Strabag SE (STR) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning from me as well. We start on Slide 5. Parts of the European construction industry remained challenging in the first half of the year. This is especially true for Austria. By segment, we have not seen a turnaround in residential construction yet. In contrast, we are seeing continued solid demand for infrastructure and civil engineering projects across different geographies. In this environment, we can look back on a successful first half of 2024. Even if the output volume has only increased slightly, we can report the highest figure ever recorded in the first 6 months of the year. We saw a dynamic development when it comes to the order intake, where we were able to successfully acquire infrastructure, energy transition and refurbishment projects, in particular, in Europe and in the Americas region. The growth of our order backlog reflects this development. At the end of June, the backlog exceeded the EUR 25 billion mark for the first time, a plus of 7% compared to the year-end 2023. This gives us a comfortable starting position for 2025. Even more important, the current level of order backlog substantially exceeds our annual output volume. All in all, that already gives us good visibility towards 2026. Whereas there is a slight plus in the group's EBITDA, the EBIT is slightly lower than last year. This is due to somewhat higher depreciation and amortization expenses. Nevertheless, the EBIT margin is stable year-on-year, and we regard an EBIT of EUR 82 million as a very solid level, especially in a long-term comparison. Ladies and gentlemen, we are reporting the highest net income we have ever achieved in our first half year. This is primarily due to a very strong net interest income, driven by a very solid liquidity position and still elevated interest rates. Balance sheet and cash position again remained very robust with some typical seasonal effects that we see basically every year. Moving on to Slide 6. If we take a look at the performance of our underlying markets, we get a mixed picture. We see positive trends in infrastructure and civil engineering in the majority of our markets as there is a high demand for new and modernized infrastructure in our core markets and for projects related to the energy transition. These parts of our portfolio are providing a stable foundation in challenging times. In building construction, we still face a declining residential construction market. This is especially true for Austria and Germany. In Poland, on the other hand, we were able to grow both order backlog and output volume in this area. Overall, residential construction accounts for less than 10% of group output. Our remaining building construction portfolio is well diversified. We are recording continued solid business activities for public buildings in health care and education and for commercial facilities, for example, in transportation and logistics. Besides the classic construction business, we are seeing increasing demand for mechanical and electrical and energy Management services. This trend is already reflected in the performance of our Property and Facility Services business, which has developed very positively so far this year. The shift from private to public sector contracts has continued in the first half of the year. In the past, the ratio was 60% to 40%, 60% public and 40% private. Now, we are seeing 70% public and 30% private contracts in terms of new orders, which can be seen as a significant shift. Our strong presence in public sector construction is currently helping us to balance out diversified developments. With lower interest rates, we expect this trend to ease, which will support our goal of a more balanced customer structure. To summarize, building construction remains challenging, while infrastructure and civil engineering has proven to be a stable bank. Thanks to our broad positioning in terms of construction segments, countries, client structures and project sizes, we have so far been able to more than offset declining trends and are confident that we will be able to do so in the future. Moving on to Slide 7. Here, we provide an overview of major projects we were able to acquire in the first half of 2024. Generally speaking, the development of incoming orders was very dynamic. We were awarded several large infrastructure projects, such as the construction of the new ship block in Bavaria, which will be built during ongoing operations. The contract includes an extensive ground and civil engineering services, steel hydraulic works and the operating technology. In Toronto, we won the contract for the design and build of the underground extension of our rapid transit line, the so-called Eglinton Crosstown West extension. In line with our Strategy 2030, we also acquired several new projects related to the energy transition and to reconstruction, conversion and refurbishment. We are part of the SuedOstLink project, currently one of the largest energy infrastructure projects in Europe. Through the grid expansion, renewable wind energy from Northern and Eastern Germany will be transmitted to the southern part of the country where the industry is. In Vienna, we were awarded the contract for the refurbishment of the central office of the Austrian Pension Fund. Instead of demolishing the building, we will build on existing structures as much as possible. Following the gutting of the building, the existing MEP engineering will be brought up to date. This includes utility lines, the power supply and the heating and cooling systems. In the area of commercial facilities, we won the contract for the construction of the new headquarters for the Czech subsidiary of Erste Group in Prague, consisting of 4 new buildings. The building complex is to receive the highest certification in BREEAM Outstanding and WELL Platinum and also meets the EU taxonomy requirements. We are using low-carbon concrete and thanks to heat pumps and photovoltaics, the project will be climate neutral. When it comes to public building construction, we won the contract for the reconstruction and extension of the F.D. Roosevelt University Hospital in Banská Bystrica in Slovakia. The EU-funded project is one of the most significant investments in Slovakia's health care infrastructure in recent decades. The project leaders are aiming for BREEAM certification and are therefore, following high sustainability standards. Overall, you can see that we also have a good mix in our order intake. This is a direct consequence of our ability to cover the entire value chain in construction. Next is Slide 9. We saw a solid level of output in the first half of 2024. Output volume came in at EUR 8.3 billion, slightly up by 1% year-on-year. The good news is that we recorded growth in our key core markets, most strongly in Germany, Poland and in transportation infrastructure in Romania. Apart from our core markets, output also grew in the U.K., where we have been fulfilling large and mega projects as well as in Italy, where we are working on projects in building construction and road maintenance. This development was cushioned by a substantial decline in Austria, however. Let me add a couple of words on Austria. In Austria, residential construction is the most affected of all our markets. This is mainly due to the stricter lending guidelines for mortgage loans. Historically, our share of residential construction is higher in Austria. Also, there is a lack of major industrial projects to offset declines in residential construction, as is the case in Germany. We are also not yet seeing positive effects from the Austrian government's housing package. With further reductions in interest rates, the situation should improve. We do not believe, however, that there will be a significant turnaround before 2025, but we do remain confident that we will be able to more than offset these declines at group level. Besides Austria, we recorded some declines in output in the Czech Republic. This development is expected and a consequence of a more selective approach to bidding due to strong competition in transportation infrastructure. As we were recently awarded the contract for the construction of the Ceská Sporitelna headquarters and the modernization of the Masaryk rail station in Prague, we are back on track for growth in the Czech Republic. In these times, the development of our order backlog is certainly of particular interest. I am therefore very pleased to be able to report a new record order backlog, which has exceeded the EUR 25 billion mark for the first time. At the end of June 2024, we can report orders worth of EUR 25.2 billion, a strong plus of 7% compared to year-end 2023 and a plus of 4% in a year-on-year comparison. This positive development reflects the successful project acquisitions in the year-to-date, some of which I presented to you earlier. Our order backlog puts us in a good starting position for 2025 and already gives us good visibility towards 2026. We recorded significant growth above all in Germany, followed by Poland, Slovakia and the Czech Republic. In contrast, the order backlog decreased in Austria, Hungary and the U.K.; in the U.K. as a result of ongoing completion of major projects. Let's move on to Slide 10. We can report very solid earnings performance in the first half of 2024 with major KPIs showing stable or increasing development. The EBITDA, earnings before interest, taxes, depreciation and amortization, came in at EUR 359 million, a plus of 2% year-on-year. Depreciation and amortization expense was 5% higher and accounted to EUR 277 million. We, therefore, generated an EBIT earnings before interest and taxes of EUR 82 million, slightly below last year's figure of EUR 87 million. This nevertheless places EBIT in a very satisfactory position in the multiyear comparison. Earnings improvement in the North and West and in the International and Special division segments was -- in the South and East, EBIT was again negative in the first half of the year as is common in the construction industry. If you have a look at the profit and loss statement, you will see that we have registered another very strong net interest income. Again, with our ongoing high cash position, we now have an advantage in the still elevated interest rate environment. At the end of the first half year, we reported cash and cash equivalents of EUR 2.4 billion. As a result, we almost doubled net interest income to EUR 52 million compared to EUR 27 million in the first half of 2023. The EBT, earnings before taxes, reached EUR 134 million. The income tax rate came in slightly lower at 31%. In total, net income after minorities reached EUR 92 million, a plus of 23%. Ladies and gentlemen, this is the highest net income STRABAG has ever achieved in the first half year. We continue on Slide 11. As you can see, our balance sheet has once again remained very robust. We can still report a very healthy net cash position of EUR 1.6 billion at the end of the first half year. On this slide, you can see the typical seasonality effect we always face in the first 6 months due to the buildup of working capital, primarily inventories and receivables. Due to the high starting value from year-end 2023, the net cash position is higher than in the first half of 2023. Although we anticipated a noticeable reduction in advanced payments due to higher interest rates, this effect has not materialized for the time being. We are still seeing a very solid level of advanced payments. The equity ratio is still comfortable above our target of at least 25%. So there is significant headroom as we are reporting an equity ratio of 31.2% at the end of the first half of 2024. Just a brief remark on the group's equity position. We successfully completed the capital measures for the reduction of the stake held by Rasperia in March 2024. That is when the final step, the ordinary noncash capital increase was entered in the commercial register. As a result, the share capital of STRABAG SA increased from EUR 102.6 million to now EUR 118.2 million. As already publicly known, this reduced the share held by Rasperia thereby from 27.8%, to now 24.1%. To conclude, the solid financial position of STRABAG is still reflected in a BBB investment-grade rating from S&P outlook stable, which was confirmed in October 2023. Let's move on to Slide 12. I have already spoken about our high cash position. We are reporting cash and cash equivalents of EUR 2.4 billion at the end of the first half year. If you take a look at the cash flow statement, you can basically see the following developments. Cash flow from operating activities returned to negative at minus EUR 450 million. This is primarily due to an increase in inventories and receivables. Cash flow from investing activities was less negative at minus EUR 322 million. On the other hand, you can see somewhat higher investment in property, plant and equipment and intangible assets. On the other hand, outflows for company acquisitions were lower year-on-year. This year's acquisitions are focused on the further expansion of our expertise in MEP, mechanical and electrical. Cash flow from financing activities reached minus EUR 300 million in the first half, only a minor increase year-on-year. This year's figure above all includes the following outflows: the distribution of the dividend for 2023 in June and the payment of the capital restructuring to those free float shareholders who decided for the cash option as part of the capital measures. For comparison, the first half of 2023 included the payment for the acquisition of own shares in connection with the mandatory offer from 2022. Currently, there are no bonds outstanding. So no repayments are scheduled for the coming years. We move on to Slide 13. Here, we provide an overview of the most important acquisitions we made in the first half of the year. As part of our Strategy 2030, we have set ourselves ambitious goals. One is our ambition to become a general contractor for the decarbonization of existing building. Why is that? We are convinced that building operations will be an important driver for future growth. Buildings account for 38% of global CO2 emissions. At the same time, we know that the European building stock is technically outdated. Renovation rates are low and Europe is aiming to become climate neutral by 2050. This makes the decarbonization of existing buildings a major lever for achieving the climate targets. How are we approaching this topic? On one hand, organically, we have already built up MEP and energy management expertise within the group, which we will bundle. On the other hand, through acquisitions in order to complement our existing knowledge and to integrate specialized personnel to create a full-service solution for our customers. Therefore, we have acquired specialized MEP and energy management companies in Austria, Germany and Luxembourg, which are being integrated into our property and facility management portfolio. As part of our building operations business, we also want to strengthen our depth and value creation when it comes to the operation of complex infrastructure. We already have experience in technical operations management for such infrastructure like hospitals and data centers. Therefore, we intend to take over parts of the Vamed Group in Austria, especially the technical operations management for Vienna General Hospital. The acquisition is subject to regulatory approval. As you know, circularity is also a core strategy -- a strategic topic for us. In keeping with this key goal, we acquired Naporo, an Austrian-based pioneer in the production of hemp insulation. This is one building block of our way to the production of sustainable building materials and to achieve climate neutrality by 2040. On Slide 15, you can see an overview of our operating segments. In the North and West segment, we report our activities in Germany, Switzerland, the Benelux countries and Scandinavia. Ground engineering can also be found in this segment. The geographic focus of the South and East segment is on Austria, Poland, the Czech Republic, Slovakia, Hungary and Southeast Europe. The Environmental Technologies activities and the construction materials business are also reported within this segment. The International and Special Division segment comprises our non-European business and our global tunneling activities. In this segment, we also report infrastructure development, real estate development and Property and Facility Services regardless of where the services are carried out. On Slide 16, we take a closer look at our largest segment, North and West. In this segment, we recorded a fairly stable output volume of EUR 3.6 billion, slightly down by 1% in a year-on-year comparison. We recorded growth above all in our home market of Germany, primarily in civil engineering and transportation infrastructure. Building construction was still affected by a weak residential construction market. Apart from an expected decline in the Benelux countries due to selective bidding, output in the other countries of the segment remained almost stable. EBIT continued to improve slightly at a high level, rising by 3% to EUR 66 million. This is primarily due to the good performance in the home market of Germany. When it comes to the order backlog in the North and West segment, we can report an impressive development. Starting from an already very high level, we managed to grow the backlog by 14% to now EUR 12 billion. Based on the annual output of this segment, we already have a high visibility within 2026. Growth was primarily driven by a strong development in Germany, both in building construction and civil engineering as well as in transport infrastructure. Sweden, Switzerland and the Benelux countries also made positive contribution, although to a lesser extent in Germany, given the size of these markets. Coming to the outlook for this segment. Based on the continued high order backlog, a slight increase in output is expected in North and West segment for the full year 2024. At least for the remaining year, we expect the German building construction sector to be affected by the still declining residential construction market. We are confident that we will be able to offset declines in this area with growth in other areas as we did in the past. In this context, public building construction and private industrial construction projects are particularly relevant. In the German transportation infrastructure business, we are noticing an increase in tenders and an intensified price competition. Our high order backlog, however, allows us to use a selective approach to bidding. We expect the increased demand for energy transition projects to continue, besides civil engineering benefits from investments in railway and power line construction. Due to ongoing high competition in the Benelux countries, we will continue a selective bidding approach. We see good opportunities in industrial construction in the Netherlands and in Belgium, especially when it comes to the energy transition. In Scandinavia, the focus will remain on medium-sized projects, primarily in residential, commercial and industrial construction. In Switzerland, demand for construction services is expected to be stable in 2024. We will continue our growth strategy supported by the necessary investments. Now coming to our South and East segment on Slide 17. Output volume was slightly down by 1% at EUR 3.1 billion in the first half of 2024. We registered significant growth in Poland and in Romania. As expected, output in Austria declined due to the aforementioned situation in residential construction. We also saw a decline in the Czech Republic, which is a result of selective bidding. However, recently acquired projects should help us to return to output growth in the Czech Republic as well. As the share of transportation infrastructure projects is traditionally higher in our Eastern European countries, the EBIT of the South and East segment is usually negative in the first half year. This is also true for this year. EBIT reached minus EUR 45 million compared to EUR 7 million in the first half of '23. It was not possible to repeat the good result in Austria. After a substantial increase in the previous year, the segment order backlog fell by 5% to EUR 8.1 billion in the first half of the year. We recorded solid growth rates above all in Poland, the Czech Republic and Slovakia. By contrast, Austria and Hungary contributed to an overall reduction of the order backlog in the South and East segment. In Hungary, this development was mainly due to the withheld EU funds and the lack of public sector investments. Talking about the outlook for the segment, we expect the output to decline in 2024. Please keep in mind that we started from an above-average level. This year's output should be well above the 2022 figures. Austria is still facing a significant drop in demand for residential construction projects. We assume that the Austrian government's housing package will only have a delayed impact and do not expect positive effects before 2025. Despite a stable tendering situation, transportation in infrastructure construction is facing greater price pressure. In Poland, public tenders were down following government and local elections. On the positive side, the private investment climate has improved. We expect positive dynamics in industrial construction. Mobility and energy investments have also been announced. The situation in Hungary continues to be challenging. Positive factors are still projects for the automotive industry and its suppliers. In the Czech Republic and Slovakia, we expect an increase of new tenders in the transportation infrastructure segment. In building construction, stagnation can be observed with positive trends in the Czech public building construction sector. To sum up, the situation in Southeast Europe is mixed. In Croatia, we are focusing on transportation infrastructure and industrial construction. In Slovenia, we successfully acquired 3 projects in July worth roughly EUR 100 million, which puts us in a comfortable position for the remaining year and for 2025. Due to several upcoming elections, we expect public tenders to be delayed in Romania. Slide 18 shows the development of our International and Special division segment. In this segment, we generated a substantial higher output volume of EUR 1.5 billion, up by 10% in a year-on-year comparison. Following an acquisition of MEP and Energy Management and due to the realization of tunneling project, the strongest growth was registered in Germany. The ongoing fulfillment of major projects in the U.K. and an acquisition in Luxembourg also had a positive effect. With regard to the earnings situations, it has to be considered that the International and Special Division segment is regularly exposed to fluctuations due to large and mega projects. Accordingly, EBIT grew year-on-year by 57% to EUR 67 million after a decline in the previous year. This development is primarily due to the absence of negative earnings impacts in the international projects and tunneling business. The order backlog faced a decline of 3% to EUR 5 billion. We registered notable additions in Germany, in particular, the extension works for the U5 metro lines in Hamburg and Munich and in Italy. Due to the ongoing fulfillment of mega projects, growth was more than offset by a decrease in the U.K. and the Americas region. Coming now to the outlook for the segment. We expect to achieve a significant higher output volume for the full year 2024 in the International and Special Division segment, supported by a strong order backlog in tunneling. Following successful project acquisition in tunneling, further opportunities could arise in the field of mining in Chile. The international business is showing signs of significant output growth. Decarbonization and energy transition projects could open up new opportunities here as well. In our Property and Facility Services business, the expansion of our MEP energy and management portfolio for the decarbonization of existing buildings is progressing as planned, also by means of external acquisitions. With regard to our infrastructure development business, we expect new tenders in some of our core markets and in South America in the second half of the year. An increased focus will also be on the development of renewable energy projects. For our real estate development business, we do not expect a significant increase in transactions before 2025. In the current environment, we are actively evaluating opportunities arising from the ongoing consolidation in the real estate market. On the left-hand side of Slide 20, you can see our current shareholder structure, which has not changed since the last earnings call in April this year. A brief update on the shareholders of Rasperia. The actions brought by Rasperia against the '22 General Meeting and the '23 General Meeting as well as against the Extraordinary General Meeting in '22 were dismissed by the Regional Court of Klagenfurt in first instance and by the Higher Regional Court in Graz in the second instance. Those decisions are not yet final. They were appealed or can still be appealed. Until today, however, we have been successful in all court proceedings. Important is the reasoning of these court decisions, which fully followed our arguments for excluding Rasperia from the general meetings. As publicly known and published by us, we received major shareholding notifications from Oleg Deripaska and the Russian company, Iliadis, in March. According to these notifications, Rasperia was transferred to Iliadis, a move that had already been announced in December last year. As you have seen from public reporting and our ad hoc announcements, Raiffeisen Bank International then intended to acquire the STRABAG share package from Rasperia. In the meantime, RBI has announced that it canceled the planned transaction. I'm sure I'm not telling you a secret by saying that we would have preferred a non-sanctioned Austrian shareholder such as RBI over a sanctioned Russian shareholder. However, RBI's decision is understandable for us due to the very complex legal environment. None of these moves had a direct impact on STRABAG. In May, in connection with the planned transaction for STRABAG's shares, the U.S. Department of the Treasury's Office of Foreign Asset Control, or OFAC, placed Iliadis and Rasperia on the U.S. sanctions list. In June, Rasperia and Iliadis were also placed on the EU sanctions list. The reason here also was the potential circumvention of the EU sanctions by indirectly moving the STRABAG shares. Due to the EU sanctions regulation, however, Rasperia shares in STRABAG SE have been frozen anyway ever since Oleg Deripaska was sanctioned by the European Union. In our opinion, the transaction in Russia has not changed the situation. Accordingly, we have continued to report the shares as frozen to the responsible entity, the Austrian National Bank. We see these developments as further confirmations of our strict interpretation of the sanction regimes. It is important to emphasize that the inclusion of Rasperia on the sanctions list in the U.S. and the European Union had no direct legal impact on STRABAG's business activities. STRABAG SA and its subsidiaries are still not sanctioned. Our global clients, partners, subcontractors and suppliers can still continue to rely on our compliance with all existing sanctions. On Slide 21, you can see the share performance in the year-to-date. As you can see, we closed at EUR 41.40 at the end of '23. In the first half, we made substantial distributions to our shareholders. First, as part of our capital measures, we disbursed EUR 9.05 per entitled share. Second, we distributed EUR 2.20 per share as a dividend for the year 2023. In total, disbursements of EUR 11.25 per share were made in the first half year. On a pro forma basis, this would imply a share price of around EUR 30. We closed the first half of 2024 at EUR 38.7, which I would classify as a very robust performance given the high distributions and a still subdued development in parts of the construction industry. We continue on Slide 22. With regard to the outlook for the full year of 2024, we expect to be able to generate another solid result, which is supported by our strong half year results. As Management Board, we continue to expect an output volume of around EUR 19.4 billion, a target that should be well supported by the current state of our order backlog. We confirm our EBIT margin target of at least 4%. And when it comes to the net capital expenditure, the cash flow from investment activities, from today's point of view, we can also confirm a maximum of EUR 750 million.