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

Good afternoon. Welcome to this presentation of the Heijmans 2020 full year results. I'm Jeroen van den Berk. I am the spokesperson and will moderate this session today, which we -- of course, we would have preferred to do live at a hotel. But I'm sure you understand that because of the measures, we're doing it online. And thank you very much for your flexibility and for attending. Welcome to our analysts and to all viewers globally who will be watching this presentation. As usual, at Heijmans, we will open with a brief introductory video. [Presentation]

Welcome back. I'm here in the studio with members of the Heijmans Executive Board: Mr. Ton Hillen, CEO; and Mr. Hans Janssen, CFO. They'll be walking you through the full year results, and after that, you'll have opportunity to ask questions. And I'll be back to moderate those. And I'm pleased to hand you over to our CEO, Tom Hillen.

And on my behalf, welcome to this presentation of the 2020 full year results. This morning, I spoke to our staff members and have described the performance at Heijmans as great pride. We're proud of the tremendous resilience and agility of the organization and the confidence from our customers and relations. We're also proud of everybody's personal dedication despite working with all kinds of additional measures at construction sites or having to work from home, often combining it with kids at home. And we're proud because in this challenging COVID-19 year, Heijmans has achieved strong financial results and all sectors contributed to these results. If you would ask me 10 months ago how 2020 would progress, I could not even have hoped for these results. Let's start with safety. Despite all our efforts, we weren't able to reduce the number of accidents. However, we did see an improvement. In H1 last year, there were 50 accidents, and in H2, there were 35 accidents. The total of 85 accidents, however, remains too high a figure. And we started the year relatively well with only 4 accidents. That's encouraging, but let's not cheer before we see the finish line. Throughout Heijmans, the safety ladder has been implemented at level 3, and at Infra, it's already at level 4 in many sections. That's our pursuit throughout Heijmans to move from reactive to a more proactive attitude to safety. We continue to discuss safety thoroughly and to discuss cultural and behavioral changes to achieve healthy and safe working conditions within Heijmans and throughout the industry. One nice example is that we now offer VR training. Of course, it's about safe working. Putting on the VR glasses, our staff can experience danger on the construction site visually. This helps raise awareness about safe working practices. Now walking you through our figures. Revenue and underlying EBITDA experienced strong growth of 9%. Revenue increased by EUR 150 million to just under EUR 1.75 billion, and underlying EBITDA equaled EUR 85 million after a strong H1 performance with good second half of the year as well. In addition, the cash position has improved significantly. In addition to good development of results, working capital continued to improve. Heijmans did not use the government support facilities such as the NOW arrangement or the opportunity to defer tax payments. And looking at our results after tax with EUR 20 million in 2017 -- 2018, EUR 30 million in 2019, we've continued to grow by (sic) [ to ] EUR 40 million last year, thanks to the good cash position and confidence about the future despite COVID-19 and nitrogen. We will propose to the AGM that we pay EUR 0.73 per share in dividend to our shareholders. This EUR 0.73 per share ratio -- is appropriate for our 40% payout ratio. And based on the current share price, it's a dividend yield between 6% and 7%. I realize that we made a dividend promise last year as well and revoked it in March because we could not yet visualize the scope of the COVID-19 crisis. We do have that view now, and we think it's responsible to provide the prospect of this payment to our shareholders. What we also noticed about the figures is that Heijmans did not need its bank facility. And 2020 was concluded with a net cash position and solvency of 28.8%, and our organization continued to grow by 100 full-time equivalents to 4,700 staff members. Now the impact of COVID-19. Of course, 2020 was overshadowed by the pandemic, and Heijmans was affected as well. Some colleagues fell ill, others lost loved ones. And 1 Heijmans employee even passed away, and that had a severe impact on the organization. But as stated, our people have been resilient and agile and thanks to the protocol of continue working safely in construction, operations continued. As communicated in previous messages, COVID-19 impacted the progress of some nonresidential projects nearing completion such as Hart van Zuid in Rotterdam and the International Conference Centre adjacent to Ahoy in Rotterdam and the art building on the Zuidplein. These 2 projects have now been concluded. But the project most affected was the court building in Amsterdam, especially due to sickness -- absenteeism and delayed completions that had an impact on logistic processes and planning. Despite all the efforts of our people and the dedication of our subcontractors and suppliers, we experienced setbacks, and the project has not been finished yet. We expect to complete the project in Q1. And the higher costs and effects of the delay through this quarter have been included in the figures and unfortunately, made this project loss-making in 2020. As for the TennneT case, there were 2 sessions of the court of arbitration in January, and the court of arbitration will provide an interim decision in the coming months. But we cannot exclude any possible legal decision, so we'll have to wait and see. The consequences of the recent ruling by the Council of State concerning nitrogen emissions has made us alert [ of delays ] in tenders for large infra projects. Last year, we urged the council and minister to take measures to avoid an additional relapse over the long term on the market. There is now a nitrogen act pending in the Dutch Senate, and it has not yet been declared controversial. We are urging the government to approve this act as quickly as possible. This remains a cause for concern in the future so that we need to retain knowledge and skill in the industry. At Heijmans infra, the order book is doing well. And by entering new markets, we're engaged in energy transition and the dike protection program. So that way, we can keep the infra order book at an excellent level. And we consider that in 2020, the South Axis contract was concluded and has been removed from the order book. In addition, the Supervisory Board of Heijmans intends to nominate Arnout Traas as a new Supervisory Board member. This nomination follows the decision to expand the Supervisory Board to 6 members temporarily, keeping with the vacancy which will emerge in April 2022 according to scheduled rotation. This timely appointment will ensure a good transition and proper training on the job. And I'll hand you over to Hans Janssen.

Let's start with Property Development. Our revenue and earnings and profits have increased with respect to last year. Revenue increased by 5%. And because the margin rose, our profit increased by 15%. With 2,265 residences, we sold 6% more residences than last year. And this was especially clear in the business-to-business segment and among housing corporations. It's good that housing corporations are investing again, thanks to the combinations we assembled with municipalities and corporations to redevelop neighborhoods such as in The Hague Southwest. We expect this trend to continue. The order book has increased substantially to EUR 540 million, thanks in part to developments in our own land bank, such as Zutphen, Uden and Amersfoort. In addition, our pipeline looks very promising with substantial developments in Feyenoord City, Rotterdam-Zuid, Nieuw Kralingen, The Hague Southwest and Almere. Our stock of strategic land positions increased this year from EUR 110 million to EUR 126 million. As stated, we have managed investments in land positions with a 3- to 5-year development potential. Our unconditional obligations also increased from EUR 26 million to EUR 33 million, and our rights declined somewhat from EUR 130 million to EUR 107 million. The [ average ] price of our sold homes continued to increase from EUR 352,000 in 2019 to EUR 395,000 in 2020 not including VAT. That takes us to Building & Technology. And I've got this fine visual of Fenix shed in Rotterdam. This building is now complete, and people have moved into it. We won quite a few awards. Now Building & Technology. That was a hybrid image. The revenue in all sections increased. The total increase was 13%, but profitability declined. On the one hand, we saw increases in profits in housing construction and services. On the other hand, we saw declining profits in nonresidential projects where we were impacted by corona. Especially in the NACH project, we faced delayed deliveries, increased absenteeism due to sickness and additional costs so that the project will be completed behind schedule, probably in this quarter. In nonresidential, we also completed some major works in the past year as part of the area development in Hart van Zuid in Rotterdam. We completed the Theater South Square (sic) [ Theater Zuidplein ] and the library as well as the International Conference Centre at Ahoy in Rotterdam. And the order book in Building & Technology is a bit smaller than last year. And this is largely caused -- in the nonresidential projects, especially the markets for offices and retail, is declining, and we're trying to be cautious in new tenders in the shrinking market. That said, in early January, we announced some major projects, which over time, will gradually enter our order book. They include the campus at Eindhoven Technical University, EUR 60 million; and the University of Leiden, EUR 70 million; rental properties for corporations near Eindhoven to the tune of EUR 60 million; and a complex of 95 apartments in Zutphen equaling EUR 27.5 million. And this visual shows a renovation of a monument called Huize Westerlicht in Alkmaar. This care home was built in 1932 and required extensive renovation. And over the course of the year, we renovated this state monument and made it more sustainable, thanks to original details such as stained glass windows. Now on to Infra. Our Infra business did very well in the past year. In addition to 7% increase in revenue, reaching EUR 662 million, the margin increase led profit to increase by 23% to EUR 37 million. This reveals the benefit of a differentiated order book and better project management. For example, our asset management activities grew, and these include long-term maintenance for our customers. We're satisfied with the order book. Admittedly, it declined by EUR 60 million to EUR 731 million. But last year, South Axis was included for EUR 134 million. As of December 31, 2020, AsfaltNu has started. That's our joint venture for asphalt production with BAM. This shows the light artwork De Zwerm, which you'll find in Eindhoven. This light art also received an award last year. It received the National Steel Award. And you can see some sparrows consisting of LED lamps that move together with the traffic flows. Now on to the profit and loss statement. I'll highlight a few of the items. First of all, the adjusted EBITDA of joint venture is striking. It's a positive adjustment whereas, last year, the adjustment was negative. So that means that the EBITDAs of the joint ventures was negative in 2020 and positive in 2019, and this is because of some loss-making joint ventures of which NACH was the largest. In addition, you see the result of disposed subsidiaries. This concerns disposed subsidiary from Heijmans Capital as well as the input of our assets in AsfaltNu. The financial income and expenditure was EUR 200,000 more negative than 2019. But when it's rounded off, it looks a bit larger. The higher cash position led to more negative interest. Next, taxes. As a consequence of our increased profitability and improved outlook, there's an income of EUR 13 million to recognize losses that had not yet been recognized at the end of the last financial year. That's why the effective tax rate throughout 2021 is virtually 0, except for 0.3%. Of the losses that have yet to be carried forward for 2020, EUR 129 has been recognized and EUR 36 million has not been recognized yet. If we remain profitable, we will probably have to accommodate the EUR 36 million, which will lead to a nominal rate impact of EUR 9 million. Cash flow and financing. Because of our good result development and ongoing improvement in working capital, the working capital went from negative EUR 82 million to negative EUR 101 million. Our net cash position has continued to improve. At the end of 2019, we had debt of EUR 30 million, but we now have a net cash position of EUR 37 million. We still see good prefinancing for our works and projects despite some of our projects with good prefinancing expired in 2020. And the receivables collection remained good probably because of the negative Euribor. Our solvency improved by 4 percentage points to 28.8%, leading us to a healthy balance sheet. Without IFRS 15 and 16, it would have been 33%. And that is probably the percentage for our bank covenant. Our syndicated loan of EUR 121 million, which we did not use last year, was extended by 1 year and will expire in mid-2023. Based on the strong results and our robust outlook, which we'll be telling you more about in a moment, we're proposing a EUR 0.73 per share dividend, which equals a payout of 40%. Now on to the net debt. These lines reflect the average net debt calculated over 365 days. And you see here that whereas, last year, we had EUR 121 million in debt, now on average throughout 2020, the debt was EUR 4 million. And we saw far less fluctuation than in the previous year as well. So we didn't use this lending facility throughout the year, and in 2021, we do not expect to use this lending facility either nor did we use the government support measures. And now my final slide reflects the development of covenants. I won't elaborate on the details here. But as you can see, we remained well within our covenants in 2020. Back to Ton.

Well, thank you very much, Hans, for presenting the financials. Now looking at our strategy. We continue to focus on making a healthy living environment, and this, of course, is defined by making our strategy better, smarter and more sustainable. Thanks to innovative ideas, products and services, we provide smart solutions that help achieve solutions to social issues now and tomorrow. One of our objectives is to make data-driven services commercially successful. One happened this week. In nonresidential, we developed a package of services for office accommodations and presented it together with CSO -- CSU as Beyond Eyes as for data-driven cleaning, supplying sustainable energy contributing to comfortable interior climate, ventilation and the quality of interior and measuring office occupation. By gathering data that we analyze, we can advise building managers and enable them to make strategic choices about accommodations, and that gives users a safe, healthy and comfortable work environment. To cluster the innovative strength from the entire organization, in Rosmalen, we set up the Hive premises. At Hive, our people assembled to share creative processes and innovations and to cross-fertilize the different disciplines. After COVID-19, this will be a wonderful breeding ground of new ideas. They will be elaborated specifically in proposals and concepts to be applied in practice. And thanks to these internal efforts and processes, we are investing in the future technology, hereby creates new opportunities for Heijmans. Now wrapping up. Heijmans is well positioned for 2021. We have a well-filled order book. And in January, we acquired some projects in Building & Technology and Property Development. Residential is already under pressure, and the shortage is likely to increase until at least 2025. In addition to the major sustainability challenge, the long-term prospects remain good for Property Development and residential construction. And infra will remain selective and will differentiate our portfolio more with the future potential from the dike protection program and the energy transition. In nonresidential projects, we're less optimistic, especially in construction of offices and retail. We expect demand to decline, and there will certainly be new transformation challenges. That's not tomorrow but the day after tomorrow, so we need to be selective in what we take on. Overall, we have a positive future outlook. The envisaged revenue for 2021 may be slightly lower than 2020 because of the temporary decline in nonresidential projects. But at the same time, the visibility of the expected revenue for 2021 is considerable from the current order book. So my expectation is that our profit in 2021 will equal at least what it was in 2020. Thank you. Over to you, Jeroen.

Thank you for this moment, Ton Hillen and Hans Janssen. Now we will have Q&A, first from our analysts present. [Operator Instructions] And we may also have questions from viewers elsewhere. I'll start in arbitrary sequence with Tijs Hollestelle from ING. You have the floor, Tijs.

Can you hear me?

Yes, we can hear you loud and clear.

Okay. My first question concerns dividend policy because, of course, that's a considerable surprise after the EUR 0.28 that was proposed last year. You're at 40% payout. And except if you look at the possible tax impact this year, then your dividend might diminish. Have you considered that? And are there very specific changes in that tax line on the profit and loss account for this year and next year? Will you need to take your expected EBIT and subtract EUR 9 million and then calculate the tax rate to figure out your net result, so your after-tax results? That's my first question.

Okay. I'll answer that one. Yes, recognition of the tax rate depends on the prospects. And if our prospects remain good, then it's very likely that a large part of the EUR 9 million I mentioned will be recognized last year and will surface on that tax line. As for your question about dividend policy, of course, last year, we revoked the dividend, and that was awkward. This year, we achieved excellent profit, and we have a good cash position, and we also thought that we -- after our shareholders were so patient with us because the last time we could -- we paid a dividend on the payout ratio was in 2013, so we wanted to consider our shareholders as well.

Maybe it would be a good idea to propose the annual report dividend policy, that you intend to keep this stable because the volatility in profits is always a factor for construction companies. And let's say you have enough liquidity at this point to support that dividend.

We'll certainly consider that. But our dividend policy is 40% of our after-tax profit. Well, I hear you, and we'll certainly think about that.

And now I have a follow-up question. Of the absolute amount that you pay in dividend, you'll also be repaying those preferred shares. And exactly when will that happen? Is that a certain date that you'll be doing that?

Well, that will happen at about the same time as when we pay the dividend. We're talking about a few days afterwards. And it's true that 50% of the dividend paid to our shareholders is used to repay the cume pref holders. So about EUR 16 million is paid out in dividend, and that means repaying EUR 8 million to cume pref holders. In addition to the coupon that we'll be paying in shares, we'll also use that amount for repayment. So that's an additional EUR 3 million or so.

Okay. That's clear. Now my last question concerns that improvement in working capital. In the cash flow, I think you see EUR 40 million. But if you break that up into pieces, you see a change in strategic working capital. So the land portfolio and the -- and are there other items for the short-term provisions? Because I can't recalculate all the balance sheet position, yet the working capital positions are included there.

So yes, it's an assembly of various items. But for example, if you look at our work in progress position, that's also improving by about EUR 15 million last year.

Thank you, Tijs, for this moment. I'm going to give the floor to Martijn den Drijver of ABN AMRO. Martijn, you have the floor.

Can you hear me?

Loud and clear. Thank you.

But I can't hear anything.

But we do hear you.

Okay. Very good. Excellent. My first question concerns the NACH project, N-A-C-H. Could you tell me a bit more of that order of magnitude of your loss or the provision you took on that? You don't have to give me an exact figure, but perhaps low or high single digit.

Well, if you relate that figure to building, then you get an EBITDA margin in excess of 3%. And then we have Infra for building properties, 6.2%. So then you achieve your target margin.

So the next question is how should we see those target margins given these data? Are you going to keep them the same? Or do you plan to upgrade them? That's the first question. How do you feel about the target margins?