Earnings Call: Q2 2019

Aug 14, 2019

Good afternoon, ladies and gentlemen, and welcome to our analyst and investor conference call on the results for the Q2 of 2019. We will start with the presentations of Tom Plates, CEO and Kristina Johan Zong, CFO. And afterwards, we are happy to answer your questions. With this, I would like to hand over to Tom Plates. Okay. Thank you, Bettina, and from my side, a warm welcome and good afternoon. On Page 2, I think the headlines are obvious for us. We're looking at Q2 as being a very robust quarter. You'll see why as we go through the numbers. For me, in particular, I take a lot of pride in announcing that that's our 8th quarter in a row of growth, 8% revenue growth and continuing to take in orders at the same very high level that we did in Q2 of last year. So I think as far as top line momentum is concerned, we checked the box, we're on track and we're driving forward exactly what we said we would do back in 2017. EBIT is improving. We are still limping a little with 1 of our subsidiaries in the technology portfolio. But I think as you look at numbers and as Kristina walks you through them, you'll see that in E and M, both in Continental Europe and the North Sea and of course, E and M International, we are delivering on plan and I'm very pleased with the progress. Looking at the bottom line, the net profit, it's in line with the plan. There is a lot of movement there again, IFRS driven and Apleona effects, let's call them that, which again, Cristina will show you, but also they're moving in the right direction. Free cash were better than last year. Operating cash flow has improved. It's still negative, but it was also very similar last year. We're ahead of last year, and that gives us confidence to reaffirm our outlook on all fronts, top line, EBITDA and cash flow, as I will repeat at the end of the presentation. But I think the overall message is we're robust, we're on track and we're still growing. We have our overview of the market as before. I won't walk through all the points, but I'll pick up a few, which I think are germane to our business. The orange one, this is quite interesting. Polyolefins has been a demand or a growing market for many of our customers. That growth is actually a plateauing out. And on the flip side, fertilizers in Europe has been a declining market for our customers, and that's kind of a bottoming edge. We've got a plateau in the bottom on one side. We thought we would flag that with an orange marker. On the positive side, the North Sea business is still going very well, growing both in terms of revenue and I think profitability on both sides of the North Sea, both the UK and the Norwegian side. We think that will continue. The oil price at $60 plus or minus for Brent and $56 plus or minus in WTI is exactly, I think, as people expect. It's above what our customers have been budgeting and therefore cash flows are positive and that cash gets converted into catch up programs on maintenance. It's good for us. What we also notice in Europe is a turning point from, I think, naphtha driven investments to ethane driven investments. We see that in the projects that we're announcing Antwerpen for I mentioned the names, but I think you know the projects in the meantime for Borealis and INEOS. We see LNG projects being announced in Germany, not for export but for import. So LNG regas terminal in Brunsbuttel. And overall, that theme speaks towards gas taking a stronger role in Europe, not only in energy, but also in chemicals and petrochemicals. We flip the page, we come to our international markets. In the U. S, it's still very robust, very much driven by what's happening in the Gulf Coast, so Texas, Louisiana. So a lot of projects ongoing, and we are participating in that. So for us, a robust and unchanged environment. In the Middle East, I mentioned it last time, overall demand on electricity is plateauing or even dropping as efficiency picks up. That's the red marker. What we see in our business, not only for us but also for our peers, is the orange marker in terms of in country value. This is where the governments of the various countries around the Gulf, in particular Saudi Arabia, the Emirates and Oman are driving the local content. By local content, it's 1st and foremost employment of locals, so Omanis, Emiratis and Saudis, but also where do companies generate value, where do they spend value, where do the profits go. And the ICV calculation is actually quite complicated, but it is driving towards localization and making sure that people invest in those countries and drive business there. You're able to command a higher price or even get a last look if it's a tender if you have the highest ICV. And this is why this is such a strong focus for people in our business, not only for Bilsinger, but also for our peers. And we think they're very well positioned to take advantage of that. If we turn the page, we're often asked, of course, the infamous or famous project in Hinkley Point. For me, I'm not worried. I do see the time line moving right for the award of our bigger offer. And we thought we'd try to make it a little bit simpler to understand on this graphic. I hope it does that. I think it's very important for those who follow Hinkley Point to look at June 26 this year. This is what EDF called jours 0 en francais, which means essentially day 0. And what happened there was that the concrete for the foundation of the first reactor was poured. That's the picture you see in the back end of our graphic there. This date, 26th June, was exactly what they predicted. So this is one of those rare projects, which although it's a multibillion double digit project, it's actually running exactly on time. And this, of course, means that as they progress through their time chart, then they will be awarding the outstanding NSSS work to us, which is now also added in what is called balance of plan. So our expectations for the order before year end is not only necessary for us to meet and exceed our order entry targets, but it's even more important for EDF to hit that target in order to stay on track with the project. The actual graphic itself shows that at the end of June, we had a little under €20,000,000 in orders. And these are early orders working around the engineering, working around preparing the contract, working with EDF on the time line, the scope, the long lead items, everything kind of working in our direction. Today, the end of July, beginning of August, we're above EUR 20,000,000 And you will see there on the graph that's what's intended to show by the end of the year, we'll add another EUR 200,000,000 plus to that, probably closer to EUR 250,000,000 on top of what we already have, and that is going to be the award of the NSSS and the balance of plan. So high level of confidence on our side, driven by the need of EDF to stay on their timeline, which to date has been amazingly on track and will assure the order comes our way before the end of the year. The Infamous Scrubber business, again, I like this business. I like it because it's driven by things we see across the market, our customers concerned by the environment. And the curve here, just a kind of a reminder that at the end of Q2 last year, although we did a lot of talking, order intake was 0. A few weeks later, that turned into a little over €60,000,000 euros That's the Q3 point 2018. And then a nice pickup as we go through and forward, we begin to sell our production slots. Then you see a plateauing there Q1 2019 to 2,000 sorry, to Q2 2019. That was intentional. We kind of filled our slots, and our capacity was running at 5 units a month going forward. We then look for additional manufacturing capacity closer to the shipyards in the Far East. We closed in on a deal in Vietnam that will now come on stream in the second half of the year. And as we go into 2020, we'll do the same for China, which is why we're now able to offer additional slots to our customers, and that's why we see the order intake going up as we go forward. So again, here, we're on track. We're not one of the top 3, but we're definitely in the top 10. We see continued interest and we see continued book building, which again, as I mentioned, we will meet with our additional manufacturing capacity in Vietnam and in China. So I think with that, I've kind of hit the highlights, I've hit the marketing backdrop, and I would hand over to Christina for the numbers. Thank you very much, Tom. So let's start off with the financials. A closer look, 1st of all, on Page 8, orders received. We had a very strong quarter 2. As you can see, we were in line with quarter 2 last year. And just to remind you, quarter 2 last year was the strongest quarter when it comes to order intake. So we were meeting that organically plus 1 even. The mixture being a bit different than last year in both quarter 1 and quarter 2 this year, we have seen more steady stream of what we call smaller projects, project with a size below €5,000,000 And we have some larger projects in the pipeline that we expect to see coming into the order books in quarter 3 and quarter 4, Hinkley Point being 1, but also a number of other ones. Just to remind you, last year in quarter 2, we had a substantial order intake from our North American project, Lindebraskem, which was above €100,000,000 Book to bill remains at 1, and also our order backlog after the June closing is in line with what we had last year at the same time. So very solid start. Maybe also mentioning that we had and we will come to these numbers a very, very strong order intake in Europe and also in the segment Technologies. So proceeding very well and not feeling any weakness in regard of the market situation. Then Page number 9, proceeding to the sales numbers. Given the very good order books that we started off this year, I remind you 12% higher order books in January this year compared to 1 year earlier, we are also here proceeding and generating a strong sales growth. In the second quarter, we had an organic growth of 11% in sales, and we are year to date at +8% when it comes to the revenue line. For the full year, we are not expecting to see 8% for the full year. We are still sticking to our guidance around 5% organic growth in the revenue line for the full year. Adjusted EBITDA improved to EUR 17,000,000 versus last year EUR 12,000,000 in quarter 2. And we are year to date then accumulated at EUR 13,000,000 euros for the first half year. So we also made an improvement here and very, very strong performance as you will see from Engineering Maintenance Europe and also Engineering and Maintenance International being also strong and compensating for the difficulties we have in one legal entity in the segment Technologies that are what we also reported after quarter 1 in line with the plan. It takes more than 1 quarter to solve these problems. And therefore, we also have a weak quarter 2 in Technologies. And we expect that we will now in quarter 3 and quarter 4 start to see the clear improvements here. And this single entity, we are expecting to be at a turnaround point in quarter 4 this year. Also the special items or adjustments further being reduced. We had here in quarter 2, EUR 14,000,000 of special items, most of that related to our rollout of IT investments, so our SAP rollout and also HR systems being rolled out. But clearly, we have now spent €13,000,000 during the first half year with a clear target that the special items, the adjustment will be further decreased this year. And obviously, also, going forward at in somehow in 2020, we expect to have one EBITDA line and no adjustments further. Strong performance also on the 2 major KPIs here to get to our financial targets of EBITDA sustainable 5%. On the left hand side, on Page 10, you have the adjusted gross profit, where we achieved a ratio of 8.5% in the quarter too, which is lower than what we had last year in the quarter too, but heavily burdened by the situation in Technologies. So if I would exclude the single unit that we are talking about in the comparison, we would have an improvement here. Looking then on the right hand side at the adjusted ratio for selling and administrative expenses, we had the Q1 below 8%. And this is something where that we have been cutting back on these costs all the way through the strategic implementation. So in 2016, the ratio was as high as 10.6%. Last year, we closed at 8.7%. We now have a quarter below 8%. However, we do not expect this year that we will be able to keep 7.9% for the full year, but a further improvement to the 8.7% from last year and with a clear plan also to achieve 7.5% or below that in 2020. So a lot of activities here to further reduce our SG and A ratio. Page 11, we go into our 3 segments, starting off with Technologies. Clearly, also in quarter 2, with the underperformance related to 1 single entity, we see that we have revenue growth organically 6%. We also had 5% organic growth on the order intake side. And on the adjusted EBITDA, we had a loss of EUR 12,000,000, most of that related to the single entity that we also mentioned in quarter 1 or after quarter 1 closing. So year to date at minus EUR 22,000,000 in the first half year, we are very, very pleased to see that we are stable enough to be able to make up for this loss, thanks to engineering and maintenance. And we clearly see that with this year, we'll unfortunately Technologies not be able to get a positive result at the end of the year, but we will be stronger and better than the results we had last year, even if the 1st 6 months have been very, very tough year. So we expect quarter 3, I mean, clear improvement and quarter 4, a further improvement and all in all, a better number than what we had last year in Technology. Proceeding then to the 2nd segment, which is Engineering and Maintenance Europe, a very, very good first half year. We moved here 2% increase in revenue. Orders received increased with 8%. A lot of these extra turnover revenue growth and also orders received coming from Northwest Europe. Book to bill as high as 1.1 and adjusted EBITA achieving €28,000,000 profit or 4% margin. Very, very strong oil and gas performance, both in Norway and UK, also the scaffolding side and our turnaround concept contributing to this excellent performance in Engineering and Maintenance Europe. The guidance continued to be positive, both on the revenue side and also on the EBITDA side, So very well on track and a pleasure to see how well we are developing this business. Then we have the Engineering and Maintenance International. Also here, we had a very strong sales, especially in North America, organic growth 44% versus last year. Orders received, clearly below what we had last year in quarter 2. Here, we have a number of larger projects that have been delayed. So also here, we are expecting to see improvements in the second half. And EBITDA, a strong improvement here growing from 0.9%, a ratio last year quarter 2 to 2.9% in this quarter. Both contribution improving from North America above all, but also from the Middle East. So moving from €2,000,000 profit to EUR 8,000,000 profit. And also here, the guidance remained the same, positive developments and growing both in profitability and in sales. We then proceed to our cash flow side. In general, we can see that both cash flow and our DSO improved in quarter 2. DSO, just to remind you, including not only the accounts receivables, also our debt balances and our prepayments. In total, not enough progress here. We are expecting to see here also thanks to a stronger profitability, but also thanks to a lot of initiatives on the working capital side ongoing, an improvement in quarter 3 and even more than in quarter 4. So we're expecting to pick up on the cash flow side and to see a turnaround here in the cash flow numbers. Adjusted operating cash flow, still negative, but improved. We see here minus 8 percent in the quarter 2. Last year, we were at minus 19 percent. On the net trade assets, we had a clear improvement on the DSO moving from at the end of March 83 days to now 78 days. Very good progress, but still a lot to be reduced here in the number 78. Unfortunately, on the DPO side, we had the other way around. We had 69 days at the end of March, and we are now at the level of 65. Also here, substantial initiatives ongoing. Looking at the adjusted net profit, positive, not exactly in line, but almost in line with last year quarter 2. And here, we need to keep in mind that we had substantial changes when it comes to the financial positions and this having a large implication on the net profit. I will come back to that. Net profit reported being negative at minus 6%. Last year, we were at positive 11%. On the financial side, we need to keep in mind that we last year in quarter 2, we're able to increase the valuation of our participation note in regard of Aperona, our share, with as much as EUR 22,000,000 in that quarter, to be compared with this quarter, this year where we only increased it with EUR 3,000,000. That is the major reason for the swings in the financial results. If we then proceed to Page 15, just to confirm that we also in quarter 2, we're able to finalize the refinancing. In quarter 1, we went out and collected on the promissory note side EUR 123,000,000, no covenants, and we had an interest coupon of 2.2% maturity 3 years. We also turned our vendor claim note with Apiona and EQT, we turned that into cash, EUR 128,000,000. The cash arrived in April. And we have in quarter 2, successfully closed a new bonding of EUR 250,000,000. Also here, no covenants with an interest coupon of 4.5%, maturity 5 years. And in the meantime, we are still then sitting on the repayment of the old bond, 7 years old, going back to a period of time where we had investment grade in Bilsinger at a very, very favorable rate, EUR 2.375. This will be repaid early December this year. And in the meantime, it obviously has got some implications on some of our KPIs. But in December, we will then get back to the normal KPI level again. Then I would like to get back to Tom to talk about the guidance for the full year. Okay. Thanks again, Christina. Let me kind of wrap it up. Revenue up, order intake maintained at a very high level. SG and A down, EBITDA improved, cash flow improved. We need to work on gross margins, in particular, our problem, child and technologies. So with that, no hesitation in reaffirming our 2019 outlook. We would like to comment on our long term picture, our 3 phase strategy. I think a lot of green notes have been set. We are not quite ready yet for ticking the box there on first successes in new growth areas. For that, we do need to continue what we're showing you in E and M Growth International. We need to land Hinkley Point and keep the scrubbers going up, but we're confident we'll get there and be able to do that too, which of course then feeds into top line growth continuing. What is positive is that the refinancing is now behind us. Great results and again thanks, Christina there. And then looking forward, if I went to the right hand column, we can already see that productivity is moving forward too and complexity is being reduced. But we're not quite there where we would like to be yet. That's part of the, let's say, the final stage for which we're also on track. So with that, I think my bottom line is we're very pleased, but not yet satisfied. And with that, I would pass it back to Bettina. Yes. Thank you very much. We would now start the Q and A session. We would now be happy to take any questions you may have. First question comes from Trico Kuglitsch from UBS. Hi, good afternoon. I've got three questions, please. So the first one is just coming back to Technologies. If you can give us a sense where we are now, as obviously another big quarter, quarterly loss. So I just want to understand whether that particular entity, I think it was in kind of biopharma or something like that, where that is and whether it's kind of I suppose maybe putting it differently when you think you can breakeven? 2nd question is on cash flow. So I think you flagged perhaps some challenges in parts of the working capital. So I get your kind of comfort level around that guidance of I think, breakeven kind of on a pre IFRS 16 basis. It just looks kind of ambitious, but maybe you see obviously, you've got a much better view than we do externally. And then finally, you haven't specifically commented on the sort of 2020 margin targets, but you do flag sort of challenges on the gross margin side. So I want to understand that 5% margin that you'd kind of previously talked about. At what point and this is not kind of midterm anymore, it's kind of like tomorrow. At what point do you reassess that? And what does it depend on? Thank you. Okay. Thank you, Mr. Gulich. Maybe I'll take questions 1 and 3 and bank number 2 over to Christina. I think in terms of the loss making entity, which is in a number of markets, not only in biopharma, what we've done there is go thoroughly through the books. I think, again, if you follow our comments from last time, how do we get into this position? It was a company we acquired a while ago. We acquired with it the management and the family management, And we then made progress going forward. As part of that management change going into late 2018 2019, we actually reviewed what was on the books in terms of projects. We looked at the change orders at not only percentage of completion, but also cost to complete. And we made certain provisions. And we did that also in Q2, which led to some of the numbers you see in our bottom line in technology. We're relatively confident that the back looking part of the project reviews is done. We've also been able to enter into negotiation with the customers on a number of change notices, which if we can then complete those in our favor as expected, will drive the turnaround in that entity and take us towards at least for the quarter Black 0 in Q4. That's what we're intending to achieve. We're on the way. We're not there yet. But I think going forward now, I'm quite confident that you'll see an improvement in the numbers. Maybe if I can add to the question number 1 on Technologies. Last year, Technologies had adjusted EBITDA, a loss of €26,000,000 We are now at minus €22,000,000 We are expecting that we will be able to improve that number. However, not our original target for this year of a breakeven. So we will see that we will start to pick up in quarter 3 and 4, but we will not be able to pick up at the speed that we will bring it to breakeven. But we are convinced that it will be a better number than the minus 26 that we had last year. Clear. Thank you. If we then look at the cash flow, I think the biggest improvement, the largest improvement that we need to gain here to improve our cash flow generation is obviously coming from a reduction in working capital. And within the working capital, it is mainly our debt balances that need to be reduced. And this is work that takes some time. In many cases, these individual bid balances can be substantial, but they are linked to negotiation with clients on claims. They're also linked to how to interpret contract terms. And these negotiations, because you're always trying to drive for a settlement and not for legal actions, they are time consuming. And at the same time, we are proceeding with many of these projects, so you don't want to have a situation where the corporation is not working. So we have an actual list. We know exactly which legal entities, which projects would need to contribute to this improvement in working capital and reduction in Vipp. And it is difficult to judge how fast you can proceed and get settlements and get the cash in to your books. But I'm convinced given also based on experience from other project businesses that we will clearly start to see this. I expect personally to see some progress on the working capital reduction in quarter 3 and then quarter by quarter to improve that. In addition, it's also a lot about contract management when we are signing off new contracts. And I'm not saying that we have the full freedom here to influence the payment terms, but I think we can do better than what we have done in the past. And also if the whole organization is active in making sure that we are not only generating sales and generating profit on this contract, but also getting the cash in as soon as possible and also in full. So it's also a bit of a culture change that we are presently focusing a lot goes through the whole organization. And I'm quite confident that we will see progress here quarter by quarter. That's the biggest confidence and the biggest most important project going on. Then obviously also with an increase in profitability in the second half, we would then also generate sounder and stronger cash flow. Thank you. And coming to your third question, the 5% target margin. I think a lot has been written on that and what are the elements and whether we reach there sooner or we reach it maybe a little bit later. I think on our side, we see 3 major ingredients. One is that entity that we just talked about, being able to do what we just described to you. And again, there we're feeling confident because we think we put the path behind us and we have a good pathway going forward. The second is Inkley Point and the scrubbers. Those are higher margin businesses and we need them not only on the forward looking radar, we need them in the backlog, and then we need to bring them through to revenue. I think that will happen. Maybe it happens a little bit later than we originally hoped, but it is part of the plan and it's part of the expectation. And the 3rd element is just a continued focus on execution. When we look around us, we see what's happening to some of our peers, even very much larger, more experienced peers in the project side. Touch wood, that knocking sound is me hitting my head. We haven't had those kind of big hiccups. We had one there in 2018 that we inherited, and we're paranoid in focusing on execution. Those three elements will deliver the 2% or the 200 basis points gross margins we targeted and the other comes from the SG and A component. We said at the time, we will deliver a 300 point improvement, 300 basis point percent for the quarter, but we will be sub-7.5 in 2020. So that side is on track. Thank you. The next question comes from Martin Beuchar, Bank of America Merrill Lynch. Yes, good afternoon. Thank you for taking my questions. So first is again on your 2020 guidance. Can you remind us if your 5 margin guidance is predicated on some further divestments or shutdowns of businesses that have a low profitability? And are you making some progress on those potential divestments? And number 2, can you perhaps quantify the losses from that problematic entity in technologies that you expect in 2019, so that we can assess what is the underlying performance of that division excluding the single problematic entity? Okay. Thank you for the question. Let me take part 1, and I think Christine already gave you some clues when she described the gross margins in part 2, but maybe she'll do that a second time. So in terms of 2020 guidance, we still have in our other operations, we have 2 entities that we're in the process of divesting. Those entities, they're accretive, so they're currently contributing to our bottom line, so they're not loss making. They are dilutive, however, so accretive in terms of their positive, dilutive in terms of our 5% goal. So that would be one element. But we're not looking at, let's say, solving our way by, let's say, unloading, for example, that entity, that's loss making in technologies. We intend to turn it around and then that will contribute to our 5% target in 2020. Okay. Talking about the losses and these losses in tea, they are related to project business, but not to one project. It's a number of projects. And we are here probably talking roundabout that we this year expect that this project losses in total will hit us with around €25,000,000 mainly then coming from this single unit and related to a smaller number, but a number of projects. So by reassessment reassessing the cost to complete, but also what we can charge in addition as claims to our customers, We have then another view of these projects and how these projects can be finalized. Some of them still being ongoing and being finalized. So we are talking roundabout, I would say, 5, 6 projects that have generated around EUR 25,000,000 of loss or expected to generate around EUR 25,000,000 of loss this year. All right. Thank you. There are no further questions at the moment. The next question comes from Christian Kort, HSBC. Thank you very much. I have a question with regards to the scrubber business. You have said during your presentation that the current capacity in terms of production is 5 units per month. My question would be, is that also the number that you're currently producing? Currently, it is, yes. We are maxed out at 5 per month. We will add another 5 in the latter part of Q3, which is the Vietnam production and then another 5 in Q1, which is the China production. But yes, currently, we're maxed out, which is what led to the flat topping of that curve I showed you. Yes. That makes sense. And that also explains, I guess, part of the growth in Technologies then in the year over year comparison. Okay, perfect. Thank you very much. There are no further questions at the moment. If there are no further questions, with this we conclude today's conference call. If there are other things you would like to discuss with us, our team is available. Thanks for joining this afternoon, and goodbye.