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

Good morning, and welcome to the Brunel International NV Results Call for the First Quarter of 2025. [Operator Instructions] I will now hand over to P.A. de Laat, Brunel's CEO. So please go ahead, Peter.

Thank you very much. Good morning, everybody, in our call for the Q1 results. And let me move on to the summary of the results. But before I get to that, maybe a reminder on where we assist our clients. Our statement is that we provide specialists to pioneering projects. And many of our clients have a deliberate strategy that they want to use external help in their projects, mainly their investment projects and their R&D projects, and also because they lack the skills themselves internally. So that's what we do. That typically helps us in a downturn because most of those projects continue or will be finalized. But what we always also see is that when the economic activities slow down, there's a delay in new projects being started. And that's what we've seen for a while now, and that's now starting to impact our results. And what especially impacted our first quarter results is all the events that happened that caused even more uncertainty with our clients and where they stopped their direct hire themselves impacting our perm revenues. Our perm revenues, so that's the one-off fees we get for finding candidates for them that almost halved in the first quarter, where it has been pretty stable for the last 8 quarters. And that's a one-off fee without any cost of sales against it. So it's also impacting our gross profit and our EBIT directly. Overall, you see a decline in revenue of 11% across the board, with the biggest still in DACH region, where the year-on-year comparison is getting tougher and tougher. That's something that's applicable for the entire group. Our first half-year results for last year were still pretty okay because the projects were continuing. But we're now starting to see an even more impact of the slowdown of new projects being started and the lower activity level despite the cost savings that we initiated last year and resulted in a cost level that was even lower than we initially guided for. We still saw an EBIT drop of 44% compared to last year. Again, first half of last year was still pretty okay. If you then look to the distribution of our revenue and GP, you can see a quite even distribution of revenue across the globe, but still a much higher contribution of the DACH region to our gross profit. And so the economic circumstances in the DACH region and the decrease in our activities there is impacting our results significantly. To move on to DACH region directly, you can see that our head count in that region is significantly lower than we've seen last year. We only saw the head count significantly decreasing from summer last year. And unfortunately, the decrease is still continuing. We are making nice progress in other industries or kind of new industries for us in the DACH region, such as defense and energy, but the stoppers in the other industries are still higher than the starters in the new growing industries. The gross margin remains pretty stable. So the margin pressure is still okay-ish. Adjust for working days, the gross margin was 32%, where it was 34% last year, and the difference is explained by the lower perm revenues in Germany and 1% more illness in Germany. Then to the summary of the results, yes, where we still achieved 10% EBIT last year, we now achieved 5% despite a lower cost level, but the decrease in revenue and gross profit is pretty significant. And what are we doing to try to turn the trends around? Like I said, we're entering and focusing on the growing industries, conventional energy, renewable energy and defense industry. Defense includes industry and technology. I'm pleased to be able to share that our share in defense of our total gross profit is now above 10%. So from almost 0 up to 10%. Yes, it's a nice performance of the team there, but also shows the growth that's happening in that area. Yes. That's all I want to share in the DACH region. In the Netherlands, we also see a decline in head count there, especially in February and March, and that's largely due to the change in law of freelancers. We saw quite some freelancers stopping in March. So that will help our gross margin percentage going forward, but it's not helping our revenue and head count. What we see is that clients are getting more and more reluctant to work with freelancers. So they just stop working with them. And most of the engagements are just stopped. They are not hired by our clients or not employed by us, but they just -- the engagements are stopped. So they are looking for alternatives. Another element or development in the Netherlands is worthwhile to share is the information again I have shared earlier in Q1 of the hiring freeze, where they're going to stop all hiring and stop all external hiring that will have a limited impact on our numbers going forward. But we do have a decent head count with EBIT normal, and they will not be stopped immediately, but just at the end of their engagement. Overall, the result decrease in revenue of 7%, a higher decrease in gross profit because of the lower productivity. Banks and illness were higher than before, and that's impacted that. There's also the element of the working day. We have 1 less working day in the first quarter, which makes up for roughly EUR 600,000 that we missed in gross profit and EBIT, but it also explains the big gap in EBIT, but that's partially due to -- or largely due to the working days. Moving on to Australasia. I did share before that we decided to terminate our last 2 projects that we still have in the coal mines in Australia. That's a market that doesn't fit us anymore for several reasons, the risk related to it, the industry we're in and the margins that come with it. So that is 1 of the reasons why our head count is slightly lower than it was last year. Another development we've seen is a slight delay in new projects in P&C that were expected to start in Q1, but are now starting in April. Overall, slightly lower revenue. But as you can see the result, again, an improvement of the EBIT percentage and nicely on track to achieve their EBIT target of 4% in the near future. Also, Australasia's gross margin has been impacted by lower perm revenue. And again, we've seen volatility in our perm revenues before, but it has now impacted all industries and all regions at the same moment in Q1, which is pretty unique, and I haven't seen before. Then Middle East and India, still a very strong performance, especially on the back of Qatar. In Qatar, we are working on a huge LNG project, the North Field expansion project, and that will run until at least '28. And we have many multiyear contracts there, and that's contributing significantly to this region. We also saw another shutdown project, which typically has a higher gross margin. That explains why despite the lower revenue, we managed to increase our EBIT with tightly managed operating expenses. And there's more activity to come, especially from Qatar, and we're also -- will be operational in Saudi Arabia from the third quarter onwards. Then moving on to Americas. decline in head count at the end of last year, but we now returned to growth, a very nice project won in Brazil. Activity in Guyana remains high. The first activities in Suriname are starting. And USA is pretty flat at the moment despite all the news around the conventional energy developments in the U.S., but we don't see any significant changes in new project activities yet. But they did manage to achieve a huge increase in EBIT, although it shows EUR 1 million for Q1 this year and last year, but that's a rounding thing, also very nice EBIT improvements continued and lower cost level despite an impact of also lower perm revenues in this region. Then Asia, head count continues to be pretty flat where we were hoping for an increase because of the start of new projects. But during the full year results call, I already mentioned that it was very unlikely to happen before the Chinese New Year in early February. We now see a little bit more activity and a little bit more starters, but it's still at a very low level. So probably it will take until at least the second half of this year before we see significant changes in the head count development and revenue and profitability, where Q1 last year was still pretty strong. So a tough comparison with a lower revenue but still some nice continuing projects. So it's waiting for the pipeline of new projects to finally start. And the pipeline has been building for 2 years, and those projects are being kept postponed. But at some point, they will have to start also because of the deadlines that are put by our clients and their clients. Then the rest of the world, that includes Taylor Hopkinson and our oil and gas -- wider oil and gas activities in Europe and Africa. To start with the last one, they are pretty stable, and we're getting a bigger footprint across Europe there everywhere. And one of the nice projects we're working on is a hydrogen steel plant in Sweden, where we provide the commissioning services. It's still early days, but a nice development there, especially nice project. On Taylor Hopkinson, the offshore wind market remains very challenging and probably is getting even more challenging with the recent announcement of Equinor with the [indiscernible] project in the U.S. and this week's announcement by Vattenfall Ørsted to, well, for now postpone a huge wind farm project in the North Sea, the Hornsea 4. And it's hard to predict when that market will start recovering. And our organization, especially in Taylor Hopkinson, is focusing on new industries, especially for their perm business, and they're making inroads there, but it takes time to make up for the lower activity in offshore wind industry. And that also explains why the revenue is lower. The gross profit difference, again, is mainly the impact of the perm revenues and that results in a decrease in EBIT. That brings us to the overall results for the first quarter, 11% decrease in revenue, a higher decrease in gross profit due to the mix on one hand in the big impact of the DACH region and the impact of lower perm revenues. If you adjust for the perm revenues and working days, our gross margin is pretty stable. Operating expenses at EUR 48 million, where initially we guided for EUR 50 million. So that demonstrates that there's further room for cost optimization. We continue to work on all our IT and AI implementations, and they are really contributing to the quality of our services and the efficiency. So we will continue to use those to reduce our cost level going forward also to make up for the lower activity level that we see for now. Gross profit by vertical, as you can see, impacted across the board. Our verticals are showing a decline in gross profit, shows that activity level was pretty low across the board and in many areas. So waiting for new projects to start. Then cash flow. The free cash flow was lower than last year. The 2 main drivers for that were the lower results, and we did pay quite some corporate income taxes in Q1 where last year, we paid them later in the year. Cash balance still really healthy, EUR 36 million. The impact of the lower revenue on release of working capital is not yet visible because it takes typically a quarter before that becomes visible. So that's expected in the second quarter, and that should help our free cash flow in the second quarter. Progress on the '27 targets. And then the outlook for the second quarter. Visibility remains low. But what we can see now is that the downward trend has stopped with our performance in April at a similar level as March. So it seems that well, for now, the downward trend has stopped, but hard to predict when we will really see new projects starting besides the one that I also highlighted in our press release in Americas and the continued activity in Qatar. Those are the elements that I wanted to share for now and look forward to take any questions.

[Operator Instructions] We have the first question on the phone lines from Konrad Zomer with ABN AMRO.

Two questions, please. The first one, your EBIT margin in Q1 went down to 2.7%. Do you consider a certain floor level of your EBIT margin in terms of how much you continue to cut costs? Or do you just take it as it comes and assume that you will benefit from a recovery when it's there? And my second question is on your EBIT in the rest of the world. We know that the earn-out was completed last year, so that, that in itself should give like a bit of leeway in terms of your EBIT for this year. Nevertheless, you turned into a small EBIT loss -- is that something that is in line with your expectations? Or would you like to see that going back to a positive number as soon as you can, too?

Yes. Good questions, interesting. The floor level EBIT. So we don't have a fixed number on the floor level of EBIT. But of course, we want to adjust our cost levels to our activity level. So we will continue to do so. Especially due to the lower perm revenues, the EBIT percentage is really low in Q1. And overall, it remains our plan to achieve our long-term targets. And it also means that the cost levels should match our activity level. But we're also mindful that we also want to be ready when the recovery starts in our markets. So we need to have sufficient salespeople and recruiters available. And that's where all the technology investments help us to make our organization more efficient. So there's still definitely room for further cost savings. Yes, we want to end up with a decent result going forward and are still trying to achieve our long-term targets. And that's -- the same thing applies for the rest of the world. And the biggest impact in Q1 is a really low level in perm fees at Taylor Hopkinson in Q1, where we see continued vacancies coming in, but a lot of starters were just canceled by our clients. So it's too much, but that result should definitely turn positive as soon as possible. And one of the elements that's making it a bit more challenging is that all the contracting work that Taylor Hopkinson is now winning ends up in Brunel regions because it's executed in other parts of the world. But it's certainly the plan to bring rest of the world to breakeven at least as soon as possible.

And then maybe as a follow-up, your performance in April seems to be in line with March. So as you just phrased it yourself, the downward trend seems to have stopped for now. Has that had an impact on how you approach your cost line already? Because I can imagine that it's quite a thin line between ongoing cost savings and holding on to capacity. How do you make that decision? Because obviously, if the business no longer deteriorates, then you don't want to keep cutting costs for too long.

Yes, a fair point. But 1 month of stable performance does not give you enough comfort that it's definitely the end of the downturn, we keep on monitoring. And again, for instance, the Hornsea 4 wind farm project in the North Sea, we were still discussing that with one of the parties involved last week to arrange the starters. And only a couple of days later, we were caught by surprise it's still ending. So it's too early, but we're definitely taking that into account that we want to be fully ready for an upturn while monitoring the current trends. Probably not the clearest answer you were looking for, but it's also a bit of the lack of visibility we have to deal with at the moment.

No, no. I mean it's obvious that it's very difficult to predict even for an expert like yourself.

Thanks for that. There are some elements that are helping. We saw the activities in the DACH region already weakening from the summer last year. That also means that we have relatively low number of projects stopping in the second half of the year. So then it should be more likely that the number of starters outweigh the stoppers. So we do have visibility, but there are still certain surprises like the Hornsea 4 project happening.

We have Marc Zwartsenburg with ING on the line now.

And maybe asking stuff that you already discussed, but I jumped in a bit later because I came from another call. So apologies if I'm asking something that you already mentioned. But maybe to start with the Netherlands, if you look at the top line trend, so the 5.5% decline working day adjusted, you see March still trend bending downwards a bit. And you mentioned April a bit stable. I guess that also then counts for the Netherlands. But are we then down now currently 7% already? Is that the kind of trend what we should be looking at when entering Q2? And linked to that, you mentioned also the freelance impact that seems to be more negative than it is a positive from people joining Brel instead of going to a perm job. How do you see that developing going forward? Because eventually, I can imagine that people want to be still flexible and it will be a small positive for you guys. That's my first question. Let's take them one by one.

I prefer that. So what we've seen in the development of freelancers in March is especially the group that was clearly that they did not meet the requirements, but they were allowed to continue until March because our clients provide us indemnity on any risks, but they stopped by the end of March. So that's a group where we already knew for quite a while that they did not meet the requirements. At the moment, after reviewing our total population in that area, we are comfortable that -- the rest of this group does meet the criteria. So, no further decline expected there. But there are some other developments that are hard to predict. We see the reluctance to work with freelancers that more and more clients, we see it increasing. And there's also uncertainty with the freelancers itself, but it's hard to predict how they will respond to that. And then on the run rate, we highlighted the head count at the end of March in our press release in the Netherlands, which was roughly 6% below where it was last year. So that means that head count-wise, the run rate is minus 6%, but because of the mix between freelancers and own employees, where freelancers typically get a higher day rate, the revenue impact will be slightly higher. So your minus 7% is an accurate estimate. And normally, we never see significant head count growth in Q2, and that's also not what we're seeing today, and it's also not what we're expecting for the remainder of the second quarter.

And if we then go to Germany, what are you seeing there in terms of trend going into Q2? Is that also a bit deeper than, was it minus 22 even? Are we going even a bit deeper because last year, it remained rather stable for a while?

If you look at the head count graph that's in the press release, you're right, in the first half year of last year, it was pretty stable, and we do see a continued but slower decline in this year. So the gap is getting bigger. Therefore, also the revenue impact will be bigger. Because we are limited to offset -- and that will be partly offset by increase of rates for the 1st of April.

What do you mean? -- sorry, the CLA increases, you mean?

Yes. There's a 3.5% increase in the CLA from the 1st of April onwards.

So you're basically saying that's compensating. So the revenue trend should remain rather stable. That's what you're saying?

Yes.

You also mentioned and that's a bit linked to what Konrad was asking, you say we have more room to save cost. You took out, of course, this significant, what is it, EUR 20 million or so. There's always more room to cut costs because you can take out staff and adjust to the top line. But given the current trend and where the margins are and your longer-term targets becoming a bit further out of reach, should we expect another sizable restructuring in the second half of this year that you need to prepare for because, with high double-digit declines of over 20% and not really visibility on things getting better, your conversion rates and longer-term targets get a bit out of reach, I would say.

Yes, that's a fair observation. But that's what we're currently working on. And what I also tried to explain to Konrad's question before that the lack of feasibility asks for a bit more time to do a further review, but it also means that we're also reviewing different levels on types of activities and offices and those type of things without impacting our capability to benefit from recovery. So, in short, there will be further cost savings planned going forward. And a lot of those will be happening in a let's say natural way.

And then maybe moving to your projects in global businesses. We knew some projects were ending. We also have some new projects starting like Papua New Guinea gaining traction. What would you expect in terms of new projects? Because do you feel that there's still less fast ramp-up? Or can they be even be halted? What is a bit the feedback from the clients that are involved in the larger projects?

So, I don't see any of the current projects being halted, but we continue to see that our clients are taking more time to really ramp up their projects. So we made, for instance, nice progress on projects in Namibia, and that's now being slowed a bit. Same for Mozambique. So, clients are taking even more time to really start ramping up, but they're continuing the preparation for it again with Mozambique. For now, we see the projects that are starting are small projects, but they're still working on the bigger ones. But yes, it will depend on what happens in the world in the next couple of months when they will start. But they are continuing the preparation.

Okay. You don't see any more concerns arising from the lower oil price at the moment?

No. Especially in oil and gas, I haven't seen any project being canceled, postponed or shelved. But we do see the continuation for the preparation for Mozambique and Namibia. These are the bigger projects. And PNG is pretty much agreed that, that will start January next year.

Okay. And if we look at the perm business, that's down 50%. It's now EUR 3.3 million in the quarter. What percentage is Taylor Hopkinson of that? And what percentage is Germany of that? Because I saw you made some statements in the German and DACH region about the perm. But obviously, I also know from the profit warning a while ago in Taylor Hopkinson that there was a lot of perm there. How would you split that? And what are you -- what are the key differences there? Is Taylor Hopkinson even weaker than the German perm or?

The surprising part in Q1 is that all the markets were weak. And Germany is somewhere between 20% and 25% of the total. Taylor Hopkinson between 35% and 40%, and then 2 other big ones are Americas and Australasia. And the decrease happened across the board. But the biggest surprise here is that, yes, vacancies that we filled and where the candidates accepted the offers were canceled anyway. So we don't get the fees there, where we now see that we continue to work on vacancies that will be paid. So I don't expect to be the impact to be -- to remain this significant in the foreseeable future. They will recover to a more normal level, but not yet to the EUR 6 million...

Germany was 25%, you mentioned there.

Yes. And just to be sure, that includes perm fees and transition fees.

Okay. And the Taylor Hopkinson, must be loss-making, I guess, at the moment?

The reporting entity is, like I explained before, a lot of the work they win ends up in Brunel regions, and we're still finalizing the final cost allocation for that.

So just to understand that, so some of the business that they win is then later on carried out and executed by the Brunel footprint?

Yes. They've won quite some work in Asia on construction yards, and it's fully executed by Brunel in Asia, and also revenue and gross profit is included in their P&L.

And that's because they don't have an operation there that Brunel has and they won the contract because they pitch for it?

Yes, and they have...

So that means that their existing business -- Yes. But that basically then means that the business that you really bought from them, leaving aside the business that they pitch for and is now executed by Brunel, the synergy that the business is significantly underperforming at the moment. I should there not be then a significant rightsizing at their end? Or should we even expect an impairment on the back of that or lower because they're not running anymore?

No, I don't agree with your initial observation is that the business that we bought is declining because they had owned entities in other parts of the world. But we don't want to duplicate our infrastructure. So we closed their entities, and now it's all done by Brunel entities. So that's the first part. So still pretty happy with especially their contracting head count. The perm performance is absolutely lower than at the time that we acquired them, and that requires attention and optimization either in ideally more work. But otherwise, we need to adjust the team to the activity level. But they are finding new inroads in other renewable markets. So -- and then finally, that also doesn't that be concerned that there will be any impairment on that acquisition.

Why not?

Because overall -- but if you add the contribution of the projects that are ending up in other parts of Brunel, then they still contribute to have a positive EBIT which is part of what we acquired because it's their clients, their contractor database, all those type of things. It's just that let's say, administrative execution is done by Brunel.

Okay. Yes, that's clear. It's just that I'm a bit disappointed in the performance of Taylor Hopkinson a few years. And of course, I know offshore wind is difficult. We know that we also read -- everybody reads the newspapers. But yes, considering what you paid for it, Tom collected a nice amount of money. Yes, at some point, they also need to deliver, and that's already lacking now for quite a while. So that's why I'm interested in how management there at Taylor Hopkinson as a plan to turn this around because even though there's maybe some profits in the Brunel organization that are clients of theirs, et cetera, in the end, given the synergies, it should be a way bigger contribution. And that's why I'm saying, I would expect then at some point that Taylor Hopkinson comes up with a business plan, how they can be much more profitable than they currently are. Is that something that's on its way or that we get an update?

That's what we -- that is in place and what we're working on. But in Q1, there were additional surprises that's impacting the results. But yes, we fully agree that the contribution, especially on the perm part needs to increase.

[Operator Instructions] And we have Maarten Verbeek with The Idea on the line.

It's Maarten Verbeek from The Idea. A couple of questions from my side, please. Firstly, Peter, to make a better judgment going forward for the next coming quarters with the perm business, how much perm revenue did you have last year?

EUR 24 million for the full year.

EUR 24 million. So more or less equally divided over the quarters?

Yes. More or less, yes.

Okay. And then you mentioned about the freelancers in the Netherlands that contracts have ended and that the customer at that moment doesn't replace that person. That's a bit old because that would mean that a lot of work simply has disappeared. Or did I understand you incorrectly?

No, you understood me correctly. And I can only say that I'm just as surprised as you are by that development, especially since some of them are working in quite some, let's say, political sensitive areas.

And how do you -- what are the risks that you will see a further deterioration in your population of freelancers? Because initially, you saw there's an opportunity that people would be transferred and you would have other contracts with them for them.

Yes. But now after we've done the full review, we've identified that yes, the freelancers that we use, they do meet the requirements. So, there's no need for them or for us or for our clients to change their behavior, except for when our clients do not want to do it anymore. But that's limited so far. So, my guess would be that the area that is impacted is not directly the area where we operate in, which makes sense because the ones that are not considered true freelancers is probably at a slightly lower level than the people we typically use.

Okay. Clear. And then to get back to Taylor Hopkinson, you mentioned that they are developing and entering new market segments. Can you provide a little bit more color on how much is still the offshore wind business within the portfolio of Taylor Hopkinson?

Yes. So, when we acquired them, their perm activities were only in offshore wind. But since the slowdown in that market in the end of '23, they've now also looking at onshore wind, hydrogen markets and even partly carbon capture markets. So, they're looking at more markets. And the positive thing is that their contractor or the database of people provide -- has a lot of people that can operate in any of those markets. And the other part is, of course, that they continue to look across the globe because it's not -- even though the offshore wind market is not doing very well, but there are still parts in the world where it's doing okay.

Absolutely. And if you now look at those 3 new segments, they have entered the onshore, hydrogen and the carbon capture, how much is that of the total business at this stage?

Yes, the 3 combined are roughly around 35%. Yes. Just to make sure 35% of a really low level. I do want to share, so the low perm revenue, again, was a significant drop in cancellations of vacancies that we are finalized or about to finalize, and that has a huge impact. And we have never seen that in the same way this level before. So, we expect that going forward, it will be more normal business [Technical Difficulty] and prices. So, it should at least be better than in Q1.

Thank you. We have a follow-up question from Konrad Zomer with ABN AMRO.

Yes, one other question. You mentioned in your preparation remarks -- your prepared remarks a few times projects are being delayed or upheld by clients. And I was just wondering, if you look at your total revenues of maybe, let's say, EUR 1.3 billion or EUR 1.4 billion for the year, whatever it's going to be. Can you give us a breakdown of how much of that revenue is generated by what you call like larger projects, maybe, I don't know, 50 people or more because your bread and butter, run-of-the-mill business of like placing a few people here, placing a few people there. I think that has continued at a decent pace. So, I'm trying to get a feel for how important those bigger projects are for your overall performance.

Yes. I don't have the accurate number, but that will be mainly in Asia, Qatar and Australia, where we have the bigger projects. So that will be roughly 40% of our revenue.

Sorry, did you say 40%?

Yes.

We currently have no further questions on the phone lines. I'd like to hand it back.

Yes. Thank you very much. Thank you all for attending the call and look forward to see many of you soon. Have a great day.

Thank you. Thank you all for dialing in. And that does conclude today's conference call. Thank you all for your participation, and you may now disconnect.