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

Good afternoon, ladies and gentlemen present in the Holiday Inn Crowne Plaza and everybody listening via the webcast. I'll be delivering the entire presentation of the half year figures this year supported by Guido Peters. And on 1 September, our new CFO, Gavin van Boekel, will join us. And in the future, he will be supporting me with these presentations. As usual, I'll start with a brief video about our increasingly sustainable material fleet. [Presentation]

This is one of the major challenges that we face in the years ahead. And increasingly, we noticed that challenges requested by the government, so energy neutral production and the sustainability challenge, is becoming increasingly important as a selection criteria. So that means that in the years ahead, as we did last year, we'll be increasingly investing in sustainability and purchasing sustainable equipment. That's why I gave you a glimpse of that. This sheet exemplifies the Polde track. It's a wonderful aerial view of Schiphol and we produced 150 tonnes of asphalt this spring in a new mixture of Flightflex so that it's more cohesive. And this improves the period of replacement. We no longer need to replace it every few years. It has a longer longevity. 70,000 cables and pipelines were installed as well as LED lights, and this ensures more sustainable LED lighting. That was a complex job that we achieved in 3 months. Despite the reduced line, we managed to reduce the burden on the surroundings, and we achieved this successfully. Traditionally, I'll start by telling you about safety. And once again, I'll tell you about this today. In the past year, we've seen a decline in the number of accidents with absenteeism and the injury frequency figure improved from 3.7 to 3.2. What we noticed is that most accidents relate to the BIG 6. What I mean by that is that there are some minor accidents. Luckily, so far, no major accidents this year. But the BIG 6 also mean danger of stumbling, falling equipment, protruding parts that cause peak bumps and sometimes scaffolds cause problems or people may be hit by parts flying through the air. So we keep emphasizing that our people think and then do. And we're doing our best to raise awareness of safety from design to realization. Throughout the company, we're raising awareness, not only among the people outside, but also in design. And we also consider environmental safety. So when it come -- when a building needs to be constructed, what's the impact on the surroundings? For example, if there are schools, what should you do? And to enhance this awareness, we launched a second training of leaders in safety, and we also have a VR glasses training about virtual success. That's where you virtualize situations by having people put on glasses and they look very realistic. It's nice to see. By now, Infra has been successfully accredited at level 4 on the Safety Ladder and that means that we're transitioning from reactive policy to proactive action, not because we have to do this, but because we intrinsically want to work with more safety. That's a wonderful step in for the summer. And next year in Building & Technology and Property, we'll try to get these accreditations as well. Here, you see a photo of the wonderful project completed with a satisfied customer for the court house building in Amsterdam, and it's lovely stairwell. I'm looking in front of this now, and it's almost like an usher picture. But if you look up, you see all the escalators mingling. I'm in front of this picture now, but it's wonderful to see, and we've already put this project in operation. Operationally, Heijmans had an excellent half year. But before I elaborate on the operational performance, I'd like to elaborate on the TenneT case to the extent possible in relation to the future course of the procedure. In addition, the procedure has been highly complex because some of the proceedings were mingled. Of course, it's disappointing that in the interim arbitral decision in May the arbitrators ruled that TenneT lawfully dissolved the agreement out of court. As a consequence of the negative and disappointing statement, we have decided to take a provision of EUR 34 million, which will, of course, heavily impact our financials. We do not agree with the decision and are preparing to appeal, the appeal in which we're confident, together with our advisers, might lead the decision not to be upheld. Because the arbitrators ruled that TenneT dissolved the contract lawfully, in the future the arbitrators will consider the amount of damages, which, through a separate follow-up proceedings for determination of damages, will come about. This claim should be composed and substantiated to be reviewed by the arbitrators before there is a ruling on the damages. Also, given the appeal, we cannot say much about the damages that will be awarded at this point. That said, the decision from May is there. And based on that, we thought it would be prudent to take a new provision. Previously, we indicated that upon termination of the project, about 10% to 15% of the project had been realized of a total contract sum of EUR 250 million. The provision mainly concerns reversal costs, in addition, consequential losses, which will need to be determined in a separate procedure to determine damages. We have distilled all the findings after scrutinizing the aspects. Based on that, we have decided to err on the side of caution and to take a provision of EUR 34 million. That's what I can tell you now also with a view toward the future course of the proceedings. Now let me give you the core figures for the first half year of 2021. Looking back at the first half year, we see excellent operational performance in all sectors. Revenue exceeds the level last year with rising profit margins. In property and Infra, we see strong performance in the first half year. We also note that, at Infra, some projects were delivered with a positive result and property, including residential construction, is benefiting from the current residential market. Increased housing sales and rising costs with no added cost for buyer had a rising margin. I'm proud that all sectors have posted a comparable or better result than last year. The earnings capacity at Heijmans has advanced, is now robust with a balanced risk profile. The focus on the ratio between risk acceptance and earnings capacity remains our top priority. I continue to say that a project is a nice project for me only if we earn something on that project. Heijmans is taking greater consideration than ever of margin over volume. I note that this critical but constructive attitude of the risk office has been immensely helpful. The cash position is noticeable with a net cash position of EUR 44 million at midyear. The strong cash position is good as is clear from the good operational performance and the ongoing strong focus on working capital. Solvency at 27% is also good. Before reviewing the performance by sectors, you'll see a photograph here of the post flood situation in South Limburg. Our work on the A79 motorway was partially flooded and that has delayed completion somewhat. You see coworkers from Heijmans working with small and large equipment to help people affected by the flooding. And that was a moving gesture working from the A79 motorway and taking the initiative overnight to help people. Heijmans' property has obviously benefited from the ongoing demand for housing. And our development in areas and landholdings have enabled us to maintain the volume in both property and residential construction. We have increased EUR 288 million in revenue, thanks to rising sales and additional homes. The margin of 6.6% is within the target margin of 6% to 8%. We sold 1,209 homes compared with 1,075 last year, which is about 15% up, of which 873 were sold to individuals. The order book has remained positive and now exceeds about EUR 570 million. In the Netherlands, there's increasing construction within the cities as well as development. And my impression is that supply will no longer align with demand in the long run. We need to build outside cities as well as inside cities to keep a balanced housing market. There's a desperate shortage of homes, especially for starters and young home seekers. Right now, we're building too many homes of 40 to 60 square meters in inner cities. And will that comply with the demand from buyers in the long run? And we're not building enough ground level homes for families so that these homes are no longer affordable to families. We need to increase our capacity, but because of lack of planning areas and very slow issuance of permits, we are not succeeding in that. Because of the delayed issue of permits for several projects, we envisage in H2 lower revenue than in H1. As integral area developer, we are pivotal in transforming areas such as Rotterdam-Zuid, NPRZ projects, Overvecht and Utrecht as well as Southwest, the Hague, and the districts to [ Noorderhaven and the Zutphen ] as well as neighborhoods here in Amsterdam. In addition, Heijmans is acquiring land holdings again to maintain our future development portfolio. This photograph reveals a bond project of 110 apartments under construction as part of the development of Noorderhaven in Zutphen. This is an obsolete factory site, which was transformed last year to a fine residential district of approximately 1,000 homes. And the Heijmans private label is delivering good affordable homes, and we're bringing creativity and starters to Noorderhaven this way. The 20% decline in revenue at Building & Technology is mainly attributable to nonresidential projects, but profits have held steady. This is mainly because of the completed NACH court house building in Amsterdam. In 2020, we achieved a lot of revenue there. But as known, the project was not contributing to profit. As with property, residential and nonresidential construction are benefiting from the strong housing market, but we noticed in addition to rising prices in global trade, we see that costs are rising in construction. And there's also an increasing scarcity of material and equipment and there's a labor shortage. To date, thanks to long-term agreements with partners, we've been able to respond to this, and the situation did not cause supply problems with projects, but we need to remain alert for the future. We often talk about industrialization as with the comakers of our Heijmans private label that can certainly help boost production and reduce production costs. But we won't accomplish that overnight, due in part to the tight housing market. I envisage good prospects for Heijmans in residential markets in property and housing construction in the years ahead. Price increases are a constant point of concern both in sale and in procurement. But to date, we noticed that we can improve the margins. In nonresidential, we noticed that principals are reluctant to invest as a consequence of the COVID-19 crisis and lack of clarity about the consequences of new work methods in the future. The reduced offer on the market has led to pressure on pricing with all possible consequences. Heijmans has opted for a selective acceptance policy. We remain cautious about accepting new projects because we need to ensure a balanced ratio of risk acceptance and earnings capacity. That means that you have to accept that revenue in nonresidential projects has declined a bit in the past year. Services are holding steady, requests for remodeling is increasing and our service operations are in increasing demand. Focusing on more recurring business is one of the pillars of our strategy. And we also advise in building management and monitoring occupancy on work sites, correct ventilation in buildings. That's becoming increasingly important. Beyond eyes, a joint venture between Heijmans and the CSU is supplying this advice and is increasingly recognized as a professional in the market in this field. And this is a fine picture of the University of Leiden where we will be building the Science Campus comprising 70,000 square meters of new construction. Heijmans Infra is delivering a stellar performance. Of course, the operationally strong figures of Infra are impacted and overshadowed by TenneT, but I just explained that all project results, including TenneT, are part of our underlying EBITDA. At the same time, the TenneT contract was terminated back in 2018 and the legal proceedings are the aftermath. So the work is not contributing to the revenue. And if you focus on that, you'll see that our current revenue is extremely profitable. Revenue has increased by over 20%. The operational result has even doubled. The margin of nearly 10% is exceptionally good. This doubling arises in part from additional projects completed in H1 with additional release of earnings and positive project results. I would say that, at present, I do not see any loss-making project of any substance in Infra or building and that is revealing. It also reveals something about increasing predictability. At one time, we said that we allow more conservatively for opportunities and risks than in the past, and we're benefiting from that now. Note that the margin level of nearly 10% in the coming year cannot easily be matched. For the long-term margins, we believe that the previously communicated guidance of 4% to 6% is more realistic, and that's still good. At Infra, we remain bothered by the nitrogen emission problems and the delaying tenders in large projects. In that context, since 2019, at the past ruling of the Council of State, in May, we've managed to maintain our order book. But the ongoing delays in tenders for large projects might, in the coming period, result in a temporary decline in volume. Last year, Heijmans focused additionally on management and maintenance of infrastructure. Thanks to this additional focus, we've grown more in this segment. We note that maintenance on roads, bridges and overpasses leaves something to be desired, first with the [ Marveta Bridge ] and now we've got the fugling metal plates at the [ Harding Fleet Bridge ]. And I'm not even talking about the deplorable situations we encounter on work such as at the A79 motorway. The government should invest additionally to manage costs for the future. The Horváth report, which was also presented to the House of Representatives, indicates that additional funding is needed to maintain management and maintenance at the desired level. A lot of overdue maintenance exists in our road network and infrastructure renovating now is much more cost effective than neglect, which would lead to forced demolition and new construction. This photograph features the realization of a long bicycle path through South Limburg between Eijsden and Sint Geertruid. It's curvy and tilly and there's also a path for bicyclists and walkers with an additional consideration of safety. Now the P&L statement. Once again, we see strong operational performance by all sectors, especially Property and Infra. And we also see the impact of the provision for the Wintrack II file. In addition, in the correction EBITDA joint ventures, we see that joint ventures on loss-making project last year, we are now having a positive contribution to results, especially because of property and some infra projects. In 2020, the joint venture result was negatively impacted by losses with the New Amsterdam Courthouse building in Amsterdam. The net result for H1 declined from EUR 15 million last year to EUR 4 million this year. The good cash flow, thanks to the strong operational performance and ongoing working capital, has meant that in mid last year net debt improved considerably to end June 2021 from a net debt of EUR 43 million to a net cash of EUR 44 million, a delta of EUR 87 million. The expectation is that for 2021 as a whole, this cash position will equal at least the level of mid-2021. Traditionally, as a consequence of seasonal effects, we see strong cash performance in H2, but because of the strong volume in H1, the seasonal influences will be a bit less this year. In addition, H2, we're envisaging additional investments to make our equipment more sustainable, and we're aiming for new investments in property holdings to maintain our future development portfolio. Heijmans did not use a syndicated loan in 2020 and 2021. Nor did Heijmans used the government support during the COVID crisis, such as the NOW arrangement or deferred taxes. In April of this year, we adjusted the syndicated loan at our bank consortium comprising ABN AMRO, ING and Rabobank. The total of committed loan equals EUR 117.5 million with a term until 31 December 2025. The new covenants aligned better with the figures reported and linked to sustainability criteria as well. And the rate has gone down from 2.25% to 1.7%. In addition, note that in April 2020, we resumed the dividend and that we have reduced the cumprefs by EUR 11 million to EUR 31 million. Now I'm going to give the floor to Guido Peters to elaborate on the covenants and the taxes.

As Mr. Hillen already explained on the previous slide, the financing was extended last year and the conditions have improved as well. In addition, the financial covenants have been revised, especially because I know that this is important for the future. It's important to explain the changes in the calculation procedure. As I said before, there have been essential changes mainly because the figures reported have been revised considerably year-on-year. We had a provision from 2006, and that meant that all accounting changes since then had to be adjusted in the covenants, thanks to the introduction of IFRS 11, 15 and 16 had a considerable impact on building. In the new covenant, we decided that we'll continue to adjust based on IFRS 11, but those for 15 and 16 no longer need to be included, and I'll explain the impact briefly. As for the adjustments due to IFRS 11, they relate to the proportional consolidation of ventures. We have a lot of projects in these ventures, and we see that as core business, and we think it's important to express this in our underlying EBITDA. And it's a bit different in relation to IFRS 15 and 16. Especially leases had a strong impact on our figures and its impact on net debt will be EUR 80 million higher in the future. And that applies for the total balance. And the impact on rolling EBITDA is approximately EUR 26 million, and that will also be higher in the future. And the impact on net interest is approximately EUR 2.5 million, and that will also increase as a consequence of the interest burden arising from those leases. Then if you zoom in on the covenants, you'll see that in most of the fractions, both numerator and denominator are impacted, which leads the outcome of the figures to change and is basically like comparing apples and oranges. And considering those changes, we've revised some of the covenant levels. It's important to emphasize that these changed levels are not necessarily the result from a commercial negotiation about more or less leverage for the firm. They merely reflect what changed in numerator and denominator in the fraction. The new covenant is that the average leverage ratio we had has lapsed because it was a special period. The leverage ratio that we had and was measured twice a year will hence forth be measured quarterly and will remain at a level of 3. The interest cover ratio will go from 4 to 5. And as I said, relatively speaking, we've gained more EBITDA than net interest. And the solvency ratio has had a one-off 2.5 percentage points increase from 22.5% to 25% and has now been adjusted on the long-term balance to 21% and is measured once at year-end. If we look at the outcome on the slide, we see that because of the stable profitability, even considering the TenneT provision, because we're not considering the provision as extraordinary, it's always on the results, we've amply met the covenants, especially zooming in on the net debt. So that EUR 80 million extra that is consistently negative that already indicates that there's no debt in the firm. And there will be virtually no net interest payments because we're meeting all covenants. If we look at our tax rate, we see initially a fairly normal rate of approximately 22%, whereas last year was 30%. In addition, please note that, throughout 2020, we did not end up with 30%, but virtually nil because we had quite a few offsetable losses that we were able to value by the end of the year. Now the 22% rate does not deviate significantly from the nominal rate of 25%, but we need to identify 2 important elements. First, the new tax legislation, which was mentioned in the presentation yesterday as well, applies to us as well. We still have offsettable losses. And those tax-loss carryforwards will change in the future. So that means that as of January 2022, all profits exceeding EUR 1 million can be offset by only 50% as tax loss carryforwards. At the same time, the government has no longer ascribed this in time, but has limited the ability to offset. This means 2 things for Heijmans. First, if we continue to generate taxable profits from 2022 on the cash outline, we'll have a certain tax burden as well. Of course, we had offsettable losses. So in recent years, we didn't see any costs there in recent years. The second thing is that all offsettable losses from 2013, and I can confirm that all offsettable losses that Heijmans has meet this criteria, they will remain offsettable in full. Then you get from the tax discussion to an accounting discussion, how should we value this as assets on the balance sheet? And you'll see that, typically, we have a fixed time horizon in how to value. And within that time horizon, we see that the effective rate, so the cash out burden, has basically halved, and that would take you to a lower valuation of the tax asset and equivalent to a higher rate in H1. This effect has ultimately been compensated. You don't see that in the figure because, once again, there are nonoffsettable losses that we manage to value based on our improved performance, and we see that we're basically ending up with a nominal rate.

Thank you very much, Guido. And if there are any questions about this later on, we'll certainly hear more from you about that. This is a fine illustration. I just said something about the labor shortage. So last year, we started a learning and training project to allow 15 asylum status recipients to join us. And we have very enthusiastic Heijmans coworkers who are their buddies, and they were far more buddies than status recipients in the project. But we see that these are very valued new coworkers, and we're delighted at their dedication and learning ability. And this is just a drop in the bucket, but this is the way forward to get new labor in this sector by giving those people the opportunity to position themselves in our society. So we're very optimistic about that. And this will certainly be followed up and expanded. Now looking to year-end. Despite the provision we took for TenneT and driven by our strong operational performance, for all of 2021, we're heading for a comparable EBITDA to last year. Especially in property and Infra, we expect excellent operational results. And for the rest of this year, we anticipate slightly lower revenue because some Infra projects have been completed. And we also have -- are experiencing a minor delay in issuance of permits for some property projects. So some of them will start a bit behind schedule. And we envisage a similar revenue to last year, but the net result is likely to be slightly below what it was last year. So in properties and Infra, we're expecting excellent operational results. And these -- the volume for larger projects in Infra will decline a bit because of the unresolved nitrogen emissions issues, but we expect to operate flexibly on the market, and we'll accommodate energy transition, water protection program and the sustainability challenges. I hope that I've made sufficiently clear that I am not concerned if revenue volume as an individual sector declines a bit. I'd prefer to have a bit less work at acceptable margins than focusing on volume with a rising risk profile as a result because in the building industry it's easy to buy projects. Heijmans is well positioned. All sectors are performing at least at a comparable level to last year, and the earnings capacity of Heijmans in recent years has continued to improve and is now at a robust level with a balanced risk profile. And I -- and our people -- I'm deeply grateful to our people. As Heijmans, we're proud of these performance. Thank you very much. Now I'll open the floor for questions. Who would like the floor?

Luuk?

I'll kick off here. First, about infrastructure, excellent margins. In the first half of the year were partly attributable to things that went well and provisions that could be released. Can you explain about the staging of the projects in H2 and next year? And which projects are on the verge of conclusion and what you anticipate there?

Well, I can qualify. It's not that we released provisions. That's not what happened. We're taking our profits a bit more prudently so that at the end of a project the profits are released. So it's not that we took a provision first.

Okay. Very good.

Now what I see is that some projects have concluded. And in property and Infra toward the end of the year, we expect positive developments. But at this stage, I can't give you a fixed percentage. That's a bit tricky.

So there are no special effects there?

No. The Infra business is doing well. We've got things in order. And I said sincerely that in our medium and large projects, we don't see loss-making projects.

So that means that all of them contribute to the margin? And you were a bit cautious about the envisaged volumes. Could you perhaps transfer people to other projects temporarily? Or do you see underutilization, but you prefer that to bringing in bad projects?

Well, because we didn't get large projects in Infra, then you get underutilization. But now we're noticing that we can use those excellent people in other areas of the company, which means that we're doing a bit better there. That's interesting. And in building and technology, we see that happening as well. At present, we don't see it disappears. But if that is the case, I'd rather something going away than taking on a bad project. But as far as we can see now, we don't have a problem with this appearance. Tijs?

I'm Tijs Hollestelle from the ING. I was looking at Page 11 in the press release, and I see that the Wintrack provision is back in noncurrent noninterest bearing balance position. It's indicated at several million. The EUR 15 million that you took as a provision in the beginning there, too. So does that mean that you have about EUR 49 million for Wintrack altogether?

I'm looking to Guido.

Well, that's treated the same way.

So is this different? Then, if the project was in execution, it would be in the short-term working capital positions ordinarily, wouldn't it? But because there's a long court case associated with this, you put it on long term?

Yes. It's a short or long-term provision. That's the difference. That's right. But if we're talking about working capital and current projects, debtors and creditors, that's not where it is.

But ordinarily you would have provisions there, too. So if the project was still ongoing, you would have some provisions for that on your working capital, wouldn't you?

Well, yes. That's true. But this project has basically been settled financially. That's how I explain it.

And those footnotes below that, is that separate? Or does that also relate to Wintrack, that guarantee obligation of EUR 18 million being work in progress? Is that a change in legislation on reporting or does that relate to the project? That's footnote 3 on the same page.

Can I get back to you on that, please? We'll get back to you about that later on, Tijs.

I understand it's complex because there was a lot of explanation, but exactly what did you take provisions for? Because previously, you said that about 10% to 15% of the project was carried out and you incurred cost. I think you had a German subcontractor that went bankrupt. So you can't really do anything with them any more either. I believe you were responsible for the entire project?

Yes. They did go bankrupt. That means that the damages are for Heijmans, and we took a provision that relates in part to reversal costs and relates in part to damages, and we'll have more proceedings to assess the damages.

And is that damages for TenneT?

Well, time will tell.

Is it identifiable or is it economically based on the plan that they had?

Well, all that is part of the court case. So I'm not going to elaborate on that at this point. It's very complex. I've told you what I can tell you about that. Of course, we'll run the side of caution and take a provision of EUR 34 million. So that's our market information, and I don't want to disrupt the legal course of due process.

Okay. I understand. I also have a question about the mix of the order book in properties. The larger exposure to individuals, that's visible. And will that remain high for individuals in the coming quarters or years?

Well, this also relates to the type of product and projects that we're realizing. But what we do see is that pricing in housing is rising so significantly that a bit more is sold to individuals than to investors. So we're making more retail sales. But if the housing market tapers off, the ratio might change. So we've noticed that 75% of the homes that we sold went to individuals. In last year, it wasn't such a large share.

And in the order book, that's relatively short term for you, right?

Well, we look a bit longer term. All those area developments are longer-term projects. So the challenge for us is to compose a mix of projects, both for investors and social housing and for individuals in retail. So that's part of our stock and trade to be flexible.

So you're basically trying to compose a mix?

Another factor, especially if you're looking at apartment complexes, we want to have 70% presold, especially in vulnerable times. It may be a bit lower now, but we're certainly not going to start realizing something of which very little has been presold because you need to manage your risk profile as well.