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

Ladies and gentlemen, welcome. Thanks in part to the press release, a solid first half year and confident about the future, we informed the market about the first half year figures of Royal Heijmans. And I'm proud to say Royal, and I notice that many Heijmans employees take rate pride in the predicate that we were awarded on 3 June. That was a wonderful experience. Heijmans has been building projects in the Netherlands for a century. In 1993, Heijmans became listed on the stock exchange but we've always retained our family spirit. The hand of Heijmans is visible throughout the Netherlands and we will always be builders of a healthy living environment. Now a word about safety. At Heijmans, we've been working hard for several years to make work in the construction industry safer. It takes a lot of energy and sometimes you wish everybody in the industry embrace that sense of urgency. Heijmans is pleased to be a trailblazer. And that's why it's wonderful to report that ever since the second quarter of this year, Heijmans is certified at safety scale 4. Thanks to the safety scale certification, it is assessed how companies develop in terms of safety. Heijmans' focuses on attitude and conduct. Certification enhances awareness about safe work and allows for measurement disclosure and comparison. The number of accidents entailing lost time has not decreased. That's -- is disappointing but we've also noticed that the nature and severity of the accidents is becoming less serious and colleagues are less reluctant to report accidents so that we're better able to anticipate dangerous situations and are able to adjust designs and operating instructions in time. Here, you see several electric equipment items taken into use, including Caterpillar excavators. Heijmans now has a great many electric equipment items and a dozen more on order. Looking back on the first half year, it was very dynamic, ongoing turbulence in the general economic and political conditions that Heijmans navigated well. 100-year Heijmans, with all the festivities and concluding celebrations at a wonderful festive occasion with 7,000 colleagues and their partners. And in addition to that, the announcement of the acquisition of Van Wanrooij, which will enhance our position on the residential market. We're awaiting approval from the authority for consumers and markets and expect to obtain that in Q3. And with that in mind, I'm very proud of our performance. We've achieved higher revenue of about 8% with a good return and the rising return in Building & Technology and Infra were ample to offset revenue in property that decreased slightly. And the order book has grown to EUR 2.6 billion and the quality is good. I'm confident about the future and we're able to express a more dynamic outlook, although in the beginning of the year, we anticipated a slight increase in revenue with comparable underlying EBITDA at EUR 107 million. Nowadays, we're going to achieve at least that level. You can see that the second line underlying EBITDA has been adjusted for the release of the EUR 19 million provision in 2022 concerning Wintrack II. I can tell you that the first hearing on appeal of the arbitration board will be on 29 August. We don't know whether there will be a second hearing in 2023. We don't expect an award or a financial impact. In the first half year cash position improved with respect to the previous year. Our strong cash position allows us to pay part of the acquisition of Van Wanrooij from cash on hand solvency at 30%, is good. And the number of employees has increased as well. We're able to retain the right people from the market. People regard Heijmans as a reliable and socially minded employer and Heijmans is a company that is dedicated to devising solutions and realizing them to contribute to a sustainable society. This is [indiscernible]. It is on-the-go 24/7 and you have to manage and maintain runways and service roads and provide lighting. From January until May, we renovated the Zwanenburg runway under [ daring ] weather conditions. 60,000, excuse me, 60% we used asphalt, 40 kilometers of cables and 2,300 lights. Our people delivered a stellar performance. Now Gavin will elaborate on the company flows and financial performance.

Let's start with property. As in previous expectations, the revenue and profit is down with respect to last year. The volume has been curtailed given the developments on the residential market. Revenue decreased by 32%. Nonetheless, EBIT -- the EBITDA margin of 6.5% is neatly within strategic guidance. 876 homes were sold, 15% fewer than the first half of last year. The decrease was particularly visible among houses sold to individuals. It's positive that in the first half of 2023, we did sell more homes than in the second half of last year and this might indicate that we've bottomed out. And it was good to see that housing cooperatives are investing again in part because the landlord levy has been discontinued in larger transformation emissions. Heijmans [indiscernible] teams up with municipalities and cooperatives and operates as an area and structured developer. In realizing these projects, the revenue of these cooperative projects is on the books of Heijmans residential, not Heijmans property. The total output for sale is approximately 850 homes, which is higher than last year when the number available for sale was about 500 and that ordinarily takes longer to sell on the housing market. We expect that by year-end, we will have completed about EUR 10 million, so about 20 homes in the -- in unsold homes in the high-end segment. We expect to have those -- that number available. This is manageable. And at the Executive Board, we're scrutinizing this. And in this slide, we're focusing on minimal advance on sale rates. This is the harbor in Zutphen. It's a unique place where landscape and [indiscernible] converge. In realizing the Noorderhaven district, we've taken the city across the railroad tracks so that the railroad tracks is now a dynamic center piece. The existing landscape and cultural historical elements of this area where the foundation for the urban design. And nature, history and homes are inextricably linked. Altogether, about 1,100 homes of all types, sizes and pricing, will be delivered here. Now Building & Technology. In Building & Technology, compared with last year, revenue increased significantly by 19% and the profitability was well within the strategic guidance of 4% to 6%. Underlying EBITDA increased by EUR 3 million despite start-up costs for our timber frame home factory, which is according to planning. In business case and the first homes will be completed in Q3. Heijmans' services and nonresidential projects did well with more one-on-one projects in nonresidential project building and long-year maintenance contracts for services. In nonresidential products the Paleis Het Loo was completed and good progress was achieved with -- on the science campus in Leiden. And we started the massive renovation of educational buildings, Gemini North on the Technical University Eindhoven's site. Our services branch in Building & Technology once again performed well. And like last year, achieved stable revenue that yielded a return, thanks in part to large contracts such as at Schiphol and ASML. In services, we see major capacity challenges. There's more work than labor. So we'll need to focus on smarter working rather than harder working in the near future. The ongoing demand for homes keeps figures for residential construction at their level despite lower sales figures and revenue in Heijmans property. Heijmans residential managed to reinforce interaction with cooperatives. The number of requests from these cooperatives, both new construction and renovation, is steady in light of their sustainability ambitions. By now the share of external revenue, so not from Heijmans' property at residential construction has increased from 30% to 40%. Revenue for Heijmans property was virtually stable. In residential construction, we see that the soaring demand from recent years in procurement is settling down. In the past half year, once again, major progress has been made in reinforcing our renovation operations. In Heijmans [indiscernible] we're focusing on maintenance and sustainability for existing cooperative homes, which are largely built in the 1950s and '60s and have low energy efficiency. So that leaves much to be improved, especially in sustainability. In the past 6 months, we completed about 950 homes, double the number in the same period last year and we have about 2,000 homes in progress. And the order book of Building & Technology has expanded by 20% compared with H1 last year. It's good quality and the order book is well distributed. This is the science campus. You see the second stage of the Gorlaeus building, part of the Leiden University science campus. The new construction, the faculty comprises a distinctive entrance, new laboratories and lecture halls. The aim is to house the University of Leiden and Faculty of Math & Sciences in joint accommodations with state-of-the-art laboratories and facilities. And it's adaptable to future requirements and it's scheduled to be completed at the end of this year and has a value for Heijmans exceeding EUR 70 million. Now our Infra company has a good half year in keeping with our expectations and revenue has bounced back to the level of 2021. Revenue rose, in part, thanks to the number of projects received and growth in our asset management activities by 23% to EUR 381 million. At the same time, underlying EBITDA margin rose to 6%, at the upper end of the strategic guidance of 4% to 6%. A few noteworthy aspects from H1, so the first half of the year, a major maintenance on the Zwanenburg runway at Schiphol that we did complete successfully in the first half year despite poor weather conditions and the awarded multiyear framework agreement for transport pipelines for Vitens. And these recurring activities now account for over 40% of the total Heijmans' revenue. So despite the nitrogen problem, Heijmans Infra is perfectly able to accommodate changing market conditions. We're focusing more on replacement and renovation, energy transition and dyke protection. The Infra order book is at a nice level, just above EUR 1 billion. This is the Lauwersmeer dyke. Here Heijmans is working in the construction combination Waddenkwartier on reinforcing the Groningen section of the Lauwersmeer dyke. The builders were awarded the operations of the water -- the [indiscernible] water conservancy, slightly exceeding EUR 90 million and Heijmans has a 75% share. Lauwersmeer dyke is a known area for Heijmans. We -- in 2020, we completed reinforcing the Frisian section of this dyke. Now I'll tell you about the P&L statement. You can see that revenue has increased by 8% and underlying EBITDA is robust with a 5.2% margin. In the first half of last year, this latter benefited from a release of the EUR 19 million provision for Wintrack II. The order book increased by over EUR 200 million since last year to EUR 2.6 billion, the highest level in a long time in which we prioritize margin over volume and always have. At present, we don't have any bleeders in our portfolio. And the new order intake is -- meets our yield criteria. Now I'm going to elaborate on some of the items here. The rising group costs are nonrecurring and are caused by the festivities of 100 years of Heijmans, so our centennial anniversary. The post-acquisition fees relate to the announced Van Wanrooij acquisition, which year-on-year will roughly double. The higher write-offs relate to increased investments in electric equipment as well as the investments in the new timber frame home factory here in Heerenveen. Net interest costs benefited from favorable interest -- positive interest rates received on credit monies. Again, note that in the second half of this year, this will be reversed as, since the acquisition of -- from Van Wanrooij, the net cash position will become a net debt position. The tax burden on the first half of 2023 equal 27.2%, exceeding the nominal tax rate of 25.8%. This results largely from nondeductible transaction costs related to the intended acquisition of Van Wanrooij. Now cash flow and financing. Our net cash position increased in the first half of 2023 with respect to the first half of 2022 by EUR 15 million to EUR 116 million, driven by strong operating results combined with rigid working capital management. Property, plant and equipment increased in this period by over EUR 20 million because of the increased investment in electric equipment and the timber frame factory. Working capital remained at a level similar to last year. Within the working capital, there was increased prefinancing as a result of the rise in Infra and nonresidential projects. This was offset by the increase in stock position in property because there were very few unsold homes under construction last year. Our solvency is back at 30% after a brief dip last year as a consequence of the redemption of cumulative preference shares. So Heijmans remains a very healthy company financially as well. Now I'd like to present our financial agenda to you. For the rest of 2023 and also in 2024, what's noteworthy is that regarding the publication dates of our annual figures for 2023 and the Annual General Meeting of Shareholders for 2023, will depend on the moment when the Van Wanrooij deal is closed. You'll understand that processing and carrying over an acquisition of this scope will take a bit more time. As soon as we've closed this deal, we'll publish the exact data. Back to Ton.

Thank you, Gavin. These are 3 -- our repurposed electric rollers at Green Road Equipment, converted from fossil to electric equipment. All the material we purchased in the past 2 years were supplied by diesel motors and all were repurposed by us and our partners. Sustainability remains an integral part of our operations in the future. Both in the industry and on the labor market, Heijmans builds a healthy living environment and embraces the importance of sustainable enterprising. According to research, Heijmans is the most sustainable building company. CO2 reduction exemplifies good quantifiable targets. In 2018, our ambition was to operate carbon neutral in Scope 1 and 2 by the end of this year. And if we don't achieve that, we'll compensate the remainder. In recent years, we've invested extensively in making our lease fleet and equipment emission free but we're also focusing on limits and availability. And we've seen in our operations that for our people and principles, choices can be tough and sustainability usually prevails over financial considerations. For example, nowadays, with our equipment and company vehicles, we use less ordinary diesel but instead, we encourage our employees to use HVO but despite there being fewer filling stations than for standard diesel. This is a brief list of the activities that we've elaborated in recent years for sustainable enterprise. And industrial production of timber frame homes is an important step. In the past year, we converted and expanded our factories in [ Heerenveen ] and reconfigured our machine fleet. And on 1 July, the first sustainably industrially produced home came off the belt. Now outlook. As indicated previously, we're giving a more -- new, more powerful outlook. Whereas at the start of this year, we expected slightly increased revenue with comparable underlying EBITDA of EUR 107 million, we can say today that we will achieve at least that level. The approved acquisition of Van Wanrooij on 21 June has been submitted for the approval of the authority for consumers and markets and is expected for Q3. And the extent to which this contributes to revenue and EBITDA of Heijmans in 2023 depends on the date the transaction closes. As Gavin said, we're positive that in the first half of 2023, we sold more homes than in H2 of last year. And we see after the dip in our home sales from recent years that the -- in recent months, the residential market has become more active. Rising mortgage interest and inflation appear to be stabilizing. We also see that disposable income of people working is improving, thanks to rising wages and salaries. That means, on the other hand, that labor costs are unlikely to decline in the years ahead. We're confident about the residential market. Planning capacity needs to be expanded and permit procedures need to be simplified, give house hunters a say in this process, too. And I've said previously that we need to build according to need, both within and outside cities and we can tell that from our sales figures. I would not convey housing policy in 3Bs but in 5Bs to alliterate in Dutch, building for people as needed inside and outside cities. Given our outgoing council of ministers, we won't be accelerating solving the nitrogen issue but we can't change that. So let's take what market opportunities we can. I hope that the government will take the responsibility after the elections and form a new council of ministers quickly. I would request that the politicians take the responsibility, work together and address problems and resolve them together no matter how difficult chart the course for the Netherlands. Now in conclusion, Am I gloomy? No, not for this year and I'm also confident about 2024. We have a well-filled order book, highly motivated staff and a wide range of fine projects with healthy margins. And the acquisition of Van Wanrooij is a nice addition for Heijmans. Thank you very much for listening. The floor is now open to questions.

Then on the quality improvement in your order book.

I'm going to answer in Dutch. What we see in the order quality is that, at Infra, we're going to remain at the level of EUR 1 billion. And we also noticed that we're less dependent on major projects. So you can see that we're above 40% in that business and that means that the risks are diminishing as well. On the other hand, we see in Building & Technology that increasingly, we wind up talking with customers early on. And we've seen our order book rising by about EUR 250 million with respect to Q1 and about EUR 300 million with respect to the end of the year. So that means declining risk for Heijmans and the client and it means that Heijmans doesn't need to accept much risk. And there's also a delay in sales in property. So we see a diminishing order book but that's because we don't take on the risk of starting projects too early. And we wait to ensure that we've got a good sales rate. We've always had one at about 70% and that can vary but then we address that together as the Executive Board.

One question regarding Van Wanrooij. Do we have any visibility on their H1 performance regarding the number of homes sold? Can it be compared to you or compared by books?

No, Tim. So in all fairness, what we -- we have some indication on Q1 as we were in due diligence in those phases. But given we are still under ACM approval, we kind of stonewall those kind of info. So as soon as we can close and we still, as Ton mentioned, expect closing to happen in quarter 3, so most likely somewhere in September, then we will be able to shed a little bit more light on the performance at that point in time.

Okay. One more question regarding residential. Do you have any target of homes sold for the rest of the year or for the total 2023?

Well, it's difficult to say that at this point, especially because we've just noticed that some recovery is apparent. So we have a huge bandwidth between 1,600 and 2,000 homes, which may sound very large. But we've noticed that in the past 2 months, once again, there are more transaction and there's more traction on the residential market but there's a lack of -- there's a shortage of 300,000 homes in the Netherlands and you see an inflow that's very high. So we do see increasing pressure on the residential market. So we've got a large bandwidth but that's understandable.

Building & Technology, which was obviously a positive surprise because overall, the sentiment is that nonresidential construction, very difficult. Can you guide on the share of nonresidential construction within that division? So you have the renovation, which was obviously very great, where you were at almost 100% increase. But what is the share of nonresidential construction, meaning offices, those kind of things?

So renovation and construction of homes is kind of in the same division. So if you will split that it will be roughly 50-50. 50% is renovation and construction of homes and 50% is services and utilitarian production.

And construction of offices, supermarkets, malls, whatever it's...

No, that we don't do. So what we only do, Tim, for your information is, if we build, for example, a building complex with apartments, at ground floor level, there could be a few commercial units. And that's one what we would develop and sell. But that would only be as part of a whole construction that we would develop. So we don't do individual malls or shopping centers or anything like that.

Okay. So in general, you're not concerned at all if the office construction, for example could recollapse because you're just not active in it at all.

No.

That's good. Okay. Then 1 question regarding the margins. So Building & Technology and Infra as well were at least same level as last year or even some slight improvements. What's the driver behind it? Did you see already easing of cost inflation, where you're just able to pass on prices fully? And also regarding wage inflation, what's your view there? Did we see the, let's say, the peak of the costs and from...

So I'd -- I'll start with Building & Technology. So what you see there is that, indeed, to your point, the margin did not really move. But then you need to consideration that we had significant expenses in the Heerenveen factory. As for our expectation is that, that part will be trending upwards in H2 and going forward as we have fallout of those investments by now. I think to your point on wage increases, fortunately, most of our contracts are indexed, so we are able to pass those on. That said, you will always have a situation where, at some point, a client will say, enough is enough, we will scale down the work and et cetera. And so the worry that we have is that there could be a spiral in wages, inflation, wages inflation. And you see now, a few of the government contracts on collective labor agreements passing on 10% plus wages. If that becomes the norm in the market, then that will have an impact on prices, that will again spiral that. So we don't know where the end will be. So far, we are able to pass it on. I think we'll be able to pass it on in the future as well. So my concern is more from a Netherlands perspective than from a Heijmans perspective.

There's also an impact on the real estate side. That's the other end.

And it's a good point. And there is more positive because people will have more money to spend. They are also easier in the money to buy a new house or apartment.

Sure. Then 1 question regarding your recurring revenues within Infra. You're at 40% right now. Is that the target share already? Or do you aim to increase that share?

We wouldn't mind to have that increased. It's not a specific target that we have set, it has to be X, Y or Z. But we feel as part of a well-differentiated portfolio, it's a crucial element that you get more recurring business in. And we see now, I think, if we put real estate to the side for a moment, because that's, I think, a different animal. But if you look at Infra and Building & Technology, we are now at 40% mark on both. Now we wouldn't mind if that increases but we don't have any -- set any specific target to say that has to be X, Y or Z.

Nor does this mean that we're not doing large projects but we do these projects only if the risk acceptance is nicely balanced with respect to the earnings. And if that's not the case, we don't take on that project and we'd like to remain on that line. So we don't do exclusively recurring business. We want large projects but we need to consider the risk, we need to be able to do it and we also need to have the courage to say no and that happens daily, to be honest. And it's good that we're aware of this.

On working capital. Do you expect any decrease, especially on the inventory level for the rest of the year? What you see with other companies that now, let's say, the supply chain issues go a bit down and -- so do you see maybe some positive effects from that side on your cash flow, or not really?

No, not really from a, I think, a supply chain point of view here because we were able to source quite well even in the turmoil after corona and Ukraine. So the issue was more on price than availability. Hence, no works were significantly delayed or stopped. What we do see and it's more, I think, linked to the answer to the question you posed earlier on what's our outlook for the number of homes. If it would be closer to the 1,600 for the full year, i.e., H2 is more of a copy of H1? We will still see within real estate that they have more houses that are being built, not sold, hence have an impact on the working capital. At the same time, if you look at the EUR 2.6 billion order book, we think Building & Technology and Infra will only go up in projects. We will then cause the opposite side in working capital to have probably a similar impact. So what we expect, although it's with high uncertainty, what we expect is that working capital will be similar, set aside seasonality patterns and could even improve a bit if real estate really would rebound more to the 2,000 homes sold for the full year.

Back to Dutch now. I have a question about the outlook. Can you tell us a bit more about what developed better in the first half here with respect to your initial ideas about guidance? Or is the confidence underlying in the guidance? Because it sounds like you're providing more powerful outlook. That was my first question. And the second is that the outlook reveals nothing about the dividend. Your policy is a 40% payout in my view. Can you say anything about the absolute level you have in mind?

If you consider the first half year, I believe that you can say that if you look at the impact of volume on property, it's decreased a bit more than we expected. That was because of the reduction in sales. And in Q1, the sales market had not yet recovered and we noticed that. We are noticing changes now and that increased our confidence but that doesn't restore the revenue tomorrow. And last year, we had switched early on, to team up with cooperatives because the landlord levy was being discontinued. So we're realizing more with cooperatives so that volume in residential construction has been maintained. And we didn't expect to get that far and the level of the volume in residential construction and the return has remained good. So you see that there's a considerable increase there. And at Infra, you see that we're doing better and better in recurring business and those volumes are up. And the policy of margin over volume shows that it's benefiting us. That's that. And as for dividend, I'm not going to state whether or not there will be a dividend but I have no cause to assume there won't be. And if we do have a dividend, it will be in the 40% framework to help you a bit. Last year, the net result was EUR 60 million, including the income of Wintrack. And after tax, it was EUR 15 million (sic) [ EUR 50 million ] and I don't expect the P&L to be radically different. So we'd get a similar result considering Wintrack with 1 major caveat and that's the impact of Van Wanrooij because that will affect our earnings at the moment of closing. We expect that will be in Q3 and then Q4 would be on top of that.

Okay. That's clear. Now perhaps you could tell me a bit more about property and residential construction. You discussed the political conditions and you seem very confident in the outlook for 2024. That means that you don't envisage significant disruptions in residential construction or property from not having a government. You don't expect a delay or stagnation with respect to license.

The most important thing that we see now is the nitrogen debate. And I hope that they continue making progress there. And that will affect new construction a bit. We're talking about dyke protection, energy transition and renovations. So we're investing in that and Minister Harbers has allocated additional investment budget for that too. So I don't see a problem there in residential. And building, we see a limited number of permits disappearing but it's not that bad. So we don't see a problem there. What we do notice is that the time frame for obtaining permits that people who have an interest, so the people who are in those homes, don't want building in their backyard. And I'd like the house hunters to have more of a say there. And if the house hunters can't have that say then they should be designated as construction areas because there is a shortage of 300,000 homes and there's an inflow. So we'll need some breakthrough there and the ministry is exploring how to do that and we have to abandon the ongoing objection process. I understand that people need to be able to object but they shouldn't have unlimited objections. And I believe that the future council of ministers and the representatives need to be able to get that in order because that's disrupting permits being awarded.

And you also mentioned the dividend following the acquisition of Van Wanrooij. Of course, there will be a one-off leverage. And you'll need to -- or you expect to have addressed that by 2026? So do you feel more comfortable about your net debt position for the next few years?

Well, I believe that at the end of the day, we believe that a building company needs to be cash positive. That's part of the building business model, there should be prefinancing. So this debt is mainly at the acquisition but it's not an permanent lifeline and we expect to pay it off quickly. And given the information we have, it should be possible to pay that off in 3 years. Okay, basically, this is like speculating it but who knows what will happen in 3 years. Van Wanrooij is a profitable company and generates cash and Heijmans has been doing well and generating cash for several years as well. We'd like to invest the cash in purchasing new land, as Heijmans. We've mentioned that earlier. Now with Van Wanrooij, that need won't be as great because we are taking over a huge portfolio. So we should be able to generate the cash to pay it off. And given our knowledge today, we're confident considering all scenarios.

Are you comfortable about your guidance?

Yes. We're comfortable with the scenarios we have but we've also considered scenarios where if there's an economic slump, things might be tough. But well, if 2010 is back, we're going to have a problem, to be honest. But if we're reasonable, we should be okay.

Now a final question, perhaps. Given your current strategic plan, that's concluding this year, you still have to close the Van Wanrooij deal. So it might be difficult to update the market on your strategy. And when do you expect to update the market about new financial targets?

Well, what we'd like to do in the course of this year, is to provide a glimpse of our quality of objectives in our strategic outlook and the quantitative ones. Well, we'll need to [indiscernible] from Van Wanrooij and that will be in the first half of next year. And then we'll disclose that.

One more question. Van Wanrooij been a major acquisition. I can imagine that, that changed quite a bit in the Dutch building landscape. As for the market situation, it may be more difficult for the smaller companies. Now are there people that rang you up and said that's interesting, could we talk about such an arrangement as well? Do you have more appetite to do these things?

Well, my phone isn't ringing off the hook, to be honest. But I'm a known market operator. People know where I am. There are no -- we have nothing current in the pipeline and we have to be very selective because not everybody is doing well. Some parties have invested a lot and are in difficulties in a down market. So we are selective. We're still looking but we don't have anything at this time.

So there's nobody who calling you in a panic?

Well, I'm sure that some people are panicking. And of course, I hear a lot of scare stories but let's not address those. Thank you very much for coming and thank you to the listeners. And we're going to conclude this gathering now. Thank you. Thank you for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]