Bilfinger SE (GBF) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to our analyst and investors inside call today. My name is Martina Kalkhake, and I'm joined today by our Group CEO, Thomas Schulz; and our Group CFO, Matti Jakel. We will start with a short presentation. Today, you will find the presentation also on our website from now onwards. We will then open up the call for questions. [Operator Instructions] The event will be recorded as usual. I will now hand over to Thomas, please.

Thank you, Martina. From our side, a big thank you, too, that you take the time here to participate in that extraordinary presentation and event what we are doing today. It's about actually to inform again about that, what Building is standing for, what our business model is, how we see the economy how we see the market, especially forward-looking up to 2030. And of course, with a lot of details what actually happened in September this year. When you look on our company, then we are covering as 1 of the largest in the offering scream from consulting engineering up to asset performance. This makes us for customers very attractive in the whole part regarding digitalization, competence and so-called skilled labor transfer. When we look into our own company, then you see that Western Europe, roughly with 1/3 and international roughly with 20% of company's top line gives to Central Europe roughly 50%. We act in 4 main industries with chemicals, petrochem energy, oil and gas, pharma and biopharma and an increasing adjacent industry. Important for us is that we are an asset-light company, but we are a company in transformation. We do that since, and that picture actually in the base is the same since '22, beginning of '23 and we have a clear target set up to 2030 to stay asset-light to have more than 90% customer retention to have more than or around 80% of our business similar or same across all the different customers, industries and geologies and geographies where we work on. When we then look into our business model, our business model is based on that we enhance the efficiency, the productivity of our customers. on their existing assets and their future assets, what the plan -- what they plan. This efficiency improvement actually generates for the customer a lot of so-called sustainability gains. The earnings potential what we have, you can split into 3 parts, so-called single trade single trade means we sell only scaffolding. The relative margin is relatively the lowest here because competition is bigger, you have more companies only doing scaffolding. Then the multi-trade relative margin is actually significant better it's bundling, like scaffolding plus insulation plus corrosion protection and painting. And, of course, the highest level what we are targeting for to each customer to offer that the so-called performance partner where the whole range of building us competence hits the client and gives actually the client the biggest upside in efficiency, so the biggest amount of positive EBIT contribution for our clients. Roughly 70% of our business is OpEx related and roughly 30% CapEx. And you see here our 4 business areas with asset performance, consulting, engineering, excess and insulation and prefabrication and installation. 80% of that business is nondiscretionary. What does it mean? It means if you have an asset, a processing plant, if you are not doing maintenance, the plant will stop. The plant will not have an a permit to go on. The plant will have significant higher investments needed if you postpone or if you stop or if you would cancel necessary maintenance activities, which is the core of Bilfinger. All that, what you see on that slide is actually what we communicated and what we are running our building a company on it. Our customer relation and customer feedback on that is so intense that we have daily direct contact with most of our clients because most of our employees are actually sitting on customer side and are an essential part of customer doing. When we then look into the economy, we don't change or we didn't change our picture on that how we see it. When you look to that, the addressable market is roughly the same as we announced in December '25. That means roughly a year ago. But we outlined here, of course, the different development and the different growth potential between Central Europe and the whole global Bilfinger range, which means from North America to the Middle East. And you see that Central Europe in all the industries when you look through a quite lower in the growth rate. And this is structural development, what we see for quite a while for multiple years, minimum since '22, and we foresee that further. But that does mean that it goes negative or that means that it would stop in Europe. It is just a lower growth rate as we have it in other parts of the world, which explains our communicated strategy to have, especially in the international segment, that means North America and down to the Middle East, higher growth rates than we have in Europe, especially in Central Europe. That means for us in the whole way, how we see the market, the so-called outsourcing share. That's the share of what customer gives us as work. And here, you see by industry, the potential of that, what the customer is doing in the area of Bilfinger, what they are willing and what they do step-by-step giving to us or others in that market as an outsourcing share. And you see in the chemicals by 60% as high as in oil and gas, energy is based on customer how customers are built up a little bit lower here. We have to do it, for example, with energy providing companies partly owned by cities and [commons] and of course, with the lower part with the pharma and biopharma. In total, the whole outsourcing share potential for us as a group lies roughly by 50%. The customer core, the 30% is what customer generally would like to keep on their own. If we then look into that what we just said, our business model announced in '22, '23, how we work, how the earnings multiple and EBITDA part is for us when we go into the different businesses. Now what did we do and what will we do to go on to manage that, what happens in the Bilfinger world. You see that in especially Europe, chemicals and petrochem is since years on a downward trend in their importance for the global market. You see that in our figures, in '22, it was 30% of the top line and we manage towards the 20% in the first half of this year. Last year, it was 23%. It goes with the customers, it goes with the industry, and we are a valid partner. To counter-compensate, we did a lot of work, and we will do a lot of work more and agile will help in that, of course. We increased, especially in the energy part especially in Europe, which is -- or which was growing from 20% up to close to 30% what we see in the first half of this year. The other industries, oil and gas, pharma and adjacent industries, all already have quite an impact from North America and the Middle East, Eastern Europe and with higher growth rates, which helps us to maneuver in these industries with a higher business potential in the future. Now to Germany, especially on the right side because Germany was a very large part in our top line based on all the things, what happens in the country and what we see to come in the next few years, we actually decreased from close to 25% now to 18%, and we foresee that Germany will go with the business, what we have on a site move, which means in the percentage, it will go down relatively to the total group. When you look into that, you see that we were growing 8% per year when Germany had a site move. That was from us a strategic decision to drive that based on that what we see in the German market happening. Out of that, what happened in September. On the top, you see the opportunity pipeline, and it's actually worth -- quite worth to look into that. It starts with index 100 in September '24. Then you have the first dark blue bar, that's the May '25 to August '25, and then you see it on the right side for this year. The figures on top actually shows how much more potential we have versus the index September '24. And it's easy to see that actually in '26, the opportunity pipeline May to August actually looks significantly better than we headed in our successful year '25. That we actually saw coming in '25 and for us, '26 was for that at the end of '25, quite a positive year to come, what we definitely didn't have. So what happens in '26 was we had a slow start in the year. The weather conditions were more severe and longer than we had it in the forecast and based on the Iran war, geopolitical uncertainty, which actually led to a more hesitant and postponing customer behavior. But in the mid part of the year, especially towards the end of Q2 and beginning of Q3, we saw quite an improved outlook. That changed when special activities happen. I don't want to go more into details in September and customers informed us that the postponement and the inferral, not cancellation to make it fairly clear of ongoing work or additional the call-offs on top get postponed. We have, of course, we report on the full year '26. With that, we had to change our view completely on the year '26 despite the fact that we already did since the severe weather conditions at the beginning of the year, corrective actions. We saw that the volume -- we saw the activity level towards the end of this year, significantly lower in the second half of the year despite we actually months before, believe it will be significant higher than especially the first half of the year. That led to a new outlook and the program agile because what hit us was especially in Central Europe, not to be agile enough in such a situation. And that situation that we were misreading that situation for the second half so much, of course, is not only driving the agile program. It drives a significant more detailed view into that, what we do already with all our customers forward looking. Out of that, I would like to give to Matti to lead you through the financial figures related to it.

Thank you very much, Thomas, and good morning from my side. And also thank you for taking the time to be with us on short notice, but this is very important for Bilfinger as we are here. So what happened? Now I'll start with the revenue outlook that we gave in March of '26 where we said it would be EUR 5.4 billion to EUR 5.9 billion, a range that already indicates that there is risk in the market and in the business. . When we finished the first half and came out with the numbers, we did not change the revenue outlook. EUR 5.4 billion to EUR 5.9 billion. However, as Thomas alluded to, when we revised and reviewed the numbers in September, we came out with an updated outlook and reduced it to EUR 5.3 billion to EUR 5.7 billion, still a good outlook for 2026. So where did it happen? Pretty much across all the geographies, the reduction [indiscernible] looking at the midpoint from EUR 5.5 billion to EUR 5.5 billion [Technical Difficulty] international, roughly minus EUR 50 million. And then in the other operations business, an increase of roughly EUR 50 million. So that gives you EUR 150 million. That was the adjustment that we had to take on the revenue side. More significantly was the reduction on the EBITDA side. Again, starting with the outlook for the year, 5.8% to 6.2%. And as communicated, we were targeting 6.0% midpoint. We took that down a notch after half 1 when we saw the developments related to weather conditions, political uncertainty and the performance of 5% EBITDA for the first half, we indicated that we would come out at the lower end of the range at 5.8%. I then came July and August and our review in September, and we took the EBITDA outlook down from 5.8% to 4.6% to 5.0%. So again, midpoint of 4.8%, giving you about 100 basis points reduction, and that is the adjusted EBITDA. If we include agile then it gets us down to 3.2% to 3.6% for reported for this year. So what are the components of the EBITDA reduction, certainly reduced revenue takes gross margin out of the business, then we had the continued underutilization that we did see in the first half of the year. We expected a much better momentum that did not happen and that we don't see. Pricing has not been an issue for us, but then product mix where customers give us less complex work and works that don't give us the additional margin potential that we typically see in the second half of any given year and very little change on SG&A and other components. That is the makeup of the reduction in the EBITDA, almost evenly distributed between the effects, reduced revenue under utilization and product mix. What does it do for the cash flow? Again, initial outlook was EUR 250 million to EUR 300 million with the small change in EBITDA at half year. We did not change the free cash flow outlook, but we did it as we're now expecting lower EBITDA for the full year and we adjusted the free cash flow accordingly to EUR 180 million to EUR 220 million, keeping the cash conversion rate expected around 80%. Importantly, again, just for completeness sake, a chart that we showed a few weeks ago comparing first half of 2025 with first half of 2026. Revenue was up, but EBITDA margin was flat free cash flow was lower. However, in the first half of 2025 with a significant onetime payment that came and has not repeated. The previous outlook, that was the initial outlook, EUR 5.4 billion to EUR 5.9 billion, 5.8% to 6.2% and EUR 250 million to EUR 300 million was the initial outlook updated to the numbers I have mentioned before. Again, important here, adjusted EBITDA before Agile, 4.6% to 5.4%. And the midterm targets, completely unchanged, 8% to 10% CAGR, 8% to 9% EBITA margin and a cash conversion that reaches or exceeds 90%. The story for Bilfinger as we see it in transformation. We started off in 2022, and the improvements are very visible here. We came out with a program, and we have 2 strategic levers. One is operational excellence and the other 1 is market expansion. Those levers have shown significant improvements in the last 3 years, both on the revenue side but also on the margin side and certainly on the cash flow side, which is not shown here. Now 2026 is a setback. That's very clear. And we're dealing with that setback with our program Agile and a number of other measures that we are enforcing and bringing forward. So the revenue projection into 2030 is fully intact. We expect a growth rate of 8% to 10% annually, and it has to be mentioned again that these numbers do include mergers and acquisitions, which continue to be part of our strategy implementation. Nothing has changed, not the geopolitical conditions or this year's performance, nothing has changed there. And the same accounts for the EBITDA margin progression very nicely achieved in the years since 2020 -- 2022, sorry, until 2025. So '26 again, is a setback, but Program Agile, we'll close that gap to bring us back on the trajectory that we have shown here to 8% to 9%, again, including M&A during the course of the next few years. And that brings us to Program Agile. Back to Thomas.

That's my thing. Thank you, Matti. So the program agile actually hits that where we showed quite a weakness, especially in Central Europe regarding agility in the set as we act in such a very volatile business environment. It is actually the strategic acceleration of planned activities in the long-term strategy of our group up to 2030. As we did from '23 on, we did a lot of activities besides that, what we standard-wise report on just with the business because we saw that the time is there step by step, the improvement and that pays off. In '26, this didn't happen. In '26, we showed a weakness which is unacceptable. That weakness, we looked, of course, and analyzed back and forward, you can imagine and we looked, of course, into the strategy, which kind of activities we should have been highlighting more or doing earlier or faster. And that is what we do with Agile. In these special -- in this special program is included the final step for global shared service organization, the final step for a global consulting and engineering structure. This helps us significantly in the efficiency of our own company, which means operational excellence, and especially with the consulting and engineering as a global organization in the market expansion. So it will not only give us a higher efficiency. It will give us a higher growth rate and a better earnings potential. Then we enforce the consolidation of locations and locations means building locations. That means we combine smaller ones, we shut down once we really don't need and that activity we [Technical Difficulty] customer sites where the future is not there any longer for us as Bilfinger, and we build up new sites with a better future. That is nothing new. It's just speeded up in close contact with our customers. The net capacity reduction is up to 1,500 FTEs and it cost EUR 75 million as a one-off. The cases and the strategic activities we take are based on feasibility and viability and, of course, to improve our leverage, especially with a focus on Central Europe. The EBITDA improvement will be EUR 75 million from the year 2028 on. The planning is ongoing. Planning phase is not long. As I said several times now, we had this initiatives already planned only on another time line and the execution will be predominantly next year in the first half. And then, of course, we have, with the global shared service then up to the beginning of '28, the finalization so that we have a full year effect in '28. And as you know, from the efficiency program, it is managed the same like a military operation, very detailed in transparency towards you as well, of course, internal and we will report each quarter from now on, on the following items: capacity reduction, onetime cost, EBITDA improvement and as well as far as we are with the global shared service and the consolidation of locations and of course, the global consulting and engineering setup. As you see on the right side, the target set of the first of January '28, so that we have the full year effect in '28. And each quarter, you see on the right side than the [Harvey balls], we will report how far we are. it's copy and paste of the well experienced and well managed by the Bilfinger Colleagues Efficiency Program. Out of that, looking again towards the 2030. The 2030 is what we planned from '22, '23 on. The activities what we have are lined out. We had multiple Capital Market Days, especially on the December last year. We informed our EBITDA bridge, revenue bridge, M&A focus, where we invest, how the growth rates are, why we are doing what we do very much in detail. And that will bring us to our 2030 midterm targets with 8% to 10% growth and 8% to 9% EBITDA and more than 90% cash conversion ratio. But 2006 was not good. We didn't see the second half of the year properly enough. We took the right -- from our point of view, the right measurements and conclusions and agile is the big part of it. which will then bring us from '27 to '28 back on the right track and road. With that, I would like to give back to Martina.

Thank you very much, Thomas and Matti. And ladies and gentlemen, we will now start the Q&A session. [Operator Instructions] So looking into my computer, I see that we have questions on the telephone line. We will start with Olivier Calvet from UBS. Olivier, we should not be able to hear you.

Thanks for doing this. Thomas, you talked about projects being deferred, not canceled. And I was just wondering if you could talk about sort of the plant closures in the German chemical industry and their impact for you. Are you involving any decommissioning work? Have there been additional closure announcements as part of your reassessment in September? And then secondly, helpful to see the revenue loss by segment that you've shown relative to your initial guidance I know it's a bit more in Western Europe. Could you perhaps give a sense of the sector level revenue loss in the different geographies you're operating.

Yes. Thank you, Olivier. Yes, what we see is not cancellation. We see actually a timing effect. Customers informed us about ongoing investments, what they want to do. And of course, we are very early informed partly more than a year before to do that at a certain time in '26, for example. And then based on the Iran war, it started to come in that they actually postponed within '26. We are with the new organization in very, very close contact with the clients, and we actually buy side by order, by line, we know what happens. What we saw is that it was pushed into the second half of the year. and we prepared to take that in the second half of the year. Then you get into a fairly high revenue recognition, you have to organize a lot because, as you know, we have 10 thousands of people on customer side, and it has to fit into like a logistic battle plan that we can then fulfill the work. That's our daily job. That would have been leading in so-called operational over-absorption and customers were very clear to us that we are a long-term contractor for them, a big partner for them that they don't want to be disappointed. Then, in the second half of the year, I related a little bit in the presentation that change and things were postponed further. The other part in that, this is the maintenance part predominantly what you can't push a lot out. Otherwise, you lose your permit, otherwise, you lose your performance. What happened on top with it was the German -- especially in the German chemical industry because you asked for a plant closure, got temporarily very high demand based on high energy cost, but more not getting the oil and gas into Asia out of the Middle East based on the Iran war, that the production in German chemical plants or Central European chemical plants went up and customers informed us few weeks ago, they really want to go on to produce as much as they can and everything what we can avoid to -- in disturbance that means turnaround special rework in the plant, we should please postpone. If it comes to the closure, yes, some of the closures happened earlier, not in 1 or 2 years, we are involved in some of them. But when you have a plant closure at first, you have to make a check up what you do as a first step, second step and so on, a real planning on it. and that planning is ongoing, but it is not real maintenance work yet. It will come later, but more plant closures faster than we all had in the books. By the way, the industry too happened. Why do we know that? Because customers inform us very early when they want to do something because the last thing what they need is if the main subcontract -- or the main contractor on site for maintenance would get the information out of media and the next they would leave the site. That's not what they like. So with that, I would like to go to Matti regarding the revenue.

Yes, sure. Looking at the geographies and the sector level, that's what you asked to Olivier. Western Europe, what we did see is mostly in chemicals, more so in petrochemicals, where we saw a reduction in revenue activities. Central Europe as well. As Thomas explained, chemicals are producing a lot this year given the logistical constraints across the globe, and they are benefiting from this. We saw all the announcements from the chemical customers that they would have higher-than-planned revenues. Which then leads to the fact that they're doing best maintenance. So that is certainly consistent there. In international, it's a bit across various sector levels. If I look at the U.S., where we're doing also business for the government, the government is pretty tight with spending, so it's more in the adjacent industry there. Looking at the Middle East, we had the impact from the Iran conflict, the ongoing. So that's oil and gas, it's chemical, petrochemical. So it's across the sectors where we are operating. Just to give you a little bit of flavor where it did happen.

Thank you very much. The next question is from Michael Kuhn from Deutsche Bank, who's also on the telephone line.

One follow-up as you just mentioned that production in German chemical plants or across Europe is actually up I see the point of the short-term maintenance deferrals, but if we see, let's say, the uncertain situation continuing and probably leaving down about the reliability of supply chains couldn't that be a medium-term positive as we will probably try to have more production capacity locally. That would be the first question. The second question on Agile and the time line. I think on -- the challenge and 1 box to tick near term is negotiations with employee representatives. I'll be curious to know about the planned time line and whether you think you will have full clarity here maybe by year-end .

Thank you, Michael. At first, yes, midterm, if that is the case, that this high level of uncertainty regarding energy supply into Asia, especially China, would go on. Of course, that would be quite positive for the specialty chemical, petrochem industry in Europe, especially in Central Europe. Do we foresee that there we listen to our clients. They actually are not that overly positive on that, but you never know. We are prepared for that. We know that what they postpone has to happen. We know when they work more, more maintenance comes because it is really vital to understand. You can't go on with an asset in processing and not having maintenance on it for a long time. It really doesn't work. It's not a car where you can do 30,000 or 50,000 kilometers without any maintenance. These are highly complex plants. They go up and down in the capacity. They have different influences. It is necessary to do the maintenance. Now to the time line with the Agile, know that we have great workers council. We know that we have great colleagues. It's a pity. It's nothing to be proud of to announce to let up to 1,500 or more colleagues, FTEs, as we call it, in that definition, go. It is necessary because the time effect of that volatility and the impact on our customers demands it. That we have these things in the drawer as strategy and that we planned to do year-on-year with less impact on our employees, I think it's obvious. But management, we see no other way than to have the agility, what we need without doing this Agile program. So we do it. to the fact with the workers' council, we are already, of course, in negotiation and discussion and consultation with our colleagues in that. In the efficiency program, we had a lot of very vital positive and good input from them, good ideas from them. And of course, we will take that on board. We are quite sure that the time line, what we showed will happen. I can say, we are through to the year '28 with a full year effect. Thank you, Michael.

Thank you. The next question is from the phone again from Andreas Wolf from Berenberg.

Several -- the first 1 is related to the similarity of your business. So you mentioned that around 80% of your business is similar across geos. Could you elaborate on the mobility of your workforce and the extent to which you can reallocate capacity from regions with lower utilization to those with higher utilization. So that's my first question. And the second is related to that. Could you also comment on the rental [indiscernible] stuff that is being reduced. Is it part of that 80% business? Or shall we look at the adjustments?

Sorry to interrupt. Could you repeat the second question, which we couldn't hear from...

Okay. Sorry. Yes, sorry. Could you also comment on the 1,500 staff that is being reduced? Is it part of that 80% business that is similar across geographies? Or is it part of the 20% business, which cannot be -- which is not repeatable in other regions. And then I have a question on the continued consolidation in the chemicals and petrochemicals business, especially in Germany and Europe, there is a potential takeover being discussed in the media. How should we look at the consolidation of the industry and the impact of that on Bilfinger, would you expect any impact from ongoing consolidation? My third question is regarding value-based selling. Could you please comment on the progress of building in selling bundled services to clients and the extent to which this is contributing to revenue growth and margin improvement. So have you made progress here since the announcement at the CMD? And then my last question is on the on the maintenance work that cannot be postponed. You mentioned on 1 of the last calls that there are areas where clients must carry out maintenance because otherwise they will lose certifications and the permission to run sites. How big is the pressure for clients right now with regard to those maintenance works to the maintenance work that cannot be postponed.

Good. [Eddie] thank you very much. The first, 80% similar business. When you look into the figures, what we showed on the slide, how we were able in the last few years to move out of chemical petrochem in the top line. We actually went down from 30% roughly down to 20% in the top line. And at the same time, we increased in energy from 20% to 30%. And we didn't have a lot of people movement in -- that we laid off a lot and recruited a lot. This shows a level of mobility, what we have in the organization. . Why could we do that over the years like that when we were not able to do that quick enough here in the beginning of the second half of the year. It is actually by country, a little bit different how the mobility is based on contracts, based on tariffs, whatsoever, and if we have some time to organize it, we have a very mobile organization. But if it goes that quick within weeks and months, it is more difficult. I can be fairly specific, let's take Western Europe, which took quite early, the same as Central Europe, corrective actions for a slow start in the year, weather conditions and then the Iran war you saw relatively fast positive impact on the bottom line of Western Europe, when Central Europe needs just longer time based on what we have to fulfill to actually improve the figures when we move people or when we have to let colleagues go. Second, regarding the 1,500. Where the 1,500 people are leaving. We look everywhere as we always do, where we do so-called efficiency improvement and strategic activities. There is no holy cow in the group. That's number one. Number 2 is the 80% of the necessary work what we do in -- with maintenance related, which is what we call nondiscretionary business, and the 20% on top actually people are the same people doing it. When we then look into the 80% similar work and the 20% on top are so-called industry experts. They have 4 examples, special knowledge in nuclear. What you have to have no matter what you do in nuclear. So 80% of our workforce and of our people can work on all kinds of projects in any kind of process industry, 20%, you have to have to be competitive, to be actually competent to work in beverage to work in nuclear to work in producing catch-up or whatever you need some knowledge of that. So we have no figure based on that, how we have to let our up to 1,500 FTEs go. Third thing is the consolidation of industry. in all the times where you have pressure in production where you have an increased competition no matter where it comes from China, U.S. or anywhere in the world, you see that customers in the most or in the hit areas are looking into if they can merge and getting with that stronger, having more supply chain in-house, having less overhead on the total business and so on. For us, as a leading industrial service provider. Of course, for us, it's good if we deal with larger customers because larger customers are more honored to buy from us bundled business, more than 1 trade, multi-trade up to performance partner where we are, what we call married with the client on a site and being part of all the activities and decisions. That is generally for us a normal movement. We can act in both ways. But of course, we like when customers are getting bigger. Then to the value-based selling, which goes in the same direction. As you know, we announced in December that we built last year, we built up a sales organization to go more on new sites. We see quite a lot of positive movement. The speed is good despite that what happened in the market, especially in the second half of the year. We see that the model, what we sell to go to the client to inform and to calculate what is actually our bottom line contribution is highly appreciated and very competitive in that. But it takes, as we said last December, quite a lot of work. Then the last question was about that the pressure on clients to do maintenance. I make it like that the -- we give the client a kind of a cookbook when maintenance has to happen as an optimum, which means it makes it us as a supplier easier to organize it, and it is for the customer the best cost and return ratio. If the customer prolongs that and changed the so-called milestones, which means that our people are on site and doing basic work and then additional maintenance work up to turnaround is then prolonged. Then as more you prolong that as more work is necessary. That's the way it is. You see that actually an infrastructure if you don't maintain, let's say, a bridge for too long time, any time it's the end, and you have to replace it with a complete new bridge, which means from the moment where you should do the maintenance up to the moment when you replace it, there are multiple steps where you still can act, but as long as you wait a significant more you have to invest. But that doesn't help us in 2026 based on timing. Thank you.