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

Good morning, and welcome to the Royal BAM Group event call. [Operator Instructions]. Following the presentation, we will conduct a question-and-answer session. I would now like to hand the call over to Mr. Ruud Joosten, CEO. Please go ahead, sir.

Good morning and welcome to this analyst call for Royal BAM Group. I am Ruud Joosten, CEO. And with me, as usual, Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. I will make some brief remarks on the key points of our first quarter trading statement then we'll take your questions. On this slide, you see the new London office of Meta, formerly Facebook at King's Cross, following a 3-year build and outfit by BAM Construct UK. In the end of March, this office was opened by the Prince of Wales and the Duchess of Cornwall. Office for 4,000 employees focuses on sustainability, whereby the levels of embodied carbon were driven down by 30% compared to standard industry practice. Revenue for our Managed for Growth businesses in the Netherlands, the U.K. and Ireland was up 5% compared to the first quarter of 2021. Adjusted EBITDA for the quarter was EUR 97.3 million, which results in an adjusted EBITDA margin of 6.3%. That included the EUR 16 million final OpenIJ settlement for sea lock IJmuiden with an exceptional contribution of EUR 11 million related to fair value changes of hedge instruments at the PPP joint venture, which has been renamed Infosys. Both our divisions delivered a strong result in the first quarter. Our Dutch residential activities continue to perform well, and there was a high-activity level installing optical fiber networks. In the U.K. and Ireland, we had a good start to the year, in line with our expectations. It's good to see where we're reappointed for two large framework contracts. Now some comments regarding our financials. Our trade working capital efficiency remained stable, and we report a liquidity of EUR 1 billion. I'm very pleased with the development of our financial position. As of the year-end 2021, our capital ratio further improved by 1.5% to 16%. Sustainability is at the heart of our strategy and highly valued by all our stakeholders. We've now raised the bar by setting ourselves new targets for accelerated emission reduction as described in our trading update. Our order intake remains satisfactory. Although the market outlook is uncertain. We continue to see cost escalations and constraint on resources and shortage of labor. Demand remains generally positive, although sentiment has been impacted negatively by geopolitical events, cost of living inflation and rising interest rates. We are on track with the execution of our strategy, are committed to deliver our 2023 strategic targets. So far this year, we completed the divestment of Bam Galère and BAM Contractors as we announced this morning in a separate press release. We confirm the outlook for the year 2022 of an improvement of the adjusted EBITDA margin compared to 2021. Now let's open the line for questions.

Thank you, sir. Ladies and gentlemen, we're starting the question-and-answer session now. [Operator Instructions]. Go ahead, please. Our first question is from Mr. Martijn den Drijver of ABN AMRO. Please go ahead. Your line is open.

Yes. Good morning, gentlemen. Just wanted to start off, if I may, with the large project business, Infra, civil engineering in the Netherlands. Can you talk a little bit about how that unit has performed going from Q3, Q4 now into Q1? And perhaps also a little bit on how things are developing currently? That would be my first question.

Yes. Thanks for the question. At this stage, we don't go into the several divisional results and segment results. What I can say is that I'm happy with the discussions we're having at this moment in time with regard to a couple of these big projects that are still in the portfolio. But that's it for now.

Okay. You mentioned yourself happy about the discussions about the large projects. Is that specifically in the Netherlands or is that across the board? Because if I read your press release -- in the full year results press release, you mentioned particularly positive dialogue. That positive dialogue element is now missing. So I was kind of assuming that discussions were a little bit more difficult now. So...

No, no. Not at all. Of course, the first element there that happened in the last quarter was the settlement in OpenIJ. So that's indeed a positive development and clearly visible also in our results. Secondly, we have positive discussions going on a lot of big projects in the portfolio. We have to come with news on that one, ASAP, but not for today. Also, of course, with the divestment of some of the other companies mentioned like Galère, but also today the press release, or contractors, some of these big projects will lead the portfolio as well. So when you add it all up a positive -- clear positive developments regarding big projects or risky projects in the portfolio and indeed with the settlement of OpenIJ overall, a positive [ reservoir ] in Q1.

Okay. And then moving on, I have one more question. You mentioned that the full year results presentation that you were hoping for a decisive action of the new ministers for nitrogen and housing. Can you talk a little bit about your sentiments with regards to what they've announced so far and how that is going to help BAM in this respect?

Yes, pretty complicated issues. I guess that's why the government appointed several ministers for these big issues that are probably the big issues in the society in the Netherlands. Of course, we hope that from -- on the housing front, there will be an acceleration of available land for BAM so we can build these houses at a capacity to build we have big issue is land. And there, we hope that the minister, in this case, [indiscernible], can accelerate his plans to work together with local governments to free up this land so we can build these houses. On the nitrogen front, very complex, also related to that when started verdicts we are waiting for and several issues there. So hopefully, there the new minister can -- together with Rijkswaterstaat or based on the verdict of Rijkswaterstaat accelerate there. Anyway, clarity for our industry to be able to build further -- I have to say, at this moment in time, the impact on our results is not so big. We have enough -- looking at residential the impact is smaller. Of course, in Infra is bigger. Luckily, we are not -- in our strategy, we are not going anymore for these big infrastructural projects within the Netherlands. So longer term, you can say for BAM not a big issue, but in the same -- of course, also for smaller projects in nitrogen is clear -- it has a clear impact. So clarity is important. But on the short term, for BAM, not a big impact on our numbers.

And when you say short term, you're meaning the next few quarters, I assume.

Yes, I think that's the short term, let's say, a year, 1.5 years from now, I don't see that impact in our numbers going forward. But of course, it's for the whole industry for society, very important to have clarity on that. Because, of course, yes, that's also for investment reasons, longer term, important, I think, to now for the total industry.

Okay. I have further questions, but I'll move back into queue.

Following question is from Mr. Tijs Hollestelle of ING. Go ahead. Your line is open.

Thanks, operator. Good morning, gentlemen. Yes, my question was also about what Martijn was discussing. And I mean I thought it was positive because indeed in the previous press releases, you specifically mentioned, let's say, the underperformance of the large contracts decision of the Dutch civil engineering. But now it seems to be performing, let's say, in line with the management view and the provisions taken. So yes, it's clear that you don't want to comment on individual projects, but is the assessment until March or is it until, let's say, last week?

Frans, perhaps maybe you can monetize on that. This press release is about the first quarter. So let's stick to that. And indeed, that sentence that comment on large projects was not in press release. Well, good observation. And I think I just referred to what was saying, hope I [indiscernible] and no new files there.

Okay. Yes. And then, yes, basically, a follow-up question on this subject. And the reason behind you said that, of course, you set out your financial targets. One of them is reaching, let's say, much more -- much better margin stability as well as margin improvement and that is, of course, on the core business. And I think that's the key focus for the analysts, but also, I think, for your shareholders. So you have winded down BAM International, but you're contractually obliged let's say, to still execute some of the larger former projects of BAM International, which I think you now spread out over your different divisions, I can imagine that probably if you have a project in Australia, you probably -- is now managed by the U.K. business. Could you, let's say, going forward also basically warn us upfront, if there is, let's say, a major impact on the reported divisional results of these businesses? Because otherwise, we think that something is going on in the U.K., but if it's still a legacy contract from BAM International from a fundamental point of view, it's then less important because we all understand that is still the cleanup of the old BAM. So what is your view on that? Are you willing to do that? Or can you comment on that?

I think it's fair. I think it's a fair, fair point. Of course, in general, you see a fast decline of these projects because now we also are in the final phase of the winding down of BAM International with -- yes, the finalization of the existing -- the last two existing projects in the Middle East. So that's coming to an end very, very quickly. Also financially, we expect that -- and then indeed, there are a couple of projects now in -- especially in the portfolio of the U.K., the BAM -- business. And that indeed will be in the general line of reporting, including on those projects. We don't have any reason today to see big calamities over there, not at all, but a fair point to raise that one, indeed, should be part of normal information flow on these projects as well. But again, let's be also very happy with the quick decrease of these big projects and risk project with divestments we're doing apart from BAM International. So when you look at the list, it's getting smaller, very fast, which is really good news. And that will lead, I think, per default to more stable results going forward.

Yes, that's already very, very helpful. Yes. Then also a question on the Dutch Construction and Property business. Maybe it's too early in the year, but do you expect or do you think it's possible that this division is making more or less a similar result this year as compared to last year? Because to my understanding and the performance of the division is highly skewed towards your housing business in the Netherlands because of higher margins in property development. And I think also quite stable margins in the building of the houses. So the market is cooling off. You can really see that in the newspapers, but also much year around basically. So what are the dynamics? Is there, let's say, let's say, still an increase in the nonresidential Dutch business there which could compensate? What's your view with this at this point in time?

Yes. Well. Again, in this trading update, we normally don't go into segment results. Of course, everybody can read the newspaper. I think from a general macro point of view, the demand for houses is still very strong in the Netherlands and will be for the next years. So in that sense, that is a very positive development and situation for BAM. And that will also be applicable for this year. So in that sense, you see already in Q1 that this business is performing very, very well. I don't see any reason why that would change during this year without going into financial details, but the market and the demand for these houses is still at a very, very high level. And let's say, it's not very difficult to sell the houses we are developing and building at this moment in time. Although, indeed, there are some macroeconomic developments with regard to inflation, geopolitical uncertainties that doesn't take away that the demand for these houses is still extremely high. So like I said before, it's more about having enough land available to build houses in the Netherlands than there is a lack of demand for these properties.

And you also don't consider, let's say, last year's performance as really exceptionally strong.

We thought it was very strong, and I think we made it very clear. The only thing we can say now in Q1, we also saw a very good -- a very strong result.

Okay. Continuation. Okay, yes. Okay. And last question, if I may, on the -- there was a big improvement, in my view, in the solvency ratio from 14.5% to 16% in only 1 quarter. They are partly explained, I think, by the EUR 11 million gain in the cash flow hedges. If I look, let's say, at the situation in which the EUR 40.5 million was based on that was only EUR 4.5 billion of total assets. Assuming all things equal, it looks like a net profit increase of between EUR 80 million to EUR 90 million. But I guess there are some other effects as well. So did your balance sheet lengthened or shortened because of the disposal effect. Could you give us a little bit feel for what the dynamics were in the key things that the solvency ratio is based on, please?

Yes, thanks -- and indeed, I think yes, the financial performance of the P&L is the main driver for the step-up in the solvency, we don't give you the net result, but we had a very good conversion to net results from adjusted EBITDA. On top of that, the balance sheet shortened a bit also because of the divestment that we affected with Bam Galère. So main driver of P&L with some support from a shorter balance sheet.

Yes. P&L and then because you normally have a couple of these line items that impact the stated equity as it relates the FX, the pensions, the cash flow hedges, et cetera.

Yes. So we -- I'm a bit reluctant to give you data points. But as I said, main driver net result, some shortening of the balance sheet -- and there were some equity movements as always, as you say, GBP is, of course, also not stable. But if those were significant, we would have mentioned it.

We have question coming through from Mr. Andre Mulder of Kepler Cheuvreux.

A couple of questions. Firstly, you provided the impact of disposals on the backlog. Can you also give those numbers on a sales and EBITDA basis? That's the first question. Second question on this, let's say, underlying decline in the backlog, any difference in the performance of the operations on basis, it declines by, let's say, EUR 400 million. So any country that stands out, either positive or negative? Then a question on guidance. Let's say, skipping the underlying business. How did you include the impact of disposals that you only take the all disposals into account or also the ones that are still pending and the same for settlements, how did you include that part in your guidance? So did you take an average or -- so I'm interested in how the guidance was set in that respect. Then two remaining questions. So the first question, on these legacy projects, can you mention what kind of sales or backlog is left for finalizing those projects? And last question is on the cash impact of disposals, what will be the effect on, for example, BAM Contractors, there's a small book loss, but I assume that also some cash will be flowing out due to trade working capital. So those would be my questions.

Well, you're really challenging us now in -- but actually Frans and Michel writing very quickly to come up with all the answers. Maybe I can give them some time by answering the question on backlog and the differences per segment. And then indeed focusing on the Netherlands and on the U.K. What you see is that especially in the bigger, let's say, nonresidential projects, there is some more hesitance because the business cases are getting more difficult with interest rates and some doubts on the cost of this project with regard to inflation. So there you see, I think, the most clear backlog impact on these big projects. An example could be the one on the picture. The projects like that are a little bit more hesitant to start with. Interesting list of projects underway, but you see there is some time delay in the decision-making for these projects. I think that's the biggest impact. Today, you see that in the Netherlands, but also in the U.K., still positive movement on infrastructure in the U.K. where we see an investment program by the Johnson government with -- of about GBP 700 billion, so that will be a long-term strong market for us because we have a pretty strong position there with BAM Nuttall. And in the Netherlands like we discussed before, still very strong market conditions for building houses in the Netherlands as well. So that's a bit of a -- the picture for the backlog at this moment in time, but indeed heavily impacted as well by the divestment we did earlier this year. We see the locking in of revenue at this moment in time coming in pretty strongly to the company also for next year. But that's a good signal. But that gives you a bit of an overview of where we are today. Looking at Frans who maybe has come up with some of financial answers.

So let's go to maybe one by one, Andre. So starting with your first question on Bam Galère, we concluded transaction in Q1. There was a cash out of EUR 11 million. We shortened the balance sheet with a little EUR 100 million, and that resulted in solvency uplift of around 0.3%. And then I refer for year-on-year comparison to the full year press release. On Page 4, you can see in the table what we disclosed per segment. And since that company is no longer in there, you can compensate for that. And then you asked, I think also your last question is on BAM Contractors. Now that is not included in Q1. So let's be very specific on that. So referring to the original press release on this, there was a limited book loss and a reduction in liquidity upon the transaction and that book loss was already taken last year. So basically, no impact on this year's numbers. And then you have to help me because you have a few questions, which one is then still unanswered?

The question on setting the guidance and one on the legacy projects, how many sales are still left in -- let's say, in the backlog?

Yes. So we don't comment on that, Andre. So the last question, we do not have a split that we provide to the market, other than that what we have disclosed in Q4 backlog. And on the guidance, I think maybe do you want to give a comment on that?

Yes. Well, the guidance, of course, is more and more based on our growth markets because of the -- let's say, a quickly developing divestment agenda. It becomes clear that it's now all about our two divisions that will be the platform for growth as we call it. So maybe that gives you a bit of a direction on how we look at full year, having now implemented a big part of the divestment agenda. So indeed, automatically then the guidance is based on the Netherlands and U.K. and Ireland. Maybe that helps.

Yes. And I can see that the disposals are becoming less and less. But in terms of the settlements, you're talking about substantial settlement. So how did you include that in your guidance? Did you, let's say, take an average assumption of what you think could be coming from those settlements?

Well, we take everything into account, of course, what's -- what we know today. And that includes possible settlements. Of course, we're always conservative in how we report out on these things because these are settlements and you can have very constructive discussions with customers, but let's have them first on the table before we can report on that.

Our next question is from Mr. Christophe Beghin of Kempen & Co.

I have two short questions. Can you simply confirm that the sounding on the constructive discussions you have with the client in the Dutch civil engineering contract did not change, yes or no?

Well, it did change because we are 3 months further into discussions. And...

But this sound -- I mean yes...

Well, like I said before, I'm positive about the discussions we had in the first quarter. So in that sense, it's more positive, a little bit more positive than what we said by the end of Q4.

Okay. Cool. That's clear. And secondly, the list of -- as you mentioned, there are substantial claims discussion ongoing. The list of this project, did you see additional projects coming into that list? Or is it less than, let's say, end of 2021?

I think that is indeed the good news that this list is not increasing. So indeed, we are solving items on this list one by one by divestment and also...

Yes, sorry. But I think I want to know if there is a new project into that list or not.

Well, I thought I said, no.

Okay. Then I think I would say, conclude continue with the recurring goods results to the performance. There are no further questions. Thank you.

[Operator Instructions] We have a question from Mr. Maarten Verbeek of the IDEA.

It's Maarten of the IDEA. I'd like to get a bit better feel for the profitability in the Netherlands and the U.K. If I would look year-on-year and excluding the losses of BAM International last year and taking out the two gains this year, then more or less the adjusted EBITDA margin moved up some 50 basis points from 4% to approximately 4.5%. So is it that these core activities in the Netherlands have improved their profitability? Or is it due to a better result of the still to be divested businesses in Germany and Belgium?

No. I think we are pleased to say that the profitability in core markets is indeed increasing just as revenue, by the way. So that's really helpful of the profitability in the managed for value market is stable.

Okay. This quarter, you had a hedge gain on those hedges within that PPP. Is it also possible that, that would reverse into a loss?

Yes. So it's a revaluation of hedges indeed. And since we now are not the full owner of Infosys as the new BAM. We rebranded to Infosys. So we take the variation in the equity value through the P&L. These variations are noncash. And in the long term, they will zero out because they are interest hedges on the concessions that we run there, but it will create volatility and that we will transparently report out on.

Okay. Okay. That was my remark, it would give to EBITDA your strategic goal is to become more predictable. So when you continue to put it in your EBITDA, it could have an impact on your own EBITDA going forward and that is not that's hard to project. Then secondly, do you expect that you are able to complete your divestment program this year?

Yes, that was very scary to make predictions on M&A activity because like you saw today, we only were able today to have the press release on BAM Construct in Belgium and only then -- when the signatures are there, I think you can be sure about these activities. So the only thing we can say is that the list is getting now very short of the to be divested companies. And yes, I think safely, we can say now that by the end of this year, we will finalize the program. But of course, we'll only do deals if it's, let's say, a good thing for the BAM Group to do. Maybe don't see a credible buyer or the value that's created is too low for the company, we will not make these deals, which is, of course, obvious. Still now, I'm really happy with the progress. I think I did not expect a year ago that, at this moment in time, we would be on this level regarding divestment. So in that sense, I'm really proud of the team, what they -- how they performed, the M&A team, what they did in 1 year and indeed hopeful to finalize this project this year.

Okay. And then lastly, if I'm right, your cash position more or less dropped from EUR 1.3 billion to EUR 1 billion. However, when I more or less make an estimate for your trade working capital, I don't see much change in that level quarter-on-quarter. So what does explain this decline of some EUR 300 million in your cash position?

Good question. So indeed, we see the normal seasonal pattern recurring in our cash flow. So in Q1, we see a drop there. The absolute table say, is lower because we have a lower revenue base. And that's, of course, I think, part of your question. The other element there is that we also did some divestments, a small impact there as well.

And we have a follow-up question from Mr. Martijn den Drijver of ABN AMRO.

Yes. I just wanted to come back to your statement about the guidance. It is based on the core countries. I was assuming that it was still including, for example, Wayss & Freytag since you haven't divested that yet. Disregarding, yes, Bam Galère and BAM Contractors, but still including Wayss & Freytag. So I'm a little bit confused -- at least 3.8%, is that for the core business? Or is it for BAM as a whole?

It's for the group. And I didn't say we don't include in business and saying, let's say, from a statistical point of view, more and more, the outlook will be based on the remaining businesses, that's what I said. I think it's pretty clear, of course, as long as we have these companies in the group, they are fully part of that outlook going forward. But now today, with the closure on Contractors, yes, you see that yes, statistically, the impact of the two grow divisions are getting bigger and bigger. That was my intention to make clear.

Okay. Got it. And you also mentioned the profitability in the core countries is improving. Is that evenly spread out over those three geographies? Because if my memory serves me right, Q1 2021, you still had Ireland and not firing all cylinders because of the lockdowns. So is the result -- the improvement now equally spread? Or is there a larger contribution in Ireland due to more lockdowns?

It's not the idea now to go into this more detailed and discussion on profitability, maybe a good moment in -- after Q2 to have some more discussion on this development, then you also have some more time in the year to get into some more detail. At this moment in time, we see indeed a good revenue development in the growth markets, and that's what we would like to convey on this moment.

We have no further questions, sir, please continue.

Okay. Well, with that, I would like to thank everybody in the call. It brings us to the end of the call. Thanks again for your questions and your attention, and we wish you a good day. And we're looking forward to see everybody again on August 18, when we have the half year results. Thank you for now, and goodbye.

Bye.

Ladies and gentlemen, this concludes the Royal BAM Group Trading Update. Thank you for your attention. You may now disconnect your lines.