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

Hello, and welcome to the First 9 Months 2022 Trading Update of Royal BAM Group. My name is George, I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'll now hand the call over to your hosts today, Mr. Ruud Joosten, CEO; and Mr. Frans den Houter, CFO, to begin today's conference. Thank you.

Good morning, and welcome to the analyst call for Royal BAM Group following the publication of our trading statement this morning. I am Ruud Joosten, the CEO. With me are Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. For our opening slide, we have chosen to show you one of the many impressive U.K. projects being delivered by BAM Construct UK using innovative methods. The Globe Point project in Leeds consists of 37,000 square feet of next-generation office workspace for 400 people. During the year 2021, still working under COVID restrictions, BAM used off-site construction of precast concrete panels faced with brick as a more efficient, safer and more sustainable technique than traditional brick laying. This modular approach also ferment a much lower impact on the site surrounding during construction. Looking at our financial performance in the first 9 months, revenue for the Netherlands, U.K. and Ireland was up by 3% compared to last year. Adjusted EBITDA improved to EUR 281 million at a margin of 5.7%. Excluding the EUR 52 million book profit on the Wayss & Freytag transaction in September, the margin for the 9 months was 4.7%. I would describe it as a good result. Operational performance in the third quarter was held back due to inflation, supply chain issues and some delays. The main impact was felt in the segment Netherlands nonresidential construction and the division U.K. and Ireland. Part of that related to our presence in Denmark, which is managed out of the Netherlands. The current projects of the small business will be completed in 2024. It's good to see that Dutch civil engineering continuing to improve, while this residential construction and property was again a strong contributor. We have some larger institutional transactions in the pipeline, which should get us to approximately 2,000 homes sold in the full year. Also I'd like to mention our Dutch activities in Water, Energy and Telecom, which is expected to realize an impressive number of 95,000 optical fiber connections to the home this year. In the division United Kingdom and Ireland, there is good momentum for energy and defense projects and the rail infrastructure network. The largest part of the order book decline in the third quarter was because of the divestments. We also removed one of the backlog, a U.K. regional development program, mainly roadworks that have been reviewed. The order book at the end of September of EUR 10 billion is substantial and of good quality. The uncertainties in the macroeconomic environment are affecting sentiment in our markets. We are using tools we have to mitigate cost inflation and supply chain pressure and support our colleagues while we delivered good projects to our clients. We are increasingly focusing on new opportunities to provide sustainable solutions using our industry-leading capabilities. For instance, during the third quarter, Dutch Civil Engineering played an important role in the realization of the AMS Energy terminal. The project in [indiscernible] substantially increase the import capacity of gas for North and Western Europe. I'm pleased with our progress so far in our 3-year strategy plan that runs to the end of 2023. The completion of the sale of Wayss & Freytag in September marked the successful conclusion of our divestment program. That transaction was the main driver of the improvement in the capital ratio to reach 21.1%. And trade working capital efficiency and liquidity were solid. For the full year 2022, we will reiterate the outlook of an adjusted EBITDA margin of at least 4%. And as we said in August, we expect to propose a dividend over the full year. Before we go over to your questions, I would like to mention 2 recent developments. As you know, the Dutch Fiscal Information and Investigation Service and the Dutch Public Prosecution Office have recently started the investigation relating to potential irregularities at some already completed projects of BAM International. BAM is fully cooperating with the investigation. The timing and the possible outcome of the investigation are uncertain. Yesterday, the Council of State has decided that the generic building exemption will lapse. This decision is obviously a setback for our industry. However, it came not unexpected for BAM. On a positive note, already granted permits are upheld. Projects that are under construction will therefore continue as usual. New residential projects are still possible, [indiscernible] nitrogen deposition remains within the legal limits, and this is demonstrated by areas calculations. BAM has already executed Areas calculations for the construction phase of almost all its property development projects. As far as BAM is concerned, any delays can be kept to a minimum. We expect that larger infrastructure projects will face limited delays. We continue to focus on product market combinations where we can make a difference, and we continue to invest in sustainable digital and industrial solutions. BAM is a frontrunner in sustainability. For example, by our investment in [ Lelystad ] plant and equipment, which is enabling us to limit the deposition of nitrogen during the construction phase. Now let's open the line for questions.

[Operator Instructions] Today's first question is coming from Mr. Martijn den Drijver calling from ABN AMRO.

The first one, and I'll do them one by one, is about the supply chain constraints/disruptions. Can you talk us a little bit how you view the outlook for the fourth quarter and perhaps in 2023 in relation to these supply chain issues?

Yes. Thank you for your question. Of course, very important subject, mainly related to inflation in a few of the more important segments, that we see an impact on the supply chain. Difficult to predict what the inflation will do over the coming period. Of course, we already on a very high level on labor cost, but also raw materials. Yes, we expect that this will not go away quickly, this inflation, maybe not the extreme levels that we saw earlier, but still substantial inflation to continue through this year and probably also next year. So we calculate that into our tenders to be able to maintain margins.

The question was more about the supply chain, not so much about inflation.

Yes, it's closely related, of course, in buying, let's say, materials and labor in constructing that we obviously largely do. And of course, that inflation causes sometimes some disruptions in that supply chain. And that's what we see in some of the segments going on. But in the whole chain of subcontracting and delivering of raw materials, sometimes there is disruption because of these price developments, earlier days, also a shortage of supplies, but that's, to a lesser extent, what we see now.

Clear. Moving on to my second question. Civil engineering in the Netherlands continues to improve. Does that apply to the whole of the activities, including the large contracts division or not? Perhaps you can shed some light on that element.

Yes. Thanks, Martijn. Frans here. Yes, that applies for the whole segment as we call it today. So that's the whole funnel, including large projects.

And how are we -- are you moving towards, let's say, your target EBITDA margin in this segment? Or are we still far away from it or away from it? Is it only trajectory, but are we -- are you satisfied with the progress?

We already provide guidance overall for the whole company. And I think as Ruud clearly worded, we are satisfied with where we are. We reconfirm outlook for the company, and that's where we leave it today, Martijn.

Okay. Then on the delays, could you perhaps shed some light on the project delay in Denmark? Is that in civil engineering? And is that one that is also operating in Germany?

No, Denmark is a smaller activity being managed from the Netherlands, but this is not in civil. This is more C&P, a few projects over there. So we report on them, yes, as part of the Dutch division. Maybe a bit confusing, but that's how it's reported within the company. And for that segment, for these projects, we see the same kind of development as for some of the product changes in the nonresidential C&P in the U.K. and the Netherlands as well. So some of the subcontracting firms having problems in delivering, sometimes indeed related to inflation, in particular examples also related to delivering of some of the systems they were, let's say, contracted for. So it's a combination of these elements, but mostly impacted by high inflation, I think caused by high inflation.

Okay. And then my final question for now. Yesterday, your Heijmans made some remarks about the housing market, specific segments of the housing market. You are guiding for a very strong fourth quarter in terms of housing sales. But how do you view the development after the fourth quarter, both in terms of demand but also in terms of pricing?

Yes. Indeed, we have some very good deals in the pipeline. So that's why we are confident for the Q4 numbers we provided in the press release. Yes, it's a bit of a complicated situation. Of course, you see interest rates going up, consumer confidence going down, but on the other hand, still a huge shortage of homes in the Netherlands especially. And that, yes, that balancing out maybe, but what we see, I also mentioned that also in Q2, that the homes we are building, we can still sell, let's say, with a lot of comfort. And I think also in the year 2023, next year, that will be the case. So we don't see a strong signal that we cannot sell the things we're developing and building. Yes, not really going into the segments there because we don't see, at this moment in time, a big difference between these segments.

Got it. I have some additional questions, but I'll leave some room for the others.

We'll now go to Mr. Tijs Hollestelle calling from ING Bank.

Yes, I've got a question about the revenue budgets for next year and then specifically also on the non-core business still within your portfolio. I think that's only one company now in Belgium, and what are the annual revenues approximately?

Tijs, so say EUR 150 million of turnover outside the 2 divisions is the number we provided also at H1.

Yes, and that's the only thing left, let's say, the rest is noncore?

Yes. Yes, so wind down of BAM International projects completed. And then for next year, C&P, Construction & Property Belgium will be in the portfolio and will stay there, adding EUR 150 million share of revenue.

Yes. And I guess that you are now doing the budget for next year. So what is your approximately the expected total annual revenue range for next year?

I think we reconfirmed the strategic targets for 2023, as we communicated where we said circa EUR 5.5 billion. And there's no other data points at this stage that we provide.

That's clear. Yes, and then on -- I mean, I know it's a very difficult subject, but on the tax authorities, let's say, rating BAM International, did they already gave the investigators, did they gave you kind of a date in which they will provide an update or any indication on the length of the investigations?

Yes. I think the best way forward is not to comment on that tax because for us, indeed, it was a surprise as well to get the visit. And the only thing we know is that, indeed, it's about a few projects that were closed already as part of the BAM International business that was closed, by the way, 2 years ago, that business. And that's what we know and that's what we communicate it could be outside market. It's better to leave it at that. And yes, let's wait for further information from the Justice Department before we have new information for you guys.

Okay. And then basically the same question on, are there any other important deadlines on arbitrage cases which could have a significant impact or anything else in, let's say, before the year ends?

We always have claims under negotiation with clients, of course, and sometimes timing and outcome is difficult to predict, but there are no specific ones that we report out on, Tijs.

Okay. That's good to know. And then also in addition to what Martijn was asking, if I read, let's say, the comments in the press release on the situation in the end markets, and it seems to me that it's really the external factors. So indeed, the supply chain caused the delays, that are causing, let's say, some underperformance or lower-than-expected performance in, for instance, the nonresidential business in the Netherlands. But there is no such thing as, let's say, mixed price contracts or, let's say, more company-specific issues with client disputes or badly priced contracts. Is that a fair assumption?

That's spot on, absolutely true. Nothing to report there. Indeed, we see some -- it's not a big surprise if you indeed look at the huge developments regarding inflation, for example. But indeed, linked to outside factors coming into these projects and some of these projects that caused us some difficulty now and then.

Yes, okay. And one final question also about the housing market. I know it's also a difficult subject also for us, but it is one of the most early cyclical businesses within your business portfolio. So I can imagine that maybe you had 20 or 30 buyers per home in the beginning of the year and that's, yes, that is going fine if you have one buyer. But if that one buy also disappears, yes, it can go rather quickly. So if I look back on the historic performance of especially the Property Development business, yes, it can be quite cyclical. But the consumers can be gone, let's say, somewhere next year because of affordability or losing their confidence completely. And that, I think, is also applicable to the institutional investors because they all have to recalculate with much higher interest rates. So yes, I can imagine that you're already seeing kind of more hesitant customers in that -- in the Property Development business. What are the scenarios you're calculating with?

Yes. So I think it relates a little bit back to Ruud's earlier remark. There's a lot of factors and complexity. Interest rates are going up. Affordability is an element, and clarity maybe in Dutch approach there on the property investor side. However, we still see sufficient appetite and also in this -- with these energy prices, climate-neutral houses with low-energy consumption are also a plus for buyers. So we still think also combined that with the structural shortage of housing in the Netherlands, there is still sufficient appetite in the scenarios we have on the table.

Yes. I was also thinking, because you are creating, let's say, that the houses out of scratch, you probably can also meet the affordability difficulty. But how quickly can you, let's say, redesign the offered houses so that consumers can indeed, let's say, afford these homes?

Yes, indeed, against spot on. Of course, we always -- in this development plans, we provide several types of homes, social, lower rent, higher rents and more free-market homes. So in that sense, we're pretty flexible together with our customers, of course, to have a market compliant delivery there. And of course, that can change over time if the market circumstances change a little bit. But indeed, we have that in our own hands, and that really helps going forward to have that flexibility.

We'll now go to Tim Ehlers calling from BAM.

I'm not calling for BAM, but from Kepler, but anyways, not that important. Now just -- I have 3 questions. So first of all, when you guide for the EUR 5.5 billion for 2023, roughly, do you expect some adjustments in your EBITDA margin guidance for that year? Or would it be in line with the 4% you had for this year?

Yes. So for next year, we refer to the original strategic targets, and we say we are on track to meet them. And those are EUR 5.5 billion indeed, as you state, and adjusted EBITDA margin of circa 5%.

Okay. All right. And one more specific question regarding your order book. So you stated that you took out EUR 600 million from that highway project in the U.K. Could you give some insights there? What was the reason for taking it out? Where -- because it's quite a significant chunk. So just want to know what happened there.

Yes. So there's a number of projects that are related to the regional road development program in the U.K., where the client has at least decided to stop some of these programs. We were already in the phase of mobilization, but some of these projects are being reconsidered. Yes, that may mean that in the later point of time, we will be able to add them back to the portfolio. But for now, we are cautious and also other projects that are in that same area of regional road development program, we took out of the order book to keep it conservative.

Okay. So do you also see a risk there with the political turmoil in the U.K. that they might reconsider their whole infrastructure budget, which was quite significant and which could have been...

Yes, very good question, a very good question. I think it's very difficult to do their predictions. I was very careful with political statements on -- in that sense. It's a very turbulent phase, just like in the Netherlands, by the way, on the political side in the U.K. with a lot of decisions to take on budgets, government budget in particular. So let's wait and see what the new government will do there. In general, longer term, we see a big appetite in the U.K. for investment in infrastructure, as in multiplier on the -- for the economy in general. And yes, we estimate that will stay. There is a, indeed, a big demand for improving the infrastructure in the U.K. that we see good developments there, for example, on the defense infrastructure side, where a lot of investments are planned as well.

Okay. And then one final question, also touching up on the residential topic. So also, as you mentioned that you believe that there will be some tailwinds because of the housing shortage and also the aim of the government to build more affordable and social housing, let's say, this actually be realized. Do you see a margin difference there compared to, say, higher-priced houses you were able to sell for a nice premium in the couple of last months and years? Do you expect a drop in margin there? Or is it actually the same level because it's more standardized houses? Yes, what do you expect on that?

No, we don't expect a drop in margin there. We are calculating with stable margins there going forward.

We'll take questions now from Maarten Verbeek calling from The Idea.

It's Maarten Verbeek from The Idea. First question, you mentioned that your operating profit was held back by inflation, supply chain and delay. Could you more or less quantify how much those 3 have held back your operating margin?

No, so that's very difficult. You can imagine we have a significant portfolio of projects. In principle, we mitigate this as a tender principle. So the inflation risk should not sit with BAM. But of course, that's never perfect. There's always a tailwind risk and you see now specifically in these extreme scenarios that on some of these projects, we experienced some headwinds, and that held back a little bit to Q3 overall. And Ruud explained a little 2 specific areas where that was visible, and I think that's what we have for now.

Do you expect the combination of these 3 to worsen into Q4 or that it will ease somewhat?

Yes, difficult to say, but probably it will be on the same level. We don't see big changes there on the inflation level, but very difficult to predict. It is very turbulent times. A lot of macroeconomic developments going on all over the globe. But I think most safe here is to calculate with the same level in Q4.

If that is not changing, and traditionally, seasonally, Q4 is a stronger quarter in the year, is then fair to assume that the adjusted EBITDA margin should be at least the 3% we have seen in Q3?

Yes, difficult to say. We reiterate the outlook, and I think that's what we can keep you right now. I think, of course, that shows you some comfort here at the table. But in a very turbulent world, I think it's wise to leave it at that.

I'd like to get back to Denmark, where you have a small operation, and I do believe it's focused particularly at schools. How should I -- where should I place Denmark in your strategic plan going forward? I believe that it was clear that the Netherlands, the U.K. and Ireland was BAM's core markets.

No, I think it's a fair question. It's indeed a smaller activity for BAM. It reports to the Dutch nonresidential business. It's about, indeed, a few projects. And we will be very, let's say, critical in looking for tenders and probably not having, let's say, a series of tenders coming into that business in the near future. But that's where we are. So indeed, it's not strategically a big item on our agenda at this moment in time. But of course, at the moment, we have more information on that when we will give you that.

[Operator Instructions] We'll take up our first follow-up question from Mr. Martijn den Drijver from ABN AMRO.

Wayss & Freytag has been sold at the end of the Q3. Was the EBITDA margin of Wayss & Freytag roughly in the 7% to 8% EBITDA margin region?

Yes, I can confirm. I can confirm, yes.

Okay. Yes. Then secondly, electrification continues, and by electrification, I mean your own electrification of the equipment you use. Lots of new announcements on LinkedIn. How should we think about CapEx for 2022? So it's only a quarter left, but also 2023, can you help us out in terms of CapEx guidance for this year and next year?

Yes. So the guidance, we also provided at H1 is it's roughly in line with the depreciation, so EUR 100 million to EUR 120 million on an annual basis. Of course, we're now looking at budgets for next year, yes. So if there's any accelerations on CapEx because of strategic investments there, we will let the market know. But for now, we see just as a normal run rate.

Okay. And then on -- you mentioned that you're expecting to pay a dividend. Maybe you can refresh my memory in terms of the payout ratio and whether that is in or excluding one-offs?

No, so the statement there was that we expect to propose a dividend over 2022, and the BAM dividend policy says 30% to 50% of net profit and make no comments on what is accepted, yes or no. So that will be a discussion, of course, after finalizing the annual report and discussing that with our Supervisory Board.

Because clearly, with recur a capital ratio of 21%, you have some -- you have more leeway than ever before, at least in the last 3, 4, 5 years.

We're very pleased with the 21% indeed, Martijn. So that is an important element of the resilience of this company. So hence, also the statement at H1 that we are confident to go into a dividend discussion.

Okay. And then my final question, it's a difficult one. But in your discussions with customers, this is again about the subject of supply chain, but mainly inflation, what is the general stance? Are they willing to work with you, renegotiate? Or now that inflation doesn't seem transitory and is getting higher, are they really just sticking to the original contract and say, BAM, you solve it? What's the trend there?

Yes, it's very difficult to give a general remark there. What you see in new tenders, of course, inflation is a big item. And so -- and we see their realistic view by customers, yes, realizing that inflation is there. It should be part of this tender process. So that is a more easy discussion and, of course, renegotiate afterwards, which is much more difficult. But also there, sometimes we see people have some realistic views as well, but of course, much more difficult. But yes, extremely difficult to give a general trend there. I think more importantly, indeed, on new tenders for new big projects, of course, some hesitation by bigger customers because of the interest rate that went up some macroeconomic developments that makes -- make big developments more difficult. And there, you see some delay of big projects. And yes, we still have some very good ones in our portfolio. We're happy with some new ones we have in BAM. But clearly, some of these projects were delayed.

Isn't it possible to say something like the property development on the investor level, they're still willing to work with you and it's more in the public domain, provinces, cities that stick to fixed price, green on price? Would that be a fair assessment?

Difficult to make a general statement there. Of course, customers are very tough, of course, on the contracts they signed, and that's also fair, I think. And that's how we also respect our customers. That's how BAM always worked. And I think that builds our reputation in the market as a very reliable partner. So a contract is a contract and on a very specific situations, we started renegotiations there.

[Operator Instructions]

Okay. Well, if there are no further questions, then I would like to end the call. Thank you for participating, and I wish you a good day. Thank you.

Thank you. Bye.

Thanks so much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Thank you.