Bureau Veritas SA (BVI) Earnings Call Transcript & Summary

Hello, and welcome to the Bureau Veritas' Q3 2022 Revenue Call. My name is Jas, and I will be your coordinator for today's event. [Operator Instructions] On the call today, we have Didier Michaud-Daniel, Chief Executive Officer; Hinda Gharbi, Group Chief Operating Officer; and Francois Chabas, Group Chief Financial Officer. And I will now hand over to your host, Didier Michaud-Daniel, to begin today's call. Thank you.

Thank you. Good morning, good afternoon, and good evening to everyone. Thank you for joining Bureau Veritas' Q3 '22 revenue on the webcast and on the call. Hinda Gharbi, our Group Chief Operating Officer; and Francois Chabas, our group CFO, are here with me. So in the third quarter of the year, the environment has remained volatile with the consequences of the war in Ukraine and still some mobility restrictions in China, further complicated by the Zero COVID policy. We continue to take appropriate measures to ensure the health and safety of all our employees. Employee safety is a top priority for the management team. And I would like to take the opportunity to thank all our teams who remain highly mobilized and ensure efficient solutions and support for all our clients. Looking at the figures. In Q3 2022, revenue for the quarter rose EUR 1.46 billion, up 17% year-on-year. The organic increase was 8.7%, showing a very solid underlying performance and 7.3% year-to-date. Four of our businesses delivered particularly strong organic revenue growth ranging from Buildings & Infrastructure at 11% to Agri-Food & Commodities at 9.6%. The scope effect was a positive 1.3% reflecting the impact of the bolt-on acquisitions we had in the first 9 months of 2022. For the last 4 consecutive quarters, ForEx had a positive impact of 7% in Q3, primarily due to the appreciation of the U.S. dollar and impact currencies against Euro. Excluding the full year impact from lockdowns in China and based on the year-to-date performance, we confirm our full year '22 outlook. In Q3, we have continued to see the benefits of our strategic direction. 3 key areas are of particular interest. First, the strength of our organic growth. Our organic revenue performance has shown a very solid growth trend, and we are reaping the rewards of our business and geographical diversification and market positioning. Secondly, we have accelerated our selective and disciplined bolt-on acquisition strategy with 4 promising transactions to extend the geographic diversification of our consumer products activities by expanding in the U.S. and in new markets. And it further positions the group in the sustainability services in Spain. And one strengthens our exposure in public infrastructure in the U.S., a key focus for our U.S. B&I platform. Thirdly, we continue to see accelerating demand for our BV Green Line of services and solutions as we're focused on first safety, quality and environmental stewardship continues to gather momentum and prominence. This includes carbon footprint verification, renewable energy, responsible sourcing of LNG fuel ships. We continue to benefit from the balanced portfolio we have established over the past few years. In the pie charts, you see diversification benefit. First, all of our activities are fueling the growth. Each business contributes to driving the group forward. Second, our strong franchise covers all continents. In the third quarter, growth was driven across more geographies with a significant contribution from the Americas as well as Africa and Middle East. Our growth platform is in place across the whole of the group and enables us to deliver steady organic revenue growth. This is [ complemented ] by our bolt-on targeted acquisition strategy. Our strategy to grow the portfolio with bolt-on acquisitions to deliver consistent performance has continued in the third quarter. The acquisition of C.A.P that we announced in September 22 to reinforce our B&I platform in the U.S. will increase our footprint in the infrastructure sector. C.A.P is a company serving as one of the largest building department services firms in Florida. The company realized EUR 25 million of revenue. This complements our presence in good compliance services footprint in the U.S. Our diversification strategy in Consumer Goods continues with one additional acquisition to expand our offering and footprint. Alongside ATL and AMSfashion, we have acquired Galbraith Laboratories in the U.S. It is an expert in health care analytical testing solutions. The company based in Tennessee will further position Bureau Veritas in the consumer health care and industrial chemical supply chain. These 4 transactions in strategic areas represent EUR 67 million in annualized revenue. The acquisitions over the last 1.5 year increased the group's revenue in the U.S. by EUR 100 million. Before handing over to Hinda Gharbi for the business review, let me say a word on our CSR achievements. Our commitment is to act responsibly in order to shape a better world. This commitment was again recognized by nonfinancial rating agency during the third quarter of 2022. This is a great achievement for the constant efforts regarding sustainability. Bureau Veritas has been ranked first by Moody's ESG solutions among 99 companies in business support services sector, with the score up 4 points to 70 based on 38 ESG criteria. We have also been ranked second by Sustainalytics among 62 companies in the research and consulting sector. The major improvements came from governance and social pillars. Now I would like to welcome Hinda Gharbi, our Chief Operating Officer; and Francois Chabas, CFO, to the call today and hand over to her for the business review. Hinda?

Thank you, Didier. Good morning, good afternoon and good evening, everyone. I'm pleased to be here with you today. When we look at the overall performance of the group, we have a growth that is broad-based and demonstrates again the resilience of our overall portfolio. Our top-performing businesses are Building & Infrastructure and Industry. Both grew double digits organically in the quarter. Marine & Offshore and Agri-Food & Commodities were both up circa 10%. Certification was up 6.6%, benefiting from strong demand for sustainability-driven solutions while consumer products grew moderately at 0.6%. Looking now at each business. First, Marine & Offshore. The business delivered an exceptional 9.7% organic revenue growth in the quarter. It was equally led by both in-service and new construction activities. Our new build activity was fueled by Asia and reflected the new order intake in the prior year. Our core in-service activity benefited from several factors: the continuous increase in occasional surveys, the growth in our fleet, some price increases as well as ship owners scheduling inspections earlier than anticipated. Our new orders continue to grow, driven by the construction of LNG fuel ships, bulk and container ships and specialized vessels. The order book of 18.9 million gross tons gives us a positive revenue outlook for the next 2 years. For Agri-Food & Commodities, the business remained strong in Q3 and recorded an organic growth of 9.6% with the following dynamics. Our Oil & Petrochemical business further improved. The trade market benefited from higher fuel consumption, notably for aviation fuel and petrol. The diversification of our services continues with laboratory outsourcing and with sustainable aviation fuel testing to name just a couple. Our Metals & Minerals business continued to perform well. It benefited from solid growth in mining-related testing, driven by energy transition minerals. The group's successful strategy for on-site laboratories continue to contribute to the growth and resilience of this business. Our Agri-food business showed some improvement. The agri upstream business benefited from strong growth in Brazil and also from the recovery of the agri trade in Europe following agreements on shipping commodities out of Ukraine. On the food front, we continue our expansion in the U.S. and in selected markets in the rest of the world, and we are diversifying our services in the Pacific and North America regions. Moving to Industry. Industry was amongst the best-performing businesses within the group's portfolio in the third quarter of 2022 with organic growth of 10.6%. The strategy of diversification towards OpEx and power and utilities markets continues to bear fruit. Power & Utilities remained the key growth driver of the portfolio with a strong organic performance achieved in Q3. In renewables, opportunities remain significant. The pipeline continues to grow, driven by integrated energy companies as they transition their portfolio to new energy sources. And we are capitalizing on our strength with these companies and providing solutions to help their transition. In Oil & Gas, we are leveraging our footprint to capture growth while we remain focused on growing our OpEx services in our business mix. In Q3, it represented 2/3 of our oil and gas revenue. For Buildings and Infrastructure, we continue to execute our B&I growth strategy, and we are strengthening our 3 platforms across Europe, Asia Pacific and North America. North America, a strategic platform for B&I grew 21%. This growth is broad-based from data center commissioning services to project management assistance and OpEx-related services. As mentioned earlier by Didier, C.A.P, our latest acquisition strengthens our code compliance business and positions us well to support our customers with climate change implications for their buildings and infrastructure. In Europe and specifically in France, our largest business, we delivered a steady 5.8% organic revenue growth in the quarter driven primarily by our large portfolio of OpEx services. This resilient growth will help mitigate any potential slowdown in the new build market. Additionally, our CapEx portfolio is designed to service different end markets and mitigate any one market weakness. Lastly, the Asia Pacific B&I platform remained resilient and recorded single-digit organic growth despite the continuous and sporadic lockdowns in China. For certification. Overall, the business achieved a solid organic growth of 6.6%, supported by both volumes and robust price increases across most geography. Latin America, Africa and Asia Pacific performed above the divisional average. We have diversified our services mix in many geographies, shifting from traditional scheme towards voluntary scheme and broadening our portfolio in Food certification and sustainability. This resulted into double-digit organic growth in Brazil, Australia, U.K. and China. Overall, market growth is driven by increased client demand for more brand protection, traceability and social responsibility commitments across their operations and supply chain. As a result, we have a strong momentum in corporate responsibility and sustainability services. Specifically, we see strong demand for greenhouse gas emission verification services namely carbon footprint assessments, neutrality or net zero goal assurance. Additionally, we have recorded strong growth in Food Certification as well as in enterprise risks led by cybersecurity and IT management system solutions. For Consumer Products, it delivered more moderate organic revenue growth, up 0.6% in Q3. Our growth was primarily led by Southeast Asian countries and Turkey, reflecting the shift of manufacturing into these countries from China. Our activity levels were under pressure in Eastern China with China facing disruptions from new regional lockdown measures and the impact of high inventory in consumer end markets. Looking forward, on the China front, the Zero COVID policy continues to restrict testing activities in the near to midterm. We continue to expand our sustainability services in this division, and we are seeing the strong momentum of growth led by social and governance audit across most geographies. I would like now to update you on our BV Green Line. As you have noticed on my update on the businesses, there is an acceleration of sustainability programs implementation globally and in all sectors. Our BV Green Line of services and solutions are gaining traction. They now represent circa 55% of our sales at the end of September this year. BV Green Line represents all our solutions and services, both in sustainability enabling sectors like the new energy space and encompasses our sustainability customer solutions to support their sustainability management journey. I wanted to share with you a few examples of services we are offering to the market. In Resources & Production, we have been awarded the project supervision and quality assurance support of the largest green hydrogen and green power solar project in China. In Consumption & Traceability, we were awarded a contract with Verkor, a European pioneer in electric vehicle batteries. With our digital partner OPTEL, we ensure full traceability of Verkor's batteries that bring greater transparency and sustainability to its entire supply chain. In Buildings & Infrastructure, we have been awarded a contract in Colombia to validate compliance with the sustainable construction standards during design and construction stages. In New Mobility, as the shipping industry decarbonizes, our marine and offshore experts released a new biofuels ready standard helping the maritime industry address the main challenges related to the use of biofuels by ship. And finally, in Social, Ethics & Governance, we have been selected by the Ivory Coast government to act as a control office on behalf of the National Agency for Waste Management. Bureau Veritas supports the implementation in this case of the cleanness objectives and preservation of the environment for 21 cities in the country. After a few months managing operations in the company, it is clear to me that accompanying client sustainability journey is in the DNA of Bureau Veritas and is a continuity of what we have done for nearly 200 years. Now as I look forward, I am confident that the fundamental strengths of our sustainability portfolio position us well to leverage the momentum in this space. I would like to hand now back to Didier for the outlook for the rest of the year.

Thank you, Hinda. Thank you. The outlook now for the rest of the year. Earlier this year, we guided on full year expectations, assuming no severe lockdowns in one of our main countries of operations due to COVID-19. As of today, we can now obviously see the repetitive lockdowns in China. Therefore, this needs to be excluded from our margin guidance. We will do what we said. So based on the year-to-date performance, and excluding the full year impact of the COVID-19 lockdowns in China, we still expect to achieve mid-single-digit organic revenue growth, improve the adjusted operating margin, generate sustained strong cash flow with a cash conversion above 90%. We live in volatile and uncertain world. In this environment, we delivered another steady operating performance in Q3, thanks to our agile and resilient business model. The growth platform is in place. We are uniquely positioned to benefit from the key imperatives of sustainability and energy transition. With the 25 strategy, we will capitalize on our strengths and continue our successful journey of creating value for BV and its stakeholders. Overall, the strong fundamentals for our business, coupled with our actual secured backlog give us confidence to remain positive with regards to our business outlook, both near term and longer term. Thank you very much for your attention. Hinda, Francois and I are now ready to answer your questions on the call or on the webcast.

[Operator Instructions] The first question comes from the line of Suhasini Varanasi from Goldman Sachs.

Just 2 for me, please. To clarify the margin guidance, is it fair to say that given the growth that you have seen in the other verticals, the margin weakness that you're seeing is mainly coming from Consumer Goods division that you saw the weakness in the growth in Q3. And therefore, that is what you're worried about to get the margin -- to potentially get the margins down year-over-year. And then secondly, the growth that you saw in Q3, did it soften towards the end of the quarter or at the beginning of Q4?

Thank you for your question. So I'm going to say the first question. You know that it's a revenue call. In fact, we should not talk about margin, but I think it's very important that we clarify the point regarding the margin guidance. In fact, to be extremely clear on that point, you know that in our Capital Market Day in December '21, when it comes to operating margin, we said that 16% is a floor, and we commit on this. It's true for this year. I'm not going to say more than that. And of course, we will have more details in our call in February. Regarding your second question, I cannot say that it slowed down in September. We -- in fact, there was no real change of trends from August to September. It's quite the same type of organic growth.

The next question comes from the line of Sylvia Barker from JPMorgan.

To start, ask on the consumer organic. I guess you did see quite a good Q2 and Q3 has been quite slow. Could you just talk a little bit more about, I guess, are you seeing any replenishment of samples? And maybe can you comment on what the consumer business did in China specifically. Then secondly, [ could you check ] within Metals & Minerals and the slowdown that you have seen sequentially. Obviously, you're saying that the comps were quite difficult, but could you maybe just give us a little bit of detail as to where that's coming from? Then in B&I in the Americas, could you comment on the U.S. a little bit and what you're seeing on the data center side there specifically?

Thank you for your question. I propose Hinda you answer this question because there are very operational questions, starting with the consumer organic growth in Q3.

Absolutely. Thank you, Sylvia, for those questions. So on the consumer front, First of all, if you look at our growth in Q3 and considered the same growth last year, Q3, this is -- these are not favorable comparables considering that last year, we were basically still executing the backlog from previous slowdowns. So that's the first point. The second point, we have seen, of course, sporadic lockdowns in Mainland China across many more provinces than what we have seen in Q2. And the third one is we have seen major retail companies in the Western Hemisphere, essentially in view of that high inventory slowdown, their sourcing and their purchases, which meant that many producers had to delay some of their new product launches. We have also seen an impact on the technology front in Taiwan. So all these factors together meant that, that slowed the growth. Now of course, we were quite pleased that our strategy that we have put in place has kicked in. So while we've seen the China slowdown and all these other factors I just mentioned, we were able to see actually growth in Southeast Asia and South Asia, and we have been working for a while there to diversify our geography footprint. We have also been working quite a bit to diversify our offering and to offer particularly new solutions in terms of sustainability, traceability. So -- and then finally, of course, we continue to be extremely vigilant as to our efficiency and how we operate our labs in China in particular. So that's on the CPS front. In terms of M&M growth, we actually have -- the Metal and the Mining sector, as you know, is in an up cycle. Now of course, as there is some interest rate increases, the exploration versus production development mix is slightly different. But we have been actually thinking about this for a while. And a lot of our strategy around on-site laboratories is really to leverage basically that production shift. So -- but we have actually continued to lead in many of these markets on the mining side. So essentially, we haven't seen any particular concerns on the growth front, and we expect to see a lot more activities as well on green, minerals and metals, and that's an area of focus for us. And finally, on the B&I question, sorry, just to be clear, you were asking about what's the dynamic there?

It's more...

Yes, yes. So on the commissioning side...

And just specifically on the U.S., I know you've been talking about.

Yes, yes. Thank you. So look, I think our growth in the U.S. was around 21% and it was broad-based. It goes from our data commissioning activities to our facility assessment and compliance activities to our project management assistance. We have a number of projects in infrastructure kicking in as well. So it's very broad-based B&I activity in the country. And we -- again, we are very pleased to have C.A.P join us as well because that adds to our code compliance business, particularly in a place like Florida, which is very sensitive today to climate change risk.

The next question comes from the line of Neil Tyler from Redburn.

Yes. I'd like -- actually, I'll start with a follow-up to the previous question on B&I. And specifically, you called out in Europe the resilience of the activities that you perform. Can you sort of frame for us a little bit the shape of the U.S. B&I business? And how you feel that would fare were non-resi construction to not that the lead indicators point to anything concerning. But is that more likely to track the non-resi construction output. That's the first question, please. And the second one on pricing. Within your organic growth, have you been positively surprised with the extent to which your price increases have settled across the business? And any areas where you would say there's more to do? Pleased to capture cost inflation?

Okay. Thank you for your question. I'm going to start by the second question. Pricing, Francois, could you answer the question regarding pricing, please?

Yes, sure. Neil, on the pricing front, I think what we've seen in Q3 is that our projections we have been disclosing in -- during the H2 results are actually on track. If you remember, we said that especially in the geographies where there is an acceleration of inflation, there is kind of a lag between our pricing adjustments and when it hits P&L. So we plan for the full year a contribution of pricing in the range of a bit above 1.5%, with an acceleration in Q3 and Q4. We saw it in Q3. So I would say, is it an easy price adjustment? No. We are moving our prices up everywhere where it is possible and acceptable to the clients. We are still very much working on it. But I would say so far, in line with our expectations, knowing that from a cost point of view, you would remember that the biggest chunk of our cost is people-driven and that remains under control.

Thank you, Francois. Before leaving the floor to Hinda, regarding your first question, you are right. Now first, I wanted to insist on the fact that our business in Europe is extremely resilient. And you are right to say so, which is good news, of course, for now and for the future. And now regarding North America, Hinda?

Yes. So North America, I think we remain consistent in how we really engineer the mix of our business. So if you look at the U.S., we have essentially 1/3 of our business is in the CapEx space, 1/3 in the OpEx and the 1/3 in the data commissioning space. So we are balanced, and we are focusing on growth in these 3 sectors.

The next question comes from the line of Arthur Truslove from Citi.

Arthur Truslove from Citi. So just going back to the Consumer Goods performance. So I just wondered how much of the impact on organic growth was driven by lockdowns in China, if you could give us any idea about that? And potentially what organic growth outside of China might have looked like? And secondly, if you could give us an update on the kind of wage growth that you might be seeing. Give us an idea of what sort of levels of wage increases and perhaps how does that compare with what you were seeing in the first half of the year? And then I guess, finally, just on the margin guidance, just to confirm, it doesn't sound like on a full year basis, we should expect the adjusted margin to go up anymore, which obviously would have been the case at half year. So is that right, basically?

So I was very clear on the margin side. So again, the commitment we have is 16% as a floor, it's not a call for margin, it's a revenue call, as you know. On the update on salary, we could have 1 hour on this one because if you think about Asia, where the salary increase is very low. By the way, the salary increase in China is the lowest one I've seen since I'm in charge of Bureau Veritas. If you go to the U.S., of course, it's a different story because, as you know, there is scarcity of manpower. And if you are in Europe, you need to look at each country, which has a different story. So overall, it's a difficult -- it's not a difficult question, it's an interesting question, of course, but the answer should be done with the 140 countries we are working with. The first question regarding consumer goods and the impact from China, Hinda?

Well, I mean, we obviously -- also thanks for the question, but we would rather not precisely really disclose the impact from each component. But it's suffice to say that the lockdowns as they stand today are quite sporadic, but our team on the ground is extremely focused to try to basically try to plan around them at this point.

Our next question comes from the line of Kate Carpenter from Bank of America.

Just one on the M&A pipeline. Could you give a bit more detail around how you expect the pipeline and M&A momentum to evolve over the next 12 months versus the last 12 months?