Andritz AG (ANDR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the ANDRITZ Q2 2026 Results Conference and Live Webcast. I'm Sergen, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Matthias Pfeifenberger, Head of Investor Relations. Please go ahead, sir.

Good morning from Graz, and a warm welcome from our side. It's my great pleasure to host the Q2 earnings call and webcast with you today. With me, I've got the CEO, Dr. Joachim Schönbeck; and our CFO, Vanessa Hellwing. As usual, we'll guide you through the Q2 highlights and key CEO messages, followed by the financial performance, followed by an update on our business area performance, the outlook, and we will then conduct the Q&A session. And now it's my pleasure to hand over to Dr. Schönbeck for his initial remarks.

Thank you, Matthias. Good morning to everybody, and thank you for joining us in this early call, and thank you for your interest in ANDRITZ. We are happy that we can report good results for Q2. We moved to another record order backlog after the very strong order intake in Q1. This year, we had a very solid Q2. Growth was driven by Metals and by Pulp & Paper. And we could see in Metals strong demand increase from the steel industry, and we could also see first signs of stabilization from automotive. We -- with a solid backlog we have, we are confident for the next quarters to come. The revenue growth accelerated, supported by disciplined execution of our order backlog and then a further increase of our service revenue share. We had a very good growth in profits and profitability. We had a significant increase in EBITDA, 15% up to EUR 182 million, and we had an expansion on the operating margin from 8.4% to 8.9% EBITDA margin in Q2. And this was driven by improvements in 3 out of the 4 business areas. And also 3 out of the 4 business areas are in the half year results inside the 2027 margin corridor that we have given. The guidance for 2026 for the full year is confirmed. Going to the details. We have a good order intake, EUR 2.3 billion. It's down 3% from previous year, but we had -- last year, we had several large orders and the EUR 2.3 billion are very, very solid, no large orders included. So we are quite happy with that result. Revenue on EUR 2.1 billion, up 8%. That is very good. And as I said, comparable EBITA to EUR 182 million, 8.9% EBITA margin. Net income, up 7% at EUR 109 million. Looking to the first half year, order intake accumulated to EUR 5.9 billion, book-to-bill at 1.5, very good drove order backlog up to EUR 12.9 billion. And for the first half year, we are on EBITA EUR 330 million, 8.6% EBITA margin compared with 8.3% in the previous year. So -- and net income up to EUR 201 million, that's up 5% from the previous year. I would say, overall, that is looking good. Project activity now remains at high level. We have the seventh consecutive quarter with an order intake above EUR 2 billion. And we do see that the markets remain active on that high level. Book-to-bill 1.5, I already mentioned. So I would say we are well prepared for any uncertainties to come. Going through the details of the order intake, you could see that in Q2, order intake growth was supported by Pulp & Paper and Metals. Pulp & Paper, 16% up to EUR 880 million, very solid activity, mainly driven by paper and textile, large paper order machine for -- order for a paper machine from Algeria. And in metals, very nicely up EUR 573 million for the quarter, mainly driven by higher demand from steel industry. But as I said, we also could see good first signs of stabilization. Hydropower dropped in Q2, no large order booked looks a bit difficult, minus 27%. But if we look to the first half year, we are up 82%. So I would say it's more a matter of timing of booking than of lack of performance. Environment Energy, down in order intake in Q2, 10% to EUR 300 million. We definitely see a very cautious investment climate across several industries. Many of that related to uncertainties also in this energy transition. However, project pipeline remains very active. Therefore, we would see this probably more a transient problem. Going to the revenue, nice increase, 8% up in the quarter, 9% in Pulp & Paper and Metals, 16% in hydropower. Here, you can see now the effect I was referring to in the last quarters that hydropower due to the long execution time of the project, needs a certain time to convert the backlog into revenue. This is starting now. And I would say the machine is rolling. Environment Energy, due to the reasons I just mentioned, down 2% in Q2, also down 2% for the first half year. In total, in the first half year, revenue grew by 5%. So that's, I would say, we are on a good track there. If we look to the order backlog, EUR 12.6 billion, a good record level. 50% is now in hydropower. I would say that will -- is also proof that the backlog will remain for a bit longer as the execution times in hydropower are the longest of our businesses that we have. Looking into the EBITA, EBITA margin, nicely up comparable EBITA and margin from EUR 303 million to EUR 330 million in the first half year and the margin up from 8.3% to 8.6%, definitely improved in order execution despite the high backlog. The low-margin legacy projects are phasing out. And for sure, the restructuring efforts are now bearing fruit. We have accounted in the first half year for EUR 18 million of non-operating items and that's on the majority, the restructuring costs we have in metals and some of the rightsizing we are still doing in Pulp & Paper and Environment and Energy. The service business is growing as we like to see it, record high on service share, 46% for the first half year, which is an extremely good value, 1 percentage point up compared to previous year, 6% year-on-year growth in service. And I would say we are growing organically as we are building more service centers close to our customers, but also through dedicated M&A activities that we executed last year. On the ESG side, we are happy that our performance is recognized by the external rating agencies. So we could see improvement from MSCI, from ISS ESG and from Sustainalytics. As you know, we have reviewed our carbon dioxide emissions with Science-Based target initiative. And we had redefined our ESG targets along with their guidance. And you could see that we are basically on track in all dimensions with all KPIs. You could see 2 ticks means that we are already at the target level of 2030. We need to keep it or on others, when we only have the one tick, we are on track. So with 6 of our KPIs, we are already in the target range and with 4, we are on a good track. The others, we only have annual values, and we will report that with our annual results. And that is from my side so far. I hand over to Vanessa, our CFO, and to have a detailed look to our financial performance.

Thank you, Joachim. Yes, ladies and gentlemen, warm welcome also from my side. With many details already shared by Joachim, I will keep my general comments brief and focus on the key takeaways. So we delivered a strong second quarter with accelerated revenue growth, improved EBITDA margins and net income. And at the same time, our order backlog reached a new all-time high, providing a solid foundation for future growth. Overall, the first half of '26 reflects strong operational execution and demonstrates thereby the strength of our business model. So from a CFO perspective, first half year confirms that the growth we achieved comes with very strong financial quality. Operating cash flow increased to EUR 291 million. This is 72% above last year. We also increased our net liquidity position by 15% to EUR 593 million on a year-on-year perspective, maintaining a strong financial position. At the same time, we produced -- we reduced our financial debt position also to manage our interest result, which obviously is rather long term with respective lagging effects. We will come to that later. Return on capital has recovered to 18.5% following the M&A-driven temporary decline from last year, 25%. That is still well above WACC, implying substantial value generation. Operating net working capital improved sequentially for the third consecutive quarter to EUR 874 million. And having reached a new record order backlog, the increase in prepayments is still outpacing the increasing need for trade working capital. Also this we will see later. So let me now walk you through the EBITDA to net income bridge on the next slide. Our usual earnings bridge shows that the higher revenue base translated into a strong EBITDA increase to EUR 404 million and further improved EBITDA margin of 10.5%, which is compared to last year with 10.3%. Depreciation increased slightly due to M&A and increased CapEx spending, but remained relatively stable as a percentage of revenue. IFRS 3 amortization remained flat, and we would expect around EUR 55 million at year-end from status quo. The financial result was lower than prior year, and this is due to lower interest income on slightly lower gross liquidity as well as, at the same time, higher interest payments on our financial liabilities. In addition, we faced higher expenses also for leasing. And as a reminder, first half '25 last year included a positive EUR 8 million valuation effect related to our Armis investment, while the total positive onetime impact for the whole financial year '25 amounted to EUR 36 million. So consequentially, we would encourage the analysts to consider these effects when modeling the numbers for the financial year '26. So while the tax rate remained stable at 25.3%, net income increased to EUR 201 million, and the net profit margin remained solid at 5.2%, which is confirming a resilient profitability despite a lower financial result. So moving to our EBITDA to free cash flow bridge, starting from EBITDA of EUR 404 million. The main operational improvement in operating and free cash flow generation came from a significantly lower net working capital outflow, minus EUR 114 million last year compared to plus EUR 4 million this year. Income taxes paid and interest received remained broadly stable and reduction in provisions and other items reflect the normal project life cycle, the maturity of the projects and expiry of respective warranty periods. So summing up, these effects result in a strong improved operational cash flow of EUR 291 million. CapEx went up year-on-year by EUR 33 million to EUR 131 million that was spent on growth, service, digitalization and innovation. After that, free cash flow reached EUR 160 million, a very satisfactory level and significantly above the prior year period where we reported EUR 70 million. In first half of '26, there were no M&A transactions and the M&A CapEx of EUR 38 million fully reflects the residual outflow of the deals that were closed in '25. So coming now to the working capital development. We saw an increase in operating net working capital in the course of last year '25, reflecting a larger service share and the consolidation effects from our acquisitions. We can now report the third consecutive decrease in operating net working capital in absolute and relative terms from Q3 '25 onwards, reverting back to a level of 11% of revenues currently. While operating net working capital management remains a focus going forward, I will now explain the moving parts in contract trade working capital and yes on the next slide. So the more detailed working capital overview here on this slide shows the diverging movements. On the contract working capital side, you see another sequential increase in prepayments and contract liabilities in Q2 alongside the good order intake reported. The trade working capital remains flat sequentially and decreased slightly as a percentage of sales, influenced by a typical seasonal buildup in Q1 and to Q3 as well as the high service business and the general strong order intake. Structurally, the shift from larger overtime projects towards more midsized and completed contract orders leads to an increase in work in progress. So disciplined inventory management will definitely remain central. However, with ongoing geopolitical influences, I can let you know from my CFO focus, this is much more important to minimize the order execution risk than minimizing inventory to the very limits. Overall, you can see we remain in a really good shape. As you can see here on the next slide, quarterly operating cash flow remains volatile as quite typical for our project business. Q2 operating cash flow of EUR 202 million was supported by better operating profit and lower net working capital outflow. The longer-term message is that higher top line, good margins and well-managed cash conversion are sustaining a structurally strong cash generation profile. So moving on to our strong financial position. Our balance sheet remains one of our key strengths and provides significant strategic flexibility. While net liquidity increased by 15% compared to the first half '25, it decreased from EUR 713 million at year-end '25 to EUR 593 million sequentially, driven by also the dividend payment of EUR 265 million in Q2 and higher CapEx. Operating cash flow remains strong at EUR 291 million in the first half '26. So we also reduced our gross liquidity by repayment of financial debt position in Q2. And keeping please in mind our EUR 500 million revolving credit facility, which is untapped for now. That means ANDRITZ is well positioned to continue executing its capital allocation strategy while maintaining a very strong financial profile. Return on capital recovered in the first half of '26, reaching 18.5% after the acquisition-related temporary dilution in '25. Higher operating earnings combined with a stable average invested capital supports the increase. And this confirms recent capital development is translating now into satisfactory returns with ROIC remaining above WACC and firmly supporting a strong value creation profile. Well, to summarize, the first checkmark is on long-term profitable growth. Strong development in order intake, another new record in order backlog and a book-to-bill of 1.5. This is supporting the revenue trajectory while margin improved further. The second checkmark here is on financial discipline and flexibility. Operating net working capital improved again sequentially. Operating cash flow increased significantly while the net liquidity remains solid. That brings me to the third checkmark that sits on value creation. So ROIC remains significantly above the average cost of capital, implying substantial value creation. While we have recorded accelerated growth sequentially and a step-up in profitability in the second quarter, I really would like to also remind you that the higher hydropower share is leading to a longer backlog conversion. So many thanks for your attention here. And I will now hand back to Joachim to provide an update on the business area performance and outlook.

Very good. Thank you, Vanessa. Let's have a quick view on the business areas in more detail. Pulp & Paper, I would say, overall, very good development. Order intake up 16%, revenue up 9%, EBITA up 12% and EBITA margin from 10.2% to 10.5%. So that's all looking very good. Order intake has been driven by paper and textile that was suffering for a long time. So we're happy about that development and this upstream integrating trend in China and for the -- in the pulp industry remains solid intact. And we also believe that there are more projects to come. Revenue is now accelerating. So the order intake from the previous quarters is now executed. Good growth in service business and service share, a very nice level of 59%. It's really good. And also market is -- has a positive outlook. Metals, I would say you considered your problem child, also improving good. The activities that management is doing is definitely bearing fruit. We are up now 9% in order intake. We are 9% up in revenue. We are up 37% in EBITA and EBITA margin increased from 5.3% to 6.6% for the comparable EBITA margin. Order intake, I would say, solid demand from steel industry, a big stainless steel complex in Turkey, a large processing line in India were definitely the, I would say, the highlights. But we also can see stabilization in -- on the automotive side, increased project activity -- so our view that we might see the end of the trough and towards the end of the year remains positive. We have a nice growth in service share from 28% to 29% on a 9% increase of the revenue, and that will further stabilize our profitability. We are now for the first half, we are in the margin corridor for 2027. I would say that's good development. Hydropower, as you know, is working in a -- I would say, really exciting market. Even though order intake is now down for the second quarter, 27% to EUR 570 million. We had several large orders booked in the Q2 of 2025. And this is why I would say this drop is more administrative drop than a real drop. If you look to the full first half year, we are up 82%. And as I said in our last call that some of the bookings we were able to book prematurely to what has been planned on the project side. The revenue is nicely up 16% compared to last year and the EBITA is up 47% to EUR 35 million, and the EBITA margin is now at 9%, up from 7.4% for the Q2. We are profiting from the high demand on renewable energy, but also the grid solutions now play more and more a very decisive role and industry has realized that a lot of work needs to be done as the amount of the unsteady renewable energy from wind and solar is increasing. Also turbo generator business is developing well. Several midsized orders, maybe worth to mention Strandfossen hydropower plant in Norway from Hafslund, Norway's largest energy provider, I would say, showing the good and solid partnership we have there in this country. The profitability is moving nicely up, and we are in the -- for the first half year, we are now in the -- in our margin corridor we have announced for 2027. Looking into Environment and Energy, order intake dropped by 10%. We definitely see a subdued investment climate across several industries. I already mentioned that before. However, we see active project pipelines in many areas. So we are not too pessimistic for the midterm outlook. And we have to -- now we have to see where the -- I would say, where this demand is not temporarily, but more long term, whether we have to take some actions to reduce our capacities. The revenue declined because of the lower order intake. However, in Clean Air and Feed & Biofuel, we have solid development. And I would say, even though with the decline in the revenue, margins are still satisfactory despite the decline and still within our corridor for 2027. What is a few words to our external effects, we do not have under full control. Happy to report that we have no adverse impact from the increasing trade barriers as well as from the war that are going on. I would say our teams are working hard and apparently very effectively to keep these impacts still low and financially to very limited amount. We are happy that the FX changes stabilized, and we did not have any more FX headwind in Q2 for the first time since several quarters. So I think that is good news. However, despite the good Q2, we confirm the guidance for 2026. Project activity will remain stable on the high level that we have reported. The revenue will be between EUR 8.0 billion and EUR 8.3 billion, and we expect the comparable EBITA margin being between 8.7% and 9.1%. We also confirm our midterm targets for 2027, revenue between EUR 9 billion and EUR 10 billion and comparable EBITA margin above 9%. We have discussed that. And I would like to end that we have now reached for -- in the first half year, we have reached to have 3 of our business areas in the margin corridor that we have announced for 2027. So we are confident to get that going. And this is where I want to end. Thank you for your attention. And if there is anything you'd like to ask, we are happy to provide the answer. Thank you very much.

[Operator Instructions] We have the first question coming from Akash Gupta from JPMorgan.

I'll start with a couple and then come back later. The first one I have is on pipeline for large orders. I think you define large orders as more than EUR 100 million volume, and there was no large order in Q2. And despite that, you had a very good level of order intake. So the question is that when we look at for the rest of the year, next couple of quarters, can you talk about the pipeline for large orders? How does it look versus, let's say, last few quarters that we have seen? So that's the first one.

Yes. So on the large orders, we could -- we can say that we are working on large orders with our customers. However, we are not in control when they really get into force. So there are large orders. As I said, we will not repeat the Q1, I would say, accumulation of these large orders. We don't expect that. I would say the key takeaway should be that even without the large orders, we are -- we have been able to sustain a very good order intake, solidly above the EUR 2.3 billion -- solidly above the EUR 2 billion threshold. I think that's a very good sign.

And my second question is on 2027 revenue target. I mean we have seen good order intake, and you have been flagging about increased duration in backlog, particularly coming from hydropower segment. We have 6 more months or 5 more months from today to come to close the year. You guide at bottom end, EUR 9 billion revenues for next year. So the question is, do you think you can get there with -- organically with the portfolio do you have today? Or do we need to see any incremental M&A to hit EUR 9 billion mark? And if we have to do any M&A, any commentary on what could be the potential timing that we should be looking for?

So on M&A, as I said, we do not plan for that. And we believe that we can -- that we reach the EUR 9 billion revenue target. And I would say, a normal small M&A activity is always part of our business model.

The next question comes from Sven Weier from UBS.

First one is on the Metals business where you saw a nice sequential improvement in the order intake against the previous quarters. I was just wondering, are you confident to maintain that run rate? Or is it also a bit like you had it in Hydro in Q1 that there was a bit of a pulling forward? That's the first one.

Project activity in metals is good. And we do not -- this is not an accumulation of events like we have seen that in. So we see that the market will continue on a good level, yes.

Sounds good. Second question is more like a strategic question. I mean we obviously saw that Valmet is considering a potential breakup of the company. And I was just wondering when we look at your business portfolio in terms of potentials for spin-offs, I mean, how do you look at the situation? Do you consider all the 4 divisions and the structure of the company absolutely core and no changes will be made?

That's what we do. We believe that we are the best owner of all 4 business areas. But if we come -- because we are assessing that on a regular basis, if we come to the conclusion that we are not, we definitely will investigate that, and then we will let you know in due time.

And I mean, my understanding, obviously, is when I think about the Pulp and Paper automation business, right, it's an integral part of your Pulp & Paper division, while Valmet seems to want to spin that off. I mean, what do you see as the biggest advantage as having it as an integral part rather than like a separate business?

Yes, we are running our business model in all business areas that we provide integrated solutions, including mechanics, electrics, automation and also digitalization. We think that is a good model. And we see from the trust our customers place with us that they also confirm that.

Do you see that as an opportunity to win market share once the business is spun off from Valmet and they don't have it integrated anymore?

We always try to win market share regardless what our competitors are doing.

The next question comes from Daniel Lion from Erste Group.

Let me follow up on what Sven has just touched, maybe not only focusing on pulp and paper, but from a shareholder perspective, it definitely makes sense to like sell parts of the companies completely, but at least float them individually. Just doing some of the parts reveals actually sizable discount in valuation when valuing the business line separately. So this also not worth a thought.

Yes.

We keep the majority, obviously.

I mean, as I said, we are reviewing that regularly. And if we believe that somebody else is a better owner than we are, we will sell it. And we have done this last year with our Otorio joint venture because we have developed the products we wanted to have on cybersecurity, but we also understood that we could not -- we were not the right platform to scale it. So we sold that to Armis. Armis has then been acquired by ServiceNow. And what we have developed as a product still is a valuable value proposition from ServiceNow. So I think that's what we do. And rest assured that we will review this on a regular base. And if we come to that conclusion that we will act accordingly.