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

Good morning, everyone. I'm Michel Aupers, Investor Relations Manager at Royal BAM Groep. Welcome to everyone joining this analyst meeting here in Amsterdam or in the audio webcast. The meeting is hosted by our CEO, Ruud Joosten; and our CFO, Frans den Houter. They will give a short presentation on key points of bonds results for the first half year 2024. Afterwards, we will take your questions. I draw your attention to the disclaimer here. Ruud, over to you, please.

Thank you, Michel, and good morning all. This picture shows the recently completed new DSM-Firmenich headquarters in Maastricht. This building is the first renovated listed building in the Netherlands set to become Paris Proof for its low operational carbon footprints. Let's start with the key points of the first half year. BAM delivered a solid performance in the first half year of 2024. The adjusted EBITDA increased by 6% to EUR 126 million versus the same period last year. And our group revenue also improved by 6% to EUR 3.1 billion. The adjusted EBITDA margin was in line with last year at 4%. Most of our businesses performed well, but it's disappointing that our results were held back by the indoor arena project Co-op Live in Manchester and 2 schools in Denmark. These projects, which are nearing completion, resulted in substantial losses. In recent years, BAM has made significant progress in derisking its portfolio. When I started as a CEO after the summer of 2020, BAM had approximately 20 high-risk projects in the portfolio. At that time, we were still working on projects like sea lock IJmuiden, Zim of the Futurium and JSArena, both in the Middle East. And we were in the middle of a complicated dispute with our client regarding the Ofladec project in the Netherlands. Today, we have completed the majority of these projects, and therefore, there are no longer a threat to our profitability. Zooming in on our portfolio today, we are nearing completion of remaining projects as Silvertown Tunnel in London, National Children Hospital in Dublin and Cross River Rail in Brisbane. The Fehmarnbelt tunnel project between Germany and Denmark is expected to be completed in 2030. We have halved our exposure to 12.5% stake after the divestment of Wayss & Freytag. Over to the key performance indicators. In the first half year, we realized a net income of EUR 55 million, reflecting an earnings per share of EUR 0.20. Furthermore, our liquidity position remains solid and our capital ratio further improved. Our order book increased by 12% to EUR 11 billion. A substantial part of our recent project wins is in line with our strategic objective to expand in sustainable solutions, while we remain focused on the quality of the order intake. Now, let's look at the performance of the 2 divisions. On this slide, you can see very energy-efficient homes realized by BAM Boum en in [indiscernible] Cartier in Arnhem. For inspiration adjustments to their homes, the buyers were invited to our Experience Center Home Studios. Adjusted EBITDA, the division in the Netherlands was up from last year to EUR 70 million, reflecting a margin of 4.7%. In the segment Construction & Property, there was a strong contribution of residential. The Dutch residential market is improving, and we sold 832 homes, much higher compared to last year. Consumer confidence is solid due to a combination of increased salaries, continued low unemployment and stabilization of the interest rates. For the full year, we expect to sell approximately 1,700 homes, which is in line with the number of homes sold last year. The reported adjusted EBITDA included substantial losses on the 2 schools in Denmark. We'll complete these projects before year-ends. The civil engineering activities continued to the positive trend over the last years and delivered a solid result. Our Dutch order book improved to EUR 5.1 billion. Moving on to the division U.K. and Ireland. On this slide, you see a recently opened breast center in Wales, a health care project of Construct UK. The overall result decreased to an adjusted EBITDA of EUR 51 million, reflecting a margin of 3.2%. Construction UK reported an adjusted EBITDA loss of EUR 24 million, and that includes the earlier reported project delays and supply chain issues. In the second quarter, we had additional cost of around EUR 30 million related to the delayed opening of Co-op Live. Our other business in the division, U.K. and Ireland performed well. Civil Engineering UK had an exceptional strong start of the year, supported by high activity levels, especially in rail. BAM Ventures also showed a solid performance. Results in Ireland improved substantially, also supported by a partial claim recognition in Ireland for the national children's hospital. Last May, the independent conciliator recommended an award of EUR 107 million and a significant extension of time to BAM for this project. Much of this around flows to related claims and the supply chain. The project result improved at a single-digit number, partially offsetting losses reported in previous years. NCH project is now for more than 90% completed, and we are on track with the revised timetable for delivery to the clients. Now, Frans will take you through the financials.

Thank you, Ruud, and good morning, everyone. This slide shows Schiphol, a key client of BAM. At Schiphol, we have started a large-scale replacement of climate systems on the A pier. This is a good example on how we are supporting our clients to become more sustainable. This morning, we released a set of solid numbers to the first half year of 2024, a revenue of EUR 3.1 billion, delivering an adjusted EBITDA of EUR 126 million. Both numbers are a step-up of 6% versus the previous year. Obviously, I share, Ruud, to disappointments related to the losses in Construct UK and the 2 schools in Denmark. However, the good performance for the rest of the portfolio was able to more than offset these losses. And this resulted in an adjusted EBITDA margin of 4% overall in the first half year. Our results are supported by the performance in Civil UK, the important settlement on new children's hospital and the strong performance in the Dutch residential. The strong net result of EUR 55 million contributed to a further growth in equity to approximately EUR 950 million and as such, again, a stronger balance sheet, also earmarked by the solvency of 24.5% and a solid cash position of around EUR 450 million. The company has not used the RCF during the first half, and we do not expect to use it for the remainder of the year. Now, let's look at the income statement. Revenues were up by 6%, mainly driven by Division NL as residential home sales recovered. We sold 832 homes, mainly to private buyers, and we continued our focus on selective multi-asset clients like Schiphol Airport. Our Belgium businesses contributed very well, offsetting the modest rundown cost of divested businesses in BAM International. BAM share of Invesis net result for the first half year was breakeven, and there were no exceptional item and the result is broadly in line with the normal operational performance of Invesis. Going forward, there is an attractive pipeline. And you may have noticed that last week, a consortium with Invesis is the preferred bidder for the Melton Hospital in Melbourne, Australia. Depreciation and amortization totaled EUR 61 million, which is 12% higher compared to last year, a result of our increased investments in sustainable and modular solutions, including the continued electrification of our plant and equipment. At this moment, approximately half our lease cars have been electrified and the first batch of EV company car fans are on the road. We report restructuring cost of EUR 4 million, mainly to adapt to the organization of Construction UK and to the current market circumstances. Income tax in the P&L is EUR 10 million, resulted in an effective tax rate of 16%. I reiterate our guidance on an effective tax rate of 80% to 20% for the coming years. For this year, the slight lower effective tax rate is explained by the relatively high contribution of Ireland, where the tax rate is only 12.5% and a small tax benefit related to the wind down of BAM International. For the full year 2040, the effective tax rate will be around 16%. Bottom line, BAM reports a net income of EUR 55 million, reflecting earnings per share of EUR 0.20. Now, let's look at the cash flow statement. Our cash flow from operation was EUR 111 million and in line with our performance of last year. The majority of the cash outflow in working capital is explained by the normal seasonal pattern and compared to the first half year '23, a modest net investment in land positions. We expect that the current level of trading working capital efficiency of around minus 11% is a good proxy for the years to come based on what we now know. The cash out on provisions and pensions totaled EUR 53 million and the cash out on investing is EUR 59 million. Cash from financing activities included EUR 53 million for the payment of cash dividend and the buyback of shares. Our share buyback program is progressing well. The repurchase of 7.2 million shares issued for the dividend in stock was completed. And today, we continue the additional EUR 30 million share buyback, which will lower the number of outstanding shares ranked for dividends. Based on the current run rate, we expect to complete the repurchasing early in the fourth quarter. Back to the cash flow statement. The remainder of the cash flow from financing relates to the leases and our liquidity position remained solid at EUR 453 million. Now, over to the financial position. Trade working capital, as said earlier, landed at minus 11.3%, and our capital ratio landed at 24.5%, a further increase versus the year 2023. Our liquidity position remained solid, and we further strengthened our capital base. To conclude, I would like to highlight that we have accelerated our midyear reporting by 3 weeks and as such update our shareholders faster on our performance. Also, it's a nice proof point on how we have strengthened our processes, smartened our systems and improved collaboration within our teams. Now, back to you, Ruud.

Thank you, Frans. I would like to conclude with the market trends and our outlook for the full year. Here, we show you the teaching and communal building of Southland College in Workshare, home to 1,650 students. This college will achieve a net zero carbon emission and low energy use. This scheme of BAM Construct UK is setting the bar and they will give guide how schools are built in the future. We continue with our strong focus on order book quality and selective tendering. The order book increased by 12% to EUR 11 billion, driven by recent project wins in line with our strategic objective to expand in sustainable solutions. After the elections in the Netherlands and in the U.K., there are new governments in place. These governments have ambitious plans, which are at first sight positive for the construction industry, but we have to wait and see how the ambitions will be translated in real projects to improve infrastructure, education, energy, security and result in a production of more sustainable and affordable homes. In general, cost increases are leading to delays in some project awards in nonresidential, while utilities and grid operators continue to invest in infrastructure. The residential market further improved, driven by robust consumer confidence due to salary increases, stabilization of interest rates and the continuing high employment rates. For the medium to longer term, there remains compelling rationale for essential investments in energy transition, infrastructure and sustainable and affordable homes. In the U.K., the order backlog of civil engineering is expected to benefit from governmental plans to energy security and continued investment in transportation. The markets for retrofit and refurbishment projects and education and health provision, offer attractive opportunities. The Irish economy is performing well, and we continue to be positive about the overall level of opportunity in the construction and infrastructure markets, notwithstanding traditionally competitive environments. We are confident that our recently launched strategic road map will deliver value to our clients, create development opportunities for our employees and generate attractive returns to our shareholders. BAM expects to deliver an adjusted EBITDA margin between 4% and 5% for the full year 2024. Now, we will take your questions.

Martijn den Drijver from ABN Amro AutoBHF. First, the main question is on the adjustment in your EBITDA margin guidance for the full year. I've understood it previously was 4% to 6%, now 4% to 5% for the full year. So, question is, what is weaker than expected in your H2 expectation than in your previous assumptions?

Well, we see the outlook within our range that we provided. So, when we presented our strategy, 4% to 6%. So, this is within the strategic band that we presented at that moment in time. We are looking at H1 and some derisking activities that we still need to do within the portfolio, as mentioned before. So, in that context and with the results of H1, at this moment in time, we feel comfortable with the 4% to 5%.

Then a follow-up question on Netherlands construction and property margins, [indiscernible] ask why the margin is still, let's say, in his perception, downbeat, despite stable housing sales?

Yes, we think the profitability there is, let's say, in line with what we used to see there in the past. So, we don't recognize their low beat profitability. I think the extension of the home sales in the first half year is supporting the results of the Dutch division pretty substantially.

Yes. Also year-on-year if you compare but also taking into account the comment that was made on schools in Denmark, there was some headwind in construction [indiscernible]

So, are included in Netherlands. Yes.

So, if you correct for that, we're pretty happy with the performance on the residential side.

And do you still see green shoots in the Dutch residential market, upside potential in the residential market or is it the change in cabinet? Of course, we'll have to see.

Yes, mid- to long term, the fact is that there is a strong demand for affordable homes in the Netherlands. And that's only increasing, I think, over the last period. I see positive plans by the new government coming in the hooved line and [indiscernible] in good Dutch. So, I think the plans are on the table. It's more about execution. Long term, we are positive because in the end, this demand needs to be fulfilled. The 1 million houses are mentioned, can also be 800,000. But for, let's say, the next 10 years, the demand is there and BAM can provide these affordable homes starting by the back of this year in our wooden concept, so also in a sustainable way. So, that opportunity will be very positive for BAM results in the future. I think that the market bottomed out in '23 beginning of '24. You see also that in the increase of our sold homes in the first half year, but the opportunity is much bigger. That's also clear.

But it's not that you now see a further acceleration from the start of this year?

Well, that's difficult to say. For the full year, we expect 1,700 homes. So, you see, we are still conservative in our expectation for the full year, and that has to do with the fact that indeed, it's still difficult in this country to get permits in time, infrastructure in time, yes, to start building homes. So, indeed, a good improvement over the last year in home sales in the first half year. But yes, let's stay realistic, and that's why we mentioned the 1,700 homes.

For now, a final question on Ireland. There was a claim collection supporting the results excluding that claim collection, the margin was a bit more [indiscernible]

No, in detail, we had a settlement on new children's hospital on a claim. That amount was also in the news, EUR 107 million. Majority of that is related to subcontractor cost and own cost. And then we had a healthy normal margin on the variation order that we brought in to the P&L.

I'm Mulder from Kepler Cheuvreux. Let me maybe continue with the housing production. So, you're guiding for 1,700 homes. That basically means that you expect a similar performance in H2 compared to H1. So, this year, no spike in Q4 that you usually have? Or is it just because you want to be a bit more cautious with the potential to go higher than the 1,700?

Yes, that's difficult to say. Like I said before, of course, the first half year was much better than last year. So that gives help for the second half year. But indeed, we also saw the spike in Q4 last year. And that spike is very difficult to predict, of course. It's still a commercial process. So, again, I think it's realistic and wise to, at this moment in time, to expect kind of the same performance in the second half year than in the first half year.

And then maybe also about Ireland. So, the settlement of the claims, I guess, is a good sign. Does it also mean that the risk that relates to that project significantly decreased and there we don't have to expect any negative news coming from Ireland anymore?

It's a significant step because it's not only the EUR 107 million. It's also an important time extension we got for the project by the independent conciliator. We are now over 90% completion. So, the risk is decreasing day by day by default because of that finalizing process that we are in at this moment in time. Still, complex project. But if you look at the results and if you look at the building already now, it's really an amazing project and it's a fantastic hospital. It's probably one of the best hospitals for children in the world. So, we are very proud of the team. We are finalizing. This was a very significant step for us, proving that we're doing a good job. And, of course, there's a lot of negative publicity by, let's say, the customer about BAM, but I think we can be extremely proud. And our team had the perseverance to just work through. And at the end, this will be an amazing hospital for the children of Ireland. And on our side, indeed, risk is coming down day by day and we will finalize the project in H1 of '25.

That brings me to my next question. It's actually, since I remember, one of the first times that you mentioned legacy projects in the press release and give us an update so that's very helpful. Thanks for that. For Fehmarnbelt, you mentioned 2030 as the target's finalization date. But for the other projects, you don't mention a desired year or the targeted year when it's wrapped up, you mentioned they are all above 80%. Is it fair to assume that if everything goes well, which obviously you can't predict, we can expect the finalization within the next 2 years for the other projects. Is that realistic?

We think earlier.

Earlier.

I think we feel more comfortable. I think you recognize that because indeed, when we started 4 years ago with our strategy, we had a list of more than 20 of these projects, so they're very difficult in these kinds of meetings to discuss them. Now, it's in a completely different world. So now, we can say this is the list. It's in the press release, and most of these projects will be finalized in a year from now. But they're also very clear about the project Fehmarnbelt , which has a completion date, 2030. So, that will be in the portfolio for several years to come, but it's a completely different portfolio than 4 years ago.

Because all the projects you mentioned in the press release also including the Denmark project and the Co-op arena, these are all the projects from the legacy portfolio. And there's nothing [indiscernible]

Yes. So, I mean, projects, the 2 schools in Denmark and the Co-op project will be completed this year, then you have the 3 other ones that Ruud mentioned, Brisbane new children's and Silvertown completed next year and then indeed, I'll also say, remaining. That's the rundown of the tailwind of the project list that you guys asked many times for in the past years.

On your legacy projects, you're saying that these 3 projects are progressing well, but I'm not seeing Fehmarnbelt to know that is progressing well. Is that on purpose or --

So, the reflection we made to ourselves starting 2020, it's a long list. Like acre 20 projects. We have 3 projects in there that are progressing well and nearing completion next year. Yes, and FRC is progressing, but we just started there. So, it's in a different phase, clearly, than the other ones that are nearing completion. This is starting up towards end of construction now scheduled 2030. So, it's not comparable with the other 3.