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

Good morning, ladies and gentlemen. Thank you for holding, and welcome to the Royal BAM Group event call. [Operator Instructions] I would like to hand over the conference to Mr. Frans den Houter. Please go ahead, sir.

Good morning, and welcome to the call for the Royal BAM Group trading update we published today. My name is Frans den Houter, CFO and Interim CEO. And with me is our Investor Relations Manager, Michel Aupers. Thank you all for joining at such short notice. We issued a trading update this morning to report major impact on our first half results from 3 factors. In order of impact: first, there is a negative effect of COVID-19 on our operations; second is the underperformance at BAM International and our decision to start the process of winding down the company. Obviously, this is a process that is subject to discussions with BAM's works councils and trade unions; and third, the settlement of a legacy issue in Cologne, which we shared with the market last Tuesday. Rather than repeat what's in the press release, I want to give you my view on these items before we take your questions. Let me start with COVID-19 which affected our various home countries and BAM International in very different ways. Ireland and Belgium and a large part of the U.K. construction were shut down completely for several weeks. Towards the end of the second quarter, most sites were in the process of reopening. Over our full portfolio, our operational efficiency has been materially reduced, which impacted our second quarter and first half performance. We lost approximately 35% operational efficiency through the first 2 months of the crisis, and we are now getting back to 80%. As a group, we have adapted and can continue to adapt quickly and effectively to the unprecedented challenge of the pandemic. During the COVID-19 crisis, we have learned how to operate in this new reality. Unless governments impose new restrictions, we expect operational performance to improve gradually during the second half of the year. Let's now discuss BAM International. Earlier this morning, I joined my colleagues from BAM International in the Hague to inform them we are starting the process to wind down this operating company. This is a painful but necessary decision. We recognized that BAM International staff have created many successes in the past, and we thank them for that. But today, we have to conclude that the company has not succeeded in turning around the business. And we do not expect a recovery in the oil and gas markets activity at any time soon. BAM International made a loss of approximately EUR 60 million for the first half of 2020. Next to the significant impact from COVID-19, this relates to uncertainty regarding variation orders, slow execution pace of projects and the earlier mentioned loss of a dispute with a subcontractor. Although very painful for staff, winding down BAM International will significantly reduce the risk profile of our group. Thirdly, we also have an exceptional charge of approximately EUR 40 million for the settlement of a legacy issue from the Cologne metro project, which we announced last Tuesday. From March 3, 2009, during the construction of a section of the Cologne metro system, several buildings, including the city archives collapsed, this resulted in a loss of 2 lives. I cannot say how much BAM and me personally regretted. Since then, tens of parties have been involved in highly complex discussions to resolve the material and financial damage. Two clients, 3 construction companies, ensures technical and legal experts evaluators and so on, and so on. For a long time, there was little progress. And this stage as a contingency in BAM's annual reports year after year. Just in recent months, there was an acceleration in the mediation process by the joint desire of parties to close this file. And this resulted in an opportunity to settle this claim at an amount, which is a fair outcome for all stakeholders. This settlement was approved on Monday evening by the City Council of Cologne. We are relieved, we can close this file. The Executive Committee and myself understand that the expected results for the first half year is a disappointment for our stakeholders. It's important to note that BAM is a resilient company. Our cash position further improved versus the first quarter to approximately EUR 1.2 billion, which includes the euro -- the EUR 400 million RCF. This is an anchor point in the COVID crisis. Finally, let me remind you that 7 of our 10 operating companies are performing satisfactorily given the difficult circumstances and that our order book remains strong. To sum up, we have been severely hit by COVID-19 and are responding effectively. Our 19,000 employees have shown agility by adapting to new procedures on sites and are rigorously lowering our cost base. Our operational efficiency is back to 80% today. We are starting the process to wind down BAM International, which is a painful but important step. Furthermore, we settled the claim of wide market in Cologne. Both actions derisk the company and improve the portfolio. We continue to take excessive measures to enhance operational performance with a strong focus on cash. As such, we expect for the full year to improve compared to the first half year of 2020. Now we're happy to take questions. Please bear in mind this is a preliminary trading update and some matters will have to wait until the half year results on Thursday, August 20.

[Operator Instructions] And the first question is coming from Martijn den Drijver, ABN AMRO.

Yes. Martijin den Drijver, ABN AMRO. The first question that I have is on the splits between the impact from COVID-19 and the performance of both BAM Germany and Dutch Infra. Is that 50-50, is that 30-70? How should we view that? The second question is, what are you planning now in terms of additional measures to improve the performance of BAM Germany and Dutch Infra? Then with regard to BAM International, what does winding down exactly mean? Will you divest certain operations and assets or integrate them in other BAM assets? Are the cost of the wind down already included in the projected pretax loss? And how can you wind down a unit that still has projects under construction and projects to be executed for you recently won-won? And then a final question with several components on financing. Can you provide a bit more clarity on the cash impact from the VAT holiday and the faster payments from governments? And maybe additional color on the goodwill and the DTAs for BAM International and BAM Germany. Quite a list, I can repeat, if necessary.

I'll try to answer the more in one run. Martijin, thank you. Maybe start with your last questions on DTA and goodwill. As we said in the press release, the consequential impairments on DTA and goodwill from the decisions are under review and will be discussed in August 20. It's too early to share that today. You ask, what is the cash impact of VAT on our current liquidity? Now that is significant. So we see an upside in our cash position versus Q1, that predominantly explained by tax relief measures and government support measures, but also by our cost reduction programs, with a strong focus on bringing the CapEx and the OpEx profiles down to adjust to our new reality. Then...

May I ask one follow-up on this one?

Yes, yes, yes.

I wasn't asking about the impairment on goodwill or DTAs. I was asking about the actual goodwill and DTAs for specifically these 2 units.

Yes. So then I referred to the earlier numbers we shared. So you can refer to the Q4. I'm not adding new numbers to that.

Okay. Please go on.

On the winding down of BAM International -- and what does that exactly mean? And how about the related cost of such? So the intended decision subject to staff consultation is to stop tendering for BAM International and to finish the current portfolio. That means we have 11 projects under construction, of which the majority will run down by the end of next year. The larger projects you referred to that we recently won are in cooperation with other operating companies of BAM, which will, yes, be managed from those companies. And with that, coming to your second point, what is the cost of the restructuring? The cost we report today are related to the additional losses in the portfolio. The exact restructuring cost can only be -- be exactly determined if we have completed the process with our works councils and unions. So that is to be confirmed when that is available. Then you say, okay, what is now the split of COVID-19 and the impact on your business? What we try to voice over is that this is the most significant element in the trading update and the losses that we report. However, we refrained from splitting losses in companies and report the specific corona effect. So we do that overall. We say, basically, we have EUR 40 million coming from Cologne. We have EUR 60 million coming of losses in BAM International. And there is also a significant corona element. And then the largest element over the full portfolio of the company is corona related. And we try to give you those operational efficiency numbers to give you insight how severe this is. The additional measures of BAM Germany and Infra, the Netherlands (sic) [ Infra Nederland ], I'll come back to my Q1 statement, where we said we have 3 nonperforming OpCos and our Executive Committee and management teams are focused to fix those problems. Today, we see a difficult decision for the staff working in BAM International on how we want to proceed with this OpCo. For BAM Deutschland, and Infra, the Netherlands (sic) [ Infra Nederland ], there are specific plans in place that we are rolling out. In BAM Germany, a few elements I can mention. We have restructured this company and put more accountability in business units. We are rolling out a business control system. We have looked at our cost allocation methodology. We are very selective in tendering, which may result to a somewhat smaller company, and we will shortly announce a new managing director and finance director to join us, which we feel have the right competencies and skills to roll out these plans. In BAM Infra, the Netherlands (sic) [ Infra Nederland ], the story is different. The 3 OpCos is very specific situation. So they required a tailored approach. There, we see a number of business units that we have in there, large projects, regional projects, rail, energy and water and Infraconsult. And you really have to dive into these product market combinations. And from there on, drive a plan to bring back profitability, also there under the leadership of a new managing director which we will also shortly announce. So a long answer, but you post a lot of questions, Martijn, I hope this is helpful.

Well, just one follow-up. With regards to BAM International, we've seen the order intake decline. You've already mentioned that it was clear that the performance was subpar. They were in a loss-making decision. How can it be that this is now -- it's not so much a surprise, but that it results in such a massive loss with insight, shouldn't have more structural measures been taken already earlier?

I think there -- if you peel it off, and I agree with you, EUR 60 million is a serious amount. And BAM International has been affected heavily by COVID-19, let me start with that. That is in there. But we should not hide behind it here. We also have ongoing problems in variation orders and in getting those settled with clients. We see the execution pace of projects disappointing. And then we had this additional dispute with a subcontractor, which resulted in the conclusion today. Also under the wings of an oil and gas market that is, in our view, not -- will not recover on a short notice. And that resulted in this intended decision.

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

Your efficiency has risen from 65% to 80%, and you expect to improve further in H2. But can you give any more clarity on the pace of this recovery, assuming that there will be no second wave? And in your outlook, you state that the full year will be better than H1. Do I read that correctly that it means that you expect a profit in H2? And then I have a question on your balance sheet. Can you comment on the current headroom to the governance and how comfortable you are with your current solvency or capital ratios?

Okay. Luuk, thanks for your questions. Maybe start with the first one on operational efficiency. I think it's important to separate operational efficiency and revenue and give you a bit more context there. So operational efficiency is a benchmark. How we are operating versus our normal performance, right? See that as the 100% baseline. It's impacted today by the number of sites that we have opened and how effectively our management teams can operate those sites. So it's not only about revenue, it's also about the cost of adjusting your cost profiles, your organizations and your operational procedures to this corona reality. So in Q2, we have seen a very wild behavior in our OpCos here. We have from one day to the other, some OpCos were completely shut down. Others were on 50%, 60%, and we saw a lot of volatility in result on country and government measures. Today, we see that pattern stabilizing with a slow easening of measures of governments, and we have adjusted to that. So linking it to your second question, how do you look at the second half of the year? We assume that trend to continue. And in a stable way, we can grow this 80% operational efficiency further. But also very important that, that is a stable pattern because then we are able to adjust our cost profiles in a good way to how this -- how the crisis evolves. Then on headroom governance, I can imagine this question. Of course, this negative impact is not improving our solvency but today, we look here at an update to the markets on 3 important recent developments in the company. Other elements, we will touch on August 20 when we have closed our Q2 books, and we have a good view on the financial KPIs of the company.

Okay. And one final short question. The EUR 40 million charge for Germany, that's included in your adjusted PBT, right?

Yes, correct. That's correct.

And the next question is coming from Mr. Christophe Beghin, Kempen.

I have a follow-up question on the objective of winding down BAM International. What are the options on the table? Because I can imagine that it's selling the business or just closing down the business after you finished the whole order book that it has an implication in the costs and provisions you have to take into consideration. Secondly, question on what should we expect over 2020 with regard to what is cash and what is noncash for what you stated and published today? And can you also elaborate a bit more into which division, each loss will be allocated from BAM International, but also from the others, please?

Okay. Yes. So maybe on -- first on the -- you asked basically what are now the cost in the second half of the year of unwinding BAM international? So today, we report the operational losses and the impact of COVID-19. As I said, the restructuring costs, those has to be determined in the second half of the year. We -- with saying we have an intended decision to wind down, we also say we want to stop tendering because we don't see elements in these market attractive. We do see -- if you ask me as, can you sell the company? Or are there assets in there? There are attractive elements in BAM International, where we think there is still for other parties interest and that can be physical assets, intellectual property and those elements. So that is on that point. Then you say, okay, what is the cash out profile of the information we give today? I think we should then peel it off. If you look at white mark, that's largely a cash out in the third quarter. And some of these costs over the course of the remaining years because we have to complete that project. BAM International, as reported today, those are effectively loss provisions on running projects. So that will materialize over the process of finishing those projects. So let's say, in the coming 1.5 years, and yes, the corona damage is very spread over the portfolio because there's also a mix there of governmental support measures. So it is something we will disclose more details on in August 20.

I have a follow-up question, if I may. I think everyone's questioning, of course, if you have still some legacy projects in the portfolio because, yes, they continue to pop up some surprises? What about the project that resulted in the profit warning of last year, do we have some better visibility there? We know you don't disclose on individual basis, but we know that there is a dispute going on, on the German infrastructure project, what should we expect there?

I mean the important thing is that today is not about those 3 projects. So the profit warning of last year versus specific situation on a deterioration on number of projects that are still in operations. So we still have not closed them. So -- but of course, we give a true and fair assessment on how they are doing each quarter. And you saw there the loss of that in Q1. If you look at the Cologne file, which is a very specific one, yes, this was a large risk in the company for a long time. As I said, for a decade, it was very unpredictable in terms of outcome and timing. It's very difficult also to translate into a financial number. And it's only very recent in an accelerated way that this came to a landing. And it's doubled because I can imagine also for the markets, it was not as top of the list anymore. But yes, we do see it as a significant derisking of our company. It was -- in that sense, it was clearly a one-off.

Okay. To come back on it, so the Cologne project, is it related to civil engineering or the other division?

No, that's civil. That's a civil project. It was a metro line.

Yes. And then the...

In the annual report on Page 196 (sic) [ 169 ].

Yes. And the BAM International, you cannot specifically guide in each division which will also result in loss?

169, sorry, Christophe, Page 169 of the annual report. Sorry, your question was...