Strabag SE (STR) Earnings Call Transcript & Summary

Thank you very much, indeed. As usual, this is Thomas Birtel from Vienna calling. A very good morning to all of you. Thank you for your interest in STRABAG's figures for the first half of the current fiscal year 2022. I trust that our presentation, as usual, is in front of you, and we'll be starting on Page #3, where we give our output volume and order backlog figures. We generated a plus of 9% with regard to the output volume and achieved EUR 7.6 billion in the first half of this year. This growth comes from our core markets, above all Germany and Austria, but also from the Czech Republic, and in particular, from the United Kingdom. With regard to the order backlog, this figure reached again a new record level of almost EUR 24 billion as at 30th June '22, an increase of plus 14% compared to the same period of last year. The backlog grew by around EUR 2 billion in Germany alone, with significant increases also recorded in Austria and Poland. We now come to the earnings figures on Page #4. Our earnings before interest, taxes, depreciation, amortization, EBITDA, amounted to EUR 325 million compared to EUR 406 million in the first half of 2021. EBIT, means earnings before interest and taxes, stood at EUR 64 million, which represents a decline compared to the exceptionally good figure in the previous year, although it still fits in -- and it still fits in well with the long-term comparison, and it's still the second best result of the first half year in the group's history. Earnings were reduced in the North + West segment in South + East. The earnings for the first half of the year, again, were slightly negative as is usual in the construction industry, while international and special divisions achieved an increase attributable, among other things, to the successful large-scale projects in the United Kingdom, which I already mentioned. On Page #5, we give our net income figures. Net income -- net interest income was positive at plus EUR 6.24 million, primarily due to increased interest income and the positive exchange rate differences of EUR 5.74 million contained therein. Our income taxes amounted to minus EUR 26 million, which corresponds to a tax rate of 37%. In the previous year, income taxes had amounted to minus EUR 46 million. The net income this year reached EUR 44 million, while it was EUR 91 million in the first half of 2021. The earnings attributable to minority shareholders at EUR 3 million only changed very little in absolute terms. Overall, a net income after minorities of EUR 40 million was achieved. With 102.6 million outstanding shares, this corresponds to earnings per share of EUR 0.39 compared to EUR 0.86 the first half of 2021. On Page #6, we come to our balance sheet. The balance sheet total remained stable compared to the end of 2021 with EUR 12.3 billion. An increase in property, plant and equipment. A property was purchased in Stuttgart to expand the local presence there, and in inventories as well as seasonal increases in contract assets were offset by a decrease in cash and cash equivalents. Compared to the 30th of June 2021, our equity ratio increased from 30.1% to 32.8%. Increases in equity from the change in the discount rate for personnel provisions and the change in the valuation of hedging instruments had a positive effect there. At the end of 2021, the equity ratio had amounted to 33.3%. We continue to report an overall net cash position, although as is usual for the season, this figure fell from EUR 1.937 million to -- sorry, EUR 1.937 billion to EUR 1.147 billion. The dividend for 2021 in the amount of EUR 205 million is still included in the other financial liabilities as the payment this year only took place after the reporting date of 30th of June. On Page 7, we give our cash flow figures. Our cash flow from operating activities turned even more negative at minus EUR 606 million, mainly due to the increase in inventories and contract assets, the result of our higher output volume. The purchases made for the expansion of the Stuttgart location are also reflected in the cash flow from investing activities, which amounted to minus EUR 289 million compared to minus EUR 220 million in the same period of the previous year. Our cash flow from financing activities reached minus EUR 192 million as at 30th of June '22. This figure included the repayment of one bond in the amount of EUR 200 million. In comparison, the first half 2021 included the distribution of the increased dividend, resulting in a cash flow from financing activities of minus EUR 714 million. I now come to our 3 operational segments and start with the first one, which is North + West, comprising our construction activities in Germany, in Poland, in Scandinavia and the Benelux countries. In this segment, we recorded a 9% higher output volume of EUR 3.7 billion in the first half of 2022. The development is mainly attributable to the German market, both in Transportation Infrastructures and in Building Construction & Civil Engineering. The second major market in the segment, Poland, showed a slight decline in output volume as did Denmark and the Benelux countries. Revenue of the segment grew as well, gaining 13%, while the EBIT decreased noticeably to EUR 11 million. This is due to declining results in German road construction, 2021 had been an exceptionally strong first half year, and in Poland as well as earnings burdens from large projects in Denmark and the Netherlands. The order backlog of the segment as at 30th of June 2022 increased by 19% to EUR 12.4 billion due to the very good development in the stable core market of Germany. Noticeably was the intake of the U.S. military hospital, with an order volume of EUR 645 million. An increase in the order backlog was also recorded in Poland. Here, STRABAG will push ahead with the further expansion of the S19 motorway. The number of employees in the North + West segment remained unchanged at 25,371 across the segment as well as in Germany, the segment's dominant market. Regarding the outlook, the higher order backlog suggests that a slightly higher output can be expected in the North + West segment in the full 2022 financial year. In the German building construction sector, the growth dynamic in material prices has slowed somewhat after the first few months, settling at a high level. Despite the increased prices, projects continue to come on to the market, with a slight shift from the private to the public sector noticeable. In the first half of the year, Transportation Infrastructures recorded a significant increase in orders. The current challenge is to work off the high order backlog with our existing capacities. At the same time, the situation allows for a very selective approach to bidding. Fierce competition prevails in the Benelux countries and in Scandinavia. The management's focus is on stabilization and consolidation as well as the completion of large projects. The Polish economy has been hit very hard by the devaluation of the zloty and the resulting inflation. This is having a noticeable impact on construction materials and especially on the subcontractor market, which is also suffering from the lack of [ acquiring ] workers. Considering the fact that the order backlog in Poland is at its highest level in history, we expect a growth in output volume. On the other hand, negotiations regarding price escalation clauses, especially with the public sector, have not yet been finalized there. Let's now go to Page #9, with the figures of South + East, which is the segment comprising our construction activities in Austria, Switzerland and everything east of those 2 countries in Europe. The output volume in the South + East segment rose by 11% and amounted to EUR 2.3 billion in the first half of 2022. This good start is based on the record order backlog at the end of 2021. Growth was recorded primarily in Austria, Czech Republic and Hungary. In contrast, there was a slight decline in Slovenia and Bulgaria. Revenue increased by 11%. In contrast, the EBIT remained at a similar level as in the previous year at minus EUR 11 million after minus EUR 10 million the year before. The order backlog increased by plus 14% versus 30th of June 2021, growing to EUR 6.2 billion. Here, too, the home market of Austria is the strongest driver. We were particularly successful in the acquisition of large projects in Building Construction & Civil Engineering. Czech Republic, Slovakia and Hungary also contributed to the growth in orders, albeit to a lesser extent. The number of employees remained almost unchanged with an increase of plus 1% to 20,258. Regarding the outlook for the segment, the performance trend exhibited in the first half of the year is expected to continue throughout 2022 as a whole. Due to the good order intake, higher output is again expected in Austria. Uncertainties exist for the second half of the year with regard to fixed price agreements for long-term projects. On the other hand, there are first signs of an easing in material prices such as for structural steel. The Hungarian economy is suffering greatly from the high inflation and exchange rate fluctuations. Public budget constraints are already making themselves felt in the tendering activity within the infrastructure sector. The Czech road construction business continues to be stable. In the building construction sector, on the other hand, smaller private investors are already withdrawing their first projects from the market. In addition to construction prices, the shortage of labor is also having a negative impact. The market developments in Slovakia is greatly influenced by the unstable political situation. Moreover, the few public sector contracts that do get awarded tend to be delayed by a nonfunctioning public procurement system. For this reason, STRABAG is mainly interested in cooperating with private investors in the country, for example, in the construction of production and logistics source. The markets of Southeast Europe, like almost all of the group's core markets, are also struggling with massive price increases and a shortage of skilled workers. While there is a mandatory price adjustment for public contracts in Romania, negotiations must be conducted individually in all other countries. In Croatia, planned investments in the railway network offer opportunities for STRABAG while the motorway network is largely completed. In Serbia, the pressure from Chinese companies is very noticeable, a problem that is characteristic of the entire region. In Switzerland, strategic and organizational changes were made some time ago. The group is positioning itself as a quality provider in the country, for example, through its BIM expertise and greater consideration of sustainability aspects as well as its own building materials testing laboratory. In response to Russia's attack on Ukraine, the Management Board in March 2022 decided to wind down our Russian business. Now we come on Page #10 to the International + Special Divisions segment, which is our real estate development business, our PPP business, our raw materials business as well as our facility management activities and our global tunneling construction activities. It's the smallest segment, and it generated a plus of 9% with regard to the output volume, which amounted to EUR 1.5 billion in the first half of 2022. Especially noteworthy here is the work on large-scale projects in the United Kingdom and the Middle East. Revenue of the segment increased by 7% while EBIT grew from EUR 58 million to EUR 78 million. Worth mentioning are the positive earnings contributions from large-scale projects in the United Kingdom. Stable results were also delivered by the Property & Facility Services and the Real Estate Development business units. The order backlog as at 30th of June 22 of the segment increased by plus 2% to EUR 5.3 billion compared to the same period in the previous year. Strong growth was achieved in mining and boring, the core business in Chile. In total, orders worth approximately EUR 283 million were secured in this country. The contract to build 140 wind farm foundations allowed us also to tap in a new business segment in Chile. This contrasts with a significantly reduced tunneling order backlog in Austria, our home market, where mega projects such as Tulfes-Pfons, lot of the Brenner Base tunnel and the [ quorum ] tunnel, are coming to an end. In the first half of 2022, staff numbers were down by minus 3% to 2,096, almost exclusively in connection with the completion of tunneling works for the Alto Maipo hydropower mega project in Chile. Regarding the outlook for the segment, the output volume for the full year 2022 is expected to be higher than in the previous year. This forecast is supported by the aforementioned order intake in Chile. The mining business will also make a very positive contribution in the second half of the year. Due to the size of the projects, the tunneling business is subject to higher volatility. We are looking for new opportunities worldwide, where the group can use its expertise to its advantage. At the same time, projects of this size must be examined especially with regard to the risk profile. In the international business, the COVID-related investment backlog and infrastructure projects is starting to clear, often supported by the public sector as a way to stimulate the economy. Meanwhile, Canada seems to be developing into an interesting market for infrastructure projects for STRABAG. At the same time, the recovery of the oil price is leading to a renewed demand for construction services in the Middle East. In Real Estate Development, the market uncertainties are becoming clearly noticeable among private investors. Years of rising property prices, coupled with an extremely dynamic price situation in construction, make profitability calculations difficult for the entire industry. The group's Real Estate Development units, however, benefit from the cooperation with our in-house construction units by not only cushioning price uncertainties but also uncertainties related to availability. The Infrastructure Development business can report an easing of the COVID-related decline in traffic volumes in the first half of the year. Construction delays caused by the pandemic also remained within tolerable limits. The Colombian MAR 1 project, PPP project, for example, went into operation on schedule. Overall, however, the number of PPP projects put out to tender in the markets we serve remains at a modest level. We must, therefore, continue to expect strong competition in this field. Our Property & Facility Services business has recovered well from the impact of the COVID pandemic. The focus now is on improving productivity in order to counter the higher costs and especially to deal with the lack of skilled workers. The digitalization measures of recent years are already showing positive results at STRABAG PFS. A new first tier are the so-called green services with which PFS can increasingly impress its customers. The increased energy prices are also affecting the building materials business of STRABAG. In bitumen trading, it is important to ensure security of supply despite the temporary shutdown of [indiscernible] refinery in Austria, which from the current point of view, is working well. In concrete and cement, on the other hand, it has been only partially possible to pass on the increased production costs to the market. Overall, however, the second half of the year should develop well. Unfortunately, the long-term outlook is slightly clouded by the expected decline in demand. Within the corporate group, the current situation shows that the dense network of building materials operations, including materials-based services, remains an important basis for self-supply within the STRABAG group and thus, for greater competitiveness. I come to the final remarks of our presentation, given on Slide #11. The forecast may be fraught with uncertainty at the moment, but our half year figures show that we are meeting our guidance so far. The output has increased as expected, and the order backlog is also showing an upward trend despite its already very high level. As predicted, we were not able to repeat the previous year's exceptional earnings results, but in a long-term comparison, we can speak again of the second best figure for the first half year, and to underpin that, we have given you the first half year's figures as from 2013 onwards on this page. We remain committed to the targeted construction output of EUR 16.6 billion for 2021, a figure that is well supported by the order backlog. We also expect to generate an EBIT margin of at least 4% on a long-term basis as the business model is proving to be robust under the current conditions. Net capital expenditures, which means the cash flow from investing activities, should not exceed EUR 550 million in the current year. Ladies and gentlemen, this was it as with regard to our comments on the first half year's figures of 2022 for STRABAG. And now I'm very glad to answer your questions. Thank you for your attention.

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

A couple of questions, please. The first one relates to the topic of cost inflation. I mean [ Paul ] yesterday commented that they are seeing kind of the peak in terms of costs with steel, for instance, and so on, coming back again. I mean the question would be to which extent or how quickly that would feed into your cost basis and to which extent there might some sort of windfall profits. Should we see this decline continuing then probably materializing into 2023? And related to that, I guess, personnel cost inflation will be a hot topic for next year. If you could maybe share your personal view and your expectations with regards to the potential outcome in the collective bargaining process and yes, Germany, Austria. And also where you expect personnel costs to end up in Eastern Europe where inflation is even higher than in Western Europe?

Well, thank you, Mr. Remis. With regard to the cost inflation, I already commented that in certain aspects, for instance, structural steel, we also think that so far, a certain peak is being reached. Although it is always difficult to make a prediction for the rest of the year because that depends on frame conditions which we do not exactly know and which we can't exactly predict, for instance, regarding the conflict in Ukraine and side effects of that. So if we could assume that the current frame conditions remain more or less stable, we believe that also the cost inflation would come to a sort of stabilization which, of course, makes it easier for us to come to rely the cost estimations and calculations. I do, however, not believe that we will be seeing considerable windfall profits out of this because, as I pointed also out before earlier in my comments, of course, we also have a certain extent of old contracts where we have fixed prices and where we have to swallow the cost increase ourselves. So all in all, I think under the line, we are well advised to stick with our guidance, which means we will meet our expectations. And if the frame conditions remain stable, the 4% will be reachable but no major windfall profits, which would bring us in the direction of the previous years' margin that is not foreseeable. When it comes to personnel costs, of course, given the current environment, we have to again expect considerable increases in the countries where we have collective bargaining, which is, of course, above all Germany but also Austria. In the major part of Eastern Europe, we don't have the system of collective bargaining and respective contracts, and we have the general, let's say, the market mechanisms in place, which currently lead again to considerable increases in wages and salaries because we see a combination of scarcity of skilled labor available in basically all the markets, and still, as I mentioned before, a strong demand for construction services. Of course, such combination gives power to the negotiating parties, either trade unions or individuals, and that will lead to, again, consider price increases. And we will have to take care that we make proper cost estimates, which include that increases appropriately. And of course, that we further increase our productivity and efficiency, which is again driving us in the direction of digitalization, but also of industrialization of construction processes.

All right. Think the last time, on the earnings call, we also kind of handled the topic of price clauses, kind of contracts that are linked to indices. Can you remind us of kind of which share of the business is covered by such agreements where you essentially then have a kind of a cost-plus structure?

Well, cost plus is just one contract model which you can apply in order to cope with the situation. The more, let's say, usual way in public business is unit pricing, which means that certain services and materials are priced at a unit. And there, we have, in the first place, we have fixed prices, but then there are price escalation clauses, which are applied as from a certain threshold of price inflation onwards, which means that you have to first swallow the inflation cost at your own till the threshold is reached, and only above the threshold, you can negotiate price escalations with your public customers. And as I pointed out before, there's one country making a positive difference. This is Romania, where you have a legal claim where you do not have the necessity to negotiate. But in basically all the other countries you have to negotiate. And this is the basic model in, on the public side. With regard to private customers, in former days, of course, the turnkey lump sum contract model was the usual one. In the meantime, we have changed to contracts with price escalation clauses or to cost-plus-fee pricing models, or another contract model would be a GMP model, which means there is a guaranteed maximum price. But underneath that maximum, you apply, for instance, the cost-plus model. But given the fact that private contracts are individual contracts, of course, you negotiate it -- each time you negotiate it from scratch because you restart from the winning with a new customer and a new contract. It's a new game, of course. And that will be coined by the market situation. As long as demand is as strong as it currently is, we have good chances to come to contract models which allow us to successfully convey the price increases to the markets.

And can you give us an idea how much of your current backlog is covered by sort of this contract price where you basically have a very kind of a straightforward opportunity to pass this on, [ higher costs ]?

It is the majority of our contracts because as you probably recall, the majority is public customers. And we also saw a sort of, let's say, rising importance of private customers to us because to a huge extent, our increased order backlog was driven by big infrastructure projects, and these are public contracts, of course.

Okay. Very clear. Then I have to come back to this painful topic of cartel case in Austria, the review of the antitrust decision that was requested by the Federal Competition Authority. I mean we got the news that maybe you can shed some light from your point of view also with regards to -- I mean timing is always difficult in these cases. But is there anything you can share with us apart from what has been made public in the press?

Yes, probably I could update you with regard to the process. We have been asked by the cartel court to reply on what the cartel authority had included in their application. We did that in due course. So our response is now also in the hands of the cartel court. And it's now again in the cartel court, which has to make a decision in due course. But as you pointed out before, we cannot predict how fast they are. We take the position and we stick to that position that we don't see any reason for the application of the cartel authority.

Right. But it's probably fair to assume that it won't take as long as kind of in the initial ruling?