Brunel International N.V. (BRNL) Earnings Call Transcript & Summary

Hello everyone and welcome to the Brunel International Trading Update for the fourth quarter and full year 2023. My name is Bruno and I'll be operating your call today. [Operator Instructions] I would now like to hand over the call to your host and CEO, Jilko Andringa. Please go ahead.

Thank you very much. Good morning. Good afternoon everybody. Q4 results and full year results. There's a double message, as I said on the Dutch radio this morning. If you look at the glass half full or glass half empty, you get different messages. Glass half full is we are growing in a market that is not always easy. There are some international global events that are happening and you see some cool-off in one of our biggest markets in Germany. And if you take that into account and you then see high single-digit growth and organically even double-digit growth in the company, organically continue to add profitability, then we're very proud of the results. Glass half empty is, we would love to be even a little bit further, because the cool-off in Q4 was not what we had foreseen earlier in 2023. And that's why we have to step up as an organization, make sure that we align our cost levels very quickly to the new circumstances in offshore wind, in the permanent placement market for Taylor Hopkinson, but also in Germany, of course. If you take this into account and then look at January and how we started the year with high single-digit growth in both revenue and GP, and we see the first effects of our cost savings activities, then we have a lot of confidence on the progression this year, on the results of this year, and how we can follow our next level plan as we communicated it during the Capital Markets Day. With that, I would like to hand it over to Peter de Laat, our CFO, for more insights on the financials.

Thank you, Jilko. And I'll directly go through the summary of our financials. Here it is. So, like Jilko said, still very high revenue growth in Q4 in almost all regions, except for Asia, but that's more a mix element, and also still EBIT growth. In this presentation, we are presenting underlying EBIT, so just it’s for the one-off cost that we incurred in Q4 to right-size our organization to our current activity level. In looking at the full year, very nice revenue growth of 18%, and also 10% EBIT growth organically. And the difference between the reported 0% and the 10% organically is 50/50 split between the impact of exchange rates and the impact of working days. So overall, like Jilko said, more or less in line with our plans, but a slightly weaker quarter than we had hoped earlier in the year. Then moving on to the individual regions, starting with the DACH region, and the key graph in this page is the development of the headcount, where you see that in Q4 the headcount was below the headcount we had last year in Q4. Glass half full, glass half empty. The positive thing is that the headcount remains stable. So there's still a lot of underlying activity, and it's giving us comfort for next year. But the market is tougher than it was earlier in the year, and we hope to see that recovering later this year. But that's also why we mainly right-sized our organization in DACH, because there's the biggest gap between actual EBIT and our ambition and forecast. The change of the year, where we always see a drop in projects ending at the end of the year, was in line with previous years. So that means that the trend we've seen in Q4 will pretty much continue in Q1. And a summary of the results, even despite what everybody knows, difficult market in Germany, we still managed to achieve 9% revenue growth and the same EBIT as we did in '22 with EUR 24 million, a very high contribution to our group results, and a continued strong performance of our team there. Moving on to the Netherlands. There, you see also the headcount development flattening a little bit at the end of the year, which is a normal pattern where we had a stronger December in the previous years, but we're still ahead of last year. Also in the Netherlands, the change of the year is pretty much in line with last year. So the trend in Q1 will continue. We have -- the biggest challenge in last year was of course the impact of wage inflation in the Netherlands, and especially our challenge to pass that on to our clients, especially government and banks and insurance companies, and it's putting a lot of pressure on our growth margin. But we see, yes, the continued work is slowly recovering that margin, but it's going very slowly. So that's why we're very focused on improving the efficiency of our Dutch organization, to make sure that we are heading for our 10% EBIT in the not so far future. The summarized results for the Netherlands. They also achieved the same EBIT as in '22, but it's pretty impressive considering all the impact on the margin. So they even were able to make up by that by just growing more. And based on what we see from our competitors in the Netherlands, we -- it's very clear that our organization is at the moment outperforming the market. We're very proud of that, and that's very promising for the future. Moving on to Australasia. That's really -- they really have again had a great year again with strong growth in our traditional markets, conventional energy and mining and the growth is both in Australia and Papua New Guinea. Papua New Guinea is also a strong contributor at the moment still. A lot of activity there. And there's so much opportunity still in that region that we also have asked a team of advanced careers. Those are recruitment agency for ESG consultants to join us, and they have joined us at the 1st of January. It's a nice addition. A small team of five people, but it's a nice addition to our added service portfolio that we're delivering in Australasia. Moving on to the results of Australasia. There you see the true leverage that comes with our industry, working with 19% revenue growth and 62% EBIT growth and they're also nicely contributing again to our results. And again we're very proud of what they are achieving in Australasia. Next, for Middle East and India. Middle East and India had a stellar ‘'22. And with some projects ending in ‘'23, it was hard to reach the same level. But they still did an amazing performance continuing the high conversion ratio and continuing to win new projects. But unfortunately, due to the mix in projects ending and new projects starting, we see the gross profit -- gross margin decreasing a bit. But the volume will make up for that. So they will continue to be a big contributor to our results. Earlier this year, we announced that we had a delay in the start of a new project. I'm happy to confirm that, that project has started by now and is slowly ramping up. So you will see the impact of that in the course of this year. The biggest contributors are Qatar, with the huge LNG facilities there. But at the moment, our activities on construction yards in Dubai, which is growing fast. And it's very nice also benefiting from the cooperation with Taylor Hopkinson, also winning a lot of work on the yards for renewable energy. So to summarize the results, still 12% growth in revenue, despite the big projects ending. EBIT is slightly lower than in ‘'22. But still at -- for this market, very high EBIT percentage of 7.6%, and with a nice contribution to the group's result of EUR 12 million. In Americas, the headcount development suggests differently, but we're still at a high growth trajectory there. And what's the connection to the headcount development then we see a bit of change in the mix with a slightly lower headcount in Brazil and a higher headcount in America at a higher day rate. So that's supporting the revenue growth, but also the EBIT growth. And Americas being the biggest engineering and energy market, there's still plenty of room to continue that growth. And if you then look at their results, also an amazing EBIT growth on the back of 21% revenue growth, increasing their conversion and they are heading in the right direction for EBIT percentage. All they need is to continue to grow and we're comfortable that, that will happen and it's happening at the moment. And, on to Asia. Asia is driven by a lot of construction work we do in yards in China, in Singapore, a little bit in Korea, and mining activities we have in Indonesia. We're very happy and very proud of our position in those countries, where our compliance service delivery is really appreciated by our clients and helps us to win new work and new clients. So also there, there is still plenty of opportunity to continue this growth path, even though Q4 suggests a slight slowdown. But that was in line with our expectations, because we knew that there were only new projects coming online in the course of this year, and actually we see that materializing at the moment. So as a result, overall, 13% revenue growth and 27% EBIT growth, contributing EUR 12 million EBIT to the group's EBIT, a nice performance and a very strong growth margin where they are able to get the right price for the services delivered in many complex countries. Then the rest of the world. The rest of the world is a combination of all our other activities. The biggest one there is Taylor Hopkinson in Glasgow and also our conventional energy activities in Europe and Belgium is included there. If you look at the headcount graph, you’ see the steep decline we had in '22. That's obviously the divestment of Russia we had that's impacting the comparisons. And the second half of the year was a bit difficult, especially for Taylor Hopkinson with all the developments in the renewable market, especially for our perm placement business, where that didn't grow as fast as we would have liked. But the contracting business in renewable is still very strong, and we're winning a lot of new business there. The perm placement obviously is a high margin contributor. So if you perform lower there, you immediately see that in your margin and your EBIT. And like Tom Hopkinson said, during our Capital Markets Day, we are expecting also the perm market to slowly recover in the course of this year. That brings us to the results of the rest of the world, an EBIT of 0. That's more or less in line with our expectations, although we would have liked to do a little bit more, but this also includes the earn-out related costs for Taylor Hopkinson and acquisition-related costs. You've seen in our Q4 results that we had a benefit in the adjustment of our earn-out obligations, because the earn-out obligation is tightly linked to their performance and with the lower performance, also our earn-out obligation is lower, so we are a little bit protected there. Then the overall group results. 13% reported revenue growth and the same EBIT as ‘'22. Again if you adjust for working days and exchange rates, that translates to 10% EBIT growth. So that gives the run rate where we're actually still on -- that we expect for ‘'24 as well. That brings us to the outlook for this quarter. As mentioned, we are -- in general, we've seen a growth rate of high single-digit in revenue. We see some new activities around projects that will start in the course of this year. So supporting the continued high revenue growth with our activities to right-size our organization and adjust our cost levels. That will result in continued EBIT growth throughout ’24, so still in line with our long-term plans. Unfortunately, a slightly weaker Q4 than we would have hoped, but that's a bump in the road like we also said in the Capital Markets Day, we will have -- we have recovered from that and we will see that in the course of this year. Then on to the balance sheet. As always, we had a very strong cash flow in Q4, resulting in a net cash position of over EUR 30 million at the end of December ‘'23. That enables us to continue to pay dividends in line with our policy. So our proposal is to pay EUR 0.55 dividend per share, the same as in ‘'22. Other than that, the balance sheet remains strong with a high solvency and a very healthy cash position. Then some organizational changes. We are very sad that Just Spee had to decide to leave the Supervisory Board due to health reasons, which probably -- which he also did in other organizations where he was in a supervisory role or similar role. Just has been an enormous contributor in the last couple of years and he will be missed. But fortunately, he will still be with us for a couple of months. The other part is Tom Hopkinson. He has played a very strong part in the integration and growing the success story of renewable, joining forces of Taylor Hopkinson and the unique Brunel infrastructure, and we're benefiting from all those synergies. And now is the time that he wants to move to a more promotional sponsor role, advisory role. And as a result, we also decided to settle his earn out and to buy his shares earlier than -- a year earlier than expected, so that will be finalized in this quarter this year. But the good thing, Tom will still have a very important role within our organization, contributing as much as he did in the last two years.

And in the operational and sales leadership side, he is replaced by internal candidates, which is also fantastic. He grew the company with a group of entrepreneurs who are with him already for some over 10 years, and some of those key people now took over and lead Taylor Hopkinson in the Brunel group. So very good to see that move and the continued collaboration with Tom.

Then finally, the development of our net fees or our gross profit by vertical, and there you continue to see the strong growth in our global key verticals. Actually, conventional energy is at the lowest level of the growth and is outpaced by growth in mining, renewable energy and also life sciences. This is a brief summary of our Q4 and full year results. And I now want to hand it back to the operator to address any questions.

[Operator Instructions] Okay we do have our first question comes from Konrad Zomer from ABN AMRO. Konrad, your line is now open.

A few questions. Firstly, the restructuring charges, EUR 4.5 million. Can you maybe share with us the breakdown of those costs? And my second question on the 20% stake that Tom still owns in Taylor Hopkinson. What's the financial implication of bringing that deal forward by one year in terms of earn out, in terms of price? How does that work? And then my third question is on the developments in Germany. Most of your peers highlighted the high sickness levels. You did mention it, but not to a great extent. It seems that, that market is actually deteriorating quite rapidly. And although your results in Germany were, I think, the main reason why the overall results in Q4 might be disappointing, but I think your underlying performance is actually quite good. So what's your view on the current state of the German market for you? And what have you specifically done to right size your organization there?

Well. Thanks, Konrad. Let me start with the restructuring charges, the EUR 4.5 million or EUR 4.8 million actually, largest part, so 75% relates to Germany, obviously with the conditions there. And the rest relates to the rest of the world. But the main part is in Germany, and it's two-fold. The largest part is obviously reducing our internal headcount to match the activity level. But we also abandoned some offices and moved to combined offices or moved to a shared office, so that's on the restructuring. Then the 20% shares in Taylor Hopkinson. So you might know or remember that we at the moment own 72%. So Tom owns 20% and the rest of his management owns 8%. You're right, we are -- at the moment we are settling the acquisition of the 20% from Tom. I don't want to share all the highlights, but in our annual report we have included also in ‘'22 that our expected obligation with the purchase of the remaining 28% is EUR 16 million. And the main impact on settling it a year earlier is there's also a timing benefit for Tom. So there's a slight discount compared to if he would have settled in ‘'25. Then Germany. I like how you phrased your question. We were expecting more from our organization in Germany. But at the moment, also seeing what our competitors do and what's happening in the market we are still pretty proud on their performance. It's hard work, but they still managed to achieve a very strong result. And that's also why we're happy to see that the deterioration you mentioned, we're not seeing in our business. Yes, our headcount at the moment is below where we were last year, but that gap is not increasing. So the trend is continuing and it's still at a very healthy level. Sickness levels. The sickness levels that you called out and that you also see with other players in our industry, that were high in Q4. Actually it’s true, was also high with us. So productivity was lower than expected. But this is part of our business model where we are responsible for all our employees. Also when they are not working on the bench or when they are sick, and yes, that should be included also in the way we price our business. The good news is in the beginning of the year, the sickness rates in Germany have gone down significantly. So that helps us a little bit in the margins also in 2024.

Okay. That's all very clear. Just one quick follow-up. By bringing forward that deal with Tom by a year, that also means that we won't get any more earn outs in 2024. Is that correct?

Not entirely, because, well, Tom owns 20% approximately of the remaining 28%. So there's still 8% left. That's the first part. The way the earnout is structured is, let's call it a zero-sum game. So any discount we apply for what we buy from Tom will flow to the rest of the team, because they have a bigger responsibility to drive the results.

Right, okay. Because the original earnout plan ends at the end of 2024.

Yes, that's correct. So 2024 will be the last year...

[Operator Instructions] Okay we currently have no further questions registered. So I would like to hand the call back to our CEO, Jilko, for closing remarks. Over to you.

Thank you very much. Yes, as we started with glass half full, glass empty, for 2024 the glasses are half full. If you look at the industries we are in, as we presented during the Capital Markets Day the capital investments committed in the industries that we have a very, very good capability for are growing and growing. And we see that in our pipeline, and we see that in the wins we have also in the beginning of this year. We had a nice flow of new client wins. We are focusing with the whole organization on activities at the client to bring in the best projects. Once you have the best projects in, you're also very attractive for top talent. And that model works. And that model is continuing to work. And with that and with the start of the year, we have a very good feel. Again as I said earlier on, the plan that we presented in November, Brunel to the next level, is still our plan. Once in a while you have a bump on the road, but the underlying dynamics are all in line to reach those goals. And yes. With that, we built on our team, and we brought new talent to the leadership level that helps us execute this plan. We have a high confidence that we can continue to do that in the quarters and years to come. Thank you for your attention, and we definitely will see you again next quarter, and for many of you probably earlier. All right, have a nice day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.