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

Hello, and welcome to the Royal BAM Group Q1 2024 Trading Update. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to your host, Ruud Joosten, CEO, to begin today's conference. Please go ahead.

Good morning, and welcome to this analyst call for Royal BAM Group following the publication of our trading statement this morning. I'm Ruud Joosten, the CEO. With me are Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. I want to start by mentioning the tragic accident in February at the Dutch project site for a bridge over the Twente Canal. Two employees of subcontractors lost their lives and 2 were seriously injured. We express our sympathy for them and everyone affected. Investigations into this accident are ongoing. And since last week, we have access to the construction site again. The safety of everyone working on our projects remains a fundamental priority for BAM, and we continue to improve our safety culture and procedures. For our opening slide, we show you Alyth substation. Last February, after almost 3 years of construction, the substation has been commissioned, delivered by Siemens-BAM joint venture. This critical infrastructure is a key part of SSEN Transmission's reinforcement of the East Coast network. It will support the connection of new renewable energy generation in the North Scotland to the grid. Looking at our financial performance in the first 3 months. Revenue was a little below the first quarter of 2023. We report an adjusted EBITDA of EUR 44 million, which translates into a margin of 3.1%. As you know, lower contributions from our businesses are not unusual for the first quarter. Important to note that adjusted EBITDA and revenue in the first quarter of last year included the result of the divestment of an office development in the United Kingdom. Let me highlight the developments per division. The division Netherlands had a higher contribution versus the comparable period last year. Our Civil Engineering activities had a good start of the year. Nonresidential construction was impacted by issues on 2 remaining projects in Denmark. We expect to complete this project during this year. It's good to see that our Dutch house sales in the first quarter of 2024 were well above the comparable period last year. More retail buyers are returning to the market as higher salaries and stable mortgages where it seems to have a positive effect on consumer confidence. However, institutional investors are still reluctant to invest. This hesitation particularly affects the development of large inner city complexes, which need a cornerstone investor to get started. There's a clear shortage of Dutch homes, which is also reflected in the forecast of some major banks that prices will continue to increase. BAM is well positioned to increase the production of new homes, provided that the government will offer more clarity regarding regulations and will facilitate faster permitting procedures. In Telecom, Energy & Water, more of our clients are moving to long-term contracts to secure our availability as a key supplier. In Dutch Civil, we see continued growth in the market for energy transition with attractive opportunities in the public transport sector. The contribution of our division in U.K. and Ireland was lower versus the first quarter of '23. The performance of Construct U.K. was held back by some project delays as supply chain issues continued. As a result, Civil Engineering improved, also supported by high production level, especially in rail-related projects. Our activities in BAM ventures in Ireland had positive contributions. I'm very pleased with the development of our order book in the first quarter. We continue to focus on margin above volumes and on project with strong sustainability aspects. In the first 3 months, BAM's order book totaled EUR 10.7 billion, which is a 10% increase versus year-end 2023. For the group, our book-to-bill ratio was well above 100%. A substantial part of our recent project wins is in line with our strategic objective to expand in sustainable solutions. For example, I can highlight our role in the Eastern Green Link 2 electricity transmission project. It was a major project win in [indiscernible] U.K. BAM-Hitachi will supply the converter stations at both sides of the Peterhead and Drax subsea cable. This is U.K.'s single largest electricity transmission project, transporting enough electricity to power 2 million U.K. homes. This is a great proof point for our strategic focus on sustainability. Our liquidity position showed the typical seasonal outflow at the start of the year. Our capital ratio further improved based on our positive result in the first quarter and a shorter balance sheet. The buyback program to neutralize dilution and scrip dividend and the additional EUR 30 million share buyback as announced in February will start tomorrow. Looking ahead for the full year, we expect to deliver an adjusted EBITDA margin with strategic -- within the strategic range of 4% and 6%. Now let's open the line for questions.

[Operator Instructions] We will take our first question from Martijn den Drijver from ABN AMRO.

I have a number of issues I'd like to broach, and I'll do them one by one. On the Danish school projects, would you be able to share, not the amount, obviously, but is it a low, is it a mid, is it the high single-digit type of additional loss provision on those 2 remaining projects? Just to give a little bit of a sense of the impact.

Okay. You do them one by one, okay, then we answer one by one. I thought you can, obviously, list them out, sorry for that. But no, we don't go into -- at this moment in time to the exact amount on these school projects in Denmark. I think the good news is that we are finalizing them. So on short notice, I think we can come back with some more details on finalization of these projects still remaining. Last year, we had 4, we finalized 2 of them by now. So 2 remaining.

And is this a project whereby you have ongoing discussions with the client, meaning that after completion, there's still perhaps a possibility of a settlement of the additional cost that you have incurred or is this given the contract structure really just a 100% bump?

As always, Martijn, we value current insights based on IFRS. So let's not speculate on further upside or downside. Today, we have in our books how we see completion of these projects going forward.

Yes. But that's what you said as well in 2023 results. But let me move on. On the home sales, the 1,700 unit guidance, which is a positive. I was just wondering, I have a bit of trouble weighing wage inflation versus -- which is up versus building materials, which are down. what would be the net? Is it positive or negative on new home sales relative to 2023?

Well, I think we had a good start compared to the Q1 of last year. So we see clearly positive development, especially with regard to private persons stepping into the market again. I think that's what we have seen in the first quarter of '24 based on the fact that people see some stability in the interest rates, but maybe even more their increased salary, net salaries they are stepping back into the market, and that's what we see. I think that's a very positive signal. Although it's a volatile market, that is also clear. That's why we stick to our, let's say, full year kind of expectation. But still, I think it's clearly a positive signal that private persons are back in the market.

Yes, I agree, but I was just wondering about the profitability of those home sales, not so much the number or the sales effect but more of your profitability, would it be fair to assume that it's better or is it roughly equal, but is there anything you can add to that?

Well, I think it's -- I think -- let's say, we are positive about it. If you look at the market situation at this moment in time also predicted by the banks that prices of homes will increase, that's what we see here as well. So there is a positive price effect on margins here in the market. That's clear.

Okay. I'll move on to the U.K. Now if you assume that the Netherlands was slightly better, let's say, EUR 1 million or EUR 2 million. Last year, you did EUR 58 million and then the starting point is EUR 60 million. You report EUR 44 million, so there's a delta of EUR 16 million. Given that you don't mention projects specifically or delays in Ireland, I assume that most of that pain, if you will, is in the U.K. in Construction and Property because Civil Engineering did well. Maybe you could share with us a little bit about these projects. Are these all projects that you bid for and won before 2020? How should we think about this project also going forward?

Well, I think it's fair to say, of course, compared to last year, you have to take into account the sale last year in our revenue and profitability of a substantial development in Q1 '23. So that's an explanation, I think, for the biggest part of that drop in profitability. On the other hand, your question regarding these projects, yes, we are finalizing a few older projects, if you can say, so we don't expect that going forward. There is always a risk, of course, in projects, that's our business. But yes, it's fair to say that these are, let's say, projects we are finalizing at this moment in time.

Okay. So -- but just to come back to that question, these are older projects -- the real question is, is it prior to your arrival or post your arrival?

Yes. It's -- we're talking about a few projects...

And it's a mix. And it's, first of all, the transaction we did last year, as we said, but then also in general as a statement on commercial client hesitating for new investments, also giving interest rates. So there's also clearly a market that is a bit tougher as we also made clear in the press release.

Okay. I'll move on to Ireland. What's specifically driving that slightly lower result for the -- or the lower results for Ireland? Is that across the board? Is it just higher wage inflation? Could you share a bit of light as to why the Ireland did slightly...

I think not a clear defined reason there, Martijn. I think that's just a very small amount. In general, we are positive about the Irish market. Of course, we are finalizing a new project there, as you know. But on the other hand, we see big investments and big program from the Irish government to invest in infrastructure, but also in hospital, schools. So we're well positioned to take advantage of that, I think, in the coming period. So economy is in a very good shape there as well. So this small drop in Q1, I think, is now substantial or, let's say, structural effect on our company.

Okay. And then my final question for Frans. On the trade working capital, clearly, there's been an acceleration in the decline of the trade working capital, so less negative. Is it logical to assume that it's more linear from now or can it be really as bumpy as it been in this particular quarter for the remainder of the strategic period?

Yes. I think for the first quarter, we see 2 things. We see the normal seasonal decline in this EUR 250 million slippage, but also indeed the structural reduction in the trade working capital efficiency and we made a step of 0.7%. We're around minus 12.5. And we guided for the full year a 1% to 2% slippage, which we, yes, iterate. So basically, this is in line with what we expected.

Our next question comes from Tijs Hollestelle from ING.

I basically had the same questions as Martijn, but let's approach it from a different angle because you've probably seen that the share price is down 17% this morning. I noticed that you are quite relaxed in, let's say, answering the questions about what's going on. But clearly, investors are still very, very cautious about what's going on. You give us, I must say, yes, not very much insight in what's going on. So the minus EUR 30 million loss in the Construction and Property business in the U.K. in the second half of last year compared to, I think it was plus EUR 15 million or EUR 16 million positive in the first half, what kind of delta should we look at for the first half of '24? I mean you mentioned that you had a positive gain in the overall U.K. of the property transaction. But yes, it's very, very difficult to make sense out of these numbers. Should I put in a minus EUR 15 million in the first half of this year or is it a plus? Any...

Yes, we don't go -- as you know, we don't go into the specific segments during this Q1. Of course, so there will be more detail, let's say, after Q2 in July, a little bit earlier than we are used to. But yes, I think like we said before, there is a substantial explanation by the transaction we made last year in Q1. And then on top of that, some difficult circumstances in the commercial construction industry at this moment in time and a few projects that are in their end phase, yes, that's in total is the [indiscernible] or the explanation for the deficit ,Tijs. And then balancing also, I think, had a comment on order book, we're really pleased with the order intake. Residential, number of houses sold are positive; solvency, heading 25%, even a bit more. Yes, so I think overall, we just look at a bit of a slow start on the year in the EBA side, but a lot of positives as well.

Yes. Okay. But you are aware that the stock market is looking at this in a different way because of a lack of disclosure and the same on the Danish projects, I mean, there were a couple of projects last year in the first quarter, you take loss provisions so that impacted Q1 EBITDA. And then assuming that you are more or less accurate with taking these loss provisions, those 2 remaining projects should, let's say, give you a 0 EBITDA. But apparently, you took additional loss provision. So if I were an investor, I would say, "Okay, what's happening in the U.K., that can also mean that in the coming quarters, there will be also all kinds of additional losses on those projects," and there, the losses were very significant in the second half.

Yes. I think Frans' statement is pretty clear. We are indeed answering these questions in the relaxed mode because we look at more fundamental, let's say, basis of the company, looking at order book of EUR 0.9 billion higher than Q4 last year. So we see a clear acceleration in these energy projects in Civil U.K., but also in the Netherlands, we see an uptick in the domestic house sales, investors coming back, I mean, private investors coming back into the market, so substantial increase is there. That's why, of course, we are positively looking at the future of this company, not withstanding the fact that we had some -- indeed some explanation like we did before on Construct U.K. with some difficulty in that market there. We see -- still see pretty substantial issues with subcontractors in the U.K. at this moment in time because that commercial market is still under pressure. So that's clearly what you see in the results. But again, a substantial part of the result last year was that sale of the -- of a commercial development we had developed earlier. So that's to make it a bit more relative, I think, where we are at this moment in time.

We will take our next question from Maarten Verbeek from The Idea.

It's Maarten Verbeek of The Idea. Question concerning the trade working capital. Pleasing to hear you mentioning the number of minus 12.5, which you did not provide in the press release. But still, when I make -- and you also mentioned that your cash position dropped by some EUR 250 million. Could you put some more color to that? Because when I look just to the drop of 13.2 to 12.5, then EUR 250 million looks a bit much according to my calculations.

Yes. So the EUR 250 million is in the press release because it's just basically the liquidity position and then comparing that with year-end, so that's how you get to that. And that delta that you are looking for is explained by the seasonal decline. So it's the normal seasonal pattern with an additional reduction of the trade working capital efficiency as we unwind the prefinancing on the large project portfolio. And for that element, we said for 2024 full year, we expect a 1% to 2% further normalization, and we took a first step there.

Okay. And then secondly, also a bit about results and maybe you can provide some guidance on that or some indication. Last year, we had the plus of the U.K. real estate sale. This year, we have losses on Denmark. If we exclude this, would then more or less -- without giving any numbers, then more or less result be at par?

Well, obviously, we don't go into that kind of calculations, but I think you can make your own calculations, of course, if you want to. But these 2, of course, had -- like we described before, had substantial impact on these numbers. And note, again, Q1 is a smaller Q. So we are looking more at the fundamentals going into the year and hopefully, in Q2 -- after Q2, not hopefully, we will in the Q2, let's say, presentation July 25, we can have a more, let's say, detailed discussion on the segments going forward.

Okay. And lastly, now you stated that you expect your EBITDA margin to be within your strategic range of 4% to 6%. Will you be willing to fine-tune that guidance during the year? Because I can understand that you don't do that at the start of the year because it's a small year when just started, but you're willing to -- or should we expect that you will fine-tune that guidance during the year?

Yes. Well, we normally -- we don't give an outlook in Q1. So what we then do, of course, is like we presented earlier during the end of the year results that we use our strategic -- long-term strategic range of 4% to 6%. And I think that's important for our shareholders to know that this range is there also through the cycle. So that's why we use that as a kind of a guideline for everybody following us. And then after Q2, normally, we come back with a more detailed outlook for the full year.