Strabag SE (STR) Earnings Call Transcript & Summary

Thank you very much. Good morning, ladies and gentlemen. This is Thomas Birtel from Vienna calling. And it is my pleasure today to make you acquainted with the figures of the Strabag Group for the first half of the year 2021. I would like to start with Page 3 of the presentation, which I trust is in front of you. We generated a 3% higher output volume of almost EUR 7 billion in the first half of this year. This growth is primarily due to the nearly 20% increase in our home market of Austria, following the temporary suspension of construction activities in the wake of the coronavirus crisis in the same period of the previous year. Our order backlog reached again a new record level of EUR 21.1 billion as at June 30, 2021, an increase of 9% over June 30, 2020. The backlog grew particularly in our home markets of Germany and Austria, thanks to numerous new projects in a wide range of sectors. We now come to Slide #4. Our EBITDA, the earnings before interest, taxes, depreciation and amortization increased by 35% to EUR 406.3 million in the first half of 2021 compared to the same period of the last year, while earnings before interest and taxes, EBIT rose from EUR 45 million to EUR 140 million, which means that it more than tripled. This development is due to the performance of the international and special divisions and the North and West segment. EBIT in the South and East segment, on the other hand, shifted from positive to negative. Let's now have a look at Page #5. Our net interest income was less negative with minus EUR 3.4 million versus minus EUR 13.5 million in the first 6 months of the previous year. This figure includes positive exchange rate differences of EUR 1.4 million as opposed to negative exchange rate differences in the same period of 2020. The income taxes amounted to minus EUR 46 million, which corresponds to a tax rate of 33%. In the previous year, income taxes had amounted to minus EUR 31 million. The net income this year reached EUR 19.94 million, which means almost EUR 90 million more than last year where we just had EUR 0.63 million. The earnings attributable to minority shareholders at EUR 2.67 million changed very little in absolute terms. Overall, a net income after minorities of EUR 88.2327 million was achieved. In the same period of the previous year, this figure had been just barely in negative territory at minus EUR 0.79 million. With 102,600,000 outstanding shares, this corresponds to earnings per share of $0.86, whilst it were minus $0.01 by the first half of last year. We now have a look at our balance sheet, given on Page #6. The balance sheet total decreased slightly by minus 3.8% from EUR 12.1 billion at the end of 2020 to EUR 11.7 billion, due mainly to the lower cash and cash equivalents resulting from the distribution of this time strongly increased dividend. This was counteracted by the significant business related increase in contract assets. Compared to the same period of the previous year, the equity ratio decreased from 31.7% to 30.1% at the end of 2020. It had amounted to 33.9%. Despite the distribution of the increased dividend totaling EUR 707.94 million for 2020 from retained earnings. The equity ratio remained very strong. Our net cash position declined from EUR 1.7 billion at the end of 2020 to EUR 813.6 million. At June 30, 2020, it was EUR 946.5 million. This was driven not only by the dividend effect, but also by the usual seasonal factors in the construction industry. We now come to Slide #7, having a look at the cash flow development. While the cash flow from operating activities was still positive in the same period of the previous year, it now registered a negative territory at minus EUR 62.5 million, mainly due to a strong increase in receivables. As investments in intangible assets and property, plant and equipment were similar to those in the first 6 months of the previous year, the cash flow from investing activities also remained in a similar range with minus EUR 220 million versus minus EUR 180 million last year. The cash flow from financing activities was strongly influenced by the increased dividend mentioned already above, especially since the dividend in the previous year had only been paid out in the fourth quarter. We now come to our 3 operational segments, and I'll start with Page #8, giving a picture of the biggest segment, which is North and West, comprising our construction activities in Germany, in Poland, in Scandinavia and in the Benelux states. This segment recorded a 4% lower output volume of EUR 3.4 billion in the first half of 2021. This development is due to a decline in the home market of Germany, which had been characterized by exceptionally brisk business activities in the previous year and to a much lesser extent, to a weather induced decrease in Poland this year. The EBIT of the segment grew by 29% to EUR 105.2 million, primarily thanks to earnings improvements in the German building construction business. The order backlog of North and West as at June 30, 2021, increased by 12% to EUR 10.5 billion, thanks largely to the situation in Germany. New orders registered in the first half of the year in the German building construction business cover a wide range of projects from apartment buildings for developers to industrial buildings to new buildings for the public administration, for example, in Dresden in Saxony. In the country's transportation infrastructure segment, noteworthy orders, including the widening of the A1 motorway in lower Saxony being carried out under a joint venture arrangement. An increased order backlog was also recorded in Poland, where were commissioned to design and build a new section of the A2 motorway and the S12 bypass Road for the city of Chelm east of Lublin. Regarding the outlook for the segment, the higher order backlog suggests that a slightly higher output can also be expected in the North and West segment in 2021. As a result of the COVID pandemics, some business segments in the German building construction sector, such as hotels, remain behind the trend. Overall, however, demand for construction services is up once more, enabling us to start the second half of the year with an even larger order backlog than at the same time last year despite the price increases in the construction sector. The transportation infrastructure sector in Germany is still reporting restrained tendering activity on the part of the public sector. This reduced activity on the markets, however, which are characterized by an extremely high capacity utilization, provides an opportunity to us to work off the high order backlog and to be very selective in bidding for projects. Still, the shortage of materials must be taken into account, for example, with regard to plastics, wood and structural steel. In Poland, the focus is on managing the enormous price increases for raw materials and building materials where increases in the double-digit percentage range were observed for steel, fuels, asphalt and plastics in the first 6 months of the current business year alone. Prices are expected to stabilize in the second half of the year. However, public infrastructure programs have kept demand in transportation infrastructures high for several years, and the building construction business has also seen a very positive trend in output and earnings in the first half of the year in Poland. Meanwhile, forecasts indicate a continued decline in investments in shopping centers and office building developments on the one hand, with an upturn in production facilities, residential construction, public sector construction, for example, schools and hospitals and in the energy sector, on the other hand, in Poland. Let's now have a look at the South and East segment, which is given on Slide #9. South and East comprises our construction activities in our core markets in Austria and Switzerland and everything east of those countries in Europe. The output volume in the South and East segment rose by 10% to EUR 2.1 billion in the first half of this year, primarily due to the absence of any COVID-related suspension of construction activities, as had been the case in the Austrian home market the year before. The business trend in CEE countries was mixed. A noteworthy decline was registered in Hungary, resulting from the after effects of the pandemic and the realization of several projects in the previous year. The EBIT of the segment entered negative territory at minus EUR 10.4 million compared with plus EUR 44.3 million in the previous year, which puts it more or less at the usual level. In the same period of the previous year, there had been a positive special effect from the reversal of a provision. The order backlog of South and East amounted to EUR 5.4 billion, 13% higher than on June 30, 2020. The this development can be attributed in particular to the record volume in Austria, thanks to large orders in building construction, especially residential construction and in civil engineering as well as stable, albeit regionally varied order intake in transportation infrastructures. Hungary also made up considerable ground. The order books in Hungary benefited especially from the contract awarded to a consortium involving Strabag for the construction of a 20 kilometer section of the M6 motorway between Bóly and Ivándárda in the first half of 2021. Regarding the outlook for the South and East segment, the trend in the output volume shown in the first half of the year is expected to continue in 2021 as a whole. After the COVID-related restrictions, especially in March of the previous year, the output volume in Austria is expected to be significantly higher, reaching levels comparable to the record year of 2019. Uncertainties exist, however, for the second half of the year due to the strong increase in raw materials prices, for example, for wood, construction steel and insulation materials and the associated price volatilities. From today's perspective, however, no supply bottlenecks are expected that could cause delays in project execution. In Austria as well, we have concluded a settlement with the cartel authorities. And as you know, the cartel authorities have declared to ask a fine of a little more than EUR 45 million from Strabag, an amount which is covered by provisions being made in the years before. This case, however, is still pending before the Cartel Court of Vienna. The construction sector in Hungary exhibited a slight downward trend in the first half of 2021. At the same time, significant higher-than-expected price increases for raw materials, building materials and labor costs had to be accepted here as well, and this must be taken into account when bidding for the numerous public tenders in the second half of the year. In road and railway construction in the Czech Republic, projects are being continuously put out to tender at a now realistic price level. We see us in a very good position in the building construction sector here as well despite the fact that the bidding processes are becoming increasingly projected. The development in Slovakia is cause for some concern. The few projects in public transportation infrastructures tend to be small, highly competitive and accordingly priced too low. Strabag is therefore primarily interested in cooperating with private investors, for example, in the construction of production and logistics halls. But here, too, the lack of materials is a burden that could lead to delays in the completion of construction projects. As a result and because of the uncertainties regarding the COVID measures, there is a trend among private clients to move the start of projects back in time. Now we have a look at our third and most volatile segment, international and special divisions. The picture is given on Slide #10. The international and special divisions comprises our non-European construction activities, our project development in infrastructure and in buildings, our raw materials business, our tunneling business on a worldwide basis and our facility management business. This segment generated a 15% higher output volume of EUR 1.4 billion in the first half of 2021. This was mainly due to the continuous execution of large orders in the international business, above all, in Chile, the United Kingdom and the Middle East, albeit at a still limited level due to the COVID safety measures in place in some countries. The EBIT turned into positive territory from minus EUR 73.4 million last year to plus EUR 58.3 million this year. The negative impact of the COVID pandemic, especially in the international business decreased, efficiency improvements in the property and facility services business provided further support, and the real estate development business delivered stable earnings at a high level. The order backlog as at June 30, 2021, decreased slightly to EUR 5.2 billion, a drop of 2% with regard to the comparison date of the previous year. Growth in Austria and the Americas, which was driven by new orders for the extension of the U2 metro line in Vienna and Line 2 in Toronto was offset by decreases in the United Kingdom and Germany. Regarding the outlook for the international and special division segment, the output volume for the full year 2021 is expected to be higher than in the previous year. This development is being driven by nearly all entities, first and foremost, by the internationally active tunneling business. So far, it has been possible to keep the adverse effects of the COVID pandemic in 2021 as well as the cost increases for construction materials in check through contractual agreements. Several mega projects are currently being carried out in the international business. For example, in Chile and the U.K. In general, the COVID related investment backlog and infrastructure project is beginning to clear, as in many countries, the public sector is funding such projects in order to stimulate the economy. The future is also looking quite friendly, for property and facility services where ongoing efficiency measures are having a positive impact and the renewed COVID lockdowns in the first half of 2021 led to only minor declines in output. Earnings are, therefore, expected to improve sustainably in all of these business areas. From today's perspective, the impact of the COVID pandemic on infrastructure development also appeared to be manageable. The construction delays here have remained within acceptable limits and the business field can be described as stable overall. The real estate development business, in particular, is benefiting from unbroken high demand in the residential segment. The outlook for 2021 as a whole is, therefore, quite friendly here as well, even as the continuing price increase in property, material and subcontractor services require careful management. Simultaneously, with these issues concerning the day-to-day business, work is underway on strategic innovation, sustainability and digitalization projects, for example, in the areas of mobility, generative design, low-tech buildings and CO2 optimization. The construction materials business also showed a satisfactory trend overall again. Overall, the country-by-country statistics show a very consistent picture in the main markets of Central and Eastern Europe on the segment. In the countries of Southern Europe and the Balkans an upward trend is evident compared to the first half of 2020. Further development in the autumn is likely to proceed according to plan. We now come to the group's outlook. A summary is given on Slide #11. We had entered the year 2021 with caution, and our forecast had been correspondingly also cautious. The order backlog in the first quarter, which, for the first time, exceeded the EUR 20 billion mark, quickly showed that business in the financial year would be brisk and the situation after 6 months confirmed this development with an order backlog of more than EUR 21 billion, a new all-time high. For this reason, we now expect to achieve an output volume in the 2021 financial year that is above the previous year's level, which means above EUR 15.4 billion. Previously, we had only projected a slightly higher output. The EBIT margin should be close to the target of 4% set for 2022. Our net capital expenditures, which means the cash flow from investing activities should not exceed EUR 450 million. These good prospects in our day-to-day business allow us to resolutely invest human and financial resources in projects within the framework of our midterm strategic program FASTER TOGETHER 2022. Among other things, in the further digitalization and automation of construction and construction-related services or in the implementation of our sustainability strategy. Against the backdrop of more frequent and increasingly severe climate change related natural events, for instance, wildfires, heat, floods, storms and the demands placed on us by our customers and employees, we adopted a sustainability strategy in the first half of this year. It was integrated into the existing long-term group strategy and individually aligned to each of the business units. Having set the target of climate neutrality along the entire value chain by 2040, we recognize our responsibility as one of Europe's leading technology companies for construction services. In the design and build phases of our construction projects, we place a particular focus on environmentally compatible and sustainable construction methods and on the efficient use of resources and their recyclability in order to limit as much as possible any negative impact on the environment. The Strabag sustainability strategy is founded on 3 pillars, which are: economy, environment and social, with a special focus on activities in the 4 major fields of action: CO2 emissions, materials and waste, supply chain and construction life cycle. As the driving force behind the necessary transformation, technology is a required tool for leveraging the potential in all the quoted 3 pillars as well as a key topic in the corporate strategy program FASTER TOGETHER 2022. Another important step in the first half of this year was the definition of the digital strategy and the systematic initiation, pursuit and evaluation of digital transformation projects by the central division, Strabag, innovation and digitalization, SID, which was established in January 2020. As part of the ongoing digitalization initiatives, SID is also focusing on topics such as robotics and automation to continuously enhance productivity and reduce CO2 emissions. In the course of the digital transformation, the division is also always on the lookout for start-ups that complements Strabag's core business in relevant markets or transform it in a future-oriented way. To this end, it operates as scouting function to adopt new technical solutions within the shortest possible period of time. But let me also talk about some of the key risks in construction. Within our comprehensive risk management system, the potential impact of climate change on the company is analyzed and identified risks, including material damage to buildings, installations and equipment as well as the health and safety conditions for employees are monitored. At the same time, on the back of the enormous price increases for raw materials during the first half of 2021, notably for cement, timber and plastics. Management assesses the financial impact on a regular basis and tries to mitigate this risk through decentralized supply chains, long-term procurement, its own production of building materials and a proactive pricing policy. Furthermore, we see data as a strategic resource. We are fully aware of the risk of cyber-attacks, unauthorized data access and data leaks, regulatory intervention and not least the environmental impact of large IT and server capacities. Strabag has, therefore, successfully recertified its company-wide information security management system in accordance with ISO/IEC 27001 standard. During the first half of 2021, regular awareness rising activities were carried out throughout the group to enhance digital skills and establish a security focused data culture. Ladies and gentlemen, this was in short our presentation of the first half year's figures 2021 of the Strabag Group. And as usual, I'm now happy and glad to answer your eventual questions. Thank you very much for your attention.

[Operator Instructions] The first question is from the line of Markus Remis from RBI.

Congrats on the results. First question relates to your guidance, specifically asking about the output guidance. I mean, when you now say you expect growth as opposed to slight growth previously. Should that be interpreted as more of a mid-single digit increase? Or what's kind of the magnitude we should...

Yes, that is the reason behind. You're right, of course, Mr. Remis. It's a gradual, let's say, modification of our guidance. But your assumption is the correct one.

Okay. Then coming on the topic of cost inflation. I mean, if I understood correctly, there is a stabilization, which you observed currently. Is that the correct, I should say, interpretation and is that true across the board? Or are there some markets or raw materials where -- which continues to go up?

Yes. Of course, one has to make a differentiation between the various kinds of raw materials and the vast resources, which we have and also between several markets. We have only rather few raw materials which have a long way to our markets. It's a typical factor that raw materials in construction are sourced locally for the simple fact that the vast majority is very heavy and very cheap. But of course, there are some examples for raw materials, which we urgently need, which come from far away. Probably the most prominent example is bitumen for the asphalt production. And also plastics, which are raw material for many products, for instance, tubes, which we have to use in our construction projects might be sourced from abroad. And I see that, especially raw materials, which have a sourcing from, let's say, markets abroad are more difficult than the raw materials, which we produce ourselves or which we source locally. But you could make more or less general statement in saying that the volume problems, the quantities being delivered that these problems get easier in the second half, whilst the high price level remains more or less in place, also due to the fact that we see an unbroken strong demand in most of our markets. So quantity problems going down and normalizing high price levels, let's say, being stabilized.

Okay. All right. So how should we think then into 2022? You basically confirmed the 4% margin target? I guess it's fair to say that output wise, you should be largely covered. So anything that stands against this 4% margin target from a cost inflation perspective? Or do the contracts which you will be working on are already higher...

I would say the longer the cost inflation remains, the better it is possible to cope with that because the problem always arises once you get surprised by such development. And the longer the tendency remains in place, of course, the better you are in a position to take that into consideration, for instance, in bidding for projects. And hence, I -- and given the strong demand, which we also see for the not distant future in our most important markets, I believe we also see a possibility to ask for respective prices for our projects. The problem would be there if the demand would be going down and the prices would remain at the level -- the supply prices would remain at the current level, then, of course, that would be a sort of pressure on us. But given the fact that this is not a foreseeable tendency I'm quite positive for the not-too-distant future.

All right. Very clear. You have a final question. I guess it varies from market to market, project to project, but is there a general statement you can make about the price discipline in the market? Is it fair to say that given that there's so much -- kind of so much volumes to be tendered that most contractors can fill their capacity. So there's no need for an extra stupid pricing.