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

Good morning, and welcome to the Royal BAM Group event call. [Operator Instructions] I would now like to hand the call over to Mr. Ruud Joosten, CEO of Royal BAM Group. Please go ahead, sir.

Thank you, and welcome to this analyst call for Royal BAM Group. I'm Ruud Joosten. With me today are Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. Today, we published our results for the full year 2020 and announced our strategic plan for 2021-2023, building a sustainable tomorrow. We have a separate session this afternoon at 3:00 to discuss the plan in detail. Looking back, BAM's 2020 results do not reflect the underlying potential of the group. Although there was improvement in the second half compared to the first half, the adjusted result and the net result over the full year were both disappointing. The COVID-19 pandemic had a severe impact on our performance, particularly in the first half year. I'm impressed how our people responded to the challenges. Although all our sites were opened in the second half year, there was a continuing headwind from our extra costs and supply chain adjustments. Another large negative factor this year was the disappointing performance at BAM International. This was caused by losses on 2 big projects in the Middle East due to technical setbacks and cost overruns. Our strongest business performance in 2020 was the Dutch construction and property, mainly driven by the continuing demand for homes. BAM PPP had a good result from its existing portfolio and transfer of projects. In the fourth quarter, we received a positive contribution from the transfer of 50% of BAM PPP to PGGM. I'm pleased with the extension of our partnership, which will benefit both shareholders. It is clear that BAM's performance in 2020 and in early years has suffered from an unhealthy risk appetite that led to large loss-making projects. This had a negative impact on total BAM results and ultimately on our shareholders' return. BAM must deliver a higher level of operational and financial performance. Last year, BAM had a major step in the derisking by implementing the winding down of BAM International. We started operational improvement by launching EUR 100 million cost reduction program and extended our partnership with PGGM. Today, we announced the full strategic plan for 2021-2023. I will come back to that later. Let's look at the business lines. The business line, construction and property, posted a positive result of EUR 41 million in the second half year as a result of activities, impacted by COVID-19. Dutch household building was our best business in 2020. The number of homes sold was a bit lower than the fantastic year 2019, but still a strong performance. At the same time, we are reinforcing our capabilities in sustainable building. The order book for construction and property finished in 2020, in line with the level at the end of 2019. A year-on-year, the order backlog in the Netherlands and United Kingdom slightly increased. The latter also supported by winning framework agreements and public sector projects. Turning to civil engineering. Here, too, there was a recovery in the second half of the year. In civil engineering, the first half year was impacted by the Cologne metro settlement in Germany and provisions in the Netherlands. The second half year has the benefit of claims settlements and determination fee for an asphalt plant. Underlying the performance is not where we wanted to be. The order book increased by 18% in during 2020. It was mainly driven by the Fehmarnbelt project for the Netherlands and Germany and the HS2 project and SMART Motorways in the U.K. Now Frans will take you through PPP and the financials.

Thanks, Ruud, and good morning, everybody. Now let's look at BAM PPP first, for which 2020 was a special year. The strong result of EUR 34.9 million that we report includes EUR 13.8 million from the partial transfer of 21 equity stakes to PGGM in the first half of the year. The pipeline of prospects and active bids remains healthy with 14 active bid opportunities at the end of the year. As we shared with the markets on the 23rd of December, we welcomed PGGM as the new 50% shareholder in BAM PPP. This extension of our long-term partnership will accelerate growth in existing European and new global markets. This transaction resulted in a net gain of EUR 118 million, including a revaluation of BAM's remaining equity stake in the joint venture. The value of bonds remaining equity stake is EUR 170 million. And going forward, we'll be accounting for as an equity investment. We will no longer provide a table that shows the portfolio value at different discount rates. Now let me comment on the group performance. As Ruud explained, the results for 2020 were disappointing and somewhat complex given the exceptional transactions, like the one with PGGM, impairments, restructuring costs and the wind down of BAM International. We try to make all clear by providing extra disclosures. We added separate lines in the income statement table for the contribution of the transfers of BAM PPP shares. And we have excluded BAM International from the business line overviews and report it separately. We also ended the first half in the second half split. As you have seen in our press release, BAM has a strong underlying cash performance. Like the increased order book, this demonstrated the inherent resilience of our group. We reduced the risk profile of the group to create a platform for delivery of our new strategy for the coming years. As such, the decision to wind down BAM International was a necessary step to derisk the group portfolio. Let's look at the income statement. In the first half year, we reported an adjusted loss before tax of EUR 134 million and a net result of minus EUR 234.5 million. This was mainly caused by COVID-19, losses at BAM International, the Cologne metro settlement and impairments on goodwill, partly offset by the gain on the partial transfer of 21 projects to BAM PGGM. The second half year showed a positive result of EUR 168 million. The transfer of the 50% shares to PGGM contributed EUR 118 million. As explained by Ruud, in the business line civil engineering, there were some positive settlements and the termination fee for the asphalt plant. Below adjusted results, there were restructuring costs of EUR 45 million, of which EUR 32 million for the cost reduction program and EUR 13 million for BAM international. In 2020, total noncash impairments were EUR 75 million. The majority relates to the goodwill and BAM international, Belgium and Germany, and there was a EUR 13 million on property development positions. Income tax in 2020 includes a DTA impairment of EUR 51 million, mainly in the Dutch fiscal entity. The overall net result for 2020 was minus EUR 122 million, which was disappointing, especially given the support of the PPP transaction. In light of this, there will be no dividend for 2020. Now let's look at the cash flow. In 2020, we generated a strong business cash flow of EUR 512 million. This was supported by our focus on stopping nonessential expenditures, close attention to improving working capital, and the use of COVID-19 governmental support scheme, mostly importantly, the EUR 230 million deferred tax payments. The lower investment in assets was driven by the halt to nonessential CapEx and the sale on leaseback transactions. Net investment in property declined by EUR 39 million and nearly got down to EUR 500 million. We continued our strong focus on the collection of receivables, also supportive was the more favorable cash profiles on new projects and that some governments showed more flexibility regarding milestone payments. All the changes in working capital are explained by approximately -- are explained by the already mentioned EUR 230 million deferred VAT and salary tax payments. The cash proceeds of the transfer of 50% BAM PPP to PGGM and the effects related to the Cologne metro settlements are both included in the line, Other cash flow. The strong business cash flow and the drawn of the RCF drove the increase in the year-end cash position to EUR 1.8 billion. The net cash position before lease liabilities grew to EUR 1.2 billion. The total positive effect of the BAM PPP transaction on equity, including the effect of the interest rate hedges and the revaluation of the remaining equity stake was EUR 228 million, and it raised significant cash. Over the second half of the year, the capital ratio recovered by 2.1 percentage points to 13.4%. The we are committed to recover our capital ratio to 20% over the course of the strategic period, which will be driven by operational performance, shortening the balance sheet and potentially divestments. Regarding the convertible, our current intention is to redeem the outstanding convertible at maturity in June. We already bought back a small part in December. On this slide, you see the development of our weekly net cash position. The spike at year-end is explained by the BAM PPP transaction and our very strong performance regarding cash collection. The graph also shows you the seasonal pattern of our cash position and the volatility throughout the year. It also shows the underlying trend of our net cash position that is clearly positive and reflects a resilient company. Back to you, Ruud.

Thank you, Frans. Now looking ahead for 2021, BAM see signs of recovery in its markets. Although there are differences in pace per country and sector, and COVID-19-related uncertainty persists. BAM will provide its outlook for 2021 in due course. Today, we also announced our new strategy. This plan has been shaped by the markets we work in, with and, of course, about our customers and clients. Growing emphasis on sustainability is very important and leveraging the opportunities from the substantial shortage of housing. BAM will be a smaller but more profitable company and a more reliable company while creating a sustainable platform for future growth. Over the next 3 years, we will restructure our portfolio of businesses to focus on markets and projects where we can apply our competitive strength and serve the growing demand for sustainable solutions. We focus on growing our construction and property and civil businesses in the Netherlands, United Kingdom and Ireland, and the private-public partnerships businesses. These businesses have the necessary scale in their markets. We will manage our businesses in Germany and Belgium for value, improving their operations and potentially divest them. Also, we will continue derisking our project portfolio. By the end of 2023, we anticipate our revenue will have decreased to approximately EUR 5.5 billion and our adjusted EBITDA margin will have increased to approximately 5%. As a first step, we are on track with our cost reduction program with a target of EUR 100 million annually. We have assembled a great team to drive our strategy forward, and you will hear from them this afternoon. Now we will take your questions. Please, can you save your questions about the strategy for more detail this afternoon.

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

I'll start off with the convertible that is due in June 2021 for this year. Can you tell us a bit where you stand in terms of the options you're looking at? And a direct question is, thus the waiver that BAM has obtained from its bank prohibits the repayment of the convertible from gross cash? That's question #1. Question #2 is on BAM International. If my memory serves me right, you took a provision in the first half to cover expected project losses. Probably a difficult question, but how come that -- again, 2 of these projects have now resulted in such massive losses. And how should we view the wind down and operating losses, therefore, for BAM International in 2021? And then I have some follow-up questions.

Frans, maybe you can start with the convertible.

The first question. Martijn, yes. So first of all, your question on the waiver. So the waiver does not prohibit us from buying back convertible. Now as we said, we already bought a small part end of last year, almost EUR 5 million. And we plan to redeem the outstanding convertibles in June. Yes. As Ruud also said there, on capital ratio, we are committed to grow to 20% over the course of the strategic period. And we will drive that primarily from operational performance, shortening the balance sheet and potentially divestments. You asked a question about alternatives. Now we may be interested at some point to replace a part of the convertible with a similar instrument, but this depends on market conditions. And in the light of, yes, today's analysis, there's nothing to mention there. Of course, we will consider carefully interest of all stakeholders and keep you posted on that.

Yes. Maybe a few words on International. Thanks for your questions. Yes, these losses are mainly caused by 2 projects in the Middle East. And the additional losses are impacted by technical issues, the difficult business environment and some delays in the finalization of the projects. Also disappointing for us, of course. And for me, it also shows absolutely the right decision to wind down BAM International. These are risky big projects and we are in the finalization phase, but you see the impact can be pretty high on our results. So a good decision to wind down. We're in an important phase now of that winding down, an end phase, but indeed the disappointing results from these 2 projects.

And one follow-up on these 2 Middle Eastern projects. Are they supposed to be completed in H1 '21 or beyond that? Just to give us a bit of a flavor as what we could expect in terms of still even more negative results from these 2.

Yes, I'm very cautious here, not going into, let's say, specific projects. But indeed, they are supposed to be finalized in H1 of 2021.

Okay. And then you mentioned -- this is probably a question for Frans, project completions, projects, provision releases, if I may rephrase and the termination fee for the asphalt. No need to provide exact numbers, but possibly a range for the effect of the project completions and a range or some indication as what the termination fee for the asphalt plant was, so we have a better understanding of the underlying performance?

Yes. I think if you refer to the settlement that we mentioned in the German project?

Yes. Yes.

No, this amount is not disclosed, but that is tens of millions. So that is a material amount. On the asphalt plant, yes, we have agreed with the customer not to disclose the amounts there. So I cannot help you with that number, I'm afraid.

But not even, let's say, below EUR 10 million, below EUR 20 million? Just to give us a bit of sense?

Double-digit number.

Our next question is from Mr. Andre Mulder, Kepler Cheuvreux.

A few questions. Firstly, looking at this group interest charge of EUR 19 million compared to EUR 7 million. How does that compare with your cash position there? Secondly, how should we look at the contribution of PFI in '21? Can you give us a bit of a comparable number for '20? And last. With the write-down of goodwill in Belgium and Germany, does that mean that all of the goodwill for those countries has now written off?

Yes, Andre. Let me take these questions, Ruud. I think they are all mainly financials. So on your first one, the EUR 19 million interest charge is related to the RCF. So that's more than half of that amount coming from the EUR 400 million RCF we drew, which we will pay back in the first half of this year in a number of terms. On the PFI contribution for the coming years, so in this new setup, PPP will be equity accounted for. We are in the process of completing the business plan with PGGM. So we will not give you any guidance there. It is, of course, also part of the earnings have been materialized in the transaction because some of the upside was taken there. So we will inform you later in Q1 and Q2, how that evolves. Then the pressure on goodwill. Yes, significant impairments there in the second quarter. Yes, that, of course, relieved a lot of those pressures because we did not have enough headroom there. We do see some remaining pressures specifically in Kairos and on BAM Ireland, you will see that also in the annual report next week.

[Operator Instructions] We have a question coming through from Mr. Tijs Hollestelle from ING.

Yes, I've got a question about the expected cash outflows in 2021. So I heard that the late VAT is about EUR 230 million. I also picked up that you can pay that back gradually. But what about, let's say, the payments for redundancy costs, the actual cash outflow for the provisions for the onerous contracts? So how does that picture look like for the next 12 months?

Yes, Tijs. Shall I take this one? Or do you want to -- do you have another question?

No. Take them one by one.

So yes, good questions, of course. So on the EUR 230 million deferred tax payments, that is a big amount. That needs to be paid back over a period of 3 years in -- yes, equally spread, I would say, so roughly EUR 70 million per year. Repayment will start in the second quarter of this year. Then the cash out on the restructuring programs, you see that we've taken EUR 32 million there, but you only see a cash out of EUR 9 million. That's also a fair question, therefore, there will be a higher cash out next year of end 2021 on that. So we will catch up there on the cash side. And then also, our trade working capital performance, 13.9% is very high, also driven by milestones from governments that were very in our favor and some financing profiles on large projects, which were favorable. Yes, you may expect there are some cash outflow again. So indeed for 2021, there will be some leakage there, also on the provision side. So if you look in the detailed statements there, you see that the provisions have gone up. So also there, you can expect some cash out, reflecting prudent positions on the projects that we have taken.

Okay. That's clear. And do you expect additional restructuring charges to be taken? Or have you been finished with the conversations with the unions?

No. We have not finished that. So we have -- as Ruud said, we're well on track with the restructuring program. The majority of those costs have been taken forward. That's how I would like to leave it for now, if that's okay.

Yes. That's clear. Yes, then a difficult question, repaying the convertible. I do understand that looking at the immense cash position that it is possible. I also take into account that you guys are doing everything, of course, to get the operational performance back on track. But if you, let's say, take a cynical view or take a statistical point of view, then there is, let's say, a 50% chance that one of the Infra businesses within BAM's country portfolios is generating a loss. And it's a bit corny to say so. But looking at the past 3 years, that is quite high. And in my view, it's completely independent of how market conditions are. So that really relates to the risk-reward issues BAM has for, I think, 20 years already. So I understand that your budgets and your aims are to improve the solvency ratio. But what if there is, let's say, an additional major loss provision in the near future and/or impairments on land positions, ] group because the track record on these exceptional items is also quite sustainable. What are your options? Because if I deduct the convertible bonds from the capital ratio definition, looking at the very low equity position locally saved by the transaction in the PFI business, but that is also a one-off because what else can you sell for such an attractive price? What are the alternatives if things do not turn out as positive as you're currently expecting?

Yes. Well, maybe I'll start answering and then Frans, you can pick it up. My experience is it is not -- never a good idea to go into what if questions because, yes, we can speculate, of course, on all things that can happen. We have -- I think we have a very solid plan for 2021. And still, of course, risk in the portfolio. We have 6,000 projects going on. And indeed, there will always be ups and downs. To a certain extent, we have derisked, yes, substantially in 2020. But of course, in a company like this, there will always be risks. We think with our strategic plan that we launched today, and the way we operate the company from now on, we think we can manage, like we just described it. And that's very important. So we feel comfortable in our strategy for the capital structure, including the convertible bond. Frans, maybe you can add some color to that one.

Yes. I think not much to add there. It's about derisking. And as we both stressed out, 2020 was a complex year with many one-offs, but there's also a theme of derisking there. It's clear portfolio choices that we already made and we continue to make, and we'll discuss more this afternoon. And then operational performance should grow that solvency towards that 20% over the coming 3 years, not only by that, also shortening the balance sheet will help us there and potentially divestments. Now if you then look at the contributions of land slot, the transaction we did with PGGM, yes, that significantly strengthened our cash position. And with that, we are comfortable that we can redeem that convertible. As I said, we are interested for smaller amount to see if there is a suitable instrument out there for us, but that needs to be at the right conditions, and that is currently not at play.

Okay. Yes. And one final question. And I've seen it before. I mean, BAM International, obviously, reporting such big operating losses in the past 2, 3 years. That is part of your derisking. But if you go back a bit further, then BAM International also generated very healthy margins. So sometimes, it's easy to to identify, let's say, a loss-making entity and then reduce it or sell it. But sometimes, these entities make healthy margins, but have the same hidden risks in the way they handle the project, but by sheer luck, report nice margin. So have you accomplished a team together that dive deeper into the way these project managers and these tender departments are approaching projects? Because things that are looking nice today or entities that are performing nice today could also incorporate these losses, which then, somewhere in the future, blow up in your face.

Yes. Again, it's a kind of a what-if analysis. The only thing what I can say is that we -- of course, we did in creating the strategy, did very, very intense and detailed analysis on all projects of the company during the second half of the year. And based on long-term analysis, project wise, regional analysis wise, we came to this plan, this strategy, where we feel very comfortable that if we can implement this plan, let's say, within the next 3 years, the company is really derisked to an acceptable level. If you look at our profitability levels in our home markets, as we call them going forward, we are pretty confident that, that will be a stable, more profitable company.

Yes. So maybe to add to that, Tijs, if I may. So as we also said in Q2, in the announcement, we will unwind BAM International. That company has a rich history in BAM and brought a lot of profitability in the past. It's a capable organization, and that is not the point. It was about the confidence we have in the future of oil and gas, which is really an important source of revenue for that company, where we just did not see the opportunities there to have a viable business case. So it's not the simple solution of, let's get out the bad project just on the merit, it's also driven by solid market analysis. And I think on that basis, we came to that decision. For the rest of the portfolio, critical point of that strategy, as Ruud mentioned there, portfolio choices and focus on operational excellence, and that is valid for every project.

Next question is from Mr. Andre Mulder, Kepler Cheuvreux.

One follow-up. Can you give us a bit more insight into the elements that will decide this EUR 860 million in net cash. So you got government support of EUR 230 million. What other parts are in there? I understood that also clients have been allowing you to pay later. And then there are the usual items like prepayments, as mentioned in the annual report, but I've not seen actual numbers there and also the cash amount that's stuck in joint ventures.

Yes. So maybe, Andre -- indeed, the net cash position improved almost EUR 500 million year-on-year, driven by, as you mentioned, the tax support measures, EUR 230 million. Trade working capital, as I mentioned there, we have negotiated some favorable payment profiles on new large projects, but also, we see governments maybe also under the pressure of COVID-19 really be very lenient in their payment milestones. That adds up to EUR 270 million trade working capital improvement and also the transaction with PGGM that we refer to brings us EUR 110 million at year-end. And that's also what you see in that last slide with that cash spike at the end of the year. And then your other question was on? Help me.