Koninklijke Heijmans N.V. (HEIJM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome at the presentation of our interim results 2020. This physical meeting, and I'm assuming that we will all be observing the COVID-19 rules, keeping a distance from each other and therefore, we did feel that it was important that we would have a physical meeting. As usual, we'll be starting with a video. We're going to do that today as well. And in fact, it's about our strategy. It's about the makers of a healthy living environment. Bart Smolders, the Chairman of Infrastructure is given the floor. [Presentation]

My ambition on my dream is that in the Netherlands, we digitally design the living environment that we're going to build so that we get this living environment in which nature people are in balance. The big upside of digital building is that the throughput time of the project can be shortened, particularly outside, you can take out the errors, and you can avoid inefficiency issues and it's all about safety. We want it to be part and parcel of our daily actions. And digitization could be an enormous support and accelerator. This is one of the land tunnels in the Netherlands Gaasperdammertunnel. We have all these different systems that work in connection with each other in order to guarantee the traffic, the throughput of traffic. And also to be able to act should there be a disaster. Data is the new source. But we've got to deal with it in an orderly way, particularly in terms of cybersecurity. And the idea is to connect all the data that we have with our professional knowledge. If we establish the right links between the data flows and data series, we can actually create value. We have BeSense, for instance, and we can measure the utilization of buildings, the climate, we can manage that properly. Those are specific examples. Future has a lot in store for us. A lot of uncertainties as well, but that makes it fun. And our dream is that before we physically start building outside that we've prepared everything digitally and built everything virtually and tested everything. So that way, we can minimize the nuisance and contribute to a healthy living environment.

And behind us, you see a banner of the Gaasperdammertunnel, you see the 3D model on the left-hand side. On the right-hand side, you see the actual situation of the model -- of the tunnel. And you see that by working digitally, we have clash detection. We can reduce operational inefficiencies, and so we designed digitally first before we realize the project. This is an important step towards the future. And as Bart said, we have BeSense, we have sensors for efficient building management. We've been working on that for a long time, particularly in this corona time, we can set up and lay out buildings in a safe way. We know where the people are, and we can also measure the availability of desks, for instance, in a building. And we know that in the market, people are really interested in that. So this is the route. These are the steps that we're taking. If we then look at the press release, strong performance despite market challenges. Well, Heijmans, over the past few years, we've realized changes and made some critical decisions. We're focused on the Dutch market. We're doing what we are capable of doing. And in the past, we've seen so often that engineers think that we can do everything, but we've seen that, that isn't always the case where we can do it or we can't do it. Margin of volume projects are accepted that have controllable risk and a good balance between margin and potential of revenue. So we've embarked on a path. We've continued on this path, and we're really well positioned. Talking about safety. Safety, we've made major strides forward. But despite all these efforts, we have still got to go the extra mile in terms of safety. Our goals were rather substantial in 2020 in order to have fewer accidents, but halfway this year, the conclusion is that when we don't -- it seems that we're not making or reaching this goal. So that means that we really have to increase safety awareness. On the other hand, do see that across the company, we've been able to implement safety ladder 3 and in Infra safety ladder 4, which means that we are really moving forward from being reactive in safety policy to a more proactive safety policy. And I've said this before, for us, safety is nonnegotiable. We either work safely or we don't work at all. So actually, there's a lot of work to be done, time to roll up our sleeves. The core figures, these past 6 months, we see that we have a deep EBITDA growth of -- in excess of 10%. Revenue has increased by 14.9% and EBITDA almost 14%, just short of 14%. So these are decent performances, I think. And of course, we've been impacted by COVID-19, but we were able to deal with it correctly. And on building side, we could deal with it because we had a thorough protocol working on together safely, we've worked on this with the cabinet, with trade unions and no projects came to standstill. So also because of our excellent IT infrastructure, we were able to facilitate working at home from day 1 onwards. But quite apart from the financial and operational impact of Corona, Corona in the months of March and April had a substantial impact on our company. In the first few weeks, we had to adjust the hours constantly. Our workers in the north of Brabant were no longer welcomed in the rest of the country, and office staff started to work from home, but colleagues sometimes as a precaution went in quarantine or became ill or ended up in hospitals. And absence due to illness, at a certain point in time, it was even 10%. Some people were even hospitalized and were in intensive care. And unfortunately, we lost a colleague to the Coronavirus. And let's not forget that lots of colleagues have lost next of kin as a consequence of the virus. And I think it's important that we be aware of that. And particularly in these times in which part of the Netherlands apparently believes that virus will go away, I don't think it will just go away. Let's take this seriously, and let's take care of ourselves and each other. And let's avoid a second dip for our health, but also for the economy. If you allow me, I'd like to zoom in on these core figures, we see that particularly in building and technology, we've realized a good revenue, EUR 133 million of the Zuidasdok was taken out of the order book, and solvency increased by 2% as compared to last year to a level of approximately 27%. And the balance sheet was strengthened step-by-step over the past few years to a robust level. So we're well positioned to face the uncertain market circumstances ahead of us. And before I give the floor to Hans, I would like to take you through a number of issues and elements. We've said this just now. Yes, of course, we have been impacted operationally by COVID-19, and particularly in terms of materials and labor from outside the Netherlands. And this is particularly noticeable in nonresidential projects in the finishing stages. There were quite a number of logistic challenges that we faced there. And of course, we have the excellent IT infrastructure. We have this protocol working together -- working on together safely in the building industry. So that allowed us to continue to work. And we had a well-filled order book. But it is particularly because of the dedication of our people that we've been able to achieve all these financial performances and results, and I'd like to complement our colleagues. But I must say that the building sector is a late cyclical sector. So we have to be cautious, but 2020 looks good. We've got to be cautious in the long term. Nitrogen, there's been a lot of publicity, a lot of attention, also for manifestation in the Hague. But recently, we see that Corona is much more in the limelight. And this worries me. So far, the building industry seems to be the only industry that is suffering from delays in issuing licenses or delays in introducing tenders for infrastructure. We've got to move towards a workable national standard. Otherwise, things will be delayed in the longer term, particularly in the infrastructure. And then we've got the new noise standard that could affect the building sector. This new standard, can it affect us as a building sector, yes, quite possible. Sometimes you think who came up with this idea? Just as the PFAS standard that we have. PFAS and the noise standards came out of the blue, come out of the blue. And now people say, that if this standard is introduced, this noise standard, that may lead to a reduction of 400,000 new houses. So houses that are not to be built particularly around airports. But I'm thinking of what should we do? Shouldn't we insulate the existing houses, but we've also got to look at these standards, what is going to happen? Houses are not going to become cheaper? They're not going to become more affordable, and there's going to be a lot of pressure in the house market. So I don't really think that house prices will go down anytime soon. The Zuidasdok, I think it's good to highlight that the principle and the contractor have reached an amicable agreement and the separation and disentanglement of the contract Zuidasdok is being -- is going to be realized. And this is what we referred to in the press release. This is one of the Infra elements that will have a positive effect on us. Heijmans in a separate assignment, will continue to do some work in order to prepare for the new tender that will be issued by the Dutch Public Works network. TenneT, their situation there has not changed. Parties have now been able to respond to each other's documents. Heijmans is allowed to respond, being the last party to respond to the legal file that will be mid-October, not mid-April, so to speak. And after that, the operators can get to work, and I expect by this year, I don't expect a ruling, but I've indicated that before. I don't expect rulings in this file, in this case in 2020. Now I'd like to give the floor to Hans.

Thank you. I'll take you through different companies. First of all, Property. We saw that the first half 2020 for Property Development went well. Revenue increased by 10%, and also the margin grew by 6.3%, and therefore, was within the bandwidth that we've established for margin, 68%. We sold just many homes as last year, 1,075 and 610, thereof, 57% to private persons, which is a growth of 8%. Sales to B2B segment decreased from EUR 497 million to EUR 465 million and also within the B2B segment, the corporations increased and investors decreased. And our inventory increased from 110 million to 118 million because of investments and costs that were recognized. The contingent liabilities decreased from EUR 9.1 million to EUR 16.5 million. And if we look at our order book, it looks good. This is a picture of the Leeuwenkuil in Rotterdam, one of the projects that we landed last year. Now Building and Technology, Building and Technology is presented as 1 unit. This is the way we manage the company or the division. And here, we saw a mixed situation. On the one hand, we have residential building and services, both had a strong first 6 months, increase in revenue and also in profitability. Nonresidential projects. Here, we saw an increase of revenue, but in a number of projects we were impacted by COVID-19, supplies materials from abroad or decreased availability of foreign labor. There was particularly a problem in projects that were in the final stage, finishing stages, such as the new court building in Amsterdam. Order book, remains at a good level, but declined somewhat as with respect to the middle of last year and the end of last year. We see that the pipeline for projects looks good. This is a picture, I see a different picture. This is Harlingen, by the way. Infrastructure now. Infrastructure performed well. Revenue increased by 4%, and EBITDA margin increased to 5.5%. This high-margin was also caused by the conclusion of a number of projects in which we could release risk reservations that we've made. The border book developed well, taking into account the fact that in the middle of last year, the end of last year, the Zuidasdok was in the order book for EUR 134 million, and our order book, especially expanded with short cyclical work with a lower risk profile. For the midterm, there's a bit of concern and unclarity because of the policy of the government concerning nitrogen deposition, but also the spending pattern of clients in the infrastructure is quite uncertain. This is a picture of the thermal network that we are constructing in Breda in the Infrastructure business. On with the profit and loss account. And the 2 elements that I would like to highlight here. First of all, the correction, EBITDA of joint ventures. This is a positive number now in the correction, and that means that the losses -- these losses in a number of joint ventures in the first 6 months. Furthermore, you see that profit tax is much higher than last year. These 6 months to be prudent. We charged the profit tax to a great extent to the valued tax losses, which we haven't done last year. And the effective tax rate, therefore, is a lot higher than last year. It's 30%. Last year, it was 13%. These losses carryforward amounts to EUR 191 million, EUR 112 million, thereof, have been recognized. Our tax asset is EUR 24.4 million, coming from EUR 32 million at the beginning of the year. Cash flow and funding. Our net debt is significantly lower with EUR 43 million, lower than the EUR 99 million mid last year. We see that our clients are paying us much quicker and our prefinancing is very strong. Expectation is that prefinancing will decline somewhat in the second half of the year because a number of projects for which we have good prefinancing, will have concluded by the second half of the year. Our solvency improved from 24.7% to 26.9%. And also, we reached an agreement with our banks with respect to the extension of our funding. Our original funding was up to June 2022, which meant that the latest in June 2021, we had to refinance. And in order to be able to give us a broader or longer window for refunding, also in the light of the uncertain COVID-19 situation, we agreed on an extension of 12 months against the same conditions so that we have a bit more time. We did not make use of the government support packages such as deferral of taxes or the government support in connection with COVID. And now Debt reduction here, you see that debt reduction has been robust. These past 6 months, we did not use credit facilities and our average net debt, 12 months average, you see with EUR 14 million, we've been able to improve that. The covenants, I'm not going to go into all the details, but you see that we are well within our covenants. And with that, I'd like to give the floor back to Ton.

Yes. Well, with great confidence, we're looking towards the rest of 2020. All in all, Heijmans has its house in order, and we're well positioned because of all the measures that we took in the past, and I referred to it briefly, focus on the Netherlands. We're only doing the things that we're capable of doing, margin over volume. And I'd venture to say that the results -- performance 2020 will at the very least be at the same level as last year. Of course, with the caveat that should there be a full lockdown due to COVID, of course, there's not very much we can do about that. The longer term, there's more uncertainty because of the impact of corona, but what happens if unemployment increases substantially as compared to the preparedness to purchase homes. And also the nitrogen problem has to be addressed adequately, and there has to be a workable national standard for the building sector. And apart from setting up important tenders, it's important that local authorities continue to have enough money to invest. Dividend. Last year, we were incredibly disappointed that we had to withdraw our dividend proposal, especially because it was the first time since 2013 that we would be paying our dividend. But should the results of 2020 be at least the same as last year, and should the future perspective give us enough confidence then it seems that dividend in 2020 would be reasonable. Ladies and gentlemen, we've embarked on a course in which we want to realize beautiful projects. But for me, beautiful projects, those projects in which we take risk that we can control and influence, and in which risk return ratio is a healthy one. We want to be known as the makers of a healthy living environment. We want to make a contribution. We will dedicate ourselves to that. And therefore, we see the future despite all the challenges with great trust and confidence. Time for questions.

Tijs Hollestelle, ING. Let me see, the first question about preference shares. They've gone down a bit but wasn't there an agreement that if you'd start paying dividend, then the -- half the cash amount would be used to reduce the preferences? Have you used other possibilities?

Well, in our negotiations with contracts holders, we agreed on a number of things. We agreed that the interest would be paid out. The annual interest will be paid out in shares. And that the amount would be used, the cash amount would be used to pay off the principal amount, EUR 3.1 million, I believe, this year. And we also agreed that if we pay dividend, not only cash dividend, but the overall dividend, that is that half of that amount would be used for further amortization.

So you're going to do that next year is a question. If you achieve your goals, you pay dividend. Another question about those losses in the joint ventures, is that concerning? Or is it just a startup phase?

No, it's not worrying. We said that we were impacted by COVID in a number of projects and particularly nonresidential, and it's included in this question. So this is nothing to be worried about.

Are there no other big headache cases? I assume that some projects are easier and smoother than others, but you look rather relaxed.

Well, we commented on Zuidasdok and TenneT. We talked about that in [indiscernible], we would deliver in October, and now it's going to be mid-November. In completion or it would be utilization would -- is going to start in February instead of December. Well, this is in agreement with the principal, and that is due to corona, to give you an example, but we reached an agreement on that.

Performance of infrastructure was supported by projects that closed well. How much was that? Overall, could you point out what that is?

Well, we more or less end up the same profit in absolute terms as last year.

And you asked a question about the spending pattern of principles in Infra. Does that could be a source of concern. Could you give us some details?

Well, for part of our company, we depend on regional principles or municipalities. We also see that municipalities, obviously, are also facing issues with COVID and also have some budgetary problems. So we don't know exactly what the effects are going to be. At the same time, we do see that there are additional incentive measures particularly at a municipal level. And so we tried to make it clear that we have some uncertainty here, no reason for alarm, but in the medium to long term, we don't know exactly what's in store for us.

Maintenance operations, they went very well. So were you able to do more maintenance now? And as a consequence, thereof, have more empty order book later on?

No, no, I don't see a reason for that. You do see that sometimes we were given some additional work because, for instance, a business that was empty and there was renovation and that was done during corona, but it's not very worrying. It's not that because of maintenance was moved up and was realized earlier that we wouldn't be having problems down the road.

Prefinancing, you referred to prefinancing. Any idea of the amount.

No. I gave you an indication we think that if you look at the net debt, in any case, we think that it will be at the level that it was at year-end last year, perhaps even better. But as a minimum, we think that that is what it will be. Yes, we have good prefinancing projects that are run off, and there are a number of works that might come in again, also have good prefinancing. But there's also always this uncertainty. So that is why we need to be cautious.

Martijn Drijver, ABN AMRO. First question about your outlook. I hear you say that the second half of the year looks good. Ton says that he has full confidence undoubtedly, you have tailwind in terms of subcontractors and material costs. And you also explained why you're somewhat cautious, but don't you think you're exaggerating in terms of being very cautious? Well, we're seeing minimum at least at par with last year. Last year, EUR 30 million EBITDA in the second half of the year, 2019, if we go back. All you need to do is EUR 17 million in the second half, EUR 17 million as compared to EUR 30 million.

It's not that in the second half of the year, that we see all these storms coming up, and that we're sort of not talking about it here. No, no. But we just want to be cautious because there's always a certain degree of uncertainty in the market, but let me repeat again, at least the level of last year.

Ton Hillen. There are a number of additional positive contribution of some works that were finalized, particularly in Infra, that have a positive contribution in the first half year that we won't be seeing in the second half year.

Now what I was talking about, tailwind, subcontractors and material costs. Is that indeed what you see in the market?

No, no, it's not that there's an enormous relaxation in the market in terms of materials.

And no relaxation in terms of subcontractors?

No, no. Now in the housing market, there's a lot of pressure on building. I don't see any relaxation. I must admit.

Real estate, 6.3% in line with your medium-term guidance, 6% to 8%. What needs to happen to move to the 7%, 8% because you have strong demand in the market, your house is in order. So what else do you need?

Ton Hillen, it's not that all property projects run smoothly. Sometimes the acquisition is expensive. Sometimes your product simply doesn't turn out to be that interesting in the market. But step-by-step over the past few months, we've moved into position, and now we can benefit from the market. It's interesting to say that particularly in this summer, we focused on hiring more people in the sales department in property because it was our impression that lots of people in the Netherlands would go on holiday and that there would be a lot of demand and a lot of potential customers. And that seems to be the fact. And it's also about adequate entrepreneurship, being close to the bull, keeping your eye on the ball. The market is good. Cost price is good. It's all about good entrepreneurship, pluses, minuses, but definitely, there's potential.

Refunding, let me call it refunding. You have an extension of 1 year, and the presentation says, this creates a broader window to realize more structural refunding? What do you mean by that structural refunding?

Well, originally, before June 2021, we had to agree on a refunding. And by the way, our funding, and particularly the documents of our funding are quite obsolete. So we wanted to make use of that situation to update things in accordance with the more recent standards. So that means that we have about a year's time to do that. The market is unclear, the funding market I'm talking about. We don't know exactly what's going to happen. So we want a bit more time in order to choose the best possible time to do this refunding. It doesn't mean to say that we will be doing -- that we won't be doing the -- although we will be doing the refunding next year, but should the situation worsen in the market, we don't want to be between the rock and a hard place because then we will have to refund -- refinance. So that's what it is. No, nothing else. And we want to have a contract for a longer period of time.

But no other instruments in the capital market?

No, that's quite -- that is quite improbable.

Andre Mulder, Kepler. I questions. One question about the direct impact of COVID. Were you able to estimate how much COVID has cost you additionally? I'm not talking about loss in revenue and margin, but additional costs?

At the time of COVID, we set up a dashboard immediately with all the relevant indicators to be able to follow that. Absenteeism due to illness, productivity. We looked at costs. For instance, if people registered hours for corona related causes, where we had some codes in our system for that. We did more data monitoring in order to find out where our risks were. And in fact, what you see there are a number of things. First of all, absenteeism due to illness, increased to 10%, but is declining now and at this point, it's even lower than last year this time. So we have a lower absenteeism due to illness than last year. Productivity, we started higher than last year, and declined somewhat during corona, but is now again higher than it was last year. Sounds interesting. And yes, there were costs that we booked on these corona codes, but it's very difficult to say that these are really Corona costs. You do have some loss of productivity, but let's say, you don't know whether otherwise, there would have been more productivity. So don't -- no, we're not going to refer to a specific number in terms of corona quite apart from a number of projects where we did incur additional costs, non-residential projects. For instance, it's a long answer, but we don't have one single number for that.

Second question about the magnitude of large projects, backlog, Infra revenue, what are the numbers?

Particularly in infrastructure, we worked hard in order to restore the balance in the order book. In large projects, it would be about 25% of the Infra order book. So the backlog of Infra, around 25%. But I think it's worthwhile to underlying once again. It's not that we're not doing any large projects anymore. We do think that there should be a healthy mix. We just -- we don't want to do it in the ratio that we used to have. Are there any questions? Tijs? There's a question from the back. Guido, can you move to Tijs please.

Tijs Hollestelle, ING. This morning, when we talked about the share price that went down. The market will probably think, oh well, there's a one-off in the Infra's results or performance. I would just like to say your risk standards, your documentation, you're focused the way you deal with your customers. Well, if you become more professional in that, you are much more capable of bringing a project to these results with your clients. So if you implement this in the organization in a number of years, chances are that you might have these releases, these positive releases at the end of a project. So ultimately, it would be recurring. So if you manage things really strictly, that would happen. That is how I see it. Is that true?

Well, there is some truth to it. We are coming from a situation in which there was no such thing. So we're not there yet, but we do see that positive impacts, tiny little impacts perhaps occur more frequently than negative ones. And that means that predictability has improved. And this is something that we can see. But I'd like to be cautious. Let me put it that way. But it's true. If we have good contract management, good project management, have the right predictability, do what we need to do. Well, we sort that all out. Sometimes those risk buffers that you have won't be released because you don't need them. Perhaps to go back to our margin guidance for building was 3% to 4%. And if you then adjust for IFRS 16, it's about 4% to 5% for the production companies. And that is feasible, absolutely. And it's 5% right now, so it's slightly above. And that doesn't mean to say that we're going to be structurally over and above those numbers. But we do feel comfortable with this bandwidth.

Well, there's a bit of a rumor among contractors. Of course, you have to abide by certain rules in accountancy, but there's also a certain free interpretation, if you will, that is if you include a lot of risk or possible costs in your results, that might not feel right, then chances are that you may have releases at the end. So if you're listed, the stock exchange would always be a positive instead of a negative. Or is that -- what do you think about -- how do you feel about that?

No, no, no. I don't know. It's not up to me to comment on that. Of course, we always aim in our accounting as well, not to have any negative adjustments of projects. This has also got to do with when are you going to take a profit in a project. We don't start immediately taking profit. We wait for the project to progress to a certain extent. And only then when you take profit. I mean these are measures that you take. And therefore, chances are that at the end that you have a positive release, yes. And that could be recurring as a question. If in nonresidential, in Infra, you keep that up? Yes. And if you don't have bloopers or bleeders, and you do the things that you're good at doing. What we started doing in '16 or '17, we've got to keep that up structurally. So far, so good, I think. And this is how we're positioned. And of course, sometimes, we will have to say, we're simply not going to go ahead and do this. If it's simply unfair. And this is what we decided to do, and it seems to be profitable.

Your capital structure, your results in all those respects, whether it's refunding or negotiating with clients, is it that it's much easier for you to negotiate because you're never stuck between a rock and a hard place, and you can always decide to?

Well, no, that would be -- I mean they'll go too far. Of course, there's more calmness. But I don't think that you should take risks. At the beginning, you should go take it on at first and not just postpone things and because if then things go wrong and things are disappointing, there's no way you can go. Nothing you can do. When of course, if you do better, if your performance is better, it's easier to hire people. And still, the market situation is difficult, it's tight. But we are capable of hiring the right people. And then if you look at the turnover, it's reasonable. It's reasonable. It's not that lots of people are leaving us. And I think that even in difficult times, we had good relationships with our suppliers and our subcontractors. We centralized this at an early stage, and we professionalized this. This was years ago. And this brought fruit to long-term ago. It's not that all of a sudden, when you do better, all of a sudden, you have a very strong position, and you can agree on better conditions. That's not the way it works. I think it always worked pretty well.

Just a question more about Infrastructure. On the one hand, it may be extraordinarily high. We always say, well, the second half, you have a lot of cash flow. And it's probably also due to the timing of the conclusion of large projects. And other builders, I think you've said that as well, you had these low licenses last year, but this year and next year, that should have a serious impact. Could you comment on that? Could that also already be visible in the second half of the year?

No, not in the second half of the year next year, next year. I'm rather reticent and reluctant in this respect. If I look at what we have in our order book and what is being realized. So I don't really see a decline here. If we look at the order book that we have for the rest of the year, percentage-wise, it's higher than it was last year. One more question from the webcast. It's a question from Mr. Brinkman. He asks whether we can comment on how we feel about the air ventilation market, government buildings and schools and whether for us, this market is important.

Ton Hillen. Absolutely. It's important for the maintenance company, nonresidential. It's very important. We want to innovate, particularly in these corona times. We're also looking at new technologies. That is crystal clear. But the good thing is, if you look at our sensor technology in BeSense or BeSafe, well, this is absolutely a market that we want to focus on. And we are indeed trying to land new business to make sure that we can sell our products. So absolutely. It's important and it will continue to be important, I think.

Andre Mulder. Always have something up my sleeve. Well, you've got quite a bit of money now. Is there anything on your wish list in terms of expansion acquisitions?

While, if you look at the company, we've embarked on a path in which we said we want continuous improvement. We want to become clever. We want to become more sustainable. That is the route that we are embarking on. If there are elements or niches, we are not going to turn away, look the other way, but it's not that there's something specific that we're looking at this point. So there's more new skills than capacity. And with that, I would like to wrap up this press conference. Thank you very much for your attention, and we see the future with a great deal of trust and confidence. Thank you.