Bilfinger SE (GBF) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you very much for joining our early call this morning. My name is Martina Kalkhake, and I'm here today with our Group CEO, Thomas Schulz; and our Group CEO, Matti Jakel. We will start with a short presentation today and then open up the call for your questions. [Operator Instructions] The event will be recorded. I now hand over to Thomas.

Thank you, Martina. Good morning, everybody. Let's go directly into our communication package what we have. So when we looked into the actual situation, we have the following comments to make on that, what we see in the market and what we see versus that what we said actually a few weeks ago. We see with especially the last weekend event and the significant increased uncertainty in the market, actually not in the Middle East, actually, in a lot of other areas, too, that the uncertainty on the customer side based on not able to predict from their point of view, energy costs and further developments as an example, that we have here no improvement, which we see and hear and got from our customers fairly clear that they are with all what they can being more on a break until they have more certainty. When we look into that what we saw in June 2026, which means at the end of the quarter 2, we see that this positive momentum, what we had in June in the opportunity pipeline as well as in the order intake actually for the longer or midterm part is definitely there, but short term, not. We see that the orders received in the last few weeks is below expectation level. I can say it like this. There is a big kind of package of turnarounds of necessary, technically necessary work, which is just not going on and getting released into our books as well as into our people. This delay of investment decisions hit us in increased underutilization and under-absorption. This underutilization and under-absorption, we see is not from our point of view, for the Bilfinger Group, acceptable. That's the reason why we actually take a lot of planned initiatives out of the strategy in a faster time. And we call that Project Agile. I will come more into the details for that. The underutilization, what we enjoy at the moment is, of course, the big trigger for the EBITDA margin outlook. When we run in underutilization, especially in high-cost countries like Germany, when we run with an unfavorable product and country mix and when we have a lack of larger and complex orders and higher-priced projects then we get a hit on our contribution margin, gross margin as well as then, of course, on our EBITDA. Out of that, we decided to adjust the outlook. When we look into the outlook, then you see on the top line, the revenue, we have, as a previous outlook, 5.4% to 5.9%, that is now lower to 5.3% to 5.7%. We have an EBITDA margin in the previous outlook of 5.8% to 6.2%. That is now down to 3.2% to 3.6%. Important to say is that the outlook without the Project Agile would be 4.6% to 5.0%. And the free cash flow from before EUR 250 million to EUR 300 million we put to EUR 180 million to EUR 220 million. The midterm targets for 2030 and especially through the Project Agile, will, of course, stay and we will achieve that. Out of that, I give up to my colleague, Matti.

Yes. Thank you, Thomas. Good morning, ladies and gentlemen. Just brief look into the segments, how the changes are reflected there, which also gives you an indication of where the problem areas are. Western Europe, we see about EUR 100 million less revenue than what we had predicted. So we took the outlook down to EUR 1.7 billion to EUR 1.9 billion, and a slight decrease in the adjusted EBITA margin now 6.8% to 7.0%, so quite well performing, but not at the rate that we had expected a few weeks ago. Central Europe revenue also EUR 100 million down but the margin is significantly down from 5.8% to 6.4%, now 4.6% to 5%. And the main reason is underutilization, under-absorption and a few of the other matters that we have discussed already. But that's the weak spot here. And international, just some slight adjustment on the revenue, EUR 50 million down, but also an impact from the various geopolitical effects here. So we took the margin down from 4.2% to 5% to 2.5% to 3.5%, although bear in mind that the numbers -- the absolute EBITDA numbers are small, so any EUR 1 million change has a higher impact on the relative margin. And reconciliation for the group, that's EUR 50 million up. That has to do with the revenues mix. And on the profit side, also EUR 10 million down because we see some issues that we have to deal with at group level and the reconciliation. So that's the makeup of the updated outlook for 2026. Back to Thomas.

Thank you, Matti. With that into the Program Agile. The Program Agile is actually speed up of initiatives, what we have planned. Actually, quite a lot talked on the Capital Markets Day in December last year. This speed up means decreasing some presence in some area, increasing in others as well as further optimizing, like shared service center. That acceleration instead of doing over 2 to 3 years as planned, that acceleration cost money. But it will put us into a situation that years like '26, where we have a slow start, the Iran-war, weak decision-making in the market or in the political spectrum with influence of the market that we are better set up to tackle with that. The start is today, the end is the end of '27. The one-off costs is EUR 75 million, which is planned to take in 2026. The reduction is up to 1,500 employees. In that reduction, you don't see, of course, that we build up because we have quite a lot of growth areas where we invest, that gets more accelerated and the savings with full year effect is in 2028. But of course, we see the year '27 not as a repeat of the year '26, which means the program will already deliver something in '27. And with that, I give back to Martina.

[Operator Instructions] And I already see the first question, which is on the telephone line from Craig Abbott from Kepler Cheuvreux.

I guess what was rather shocking was, of course, the magnitude of the negative operational leverage. We understand that due to underutilization and -- but you also mentioned in the press release negative sales mix effects. If you can maybe elaborate on some of these, that would be helpful, like which end market specifically, what types of works, what gives you the confidence that we will likely recover in '27? And also given the magnitude impact on the margin, it raised question, are you also seeing pricing pressure?

Yes. Thank you, Craig. So the -- we work here with two impacts. One is the underutilization and the other thing is under-absorption. When we look into, we have, of course, especially if it comes to larger projects, which are planned for quite a while, where we had long-term negotiations. I take for example, in Germany, gas power stations, nuclear and so on, there's quite a lot in the pipeline, which will come but got postponed, and that leads to the fact that we have engineers underutilized. And you don't need a lot of engineers in high-cost countries underutilized to get quite a significant EBITDA impact. The other part is the under-absorption, which is partly pricing too. That means that we see of course, demand and work, but the work is of less complexity in nature, just simple work, keeping plants up and running, no real turnaround, no improvement, no efficiency work to improve the site, and that is generally less profitable, which is a so-called a product mix change where we see that the less profitable work has a higher percentage in that what we do. That all with a company like us in a margin area 5%, 6%, a little bit more than 6%, you don't need a lot of that to get a kind of impact of that magnitude into the contribution margin and with that into the EBITDA. We see in Western Europe, where we run just on a better product mix as well as a better absorption that the profitability is significantly better. So out of that, it is a mixed. Then we have an industry situation. You saw that with pharma, where based especially out of the comments from the German Government, some of the pharmaceutical companies actually lowered their investment potential, which is directly not hitting us, but it brings uncertainty in the market and a lot of projects and decision-making for new work is quite delayed. Of course, the pharma industry is quite a profitable area for us.

My question on the price, pricing pressure.

As I said, when you look into the under-absorption, that means that we sell less complex work, you can say there is, of course, a pricing pressure in it too because if customers say, I need more simple work then, of course, the charged amount of money per hour is lower and that is an indirect pricing pressure, too. That is what we see temporarily because -- and that was the confidence what we had a few weeks ago. It is nothing what we -- it's not about what we see what could come. It is actually work what is absolutely necessary to keep the plants up and running in a very efficient way.

We have the next question on the telephone line from Michael Kuhn from Deutsche Bank.

It is mostly about, let's say, temporary with the structural effects. You partly commented on it already. So the situation obviously is that some projects, major shutdowns, et cetera, can be delayed for a couple of months. It looks like like they are now delayed into next year. Is that coming with the risk that say that part of those capacities will be like permanently out of the market, bigger plants being shut down or will we see then a major revival next year and also for the some of the bigger projects for new build? You mentioned, for example, the power plants. And on the Agile Program, you said that this is mostly an acceleration of things that are planned anyway. So in that program, EUR 75 million, that's about 1.3, 1.4 percentage point margin equivalent. Is there anything new? And what does it mean, let's say, for the medium-term margin trajectory? Because obviously, the starting point will be a lower one than initially predicted about a percentage point. So how will the medium-term margin trajectory look like from here?

Yes. Thank you, Michael. I take the part with the project and what we see in the market. Actually, the -- we don't have really big cancellation of things which were really planned. There is a lot out of the pipeline, but that is ongoing for quite a while. This is not new -- of, for example, some green project when you here into Shell, BP and so on, how they act on that area. But for us, it makes a hell of a difference if bigger projects in nuclear, gas power station, bigger turnarounds are actually each month getting postponed, because, as I explained before, we have the people available. And if we decide to take these people out on a certain project into another one, then, of course, the customer will not get that what they want to have. On the other side, if we keep it there and it doesn't come, it brings us into under-absorption. The fact is that we see in next year, then the demand and the need to do these things significantly higher than we see this year. And when we talk with our clients in the vast majority, they see that themselves, but the uncertainty what they see in the energy cost, especially in Germany, is too high that they release and go with that what they actually had planned for and what they see technically as necessary. So out of that, when we look into that, we expect that we have a more normalized year in 2027. That's the reason why we take the Agile Program into account, which is just a significant higher speed on initiatives, what we wanted to do over 2 to 3 years and actually taking and breathing with the normal business, that was the business planning what we communicated in December last year. If it comes to the second part of the question, Matti?

Yes, Michael. Anybody who has been in contracting or construction knows that acceleration does cost money. But we see a definite need based on our revised expectation for second half 2026, we have to do something. You asked if there's anything new in the program. As a matter of fact, there's no new ideas or activities or measures in the program. We just take those activities and measures forward and that is why we need to take the EUR 75 million provision into 2026, so that we can implement those measures, capacity adjustments, consolidation of locations, setting up shared service center and so forth. All of this was part of the strategy implementation and execution plan until 2030. So we take those forward. That does cost us money. So it's hitting 2026 profitability. But the margin trajectory that we had in mind for midterm doesn't change only for '26 as we take those measures into 1 year instead of spreading them over 3 to 4 years.

Maybe one quick follow-up because obviously, there is a, let's say, hit from the high energy prices, especially for things like the German chemical industry. If we see a prolonged higher energy environment, would that come with additional risks?

We analyzed the market, and that was the work from the beginning of the year when the year started very slow with the long winter time. There is a difference between that what is technically necessary, what we, as experts in maintenance and asset performance actually see and the customer too versus that what the, let us say, the CFOs on the customer side will give as a money into the technical teams to realize the necessary work. The technical people see definitely a significant high demand to do all these jobs and all the work. And it will not get smaller from that. But the pressure what they have, the pressure what they have on their own cost structure, with their cost-cutting measurements as well as the pressure on profitability, combined with the uncertainty of the energy cost, put the foot on the brake. If as longer they put the foot on the brake as more expensive and efficient asset performance of the asset will be, that is how we see it. Then we have the second -- so it will come. The second in it is regarding the projects. There are, of course, cost measurements. There are, of course, delays based on the general situation, not only the Iran-war, actually, political impact kind of paralyzed situation in some of the countries, Germany, for example. But of course, in the -- with these projects, the need is bigger now than it was 2 or 3 months ago to do something. But if we take, for example, the gas power stations, it takes just too long time to get it into the books of the customer and with that into the rooms where we negotiate and finalize then these deals. The time element hits us here in '26. And that is what we see in the figures. So we see for '27 actually an improved market environment. And when we look back, that's our actual scenario. When we look back then on '26, it's like quite a step down, but temporarily. And '27 back on track.

We are now turning to questions on the chat in the webcast. So the first question is from Andreas Wolf from Berenberg. The question is, which verticals skill sets and specific higher-cost countries with the capacity adjustments effect? Do you expect this business to return once the economic situation improves or do you see structural changes on your client side? If you view the weakness as temporary, will Bilfinger [indiscernible]

Let's start with the last part of the question, and thank you, Andreas, for the question. The lower cost location is not -- has nothing to do with the qualification in Germany versus other countries, you see that Germany is actually -- they're definitely a champion. And it has nothing to do with the qualification. We have very good people in high-cost countries, and we have very good people in low-cost countries. So the work, what we do in high-cost countries is, of course similar or same as the work that we do in low-cost countries. Oil and gas in work on assets in Norway or oil and gas work on assets in the Middle East are more or less the same work, what we do. If we then look into the verticals, as we said, with skill set and specific higher-cost countries regarding the capacity adjustment, we saw and we communicated that, that some areas in -- especially in Central Europe, are for the future, not growth areas because we have some plant shutdowns and just the work is not enough there to be -- to have a big group there. We saw that in a way that we would transfer these areas in a 1, 2, partly 3-year change into the other areas in Central Europe, too, for example, in Germany, with the buildup of the sales force and with that attacking new locations to build that up their new people. So the -- to ramp down on one location cost quite a lot of money if you accelerate it and to ramp up cost more money if you do it fast, too. So it's kind of a shift what we do faster. The capacity what we see in Germany for the Bilfinger Group is actually what we -- and we communicated that on a side move. We actually have in Germany in the last few years on the revenue side, roughly a side move because we were able to have business which disappeared to replace with new business in other locations. That is what we have to accelerate. And that, of course, is a big part of the cost. Then the next part, the middle question, do you expect this business to return once the economic situation improves. Yes, we expect that, but in some cases, especially in Germany, in other locations, not in the same location.