Bilfinger Replaces CEO Koch After Second Profit Warning

Bilfinger SE, the German builder turning itself into a services specialist, dismissed Chief Executive Officer Roland Koch after the former politician cut an earnings forecast for the second time in five weeks. The stock dropped as much as 14 percent in Frankfurt trading.

Adjusted net income will be 205 million euros to 220 million euros ($295 million) for 2014, 25 million euros less than anticipated, the Mannheim, Germany-based company said in a statement yesterday. Former CEO Herbert Bodner, 66, will take the reins from Koch, 56, on an interim basis until next May.

Koch, the former prime minister of the state of Hesse who became CEO in 2011, built up the services operations with about 1 billion euros in acquisitions, while divesting building businesses as he tried to stabilize earnings by avoiding the cyclical peaks and troughs of the construction industry. The 134-year-old company, once Germany’s second-biggest builder, is also in the process of selling civil-engineering businesses with 800 million euros in revenue.

“Two profit warnings within two months represent a significant loss in confidence,” said Frankfurt-based DZ Bank analyst Jasko Terzic. “Winning back confidence by the new CEO should take some time.”

Board Vote

The stock declined as much as 8.47 euros to 52.50 euros and was down 8.7 percent as of 2:35 p.m. in Frankfurt. Before today, the shares had lost 25 percent since the start of the year, while Germany’s DAX benchmark index had dropped 4.2 percent.

Bilfinger will continue with planned job cuts and structure changes, Chairman Bernhard Walter said at a press conference in Frankfurt, adding that he considered the profit targets set by Koch to be “very, very ambitious.” Koch decided to resign after discussions with Walter on Aug. 2 and 3.

Koch, born in Frankfurt in 1958, served as prime minister of Hesse for 11 years until 2010 as a member of Angela Merkel’s Christian Democratic Union. Frankfurt is the largest city in the federal state. As one of the highest-ranking officials in the CDU, Koch was often considered a candidate for a ministerial post in the federal government or even as a potential chancellor.

Koch has bought at least 25 companies since taking the helm in 2011. One goal was to increase Bilfinger’s reach outside Europe, where it gets less than 20 percent of sales. Koch’s strategy to steer away from construction differed from that pursued by Hochtief AG, Germany’s biggest builder, which has reversed a push into services to concentrate on engineering projects.

Investors’ Faith

“I must recognize that large portions of the supervisory board do not agree with me enough in deciding the next necessary steps for the company,” Koch said in the statement, adding that investors’ faith in him had been shaken by the two target cuts.

The supervisory board will vote on the replacement of Koch on Aug. 7, with Bodner assuming the interim CEO role on Aug. 11.

Bodner, a civil engineering graduate, joined in 1991 and was a member of the executive board from 1997 and its chairman from 1999 until his retirement in 2011. He started the company’s expansion of service offerings for industrial facilities, power plants and real estate.

The 66-year-old will serve no longer than a year as CEO, ensuring that he returns to the supervisory board before the 2015 annual shareholder meeting. That would enable his appointment as Bilfinger chairman, Walter said, adding that he didn’t regret picking Koch as CEO.

“Price pressure in an increasing number of end markets in the industrial division remains a concern,” said Craig Abbott, a Kepler Cheuvreux analyst. “Despite the shares having already undergone a major de-rating since the initial warning, we downgrade our rating from hold to reduce.”

Power Division

Bilfinger said yesterday that earnings before interest, taxes and amortization will be 340 million euros to 360 million euros, or 40 million euros less than anticipated. The latest profit warning stems from a lower forecast in the power division, partly due to the loss of an unidentified project in South Africa. Bilfinger said June 30 it would miss an earlier goal of increasing profit “significantly” from 2013’s 255 million euros.

Job Cuts

After the first target cut, Bilfinger announced it would eliminate a “significant” number of jobs at its high-pressure piping unit in Germany to achieve cost savings in the “low to middle double-digit” million-euros. The division has a goal for 400 million euros in revenue as it cuts capacity in Germany by half.

The company was already seeking to trim 90 million euros from annual costs by next year by eliminating 1,250 administrative positions that were built up with the acquisitions.

“Despite management’s efforts to cut costs to address the current capacity underutilization, in particular in Bilfinger’s piping business, we think that the group may not achieve its profitability targets over the coming 12 to 24 months,” Standard & Poor’s Ratings Services said in a statement.

The ratings company yesterday cut its outlook on Bilfinger’s debt to negative from stable while affirming its BBB+/A-2 ratings.

“Uncertainties related to the power transformation market in Germany and in central European countries have led to the postponement or cancellation of several investment decisions,” S&P said.

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