Strabag SE (STR) Earnings Call Transcript & Summary

Thank you very much for the introduction. This is Thomas Birtel from Vienna calling. I'm happy to present to you today the first half year's figures of Strabag SE and the Strabag group. I trust that you, as usual, have our presentation in front of you, and I'll start with Chart #3, giving you the key figures of output and order backlog for the first half of 2020. Strabag has generated a 10% lower output, lower output volume of a little more than EUR 6.7 billion in the first half of this year. This is largely due to 3 factors: the loss of a German key account in property and facility services, resulting from an expired contract in mid-2019; the temporary hold to construction activity due to the coronavirus cases in Austria; and the execution and completion of tunnelings projects in Chile. Our order backlog on a contrary as at June 30, 2020, reached a new record high of EUR 19.4 billion, which corresponds to 6% growth over the level from 30th June, 2019. Work progressed on larger orders in the Americas, Hungary and Austria, among other places, resulting in a decline of these figures there. This development was however contrasted by new large orders and contract extensions in tunneling in United Kingdom, and a significant increase in the order backlog in Germany and in the Czech Republic. We now come to Chart #4 to the result figures. Our earnings before interest, taxes, depreciation and amortization which is EBITDA, increased by plus 2% and reached a little more than EUR 300 million in the first half of 2020. In the first half of 2019, it was EUR 295 million. Depreciation and amortization grew disproportionately as a result of higher investments in the previous year however, so that earnings before interest and taxes, EBIT, fell by 26% and amounted to EUR 45 million from EUR 61 million in the same period of the previous year. This decline is attributable to the development, especially of our International + Special Divisions segment. On Slide #5, we give the net income after minorities and the earnings per share figure. Our net interest income stood at minus EUR 13.5 million compared to minus EUR 19.5 million in the first 6 months of the previous year. This figure includes higher negative exchange rate differences, which is more than compensated by lower interest expenses. Our earnings before taxes, EBT, came in at EUR 31.6 million compared to EUR 41.5 million in the first half of 2019. The fact that the income taxes reached a similarly high level as the EBT figure, at the same time is mainly due to project losses in non-European countries, resulting in an almost 100% tax rate. Because in non-European countries, project losses cannot be offset by the possibility of a certain loss carryforwards. This figure, however, is not by no means coining the full year, where we will quite safely reach our normal tax rate, which is about 30%. The earnings attributable to minority shareholders were barely changed to the figures at EUR 1.4 million. Overall, net income after minorities of minus EUR 0.8 million was achieved. In the same period of the first year, for the first time, it has still been in positive territory with plus EUR 10.7 million, though the net income after minorities tends to be below 0 for the first half of the year. With our 102.6 million outstanding shares, this corresponds to earnings per share of minus EUR 0.01, whilst it was plus EUR 0.10 in the first half of 2019. We gave the balance sheet figures on Slide #6. Our balance sheet total decreased slightly by minus 2.5% from EUR 12.3 billion at the end of 2019 to EUR 11.9 billion due to seasonally lower cash and cash equivalents, though it exceeded the figure at 30th June 2019. Compared with the first half of the previous year, the equity ratio increased from 29.9% to 31.7%; at the end of 2019, it had amounted to 31.5%. Our net cash position decreased as is usual for the season from EUR 1.143 billion at the end of 2019 to EUR 946.5 million by the end of 30th June, 2020. Let's come to Chart #7, cash flow. While the cash flow from operating activities had been clearly negative in the same period of the previous year, it now registered in positive territory at plus EUR 32.8 million due to a lower working capital increase. As there was significantly less investment in property, plant and equipment than in the previous year, the cash flow from investing activities was about 40% less strongly in negative territory this year. The repayment of a bond with a higher volume than the one in the previous year led to a cash flow from financing activities of minus EUR 261 million compared to minus EUR 183 million in the first half of 2019. We'll now have a look at our 3 operational segments. I start as usual with the segment North + West on Slide #8. This segment comprises our construction activities in Germany, Poland, the Scandinavian region and the Benelux states. It is the biggest segment, and it posted an almost stable output volume of EUR 3.5 billion, which is a minus of 1% in the first half of 2020. The trends in its largest markets, meanwhile, were mixed. Poland exhibited strong growth, while the output was down slightly in Benelux, Denmark and Sweden. In Germany, our biggest single market, the output volume remained unchanged at a high level. The EBIT of the segment turned clearly from negative to positive with plus EUR 81.6 million, after minus EUR 29 million in the last year. Especially in Poland, there was a lower negative impact on earnings from large projects. At the same time, earnings improved in the German Transportation Infrastructures business, for example, the order backlog of North and West per 30th June 2020 remained at a very high level with more than EUR 9.3 billion and a plus of 1%. A large number of new orders in Germany were partly offset by the execution of large orders in Poland and Northern Europe. Regarding the outlook for the full year of the segment, the output volume in North + West is expected to be somewhat lower in the 2020 financial year than the previous year. The construction industry in the markets served by this segment has proved to be stable during the COVID-19 crisis so far. In our home market of Germany, for example, several factors have helped to minimize the impact of the situation. The order backlog was high at the beginning of the year. Orders received in the first 6 months of 2020 were at the previous year's level and construction activity remained brisk for the most part. The prospect of declining demand in building construction and civil engineering in the second half of the year is clouding the forecast, however. If so, tougher prices -- tougher price competition is expected in the business field, especially in public sector construction. This has already led to a downward trend in prices for subcontractor services and building materials, a relief after years of extremely high capacity utilization on the markets. While the impact of the COVID-19 crisis also on the execution of projects in the Transportation Infrastructures business remained minimal in the first half of 2020, a sharp reduction in the number of tenders submitted by municipalities and local authorities as a result of the crisis caused a high level of competitive pressure already in this period, leading to a decline in market and construction material prices. This is true not only for the regional business and large projects in road construction, but increasingly also for individual railway construction segments. In the markets of Benelux and Scandinavia, the construction industry remained relatively unaffected by the ongoing crisis in the first half of 2020. One exception is Belgium however where the majority of construction sites were closed for several weeks. The construction sector in Poland has also been unexpectedly positive this year. Productivity losses, if any, were due only to the high number of rainy days. For the year as a whole, earnings are therefore still expected to be somewhat lower as a result of cost inflation, but no additional COVID-19 related burden is anticipated. We now come to chart #9, given the key factors of our South + East segment, which comprises our construction activities in our home market of Austria, Switzerland, and the rest of Mid- and Eastern Europe. The output volume in the segment fell by 9% to EUR 1.9 billion in the first half of 2020, primarily as a result of the temporary suspension of construction activities in our home market of Austria due to COVID-19. On the other hand, an increase was registered, for instance, in the Czech Republic. The EBIT of the segment, on the other hand, returned to positive territory with plus EUR 44.3 million, after minus EUR 20.9 million in the previous year. One of the reasons for this positive development is the absence of the onetime burdens from the first half of last year. The order backlog came to EUR 4.8 billion, up to plus 10% (sic) [ 2% ] to 2019 -- to the 30th June 2019. The figure declined above all in Hungary and Austria as expected due to the execution of large orders in those both countries. By contrast, significant portions of projects in the Czech Republic and Croatia have yet to be completed. We were awarded large contracts in several countries in the first half of 2020. Regarding the outlook for the South + East segment for the full year, the previous negative trend in the output volume can be expected to soften slightly, resulting in a lower decline in output for the year as a whole than in the first half of 2020. We base our forecast for the home market of Austria on the assumption that in contrast to the first half of the year there will be no full suspension of construction activities in the country in the second half, not even temporarily. The volume of incoming orders in building construction remains solid and allows us to have a positive outlook into the year 2021. The reach of the order pipeline in transportation infrastructures, on the other hand, is considerably shorter. This is why the reduced number of public sector tenders means that there is a certain risk of order shortfalls in the autumn of 2020. In Hungary, the substantially lower order backlog resulting from the completion of large public sector projects acquired in 2018 and '19, along with a possible reluctance of the automotive industry to commit to new investments leads us to expect a further decline in the output volume in that country. The first effects of the COVID-19 pandemic, and as a result, stronger competition are not expected until the end of 2020, however. The order backlog in Transportation Infrastructures in the Czech Republic is helping the segment to weather the crisis. At the same time, the government is accelerating and increasing its investment spending in this country. The output volume in the Czech railway construction sector is forecasted to be high as well. In building construction, however, several major tenders have been temporarily suspended. As in Slovakia, private investments are being delayed in all asset and customer classes, for example, business centers, residential buildings, car parks, hotels and projects for the automotive industry. The awarding of contracts for public sector projects in Slovakia had already been postponed repeatedly, not at least because of the parliamentary elections in February 2020. We'll now have a look on Slide #10 on International + Special Divisions, the smallest operations segment, but also, as I always put -- underpin the most volatile segment of the Strabag group. The International + Special Divisions segment generated a 33% lower output volume of a little more than EUR 1.2 billion in the first half of 2020. This reduction is mainly due to 2 factors: the loss of a key account in the property and facility service segment in Germany in the middle of the previous year, and among other things, COVID-19-related restrictions on large tunneling projects in Chile. The EBIT of International + Special Divisions also deteriorated significantly from EUR 123 million to minus EUR 73 million by the end of the first half this year. Following a very favorable environment in real estate development and the gain from the sale of the facility management company in the same period of the previous year, these figures were now burdened, among other things, by the above-mentioned restrictions in connection with the coronavirus pandemic and tunneling and in the property and facility services business. In sharp contrast to that, the order backlog grew by 20% compared to the 30th June 2019 and reached now EUR 5.3 billion. A notable development is the growth by the equivalent of more than EUR 1 billion in the United Kingdom, where Strabag as part of a consortium was awarded the contract for the construction of the High Speed 2 railway line after having already been previously entrusted with the planning for the project. Internationally, the road widening project in Uganda and Africa co-financed by the European Development Fund was also acquired in the first half of 2020. The order backlog in the Americas region decreased significantly due to the execution of large projects in Chile. Regarding the outlook for the full year of the segment, the output volume is expected to remain significantly lower in 2020 than in the previous year. It is not yet possible to foresee the extent to which the COVID-19 crisis will have a lasting impact on the real estate market and consequently, on our real estate development business. The residential asset class recovered quickly after brief lockdown phase. We performed well in this segment with corresponding offerings, especially in Vienna. The hotel and retail asset classes, on the other hand, have clearly been impacted negatively. The market players are currently adopting a wait-and-see attitude. A certain decline in rental revenues was recorded in the office segment in the first half of 2020. Vacancy rates and peak rental rates are still proving stable, however, it cannot be ruled out that at least the vacancy rate will increase in the second half of this year. On the other hand, there is abundant capital available for investment. We recently benefited from this through the sale of an office property in Freiburg, Germany, for example. Furthermore, several large projects are scheduled for completion in Germany in the rest of this year. Further projects are already under construction, have been successfully rented out or the construction is scheduled for approval in the current year. Land reserves are also available for further development in the core countries of Germany and Austria as well as in the countries of Central and Eastern Europe. The restrictions and uncertainties surrounding the COVID-19 pandemic are delaying, however, approvals and transactions overall. Still, delays in construction work have so far been kept within limits. Strabag Real Estate has been expanding its acquisition focus in Germany and Poland to include so-called B cities as well as the capitals in the countries of Central and Eastern Europe. In Austria, in addition to the commercial asset classes of office and hotel, the group continues to offer the entire spectrum in housing from subsidized to affordable to privately financed residential construction, supplemented by real estate with residential use, for instance, student apartments. Our property and facility services business has been seriously affected by the COVID-19 crisis. Further reductions in output volume are expected, particularly in real estate management, in the industrial services business field, and in Austria in infrastructure facility management. Positive factors are by contrast the new orders received in the first half of 2020, including those in Germany for several Berlin ministries, the contract extension with telecommunications provider Vodafone and those for the technical facility management of various office properties as well as data center of Raiffeisen-Holding, lower Austria, Vienna, in Austria starting on 1st January 2021. In contrast to the services sector, the COVID-19 crisis has had hardly any impact on existing concession projects. This also applies to infrastructure with traffic-dependent revenues and with regard to the financing offer. In Colombia, however, a project under construction is experiencing some restrictions due to the COVID-19 pandemic resulting in a certain slowdown of construction progress. Nevertheless, new tenders in this country are being watched with interest, not at least because the market for new projects in the core markets of Europe is still very challenging. Our tunneling business has also been adversely affected by the COVID-19 pandemic as several large projects are being executed in the severely affected regions of South America and Singapore. On the other hand, the large contracts acquired in the U.K. in the first half of this year will keep the entity busy for several years. In the International business, which means our business outside of Europe, tenders and project orders are being delayed, for example, in Oman, Qatar and in the United Arab Emirates. As regards to our Infrastructure & Safety Solutions segment, it is worth noting the focus on the core business of technical infrastructure solutions and on security and communication systems. In this context, Strabag sold its small railway communications business unit as part of an asset deal in the first half of 2020. Our construction materials business continues to show a very satisfactory performance. In the first half of 2020, sales volumes were at about the same level as in 2019 with only Austria falling short of the planned figures due to the crisis. The main markets of Germany, Hungary, the Czech Republic and Poland are very stable. Business in Southern and Eastern Europe is mixed in part influenced by a lack of major investments, but there are still prospects for the future. From the current perspective, business should proceed according to plan in the autumn. The dense construction materials network remains an important basis for our greater competitiveness. And I now come to Chart #11, upgrading our outlook for 2020. At the first glance, the first half of this year was strongly affected by the coronavirus pandemic. For instance, in our home market of Austria, which was particularly hard hit by the accompanying restrictions, construction activity came to a complete standstill for a period of about 10 days. Indeed, to a large extent, management resources were tied up putting together packages of measures to minimize risks. And of course, COVID-19 was the main topic in both formal and informal discussions internally as well as externally. However, this is only partially reflected in the figures. As you could see, our output volume for in -- for example, fell by merely 10%, in part due to other expected and budgeted factors. One of the reasons for this is that we generate only about 15% of our group output volume in Austria. In markets such as Germany or Poland, on the other hand, the restrictions were hardly noticeable, but the crisis has not yet been overcome. Because one thing is clear: This is no short-term situation and the way back to the way things were before March 2020 won't be an easy task. My management board colleagues and I have, therefore, taken the coronavirus pandemic as an opportunity to subject the company's strategies to an ad-hoc, in-depth review in the middle of this year. The other reason for that was the establishment of a separate management board position responsible for digitalization, innovation and business development starting on 1st January, 2022. This action did however not result in any significant changes to the group's strategy as detailed in the 2019 Annual Report of Strabag. The review of the current risk situation also showed that in the reporting period there existed no risk which threatened the existence of the company and that for the future no risks are recognizable, which constitute a threat to its continued existence. Of course, particular attention was given to the risks associated with the COVID-19 pandemic. All in all, our business model once again stands to test as it did before, for example, in the world financial crisis. In addition to the medium and long-term direction of our business, we also reviewed our short-term forecast for 2020 as a whole. Here, we came to the conclusion that our output guidance of EUR 14.4 billion, which was updated in April following the start of the pandemic, was probably too conservative. Instead, we now expect an output volume of around EUR 15 billion for the full year. At the same time, an EBIT margin of at least 3.5% on sales should be attainable as previously expected. Net capital expenditures, which is cash flow from investing activities are now forecasted to be below EUR 450 million. We are basing our forecast on the assumption that unlike in the first half of the year there will be no full suspension of construction activities, not even temporarily in any one of our core countries in the second half of the year. This does not mean, however, that the second wave would hit us unpreparedly. This is the first glance on our first half year's figures. And now I'm happy to answer your questions. Thank you very much for your attention.

[Operator Instructions] The first question comes from the line of Markus Remis of RCB.

A few questions, please. I'd like to take them one by one. Firstly, can you maybe clarify the comments you made about the public tender activity in Germany, the sharp reduction you flagged. Is that, how I should say, still kind of an aftermath of the lockdown? Or is that, would you say, more of a sustainable issue? And in that respect, I would also like to hear your opinion about the scope for kind of pushing forward infrastructure spending in Germany. You all know this big [indiscernible] plant? Are there any indications that the authorities are pulling forward projects while you have to battle the crisis?

Thank you for the question, Mr. Remis. I tried to make clear that this is mainly -- this public tenders -- reduced public tenders activity is mainly focused on municipalities and local authorities. It is not true for the big contracts tendered by the federal authorities where we also won some major projects in the first half of this year. But we see a phenomenon which we also can observe in Austria, that especially the local authorities and municipalities suffer from the COVID-19 pandemic financially and that they don't have enough own means to tender what is needed to be tendered. Of course, the situation has been recognized by the federal states and also by the federation as it did in Austria, but we believe it will take some time to make subsidies available to the municipalities in order to bring them again in a situation to launch the tenders, which they liked to launch. But I would like to underpin that in Germany also on the federal level, and this is, I think, the question which you had in the second part, which is the huge midterm federal plan to refurbish the infrastructure in especially Western Germany. This plan is not being halted or considerably negatively influenced by the crisis. So what is lacking is a huge number of small and medium-sized contracts. It's not the big and long-term contracts.

Do you think this is more of a persisting issue or more short-lived for, say, I don't know, a couple of months and as of next year kind of municipalities are restarting again, so?

I would guess the latter is the case because the needs of the municipalities are also very big, especially when it comes for school buildings, for instance, of municipal streets and hence, measures have been taken by the federal states and also by -- on the federal level to recapitalize the municipalities. And hence, I sincerely hope that positive effects will already be seen in the second half of this year and -- before all in the next year. So I don't believe it will be a structural long-term problem.

Yes, okay. And the situation is similar in Austria?

That's our feeling, yes, yes.

Very good. Can I then ask you on the comments regarding price deflation or at least further uptick for raw material subcontractors? How quickly can you benefit from that? I think if I recall statements in the past that you try to kind of fix the input costs already in the tender phase. So is it now fair to assume that there won't be any short-term relief to your cost base, material or noteworthy relief to the cost base that it needs longer to become visible in the P&L or is this assumption too conservative?

Well, when it comes to the cost base, I think we have to make a distinction between raw materials and subcontractors. Because, as you know, a huge part of our raw materials are provided by our own resources. And of course, there it means that reduced price levels on the market would also reduce our results in this segment and hence not really provide -- relief us on the cost side. Because we would, of course, calculate lower cost because the market prices are going down. But on the other hand, also it results in the raw materials business would be going down. This different thing is true for our subcontractor prices. Usually, our subcontractors react very fast on the changed market condition. And this also gives us a very fast relief on the cost side, which means once competition is increasing, we have a very fast relief on the cost side because our subcontractors tend to react very fast on that development, and that can already partly be seen today.

Do you foresee any maybe not a wave, but a higher number of insolvencies in the wake of the crisis in your subcontractor base or general in the market?

So far, we haven't seen any major cases of that kind. Although it has to be admitted that, as you know, given to legal stipulations to -- nowadays the need for filing insolvency is somewhat postponed, and we will probably see a certain wave of that later in the year or next year. But currently, we can't detect such a movement in the market.

Okay. Last question. On the capital spending, the reduction from, I think, previously around EUR 500 million to EUR 450 million, is that actual savings? Or is this more of a postponement because of current circumstances?

A very good question. As you'd probably recall, we already budgeted a certain reduction on our CapEx from the beginning of the year. Because we felt that last year was a sort of peak year in line with the strong growth, which we have seen over the past years. So a certain part of the reduction was already budgeted and will be a sustainable reduction because the needs for extension investments are not as they were in the past years. And it might also be the case that some of the reduction this year will be also -- will be just a postponement in the next year. But all in all, for the forthcoming years, I don't see any major growth on expenditures on investments because we have seen this growth in the past years, and that means there is no similar need in the forthcoming years.

[Operator Instructions] The next question comes from the line of Christian Korth with HSBC.

I have 1 question on the conditional part of the dividend that's possibly to come later in the year. Could you give us an update where this balance sheet number or ratio that you calculated internally, where that stands as of the end of June 2020?

Mr. Korth, well, in the case we also today, do not expect that the dividend will not be paid out due to the balance sheet figures, which have been stipulated in the condition -- decision of the Annual General Meeting because it has been said that the condition is that we would not have less than EUR 1 billion in free cash and cash reserves even if you include the payment of the dividend, and by the end of 2020, our cash and cash equivalents amounted to more than EUR 2 billion. So it is more than 200% of the limit which has been set in the conditions for the dividend payment. And that's by no means a development foreseeable, which could bring us in the neighborhood of that limit.

Just 1 follow-up. I understood you said at the end of 2020, did you mean at the end of the second quarter 2020?

Yes, of course, because it is the 31st of October is the D-date for that for the stipulation. Thank you very much for that hint.

And then the second question would be where do you expect the tax rate to be for the full-year 2020?

Difficult to say. But if you have a look at the previous years, it's tended to be around 30% which is quite high admittedly, we always admit that. But given our business model and the fact that we have major contracts in countries where we can't offset certain tax results against others, it is a structural tendency to have such a high tax rate. But I think around 30% will also be a good guess for this year.

[Operator Instructions] There are no further questions at this time. I hand back to Thomas Birtel for closing comments.

Well, thank you very much for your interest in our first half year's figures. I keep my fingers crossed that you stay healthy for the rest of the year. And I'm looking forward to talking to you again in -- by the end of the year. Thank you very much indeed.