Koninklijke BAM Groep nv (BAMNB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for holding and welcome to the First Quarter 2020 Trading Update by Royal BAM Group. [Operator Instructions] I would now like to hand over the conference to Mr. Frans den Houter. Go ahead, please, sir.

Yes. Thank you. Good morning, and welcome to the call for Royal BAM Group trading update for the first quarter of 2020. I hope you are well, and thanks for dialing in. My name is Frans den Houter, CFO and Interim CEO. And with me is our Investor Relations Manager, Michel Aupers. The slide on your screen shows the NHS Nightingale Hospital in Harrogate. It provides 500 additional beds for COVID-19 patients. Teams from BAM Construction worked 24 hours a day in shift patterns to be able to hand over the facility less than 3 weeks after work started. We are proud of the role that BAM companies and individuals are playing to support health services, other essential services in our wider communities. Another example of this is our support to the [ Held ] hospital in the Netherlands, where we create a temporary additional medical facilities. Let's look at key points of the first quarter. We are reporting an adjusted pretax results for the quarter of EUR 1.3 million. This does include the initial COVID-19 impact in Belgium, but it's important to mention that it does not reflect the negative effects of COVID-19 on BAM's future performance, which are subject to material uncertainty and, therefore, difficult to predict. Our disappointing Q1 result is lower compared to the first quarter of 2019. There are 2 main reasons for this. First, we have to report again a weak performance at construction in Germany and at BAM International. Also, in the Dutch Civil engineering, the improvement measures did not yet translate into a stronger performance. Second reason, the result of Dutch Construction and Property while good were below the exceptional level of last year. COVID-19 first affected our operations in Belgium in the last weeks of March with a modest negative impact. Results for the other businesses were generally satisfactory. Our first priority has always been to protect health and safety, and that is now more important than ever. We are complying with new and evolving regulations for how we work on site, and most of our non-site employees are now working remotely. These are 2 of our 4 crisis management principles, which also includes serving our clients and focusing on cash. New regulations regarding health and safety meant we had to suddenly restrict or stop working on projects in several countries in late March. So far, in the second quarter, we have seen some easening of restrictions, specifically in Belgium. In Ireland, the government has announced a phase return to -- of outdoor workers as of 18th of May while maintaining social distancing. We ended the quarter with a good trading working capital efficiency of minus 10.3%. As we announced earlier, we drew down our EUR 400 million RCF, and that is included in our total liquidity that we report at the end of the quarter of EUR 944 million, which also reflects the normal seasonal pattern. We have cut back nonbusiness critical cost and CapEx, which will result in significant cash savings. Management continues to focus on additional cost reductions and further derisking BAM's portfolio. Next to COVID-19, we are fully focused on the improvement measures at Dutch Civil engineering, German Construction and BAM International as part of our strategy to derisk the company. The measures that are being rolled out include a further downscaling and refocus of activities. Let's look at the effect of the pandemic in more detail. We have summarized the latest position in each country in today's press release. Our operational efficiency, which is reported on a weekly basis to our own corona crisis management team, recovered from an estimated low of around 55% to an estimated 65% earlier this week. We are experiencing pressures on the sourcing and supply of some construction materials. This is a mixed and evolving picture. For example, there are some delays to deliveries in the U.K., while on the other hand, a specific project in the Netherlands, the supply of glass panel doors from Asia is coming back on stream. With respect to our fourth crisis management principle, the focus on cash, we are taking mitigating actions by reducing OpEx and CapEx and making maximum support from -- maximum use of the support of governments, which includes, for instance, furlough schemes and tax measures. Our order book at the end of the first quarter was strong and stable. Since then, we have continued to bid for and win new projects. We are part of a consortium that just has been given notice to proceed with the design and construction of the first phase of the HS2 railway project in the U.K. Another example is the start of the Helix building in Utrecht, the Netherlands and the final award of the Dendermonde Prison in Belgium by BAM PPP. Now we come to the outlook. It is not possible to predict how the pandemic will evolve and what its consequences will be for national economies. We believe there will be long-term impacts, mainly in the private commercial markets. Certainly, the construction industry will be a leading source of employment and recovery once the crisis passes. So it's urgent that the government takes proactive steps now to support the industry. In the U.K., it's clearly positive that the government is proceeding with a sizable HS2 project that I just referred to in which we are involved. However, our industry needs more initiatives like this across our home countries. We welcome recent initiatives in the Netherlands where trade organizations, banks and the industry are cooperating with the government in order to fast track road maintenance projects and residential construction. In parallel, also adequate political measures should be taken to lower the negative impact of nitrogen and PFAS legislation. For BAM, we know there will be a significant negative impact due to the COVID-19 pandemic on our operations and, in turn, on our future financial performance. But we will provide -- we will not provide any financial guidance until there is more visibility on the situation. We will now take your questions.

[Operator Instructions] The first question is from Mr. Martijn den Drijver, ABN.

Quite a number of questions. I'll do them one by one, if that is okay by you. Could you elaborate a little bit on the order of magnitude of the project issues that you've had in Civil and International in Germany, just to give us a sense of what the underlying performance is?

Yes. So as we said, the main driver for the disappointing results are coming from those 3 opcos, and it's a mix of projects in that portfolio. So we don't -- as you know, we don't give specific numbers per opco or per business line in the trading update. So you have to do with that, Martijn.

But would it be possible for you to give an indication for all 3 combined? So not per business units. So is it single digit? Is it low double digit? Is it high double digit? Just a bit more clarity would be very helpful.

No, I think the clarity is coming from the press release where we say the underperforming businesses are the main driver for the disappointing results, Martijn.

Okay. Then I'll move on. The second question is in relation to Civil engineering. You've mentioned that are -- that there are no improvements yet. What specifically is causing the measures that you've taken not to result in improvements?

Sorry. What measures?

You mentioned with regards to Civil engineering in the Netherlands that you've made -- there have been measures, but you haven't seen the required or desired improvements. Why is that? What is causing the improvements to be delayed?

Now as we stated before, we have taken a number of measures. So we're extremely cautious in tendering large projects above EUR 150 million. And we say with the baseline and the stage gate process, we are very focused to improve the risk/reward balance in the portfolio. And that is also related to product market combinations where we work but also to taking individual projects. As such, it takes time to see the risk/reward balance improving, and what we report here is basically that we are not there yet and that it's a difficult lengthy process to turn the corner there.

Would it be then fair to say that it may take a couple of more quarters? Or is this more of an even longer term process...

No. And that's, of course, a good question. I understand that. But as you know, every quarter, we report an accurate view on how we see the projects in our portfolio. And in Q1, this is where we are.

Okay. I'll move on to the next question. You've extended your RCF with 1 year, you've had that option, but the RCF has been reduced from EUR 400 million to EUR 360 million. Should we conclude from that extension that the remaining syndicate banks agree that you can actually use the drawdown for the refinancing of the convertible debt, the EUR 125 million that is due in June next year?

No. I think those are 2 separate topics. I think it confirms that the banks are confident in BAM. Our cornerstone banks remain supportive of our company, and this is securing long-term liquidity access to the revolving credit facility. The solutions for the convertible is a separate topic.

Okay. It's a separate topic, but is this at least one of the solutions that you can opt for buying in a different way?

Well, I mean, optionality in the end is driven by liquidity. So I refer to the overall liquidity of the company where we say, we are resilient, we have optionality and we have all interest of all stakeholders clearly on the radar, also the interest of our house banks.

Okay. Then with regards to the governmental support, probably none has been received in Q1. Could you say something about the amount of staff on furlough or [indiscernible] or [indiscernible] at this point in time?

Yes. So a bit of flavor there. Maybe as we said, we only report minimal impact in Belgium second half of March. Also, as such, there is also very limited support visible in the Q1 numbers. So that's confirmed. In respect, what do we now see? I can report that we have around -- in the top, we had around 2,000 people in furlough schemes, and we see that number coming down to around 1,500. These are estimates. But it indicates, as we also reported, Belgium is starting up again. So people are moving out of the furlough system. In general, governmental support, also driven by tax measures. We see, yes, also support in our liquidity in the second quarter.

Yes. So the tax measures have not had an impact in Q1 either?

No, but there -- all I'm saying is they're significant and they're in Q2.

Okay. And then my final question is, can you provide perhaps some CapEx guidance for the full year and maybe some phasing? But also more importantly, what has been the delta in terms of CapEx in Q1 2020 versus Q1 2019?

So on your first one, as we said, so we've taken the position, one of the fourth principle, strong focus on cash. So any cash that is not related to supporting our business, safety or compliance, we carve-out of the spend profile. And as such, CapEx is significantly reducing. How that will pan out in Q2 is also related to how will the pandemic evolve. So I don't want to take a position there by giving you a number in this stage if you allow me. The delta CapEx Q1 '19 to '20, I cannot provide you at this stage.

And just to clarify, I understand that CapEx for the second quarter is difficult, but maybe some guidance still for the full year. Is that -- would that be possible, not specifically Q2, but...

No. I'd like to help you and understand why you need those numbers, but I come back to the opening question -- the opening statement that we have scenarios on the table. So we had exact impact of the pandemic and how it will evolve is very much driving to what scenario we will navigate in the coming period. And with that scenario, there's a certain CapEx profile. So that's why I'm resistant to give you a number there. So you have to bear with me until the second quarter before I can do so.

Your next question is from Mr. Luuk Van Beek, Degroof Petercam.

Well, first of all, a question on the setbacks in Germany and the poor performance in BAM International. Can you indicate if those concern things that already affected the previous quarters? Or is that anything new has popped up in this quarter?

Yes. So thanks, Luuk. So I think it's important to explain that it is a mix of projects. So there's not 1 or 2 big elements, and we see some discussions with clients that take longer. We see some variation orders that are being discussed very lengthily. We see some disappointment in the speed of the operational execution. And there's also an element of dispute with a subcontractor that had an outcome that was unfavorable for BAM. So it's not 1 big element, it's a mix of projects.

Okay. That's clear. And then you mentioned in a couple of countries like the U.K., Belgium and Ireland that you're gradually starting a part of your projects. Is it possible to give any indication of, say, what percentage of projects are now active again?

Yes. So we try to do that in the voiceover. So let me repeat general statement, we are -- and these are estimated numbers. So we have a high iterative process, getting data of the organization, translating it into decisions and communicating those back. And we add, those are dashboards. We report today 65% efficiency overall. If you peel that off, it's around estimate 80% of our sites that are open and running, and they are doing that as an effectiveness of around 80% because in dealing with the impact of corona, you change your procedures. Social distancing, of course, impact the operational effectiveness. So that's how you come to that 65%. I hope that is clarifying.

Yes, that's a clear number. And then my final question is on the order intake. You mentioned that you continue with tendering, but do you see fewer tenders or a change in the behavior of the customers? Is there anything different there?

It's too early to say. We had something positive even there to report, High Speed Two. It was an award where we are in a consortium, which took place in Q2. We did -- as we also said, we have some concerns here, commercial real estate, how will that develop and how will the pandemic impact there. For now, I would say it's too early to call, Luuk.

The next question is from Mr. Tijs Hollestelle, ING.

Yes, you arranged a new financing with the banks. So they are confident about BAM's future, but I assume that you have showed them some kind of financial scenarios. So would it still be possible to give us some indication on what you are seeing in your different countries in the P&L of Belgium versus the Netherlands? What kind of top line decline? What kind of cost base evolvement? Because, yes, obviously, I'm covering BAM for 20 years, but I have no clue how to forecast the financial performance going forward. And yes, I assume that the banks need some kind of scenarios in order to allow you to refinance. And then in addition to that, looking forward, on which covenants are you most concerned looking at your scenario? Is that the average ratio, the interest coverage, the solvency ratio? So a bit of clarification on that would also be helpful, please.

Tijs, I understand your questions. I think this is very much related to the scenarios. So basically, what you are asking is what will the impact of corona be on BAM. And we try to be transparent, but it's difficult to forecast. So liquidity is important. That's why we added the liquidity number in the Q1 release. So you can compare that to Q4. And yes, to conclude, we are a resilient company. Then your question is for your modeling. What can I use? No, I think you have to wait for Q2 until we can give you more insight.

Okay. But I understand that it is difficult for you guys to get all the information. That is a bit of a delay. BAM is not a factory, but a clear view on what is going on in April in different businesses.

No, I think we try to do that by being transparent on the efficiency, yes, 65% of efficiency comparing to a normal 100%. We indicate that, that is a material number, but also saying we have seen an all-time low of 55% so far, end of March, beginning of April. And this is the situation that we are in. And from that 65% back to an efficient company, that route has various scenarios. And those remodels and each model has an impact on the balance sheet on financing. And also, you referred to covenants. So yes, it depends. I know it's an unsatisfactory answer at this point, but it's the best I can do.

It is helpful because with the things we know today, the -- what do you say, 55% all-time low, I mean, all those countries are moving out of the lockdown situation. So that will then improve. And I understand that you don't know the pace of the improvement, but at least that is -- yes, that has been quiet helpful, yes.

Exactly. And that's where -- so yes, and that's -- the big question is, indeed, as you say, how will it move forward? So we saw some positive news in the Netherlands again, yesterday evening. May 18 is an important date, then the Irish government will advise on how they will continue. In Belgium, we are reopening, adjusting our procedures to a new reality. We're learning and adjusting in how to do that, and that's how the 65% we will see evolving.

Yes. And one additional. If you have the government conversation, do you -- will you report that immediately in the second quarter? Or is there a delay in the payment there? Because I imagine there's a lot of paperwork in all the different countries.

No, in Q2, we always give more insight. We probably, by the end, have a better insight how the pandemic will pan out. And then if we provide you insight in liquidity, we'll give you more details. And I think it's -- you ask, will that be quick? The tax effect, we see that in all the markets where we are operating, have an immediate positive effect in supporting the cash flow.

The next question is from Mr. Christophe Beghin, Kempen.

I have actually one outstanding question left. With regard to you referring underperforming businesses in Q1, where some projects that were lagging last year, especially when you had to issue a profit warning, are those still included in these underperforming businesses? Yes or no, please.

There is no -- let me say, they are not a root cause of what we report here. There are some minor adjustments in forecast updates, but this is really a mix of effects. And I mentioned 4 or 5 root causes in a wider portfolio. This is not an extension of a further deterioration of the projects involved in the profit warning.

The next question is from Mr. Wouter De Blaere, AlphaValue.

Just a quick question. The focus on last year would have been on the PBT margin between 2% and 4%. Is this still the goal to reach? Obviously, in Q1, PBT was, let's say, 0%. Is it still the goal? And which measures are you going to take or are you taking to protect the margin?

Yes. So in terms of goal, that's an indirect question around guidance. I just stick to the statement that we made here. That is too early because the earlier reported numbers did not take into account a thing like corona, and that basically changed the whole landscape. What we are doing is not changing. There is a higher focus on derisking the company and improving the 3 nonperforming operating companies. And the corona doesn't take away the focus of management in the Executive Committee and in our opcos to get this resolved.

Yes, okay. But I mean you have some land on your balance sheet and then some stuff that you could use, let's say, to land between 2% and 4%. Should we completely forget about any forecast or any outlook also for the margins this year?

No. So I think if you refer to the property positions, those are part of our business. And let us also stress out that 7 operating companies reported satisfactory numbers in Q1, where we drive a good business, and developing property, if you're referring to that, is an important element of that. So as such, there is the base performance of the company. We have 3 opcos where we have performance issues, and we have the bigger known effect of corona on which we will give you more insight as soon as we can do that. And that will need to add up to a more specific guidance, but we cannot do that at this stage.

Yes. Okay. And maybe a last question. In -- as of mid-March, let's say, do you see any nervosity in your clients, are they -- are you seeing any cancellations coming up? I understand it's, again, an indirect question on guidance, but I mean, just -- I mean, if you could just give a little bit more color on cancellations, please?

No, I think, in general, we see the realization that we're in this corona thing together as a society, and we see our supply chain, our clients and our partners working together to get through as good as we can. How that will further work out in Q2? We still have to see. We see also -- maybe it's also good to report something positive there, where negotiations with some specific public clients on claims. Also, there's a willingness maybe to settle in a more speedy way. And that's something for Q2 to further investigate, but too early to call. But it's not all negative. That's what I'm saying.

The next question is from Mr. Andre Mulder, Kepler.

Yes. A couple of questions. First, on the 3 pain areas, so Dutch Civil engineering, Germany and BAM International. Any statements yet of what you want to do there, possibly in terms of timing, possibly you have some other problems at this moment. But how is the development there? Also, any statements on the size of those operations in terms of possible provisions to be taken? That's the first question. Second question on the order intake. I can see that it's maybe too early to comment on things like April or May, but how about the exit rate of order intake? Has that changed compared to, let's say, March or compared to January, February? So I'm looking for certain pattern there. Question on payment date for your clients. Any changes there? And last, coming back to these scenarios, can you give us a sort of a rough view of what scenarios you are looking at, possibly only the black and white one, maybe in terms of these numbers that you mentioned, the 65%, 55%?

Four questions, let me try to address them all in one go and see if they require a follow-up. So on the downscaling and refocus because that's what we referred to in the press statement and how do we fix these 3 opcos. There's a high focus on the quality of the tenders that we pursue and order intake. As such, we try to improve. We are improving the risk/reward balance in those companies. And being more stringent than that, we have been resizing already, for example, also in International, where we see oil and gas markets being thin. On top, improving operational performance, new management teams in place and a high focus on solving claims and variation orders that are outstanding. So that's a mix of actions we are pursuing. If you then say on your order backlog, do you see a change in the profile in the second quarter? We have not seen that yet. So that's too early for that, as I referred to earlier. We also had some -- a big win in the U.K., HS2. And yes, it's too early to make comments on that. Third one, payment behavior is as normal. So trade working capital was good. Behavior so far is in line with the seasonal pattern, and there's no reason for concern there. Then your last question is on the scenarios, and I'm a bit repetitive, so I don't hope I'm boring you. But yes, it's just too early to share insight on that. And it's important to realize for you as stakeholders in the company, we are looking at stress testing. We are looking at scenarios with measures that come with that and measures that we already have taken with assessments of potential governmental support, how that will evolve. Yes, to provide numbers on those scenarios, it's too early, but we try to give you an accurate picture of where we are by sharing those efficiency numbers, that 65% estimated efficiency.

Why would it be too early because this scenario still stands and whether they hold through, that's, of course, in the future? So why can't you share, let's say, the black and white scenario? So what's the top, what's the downside?

It depends on how pessimistic you are on corona. So in the end, it's coming down -- how do you want to model corona and how will it evolve? Pessimistic people say it will come back in the autumn. Do you model that in? Yes or no? These are questions that are bigger than BAM or our portfolio.

Okay. Then on the 3 areas, with the problems. Do you plan any parts of those operations to be closed or sold or...

Nothing is off the table in a company, if you look at your portfolio. But there is no decision or discussion today on that. Otherwise, we would have reported that.

Okay. That would be definitely a thing for the future, of course. I said you currently have other problems in your mind.

No, I think the 2 things there. I am saying that large organizations always need to consider product market combinations and where are you active and take decisions on that if needed, and we will keep you up to speed on that. And the second question was, sorry, Andre?

Yes, sort of maybe parts being pre-closed or sold that way.

No. Yes, so that is not on the table in this stage.

Last question on the order intake. So has there been any change in March compared to January, February?

No. So the -- we see in tender activity and securing of backlog and the quality of that backlog in which we go for quality, not quantity. No signals of the corona impact yet. And that is early days, of course, and there's a longer -- mid-, long-term to consider because in the end, as we said also in the introduction, specifically in the commercial area, we have to see how this will evolve. And then there's always the balance with Civil, where you see public spending tends to go up to keep employment at a high level. How this will work out in our home markets and add up to the portfolio of BAM, we will keep you posted on that.

Okay. Then last question on these numbers again, the 80%, 80%, 65%, 55%. How should we feel the 100%?

100% normal operation pre-corona.

Should I then refer to, let's say, 2019 or 2018?

No, just a normal production. So we were a EUR 7 billion company. And if we just do what we normally do, that is defined as 100%. And the steps to 65% is just saying what is the impact of corona on the efficiency of our operations. So there's nothing else in that mix.

Okay. It does not take into account this margin target of 2% to 4%?

Nothing with margins or cash or cost. It's just efficiency of the operations.

The next question is from Mr. Martijn den Drijver, ABN.

Yes. A follow-up on Germany. Can you elaborate a little bit on the statement of under coverage of overheads in Germany because that implies quite a steep decline in revenue. And if you combine that then with the project issues in BAM Germany and the fact that they have new management, is there some sort of kitchen sinking to put it bluntly?

No. Let me be clear on that, absolutely not. So we have a true and fair view on our projects, and we say there's a mix of projects in those 3 opcos where we see deteriorations in the process of fixing those. Specifically, on Germany, there is a mix of effect. So it's not 1 element. You refer to on the profit of overheads. We also see there are setbacks in project execution. We take a cautious view on claims, and there are lengthy discussions with clients on variation orders. So I would say the overhead is also driven by somewhat normal seasonal pattern in Q1.

I appreciate those last comments, but you, as far as I know, never reported under coverage of overheads in the other -- the reasons that you just mentioned. Those have been in occurrence quite often. So I still don't see why...

Yes, but that's -- I think I'm also saying let's not make that too big because that's not the biggest number in the scheme of things. There is, as I say, 3 opcos, mix of effects on projects zooming into Germany. I give you 3, 4 or 5 reasons, and there's also, yes, an effect on overheads, but that's not a significant element in the bigger scheme of things, and it's definitely not to be referred to as a kitchen sink in that context.

Okay. Then on the search for CEO, how far do you -- can you maybe share how far the Supervisory Board is? Are they at the long list stage or already at the short list stage? Is there anything you can say so we can get a better sense of the timing of a possible new CEO?

That's not up to me, I'm afraid. So Supervisory Board started this process, and they are in a careful process to make sure we have the right capabilities in the boardroom, and they will update the markets when appropriate.

The next question is from Mr. Andre Mulder, Kepler.

Sorry, but one last question on these numbers, the 65%, 55%. So I understand the 55% is really the low. The 65%, does that represent the statement today for Q1 as a whole?

No. So it's -- we have a weekly update. So the 65% is the status today. And that will be different tomorrow, and it was different yesterday. And months ago, we were around 55%, and this is -- yes, this is a very volatile profile. So you cannot just bluntly apply it to a full quarter. It's just a status quo where we are today.

The next question is from Mr. Bart Cuypers, KBC.

Yes, a question for me regarding what has been said already on Germany and also, yes, the results on BAM International remaining difficult also over there considering what has happened in the oil markets as well. I guess, is it safe to assume that we will also see significant restructuring charges in the P&L below the adjusted PBT level next quarter or for the full year? Is there anything you can say on that on the restructuring charges to be expected?

No. That's too early to say. If we would have those plans, they would have been included now. So that's already a confirmation that, that is not on the table.

Next question is from Mr. Maarten Verbeek, TID.

It's Maarten for TID. Brief question about OpenIJ. Nothing mentioned in the press release. So I guess, it's all running just reasonably well and no additional cost, whatever?

Yes. Yes, OpenIJ, we announced not to further disclose this update on this project unless it has a significant impact on the view of the company. Now since we have not done that, it's indeed fair to conclude that it's moving in a bandwidth that is normal for such a project.

Last year, the results was particularly harmed by 2 projects, 1 in Germany and 1 in the Middle East, and you started negotiations about to be refunded. Have you made any progress in that respect?

No. So as we said before, partly a recovery of these costs is a difficult process. It takes time, and it's uncertain. And there's no other update that we can provide you with in this stage.

And then lastly, regarding tendering, you mentioned tendering goes on well. On one hand, it can be volume-wise. Could you also say something about pricing? Because I can't imagine that price would be under pressure because people are seeking for work. Otherwise, price will go up because of social distancing, maybe that they can't source products at the right price or higher prices. And could you inform us about that a little bit?

No. I think it's good. Important statement, we always focus on quality and not on quantity of the order backlog. So the future after the contracts that we now secure, we -- yes, we focus on the margin and on the risk/reward balance and not on the volume. Corona effects basically translates into specific contractual clauses if and when needed.

[Operator Instructions]

Okay. Thanks for joining us this morning, and I think this brings us to the end of the conference call. It is clear that corona is having and will have a substantial impact on many aspects on how we work travel, communicate, consume and how business is operating. It's reassuring to see that our employees have adapted quickly and responsibly to this new situation, and the flexibility in combination with our financial resilience give us confidence. Thank you, and stay safe.

Ladies and gentlemen, this concludes the Royal BAM event call. Thank you for attending. You may now disconnect your lines. Have a nice day.