Strabag SE (STR) Earnings Call Transcript & Summary

Thank you very much. A warm welcome to everybody joining us here in this call where we will disclose and discuss our year-end figures for the year 2021 for Strabag. Let's start with Page 3 of the presentation, which I trust, is in front of you. The financial review of the 4 key figures given on that chart shows that Strabag successfully mastered the second COVID-19 year as well. Despite disruptions in the supply chains for important construction materials, which occurred with a slight delay compared to other industries. The price is double for several important materials such as steel or plastic. Nevertheless, we succeeded in mitigating the impact of rising prices by working in partnership with suppliers and with our customers. In the face of new and unpredictable events, I am pleased to announce that at least the fiscal year 2021 has been an exceptionally successful year for us. The order backlog, as you can see on the picture there, as at 31st December 2001 -- 2021, sorry, grew by 22% year-on-year to EUR 22.5 billion, and has achieved a compound annual growth rate of plus 8% since 2017. In terms of output volume, given on the right-hand side of the chart, we were not yet able to match the record year of 2019 but with an increase of 4%, we were slightly above the EUR 16 billion mark. The earnings before interest and taxes, EBIT, the most important financial indicator for us rose by 42% to EUR 896 million as a result of numerous positive earnings effects in all segments. This corresponds to an EBIT margin of 5.9% after 4.3% in 2020. Following the extraordinary increase approved by the Annual General Meeting last year, the management -- manage Board considers it justified to return to the usual range which is a payout rate between 30% to 50% of the net income after minorities with regard to the dividend and will, therefore, propose a dividend of EUR 2 per share at the AGM on 10th June, 2022. This corresponds with a payout ratio of 35%. The dividend yield is 5.7% based on the average price of the Strabag SE share. Let's now discuss some KPIs more in detail and come to Page #4 of the presentation. The Strabag SE Group recorded a 4% higher output, as I pointed out before, of EUR 16.1 billion in the 2021 financial year. This is mainly due to a 10% upturn in our home market of Austria following the negative business development as a result of the temporary suspension of all construction works in the wake of the coronavirus crisis in 2020. Growth was also recorded among other places in Germany, the Czech Republic and due to ongoing mega projects in the U.K. Let's have a look at the order backlog on Page 5. The order backlog was at EUR 22.5 billion, 22% higher than in the previous year and once again at an all-time high record level. Increases were recorded, especially in the home markets of Germany and Austria but also in core markets such as Poland and Hungary, thanks to numerous new projects in a wide range of sectors. On Page 6, we analyze and debt the EBITDA and EBIT development. In 2021, earnings before interest, taxes, depreciation and amortization, EBITDA, increased by 23% to EUR 1.45 billion, significantly topping the EUR 1 billion mark for the third year in a row. The EBITDA margin grew from 8% to 9.5%. As the depreciation and amortization expense increased only minimally by around EUR 6 million to EUR 550 million compared to the previous year, the earnings before interest and taxes, EBIT, rose by 42% to EUR 896 million as a result of numerous positive earnings effects in all segments. This corresponds to an EBIT margin, as I pointed out before, already of 5.9% after 4.3% already in 2020. As you will see later in the outlook, we view this as an exceptional level and do not expect this margin to be repeated in 2022. We now have a look at the net income and earnings per share development given on Page #7. With an increase of 48%, net income after minorities stood at EUR 586 million in 2021. The earnings per share amounted to EUR 5.71 as compared to EUR 3.85 in 2020. The increase of the net income was even relatively higher than the EBIT increase because net interest income improved by around EUR 8 million to minus EUR 12.6 million due to the less interest expenses. The income tax rate was 32.5%, slightly lower than in the previous year. Earnings owed to minority shareholders amounted to EUR 10.7 million after EUR 3.8 million compared to last year. We now have a look at the net cash position given on Slide #8. The total assets and liabilities remained almost unchanged at EUR 12.2 billion compared to the previous year. The nominal capital decreased as a result of the withdrawal of our treasury shares. Noncurrent financial liabilities decreased in favor of current financial liabilities due to the last charge of the bond in the amount of EUR 200 million. And net cash position was reported as usual on 31st December 2021. This figure given here on the left-hand side of the chart was up to EUR 1.9 billion in the face of the lower severance and pension provisions and the increased cash and cash equivalents. Equity decreased slightly to EUR 4.07 billion, yet remained above EUR 4.40 billion as in the previous year. This was reflected in a decline in the equity ratio from 33.9% to 33.3%. This is given on the right-hand side of this chart. Reassuring factors also for the ratings agency Standard & Poor's in December 2021, S&P, again, confirmed our investment-grade rating BBB. The outlook was left stable. S&P sees Strabag SE's strength and opportunities above all in the stable margins in an otherwise quite cyclical market development, the strategic assets to raw materials, the strong market positions and Strabag SE's high standing in the credit market. We'll have a look at Page 9 of the presentation. It gives the cash and cash equivalents. The cash flow from operating activities fell from EUR 1.28 million to -- billion, sorry, to EUR 1.22 billion is despite the increased cash flow from earnings. The main reason for this development was a less pronounced reduction in working capital compared to the previous year. The expectation of a significant reduction in advance payments in 2021 and a concomitant increase in working capital to familiar levels once again failed to materialize. The cash flow from investing activities was again slightly more negative following the low investments in intangible assets and property, plant and equipment in 2020 due to COVID-19. The cash flow from financing activities showed a value of minus EUR 744 million after minus EUR 496 million in the previous year, which is mainly due to the dividend payment. All in all, this leads to an increase in cash and cash equivalents by EUR 108 million to EUR 2.96 billion despite the distribution of the extraordinary dividend totaling around EUR 708 million for the year 2020. We now come to Page #10. This chart shows that the high cash flow inflows are always registered in the second half of each fiscal year. The second half of 2017 was a record, and we expected that the high working capital inflows would reverse over time. The expectation of a significant reduction in advance payments and a concomitant increase in working capital, thus has not yet materialized so far. Page #11. As usual, we were able to post a positive free cash flow of EUR 843 million as compared to EUR 930 million in 2020. We had forecasted net investments, which is cash flow from investing activities of up to EUR 450 million for the 2021 financial year. In the end, we amounted only to EUR 378 million. The gross investments CapEx before subtraction of proceeds from asset disposals stood at EUR 483 million. This figure includes expenditures on intangible assets and on property, plant and equipment not including the noncash additions of right-of-use assets of EUR 456 million, the purchase of financial assets in the amount of [ EUR 19 million ] and EUR 7 million from changes to the scope of consolidation. Expenditures on intangible assets and on property, plant and equipment during the year and the report must be seen against depreciation and amortization expense in the amount of EUR 550 million. At EUR 6 million goodwill impairment was somewhat higher than in the previous year, but still on a very low level. Let's now discuss the situation in our 3 operational segments. The first and most important one is North and West. The chart is #12. North and West segment comprises all our construction activities in Germany, in Poland, in Scandinavia and in the Benelux markets. This segment recorded in 2021, a slight increase of 1% of [ noted ] volume to EUR 7.1 billion. This is attributable, in particular, to the home market of Germany and, to a lesser extent, to the market of Denmark. By contrast, construction output in other markets such as Poland, Benelux and Sweden, sorry, showed a slight decline. The EBIT also grew by 9% in the segment to EUR 443 million. While the transportation infrastructures business in Germany consistently makes positive contributions to earnings improvements could be reached in the German building construction civil engineering business as well as in Poland. The EBIT margin thus exceeded even the extraordinary high level of the previous year coming in at 6.1%, which is really an outstanding level. The already high level of the order backlog was increased by a further 27% as of December 31, 2021, mainly due to the strong development in Germany. The new orders registered in this country in the year as a whole, covered a wide range from apartment buildings for developers to industrial buildings to new orders from public sector clients. The second segment is South and East and the chart is #13. South and East focuses on our construction activities in Austria, Czech Republic, Slovakia, Hungary, Southeast Europe, Russia and Switzerland. The environmental technology activities are also handled within this segment. The output volume in South and East was up by 6% and amounted to EUR 4.9 billion in the 2021 financial year, primarily due to Austria, as already explained earlier in this presentation. Business in the Central and Eastern European countries, on the other hand, was mixed especially noteworthy is the decline in Hungary resulting from the after effects of the COVID-19 pandemic in the previous year. In contrast, an increase was recorded in the Czech Republic and Slovenia. The EBIT of the segment increased by 11% and amounted to EUR 195 million due to improvements in almost all countries of the segment. This results in an EBIT margin of 4.0%. The order backlog increased by 26% and amounted to EUR 5.6 billion. This is due especially to the record level in Austria. Many orders in building, construction and civil engineering, especially in residential construction, as well as stable, albeit regional petrogenous new orders in transport infrastructures, played a decisive role in this positive development. Hungary caught up significantly as well. The other markets of Southern and Eastern Europe showed very divergent trends. We now come to our third and last operational segment, International and Special Divisions. This includes the field of tunneling as well as the concession business, with special and transportation infrastructure operates worldwide. In the markets of the United Kingdom and Chile, Strabag offers handling as well as a variety of country-specific services. Regardless of location, all construction materials activities with exception of asphalt are also part of the segment with a dense network of production plants in Europe. The real estate business, which charges from product development and planning to construction operation, it also includes the property and facility services business, completes the wide range of services in the segment. Additionally, most of the other services in non-European markets are also bundled in International and Special Divisions, which is the small, but also the most volatile business segment of Strabag. Extraordinary strong growth in the EBIT to EUR 272 million was recorded in the reporting year. The negative impact of the COVID-19 pandemic, especially in the international business decreased, while diversification of the facility management portfolio made further positive contribution to the earnings together with the real estate development business. With regard to the output, the segment generated EUR 3.2 billion in 2021, 12% higher than in the previous year despite the more difficult conditions caused by the COVID-19 pandemic. The increased output is mainly due to the continuous execution of large orders in the international, which means the non-European business. The order backlog of International and Special divisions increased by 11% to EUR 5.3 billion compared to the same period of the previous year. Growth was recorded into [ Alia ] in Canada, the Strabag [ on ] the tunnel works for Metroline 2 in Toronto, but also in Austria due to the new order for the extension of the Vienna U2 Metroline. The United Kingdom and Germany also contributed to this development. With that, I close my review of the year 2021 and come to recent events. And therefore, I would like to draw your attention to Page #15. 27.8% of Strabag SE shares belong to Rasperia Trading Limited in which Oleg Deripaska holds indirectly 49%. On 15th March, the Management Board decided to suspend dividend payments based on the sanctions imposed by Canada and the U.K. at the time. We had done so already in 2018 when the [indiscernible] sanctioned by the U.S. Department OFAC. We also decided to wind up the Russian business currently of subordinate importance, with 0.3% of the group's output volume. The Haselsteiner Family private foundation as one of our core Austrian shareholders also terminated the syndicate agreement that has linked all 3 core shareholders as per 31st December 2022. On 8th of April, the European Union imposed restrictive measures, including an asset freeze on Deripaska. The sanctions also apply to Rasperia Trading Limited. Strabag, however, is not a sanctioned company. As Strabag SE is not and never has been controlled by Rasperia or indirectly by Mr. Deripaska as defined by the sanctioned regulations. Rasperia shares in Strabag SE and all rights associated with these shares, including voting rights and dividend entitlements are frozen as well. Therefore, the joint control of Rasperia of Strabag SE ceased following the U.S. sanctions that entered into force on 8th April 2022. We have convened an extraordinary general meeting in accordance with the request of the Haselsteiner Family, private test. On 5th of May, Mr. Thomas Bull has been delegated to the Supervisory Board to Rasperia to be dismissed. Dr. Melekhov, who was nominated by Rasperia prior for the Supervisory Board has already resigned on 13th of April. The move will help prevent any possible direct or indirect influence by Oleg Deripraska on Straberg SE. This action is also necessary to avoid adverse consequences and damages to the Strabag SE group as alone in the indirect connection to Oleg Deripraska has had a partially negative impact on the group's business activities since the start of the war against Ukraine. Let's now come to a close with our outlook for 2022. It is true that in times of great uncertainty, forecasts are obviously difficult to make. Before the start of the war, we had still targeted an output of EUR 16.6 billion base and the recent record order backlog of around EUR 22.5 billion at the end of 2021 which could have corresponded to the high level of 2019, which means the time before the pandemic. Now we are seeing war-related material bottlenecks and price rises and the dynamics are even stronger than the previous year. The impact of these developments on our business cannot yet be quantified concretely. Nevertheless, we hope to be able to overcome also this crisis with our proven strategy of diversification and regionality. That is why we maintain our guidance for 2022. With regard to the output volumes of our segments, we expect North and West to remain stable at a high level. For South and East, we hope to return to levels of the year 2019 before COVID. Also the International Special Divisions segment should show a higher output volume. In terms of the EBIT margin, which means EBIT versus revenue, the company is keeping to its target of achieving at least 4% on a sustainable basis from 2022 onwards. That's our current regard on the whole year 2022. Thank you very much for your attention to my comments, and I'm very much looking forward to answering eventual questions from your side.

[Operator Instructions] First question is from the line of Matthias Pfeifenberger from Deutsche Bank.

A couple of questions from my side. The first one is on backlog. So I guess the majority of the EUR 22.5 billion was booked and agreed and also agreed in terms of pricing before the major cost inflation happened. So how do you make sure you're not getting squeezed on potential cost overruns? So what's the share of -- what's the share in the backlog of, let's say, pre cost inflation and post cost inflation? And what's the share of price escalation clauses or something like that? And then -- where do you see most bottlenecks and price rises on the inputs specially there, what is the situation in bitumen? Can you remind us of the backward integration and the price raises there on the spot markets?

Thank you very much, Mr. Pfeifenberger. Well, it's true, of course, that the order backlog as per the 31st of December 2020 to consist of contracts which have signed to that very day. But on the other hand, we have -- we had already seen sharp price increases, if not explosions, already in the last year. admittedly not because of the terrible war against Ukraine, but because of the COVID-19 pandemic. So we had reason to revise our price formulas and to take a cautious step with regard to contracts to be completed already in the last year. And as we have proven for 2021, in that year, we managed to cope quite well with the sharp price increases in that year. And hence, we feel quite comfortable and with our current outlook for 2022, which means that, again, we should be in a position to go well with that additional challenge. Although I have to admit, it has become a greater challenge. And hence, we underpin, we do not believe to be back at that exceptional level of almost 6% in 2022, but we are quite confident to reach at least 4% let's say, normal targets, which we had initially foreseen for 2021 as well. We have also taken additional measures in the course of this year. So we have -- we came to even stricter measures with regard to price formulas in 2022. That has to be admitted because we feel that the situation has really worsened there are various, let's say, bundles of tools available for us, and we have to make a distinction between customers, private customers, on the one hand, and private customers on the other hand, when it comes to public customers, there are mostly general conditions for tendering processes in the various countries, and they have various consideration of price escalation clauses. And there already last year, we have seen several countries who have introduced quite, let's put it that way, flexible or comfortable regulations for the contractors the most positive example I could quote is Romania, but also Poland wasn't that bad. And in other countries, we had price escalation clauses anyhow. When it comes to private customers, it is true that in the past, the dominant contract model was turnkey lump sum price contracts. And that had already started to change a little bit in the last year. We have seen alliance formulas. We have seen cost plus fee conflicts. And that tendency, of course, has been strengthened in the year 2022. And today, it would be very difficult for us to agree on a turnkey lump sum contract at all. That means, in general, we said goodbye to this contract model also, for instance, in the highly competitive market of building construction in Germany. We would have a bit difficultly to agree on a turnkey lump sum contract today. This is not a major problem, although, of course, it leads to the fact that certain contracts are not concluded with us because on the other side, the customer is not in a position to agree on such flexibility. But given our outstanding order backlog, we can easily afford that. We have to make a selection anyhow. So different situation on the public side, price escalation clauses are more or less in place, which is not that much the case on the private side. But there, we simply have to see to it that we do not conclude turnkey lump sum contracts anymore. With regard to bottlenecks, that is a huge difference as compared to 2021. In 2022, the major question is pricing. Whilst in 2021 -- in the first half of 2021, it was also a matter of quantities. So there were for instance, shortages in wood or steel, which would not be overcome even if sharp price increases were accepted. This, in my eyes, is different now. Today, it's all a matter of pricing. When it comes to bitumen, my guess is the bitumen price level is about 45% above last year's level. When it comes to diesel, my guess is that the average price per liter in the countries where our group is active in Europe, is EUR 0.80 higher than last year. which is important because to give that example as well, we have an annual consumption of about EUR 170 million of diesel every year in the group. So that is, of course -- that was a challenge that has to be admitted. But at least the quantities are there. And as I pointed out before, if we take the frame conditions as they are today, with all the price explosions which we have seen with all the difficulties, which we face, we still come to the conclusion that we should be in a position to make our initial guidance, which means EUR 16.6 billion in output and about at least 4% EBIT on sales. It is true once the frame conditions would once again severely deteriorate. Of course, we would have to think of it again, but that goes for everybody in every market and every industry.

Okay. very helpful. If I can sneak in 1 more. So what's basically the rate of installations and delays in the backlog currently? Is it still minor? Or is it increasing?

Well, with regard to cancellations, the answer is very easy. It's just nil. We haven't seen any one contract being canceled because, for instance, of our points with all dairy [ pascanesperia ]. There was no one contract being canceled. It is true that there were several contracts, which we have not been awarded in a transitional period. That has to be admitted but at least that was not a major influence. When it comes to delays in construction times, there are some minor impacts that is true because of delayed supply and so on. But this is not yet a coining effect on our overall business. There is some delays but we used to have delays anyhow for various factors in construction sites. So this is not really a major coining factor of our day-to-day business.

[Operator Instructions] There are no further questions at this time, and I would like to hand back to Thomas Birtel for closing comments. Please go ahead.

Thank you very much. I think this is for the first time that we just said 1 question, but that leads to the conclusion that good figures lead to less questions. Anyhow, I thank you very much for your attention, and I'm very much looking forward to talking to you again at the next occasion. Take care and stay healthy. Thank you very much. Bye-bye.