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

Ladies and gentlemen, thank you for holding, and welcome to the event call of the Royal BAM Group. [Operator Instructions] I would like to hand over the conference to Mr. Ruud Joosten, CEO. Go ahead, please, sir.

Thank you. And good morning and welcome to this analyst call for Royal BAM Group. I'm Ruud Joosten indeed, CEO since September 1. With me today are Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. Now this is my first chance to talk to most of you since I started on September 1. And in the meantime, I've been visiting our operating companies to the extent possible with -- in this COVID period, of course, and seeing for myself some of our major projects and speaking to customers and other stakeholders. I am really impressed by the talent and enthusiasm of our people and the way they have adapted to meet the challenges of the corona crisis. This is a company with very good capabilities and a strong potential. Today, we are reporting a positive result for the third quarter. The situation regarding COVID-19 was stable in most markets from July through September, and revenue was nearly the same as third quarter '19. In C&P, construction and property, all the home countries were either positive or around breakeven. And in civil engineering, activities in the home markets all made a positive result, except for a small loss in Ireland. BAM PPP had another solid quarter from its existing portfolio. And discussions regarding the extension of our long-term partnership with PGGM are progressing. The cash position remained strong, supported by further improvement in trade working capital efficiency, including governmental support measures. Solvency improved compared to the end of June due to the positive results and shortening of the balance sheet. Looking ahead. The COVID-19 situation is still causing a lot of uncertainty. Taking everything into account, we are maintaining our outlook for positive results in H2, the second half year. The major restructuring program we announced in September is underway. Cost benefit will ramp up during the next year, 2021, towards around EUR 100 million annually. The new COO of civil engineer, John Wilkinson. And MDs for BAM Infra Nederland and BAM Deutschland, Carla Rodenburg and Daniel Häußermann, respectively, joined us in October to complete the new management team. Very clear to me that we can do more to derisk our activities and improve our focus on product market combinations where there is strong long-term demand and we have strong capabilities. We are reviewing at this moment in time the risk-reward profiles, procurement route and contracting models of large civil projects. If we can't manage these issues, we will walk away, as we did recently from a large infrastructure tender in Belgium. On the other hand, we see many attractive opportunities and we have a solid order backlog. We have started a process to define a new strategy in order to create more value for our shareholders and solid prospects for all our stakeholders, including our employees. We'll update you on our plans in the first quarter of 2021. Now we will take your questions.

[Operator Instructions] The first question is from Martijn den Drijver, ABM AMRO.

Yes. The first question that I have is with regards to the outlook and, I guess, somewhat cautious outlook, understandable given COVID-19, but the question is, if we assume that the lockdowns remain as they are or as they have been announced, is there any reason to assume that there would not be normal seasonality going from Q3 to Q4? I mean normally we have the fourth quarter, which is usually stronger than the third quarter. Would that be something to take into account this time around as well if COVID-19 situation doesn't change from what it is today?

Yes, it's always difficult, I think, to take hypothetical questions into account. At this moment in time, we feel pretty comfortable with COVID in our main markets. It's very unclear what will happen, to be honest. So we thought it was also prudent. Indeed we have a strong solid quarter for Q3, but looking at the total context, we felt it was -- we feel today it's still prudent and wise to stick to our former expectation for full year.

Okay. Then moving on to Germany, better performance, perhaps even nearing breakeven. Should we see that improvement in the third quarter as a trend that will continue in the fourth quarter? Or is there some seasonal element there that I couldn't think of?

I don't see a seasonal element. Of course, we change management. Like I just mentioned is that -- also, the CFO, we changed. And there's a complete new top management for CP Deutschland at this moment in time. So yes, that is a positive signal but, I think, too early to call victory for that part of the company.

Okay. And then on the restructuring with the targeted savings of EUR 100 million. I came into the -- your remarks a bit late. And perhaps you've addressed that, but could you provide a bit of color on the timing and the possible charges? Because it's been now quite a while since you've announced that. Is there anything you can say about that, those charges and the timing thereof?

In general, we are a bit cautious there because we are in full discussions and conversations with our partners and with our employees but also the works councils and unions in the home markets, so not to disturb that process, I think, is very important at this moment in time and would not also be fair to these parties involved. So hopefully, we can come to conclusions very, very soon. We said earlier EUR 100 million annually, starting that amount somewhere in 2021. That sticks -- we stick to that kind of prediction. We think, after Q1 in 2021, we should see first savings coming into the P&L.

Right. 2 more questions left. When you look at the quality of the order intake, can you say something about competitive environment and pricing pressure?

Yes, sorry for the [ tick ] in the background, but we don't know what that is. It's probably a competitor trying to listen in, but sorry for that. We're trying to solve that one now. Yes, it's a scattered picture, I think, the markets around us. We see some very positive signals from, for example, U.K. government investing a lot of money -- or planning to invest a lot of money in civil but also in hospitals and schools. Also, in Holland we hear positive sounds around loosening up the permit procedure a little bit and making it possible to build a lot more houses in the next period, but on the other hand, we are still restricted by some governmental issues in the Netherlands in the civil part regarding nitrogen, for example, so yes, also a little bit of a hesitant investment in retail at this moment in time, which is pretty obvious with COVID. So the only thing we can say for ourselves is that we have a pretty solid backlog at this moment in time a little bit influenced by some long-term projects but still a strong backlog for the company in total.

And in terms of the behavior of your competitors pricing...

That's a very scattered picture in over the 5 markets. It's very difficult to draw conclusions there. Maybe you should ask them and -- about their behavior, but again we are pretty confident with our backlog situation.

Okay. And then the final one, for Frans. The taxes that have been deferred, they have, as I understand it, remained at relatively the same level. When should we expect repayments of those or actually payments of those taxes? Is that a Q4 or more a 1H 2021 item?

Martijn, thanks for your question. And we expect, for Q4, the number to further go up, yes. So we still in our home markets expect some additional tax support measures since they tend to continue. And then the payback is, in our view, starting in Q1 and will be spread over a period of 3 years.

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

Yes. First of all, a question on your efficiency. With H1, you indicated that you had gotten back to around 90%. Now you again indicated it's closer to normal, so can you give a bit more color on where you're standing currently? And to what extent do you expect a relapse in Q4 due to the additional measures that have been announced?

Yes, regarding the efficiency. I think, in August, we said around building up to 90%. We are now, let's say, on average, on 93% for the total company. So we don't hear a lot of issues at this moment in time on the projects' clarity. I think that's also, let's say, reflected in the Q3 numbers.

Okay. And another question, on the Dutch infra activities, where there a lot of stories about tenders being delayed because of the nitrogen and PFAS issues. How do you look at your -- well, at the pipeline in combination with your current backlog [ regarding the capacity ] that you need to cover for 2021 and later?

Yes, over the last couple of weeks, there was a lot of publicity in Dutch newspapers, also our -- from our colleagues, supported by BAM as well to clarity, but indeed the construction market is asking for a clear government policy on investment in civil. I think it's really important for the industry. We have a healthy backlog, but it's also very clear that I'm focusing on derisking this company and looking to the standards very carefully because what I see coming from the outside is that a lot of risk from these projects are being deferred to construction companies like BAM. And for the future, we have to be very careful if we want to evolve ourselves in these projects -- and risking -- increasing the risk profile of the company. So that's an important part of our assessment we are making at this moment in time.

Yes. And my final question is also about the civil engineering activities because you mentioned that there were some benefit from derisking and improvement in Q3. So can you give some examples of measures that are already paying off in Q3? And do you expect that to continue going forwards?

Yes. What we see today, I mean, we changed the management in Q3. Of course, that's not reflecting immediately in better results. You also see, yes, indeed some improvement in the profile of the projects in Q3 coming through. And I think in particular you see also the effects of cost cutting that we did already early in the year, in the COVID context, coming together in infra in the Netherlands. It would be unfair to say that the measures on new management and less risk appetite on projects are already reflected in the Q3 numbers. That's more a mid- to long-term effect that we will see.

The next question is from Mr. Christopher -- Christophe Beghin from Kempen.

I have a question with regard to did you state it that in the civil engineering the Irish -- in Ireland you stated a loss as well.

Yes, indeed there was a small loss accounted for in Q3.

Okay, and can you maybe elaborate a bit more? So we see that on BAM International it remains loss-making. How do you see the development going into Q4?

Well, with regard to Ireland, COVID impact is pretty substantial already in -- I think, reported in H1, but we still see that to continue in the second part of the year, one of the reasons we are pretty, let's say, humble on our results over there in this year. And I think that is the big impact that's causing that impact on Ireland, yes, which is normally a very solid company for BAM.

Yes. And with regard to BAM International...

Yes, BAM International is a different situation, yes, where we are in unwinding process of that business. That's on track, yes. So we expect to see the last projects coming out during next year. So hopefully, within a year from now, we can -- let's say we can have final conclusions on that unwinding.

But to follow up on that: BAM International remained loss-making, but I suppose that has nothing to do with unwinding the business. Is it still projects that are still hampered by several elements? Or -- and do you see that being solved into Q4?

Yes. So maybe -- Christophe, Frans here. So as we announced earlier, in the unwinding of BAM International, we have 3 elements, yes. We have the discussions with the unions on the -- and the provision that we've taken that has come to a landing. Then of course, the project portfolio, we need to unwind. And then the third element is, of course, there is an asset base on which we try to recuperate some value. The additional losses that we report in Q3 relate to the second element, yes, so to the portfolio, where specifically, yes, in the Middle East that is, yes, very, yes, unpredictable also in the discussion with the clients how that will evolve. But as we also said, Q3 and Q4, we have a number of milestones unwinding it, and we are progressing that.

Okay. And maybe last question from my side, maybe for Ruud. You stated that indeed one of the main tasks is derisking the business profile of BAM. How do you then look at a capital ratio of 12% or in the range of 12%? Do you feel comfortable with that?

Well, I think that as a result. The financial ratios are a result of, let's say, a strategy. And when I talk about derisking, I'm talking about the derisking of our project portfolio and the way we do business. I think that should be first very clear to everybody involved, especially to our employees but also to our customers. And then the reflection of that, of course, is the financial KPI in solvency. So -- and other KPIs, by the way. So I'm focusing in our strategy definition on that first part. I think that's very important, to improve that profile and walk away from too risky big projects and focus on the solid portfolio that we have in several of our opcos, by the way. And if we do that, let's say, continuously, you will see that the financial KPIs will improve dramatically.

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

Yes. The first question is looking at the statements today. It appears to me that the net cash position before IFRS 16 of, what was it, EUR 608 million at the end of June remained more or less the same at the end of September. And how do you as a management team judge this net cash position, yes? Because you already mentioned the delayed VAT. That's about EUR 120 million, so if you subtract that, you get to EUR 500 million. BAM normally reports in the annual accounts a restricted cash position of about EUR 200 million. So if you do not see that that's free cash available to BAM, you get to EUR 300 million. And then we have the -- yes, the wind-down costs, the pending restructuring charges and, as such, the redundancy costs; and also cash outflows going forward; maybe also [ another ] full review of the portfolio, the project portfolio, yes, so there could also be other problematic projects which are losing cash. And then lastly, yes, the BAM has significant trade working capital positions on the balance sheet, which tend to fluctuate like they have always done with BAM. So in my view, it could easily reduce the EUR 300 million cash to 0 in any given quarter. And are you allowed under the bank covenant regime to go below a net cash position within BAM? So what's your view on the current position? And also some comments on the bank covenants, please.

All right. I think we are pretty confident with our cash position. It's very strong. Our trade working capital management, I think, is -- when I benchmark it with competitors, is probably best in class. So I'm really happy with that, but maybe, Frans, you can give some more color on the question asked.

Yes. So I think, if you look at indeed that liquidity position of -- cash position of EUR 1.2 billion, fair point, yes, taking out the RCF and the tax support measures, yes, which have a -- as I just explained, the payback period is 3 years, so there is -- that's not a temporary effect. We have some support for that to cover for the cash corona costs that we have been confronted with, yes. So that is a welcome support measure from the governments in the countries where we operate. Then yes, coming to that core positive trade working capital, I think that is really as a permanent character because it's part of how the model works in construction industry. We have very, yes, modest margins, and as such, we are prefinanced by clients for our operations. And that is not something that we want to sacrifice and as such evaporate very easily, yes, as you suggest. So I would take a more stronger position on that, also driven, supported by, of course, the strong cash focus of the company. If you peel that off to the trade working and the operating working capital performance, the strong focus on keeping cash in the company is paying out. And also, of course, the operational performance, yes, and linking that to what Ruud explained. Focus on derisking and a steady performance should grow our cash position further. Then your last remark, yes, you point to the covenant with the banks. Well, there's a -- we explained in Q2 the net recourse position should be a positive one. So we're not allowed to have net recourse debt in our company, and we see more than sufficient headroom for that. So that is not a point of concern for us.