest market in -- which is Austria. And also there, we have an order -- the share of order backlog, just let me briefly jump there. The order backlog is from Austria. And in terms of construction segments, we have around 60% of our order backlog in civil engineering, which is railways, roads, energy works and also tunnels and bridges.

And I will hold the room for another moment. Should be any questions left. And that doesn't seem to be the situation. As no further questions have come in, we now come to the end of today's roundtable of the PORR AG. Should further questions arise at a later time, please feel free to contact PORR's Investor Relations team. Thank you dearly to Lisa and to everyone for attending this call. We're looking forward to this day and kindly invite you to our panel discussion at 1:00 p.m. with Vienna Stock Exchange. And now I hand over again for some final remarks to you, Lisa.

Thank you, Judith. Thank you also for the moderation and introduction, everything. And thank you all for coming and attending this presentation, and I wish you a nice and happy day. Thank you.