Bureau Veritas S.A.

Didier Michaud-Daniel - CEO François Chabas - EVP & Group CFO Philippe Donche-Gay - Senior EVP, Deputy CEO of Intl. Ops & Support

Edward Stanley - Morgan Stanley Thomas Sykes - Deutsche Bank Alexander Mees - JPMorgan Chase & Co. Rory McKenzie - UBS Investment Bank George Gregory - Exane BNP Paribas Andrew Grobler - Crédit Suisse

Yes. Thank you.

Good morning, and good evening to everyone. Thank you for joining Bureau Veritas Q3 revenue 2018 call.

On Page 5, Andre to be joined by François Chabas, our new CFO since beginning of September. So a few may have met François during our recent [Foreign Language].

François has been with BV for 15 years, during which time he has had a number of managerial positions in both financial and operational roles. These experiences means he has excellent knowledge of the group, our operations, our challenges and our people.

Okay. Let's move to the key highlights regarding the third quarter.

Q3 stood at €1.2 billion, up 8.6% at constant currency. Organic growth was 4.8%, up from 3.5% in H1.

All 6 businesses are now growing organically. Our late cyclical markets, Marine & Offshore and Oil & Gas CapEx are bottoming out and showing the first signs of recovery.

Our growth initiatives performs strongly, generating a 7.9% increase in revenue organically. Our full year 2018 outlook is confirmed and our transformation plan continues on track.

Now, I would hand over to François for the financial review. François, please?

Thank you, Didier. Good Morning, and good evening to all.

So I'm on Slide 7, starting with the revenue bridge for the first 9 months of 2018. Our organic growth reach 3.9%, acquisition had a 3% positive contribution and as previously noted, ForEx had a negative impact of minus 5.7%, mainly due to the appreciation of the euro against the dollar and other currencies.

For the full year 2018, at current spot trades, we continue to expect around minus 4% in revenue and minus 6% on adjusted operating profit. Moving on for the first 9 months, revenue growth has accelerated 6.9% at constant currency.

Moving or taking a closer look to our Q3 2018 performance, slide 8, we see that organic growth has accelerated to 4.8% to be compared to 2.6% in Q1 then 4.4% in Q2. So this is Bureau Veritas best quarter of organic growth in 6 years.

Acquisition had a 3.8% contribution to the top line growth. ForEx, a bit more limited, minus 2.9% negative impact after minus 7% in the first half of the year.

So all in all, revenue growth moved up 8.6% at constant currency. Now turning to growth by business on Slide 9.

As you see and as mentioned by Didier, all our 4 businesses delivered positive organic growth in the third quarter. B&I, Agri-Food, Consumer Products, all delivered solid growth.

Worth specific mention though, our Certification, which as you see, recorded close to 15% organic growth, thanks to the positive impact from the revision of standards. Industry, which confirm its return to positive growth after posting a 3.5% organic growth supported by both our OpEx growth initiatives and the stabilization of the CapEx markets.

And third, Marine & Offshore, which is now bottoming out, achieving 1% organic growth after almost 2 years of decline. Moving to Slide 10 and focusing again on the third quarter, you see that the growth was fueled both by the Base business, accounting for 2/3 of the group revenue and our 5 growth initiatives.

Base business is up 3.2% in the quarter organically, so showing a gradual recovery as you see on the chart. While our growth initiative which represents 1/3 of the group revenue delivered a strong growth, up 7.8% organically in Q3, in line with our ambition to grow at a high single-digit rate.

Looking further at the 5 growth initiatives, B&I on Slide 11. B&I performed well, up 5.7%.

OpEx confirmed the improvement that we've seen already in Q2, with a strong 15.1% organic growth in the third quarter, thanks to the ramp-up of large contract wins. Agri-Food grew 1.9% with strong performance in food offset by some poor market conditions in Agri Europe.

Automotive recorded 9.9% organic growth, led by connectivity testing while a finally SmartWorld grew 0.9%, but this compared to a particularly strong performance in Q3 last year, which for the record, was up 17.3%. So overall, our total growth stands at 15.4% and 20.1% at constant currency.

We'll now hand it back to Didier for the business review.

Thank you, François. Thank you.

Okay. We move to Page 13.

Starting with Marine & Offshore. The business delivered positive organic growth in Q3, up 1%.

Confirming the recovery in the sector, new orders amounted to 4.8 million gross tons at the end of September 2018 compared to 4.1 million a year ago. New Construction benefited from improvement in the new equipment certification services.

Core In-Service was slightly down, but this is compared to very strong Q3 last year. Offshore was driven by the expansion of services offering and the stabilization of risk assessment studies.

For the full year 2018, we continue to expect full year organic growth to be slightly negative. The In-Service activity should be remain resilient.

For New Construction, H2 should be positive, benefiting from the ramp-up of recent order wins. Moving now to Agri-Food & Commodities.

The business continues to improve with revenue up 5.3% organically in Q3. As we remember, it was up 4.8% in Q2.

By sub-segments, Metals & Minerals confirms its strong recovery, up 8.8% in organic growth. Upstream activities grew 14% notably in Africa and in the Americas.

Trade achieved low single-digit growth after a good Q3 last year. Agri-Food grew by 0.5% organically.

Food delivered true growth but this was offset by the weak Agri segment in Europe. Growth resumed in Latin America with the end of the trucker's strike in Brazil which had impacted exports.

Oil & Petrochemicals was up by 2.4% organically with robust performance in Europe, thanks to new services and market share gains. North America remained stable in the period.

Lastly, Government Services were up by 12.6%, thanks to the ramp up of VOC and single window contracts. For the full year, we expect improved growth versus 2017, fueled by recovering Metals & Minerals markets, healthy Agri-Food businesses and stabilizing Government services.

Turning to Industry. The business confirmed its positive growth, up 3.5% organically, a result of our successful diversification.

Oil & Gas CapEx related activities being 16% of divisional revenues, have now stabilized, being slightly up in Q3 after a decline of 12% in Q2. Oil & Gas, OpEx recorded double-digit growth with strong volume increase across all geographies, largely offsetting price pressure.

The recent Qatar gas contract has also been a key driver. We achieved 7% organic growth in Power & Utilities OpEx with a ramp up of large contracts in Latin America.

For the full year, we expect positive organic revenue growth overall for the Industry as our diversification strategy continues to pay off. We are also seeing the early signs of recovery in Oil & Gas CapEx, where markets are expected to improve.

Some details about Industry on Page 16. This recovery is, at this stage, being driven by new small size CapEx projects.

This is where we are currently seeing returning activity. Again, considering the lead time on this project, we would only expect the benefits to flow into our P&L in a meaningful way towards the end of 2019, early 2020.

In Building & Infrastructure now. Revenue increased by 4.6% organically with a broadly similar organic growth in both construction-related activities and on Building In-Service activities.

Organic growth performance was good in Europe, led by high single-digit growth in France, 35% of revenue. OpEx-related activities perform particularly well in France, which benefited from one additional working day.

Good in the Americas now 22% of divisional revenue, thanks to solid performance in the code compliance market in the U.S. as well as in South America.

Finally, in Asia and China, the pace of growth was solid and prospects remain strong in Chinese infrastructure projects. For the full year 2018, the outlook for the business remains positive overall with good growth in Asia, Americas and Europe, driven by both CapEx and OpEx.

Certification, Page 18. Certification was again our top-performing business in Q3, posting a 14.9% organic growth.

We experienced double-digit growth in Europe, Asia and North America. Supply channel and Global Certification grew by double-digits.

Some details on the Certification business. As you can see Page 19, on the left-hand side of the slide, starting from Q4 2017, we have enjoyed strong growth in over Certification business, driven by the revision of standards for which the transition deadline was September 15.

This has generated strong revenues, but is obviously dropping off. As announced earlier in the year, we expect H2 to the much lower in H1, implying a negative Q4.

Looking ahead, we expect the next main drivers for the growth of this business to lie in the corporate risk area. Certification concerning data privacy, cybersecurity, brand reputation, et cetera, will be where we will notably focus our growth efforts.

Moving to Consumer Products. Consumer Products recorded a 3.2% organic growth across all major service categories.

Softlines delivered mid-Single-digit growth, led by the ramp-up of new contract wins in Europe. Hardlines achieved growths below the divisional average as this compares to a very particularly strong Q3 last year.

The Electrical & Electronics subsegment grew low single digits, primarily driven by Automotive and by South Asia and Europe. The classical electrical products experienced a slowdown both in China and in the U.S.

The implementation of tariff increases has led to some 'wait-and-see' attitudes among some customers and triggered the postponement of some product launches. Nevertheless, the Chinese domestic market continued to develop steadily.

For the full year, we expect Consumer Products to maintain mid-Single-digit growth, reflecting strong growth in Southeast Asia, Europe and led by automotive initiatives. Some words on the tariff increase.

I wanted to take the opportunity of this call to put U.S. trade tariffs on China into context of raw data.

First, tariffs concern only our consumer product business, which represents 14% of group revenue. Of this, 95% of business is today outside the scope of U.S.

tariffs. We estimate that around 5% of Consumer Products business is within the scope of tariff increases.

Secondly, we are closely monitoring the situation, and we have engaged proactively with all our clients. In the past, we have supported them in new manufacturing countries such as Cambodia, Vietnam, Bangladesh and Turkey.

We have the capacity to follow any manufacturing relocation while working on various scenarios to accommodate them. Thirdly, this may also provide an opportunity for us as our services will become even more important to ensure the quality of products is maintained.

Lastly, as the demand for TIC services for the Chinese domestic market is increasing, we are well-positioned to seize that opportunity. We have taken strong measures to accelerate our development in the Chinese domestic market and outside of the U.S.

In Southeast Asia and in Europe notably, but also in Africa eventually. Moving now to the outlook and to conclude, Page 23.

So to conclude for full year 2018, we confirm our outlook. We expect an acceleration in organic growth revenue compared to full year 2017, a slightly improved adjusted operating margin at constant currency and improved cash flow generation at constant currency.

Thank you for your attention. This concludes our presentation.

François and I will now answer any question you may have.

I've got three, please. And I guess, we've got to ask on that trade war.

Do you have any feeling for quite how much of a drag it has been in Q3? And I'm just trying to gauge, if 95% is currently outside the scope and it was 80 bip drag or 50 bip drag in Q3, I'm just trying to think how that might play into next year?

Secondly, on the Marine ramp-up and the new business you're winning there, is that a favorable mix i.e is that tending to be higher margin new-build ship construction? And thirdly on -- a question for François, I'm interested to hear what's top of your priority list for 2019 to get done first?

Okay. Thank you, Edward, for your question.

Let's start with your first question on the drag. We think it's very, very small, close to nul in fact.

The only drag we have for the moment is some postponements from some clients which are just thinking about what could be their future situation, but they are moving progressively back. So for the moment, the impact is extremely small.

For the Marine ramp-up, maybe Philippe, you would like to answer the question. Philippe Donche-Gay is with us.

He's in charge of the Marine & Offshore business. It might be the best solution for him to answer your question.

Philippe?

Yes. The question about the mix of the new orders.

It's relatively good. Seems we had contributing to our growth in H1 new orders for LNG fuel, the container ships for CMA CGM and several cruise ships as well as a strong demand for LNG carriers.

So these are rather high-value vessels, which in turn should lead to relatively good margin when we deliver the construction of those vessels.

Okay, Philippe, thank you very much. Francois, good question on your priorities.

Yes, thank you. Thanks, Edward, for the question.

I'll make a statement that I did with a lot of you guys I have met over the last few weeks. My priorities are twofold, very easy.

It's about making sure that the company shows operational leverage in terms of margin. As you know, we have a guidance that -- which is, into our plan 2020, which is to show at that stage the margin of 17% at 2015 exchange rates, which in a nutshell stays at 16.5%] to date.

So we have some actions here to be taken, and I will make sure that they are taken. And the second one is to improve the cash generation of the group and bring it back to where it was, perhaps, a couple of years ago.

Thank you, Francois. Another question?

If you please, could you maybe just make some comments on your French businesses overall? And particularly, B&I in France?

And whether the rate of growth there can continue where it is? Could you maybe just, say, at the group level, do you expect your Q4 organic growth to be same, above or higher -- or lower than where you were in Q3?

And just clarifying some of the comments you had on consumer, because you're saying for the full year that you expect mid-single-digit organic growth. So just to clarify, you were at 4.4% for the 9 months, so are you expecting that to improve a little bit despite the trade drag?

I was just not quite clear what you're saying there, please?

Yes. So there is no -- as I said, for the moment there is no impact due to the tariff.

Clearly, we confirm our mid-single organic growth for consumer products, okay. So this is confirmed for the year.

The second question was about the French operations. Two months ago, François you were still in charge and the CFO for Europe, so you know trends there.

Well, maybe you would like to comment on this and answer this question to Tom.

Sure, Didier. Tom, when it comes to B&I France, as you know, it's made of 2 components.

The CapEx part, as mentioned earlier on is a bit disappointing on those sides with a moderate growth. However, as mentioned by Didier, it's more than compensated by OpEx activities, on which we have posted for the first 9 months a very strong growth on the back of several large contracts.

Obviously, what we have ahead of us is a bit tougher in terms of last quarter. We have a very high comparable on the OpEx side as this growth has actually started mid end of last year.

So to be within the level of comfort, I can give to you, would be more mid -- low mid-single overall for the last quarter.

Thank you, François. So your first question about -- was about Q4?

Yes, just the group level organic growth, yes.

Yes. So in light of our first 9 months performance of course we confirm over 2018 outlook of duration of the organic growth versus last year.

We achieved 3.9% organic growth in the first 9 months. We cannot expect it to be so high in Q4.

Last Q4, 2017 was particularly strong and second, of course, as you know there will be 2 main moving parts. The first one, 1 positive coming from Marine & Offshore, but which could probably not compensate the negative on Certifications.

So we can expect the Q4 probably, a little bit down to Q3, but overall, we confirm our organic growth performance for the year means acceleration against last year.

Okay. Sorry to be a bit persistent about this but you mentioned 3.9% at the 9 months, and then you said you would be slower.

I'm sorry, are you saying you expect to be below 3.9% in the Q4? Or you just expect to be below the Q3 level, which could be above 3.9%?

We give detail of information I have today, but it needs to be confirmed because, of course, we are still -- after one month, we think we could be probably a little bit less than 3.9%.

Three questions, please. Just on certification.

First off, I wonder if you can give us some thoughts about the outlook for 2019 whether its realistic to expect positive organic growth? Then secondly, on Marine & Offshore, it's great to see it moving into positive territory in organic growth.

I wonder what your visibility is for the ongoing recovery over the next few quarters? And finally, if you could just remind me what proportion of your Chinese business is focused on the domestic market rather than the export market, please?

Okay. I'm going to start with your first question.

For a moment, again it's too early, and we will discuss in February, but we anticipate certification, probably, to be negative next year. But as you may know, we launched a lot of new certification schemes, which could compensate a part of the fact that this year, we had to -- our clients had to update their certification against the new standards at the end of September.

So, too early to talk about it. We will discuss in February.

But again, when you look at the fantastic performance we had this year, you could anticipate probably something which can be negative, but too early to talk about it in certification. Okay.

The second point is Marine & Offshore, maybe Philippe, you would like to answer?

Sure, Didier. We expect the market to, at least, from a new orders perspective to remain at the same level, which is about -- between 50 million to 60 million gross tons new orders in the market.

And still some uncertainty about the impact of the new regulations, notably, the sulfur regulations for 2020. It is currently being debated at the IMO whether they will enforce it as of January 1 or have a transition period.

So that can impact the pattern of new orders and for the time being, it is creating some uncertainty among people.

Okay. Philippe, thank you.

Now I come on the questions about China. So I would say, it's 50-50, 50% domestic, 50% exports.

As you know, we have several businesses in China. I count in export the job we do for the built on order program out towards China like we do with some Chinese clients.

And of course, the Marine business because the new building is mostly in the shipyards in China. But when you look at it, it's 50-50 today domestic and export.

Regarding B&I, it's 100% oriented to China today.

Just two for me, please. Firstly, on the Industry ongoing recovery.

Can you talk about the trends you're seeing into Q4 on both Oil & Gas CapEx and OpEx side? In particular, what types of projects are you seeing in CapEx?

And what discussions might be coming through there? And then, the other area I want to ask about was actually in Agri-Food and commodities.

Again, sorry to mention Oil & Gas again, but can you talk about the price pressure you're still seeing in Oil and Petrochem and whether there's any signs of that easing?

Okay. Regarding your question about Industry, we can clearly see a recovery and you can see it on the presentation made today.

There are 2 main points I would like to make. The first one is our strategy to turn to more OpEx in Oil and Gas and power, and it is paying off.

We are now winning some nice contracts in OpEx. Qatar Gas is a good example, and we are still winning some very nice contracts in Power and Utilities OpEx.

Good news for the resilience of the company, and you know that it is a clear organic growth initiative that we took in 2015 to increase the resilience of the company. Regarding now the CapEx in Oil & Gas, clearly, it's accelerating with more tenders compared to what it was at the beginning of the year.

So these are not the same type of contracts that we enjoyed in the past, which is probably good news in terms of value. I mean, lower value, more oriented to onshore or offshore in shallow waters, more oriented to Middle East and the U.S.

We are working on these tenders. We will give you more color, of course, in February.

But clearly, the Industry businesses is growing again and is recovering. Q4 will be, of course, okay, but we anticipate, of course, Industry to continue to perform in the future, knowing that we bottomed out in Oil and Gas and now we have new projects.

So next year, and we should start to have -- to enjoy better organic growth. On the Agri-Food and Commodities business.

So it depends. You're talking about mostly Oil and Petrochemicals business?

Yes. And in South America.

That's what you asked, I think. So we have the same price pressure there's nothing more, nothing less.

I would say, that's stabilized at a certain level now. I cannot say more, I cannot say it's more, I cannot say it's less today.

As you know, we have enjoyed the 2.4% organic growth in Oil and Petrochemicals. It has stabilized a little bit compared to what it was when the oil price was extremely low, for obvious reasons.

But now it seems that it has stabilized at the level, which should stabilize the margin for the year. But I'm not going to talk margin now.

I'm talking about the one for Oil and Petrochemicals.

Yes. Okay, sure.

And maybe one more on the Agri-Food division, if I may. The weakness in Agri in Europe, do you think that's just a temporary issue, given some of the season patterns?

Or do you think you'll see a bounce back into Q4 into next year, for the Agri in Europe?

It depends on the weather. As you know and I think you know it very well, it's totally linked to the weather.

Less water in the years that we have very warm weather. And of course, less crops due to the fact that there was less rain this year in particular, in Germany and the Ukraine.

So it is purely the impact of the weather.

Okay. So there is no impact of contract losses in there or anything like that?

No. Absolutely not.

I'll go with the traditional 3, I think. Firstly, just on consumer.

I -- perhaps, I didn't fully follow this, but should we expect Q4 growth to be slightly higher? I'm not clear on how the comps are in the subcomponents in the fourth quarter so the Q4 growth last year was a little stronger overall.

But I think there were some working day fluctuations there. Secondly, on M&O, Philippe, you gave us some useful color there in terms of the sulfur regulations and the potential transition period.

I just wondered if you could maybe elaborate on that? Is that impacting current orders?

And have you seen a more recent slowdown in IMO-lead orders, which had already picked up? Maybe just a bit more color around that discussion would be helpful.

And finally, François, on the currency impact. So I think your prior guidance for the year was -- maybe your predecessor's guidance was down 4% revenue and a bit more on margin.

I just wondered, if you could update us on your full year expectation for both revenue and profit, please?

George, we like the traditional three questions, now it's becoming like this. Okay, maybe François, you'd like to answer first on the currency impact and after, Philippe, and I'll finish with the consumer.

Thank you. Well, to make it simple, we maintain our guidance on the impact.

As you know, so the -- approximately 4% and 6%, as you mentioned. You know as good as me that we are very exposed to USD and emerging markets.

The trend has kind of reversed in the third quarter compared to H1. But by and large, it remains within our guidance.

So at that stage, we really confirmed the guidance that was given by my predecessor as you kindly mentioned.

Thank you, François. Philippe on M&O.

Yes. The question today that you have in the market, as everybody knows, is about these new regulations for the 0.5% sulfur content and the decision to install scrubbers or not.

And some ship owners already have decided, some very big ones to put scrubbers on the new constructions and to retrofit the other ones. I would say that some, perhaps midsize notably, but carrier owners are perhaps waiting to see whether there will be a transition period or whether they have to rush now.

It has not vastly affected the market because big players already made their choice to go either to low sulfur fuel or to install scrubbers, and has not slowed down this year.

Okay, very clear. Thank you, Philippe.

On the consumer products side, clearly, I'm not going to give a quarterly guidance, but I confirm the mid-single-digit for the full year 2018. So I know you would be very good to do your math for Q4.

Three for me as well, please. Just on the government services, which picked up very nicely in -- during the quarter.

Given that was driven by some new contract wins, is that now pretty settered at the high single-digit, low double-digit growth rates through the next 6, 9 months, would be first. Secondly, just going back to tariffs and you mentioned that only 5% of that business was in the scope of the tariffs.

When you talked about some clients postponing decisions through Q3, were those clients that have products are in scope? Or is it kind of a more general caution that maybe that the scope will increase?

Or other kind of realities of trade between those two regions will come into play? And then thirdly, just in terms of Oil and Gas, the CapEx is back to growth, which is excellent.

What's the pricing environment like? As there is a bit more activity, are you getting some pricing tension back in the market?

Or is it just too early for that to be a reality?

Thank you for your questions. Of course, I'm going to start by your last question.

It's -- you're right, it's a little bit too early. But of course, as long as there is more volume, the prices will be better, because you know the story of the market and supply and demand.

So the volume is coming back. We could expect, of course, the price to be better.

The good news, as you know, is that CapEx has always been with a better margin than OpEx. On the tariffs, it's a very good question.

I met, in fact, a lot of our clients when I was in the U.S. 3 weeks ago, and I had the opportunity because we decided to have like a function with a lot of retailers.

So I had really a lot of discussions about the tariffs. It was interesting, by the way, to see that one client, I cannot mention of course, said to me "but Didier it's fantastic for growth that there are tariffs, because 10% more means that we could have an issue of quality.

There are jobs to be sure that the quality is going to be at the same level. Because we don't want the Chinese manufacturing to work on quality to find the 10%".

So I thought it was a very good point. And today, when you think about the actual market conditions, the scope is the one we gave to you, meaning 5% could be impacted, which has not been the case yet.

On the Government Services we did very well. In fact, we have some good contracts in VOC and single window, which are ramping up.

Expecting double-digit overall next year is probably not sustainable, but we should -- we are back on track with good contracts, and we are quite happy with what is happening now with Government Services business.

Okay. Just going back to the tariffs.

I know it's a very broad question, but just when you talked about some clients postponing decisions, were they -- were those clients that were directly in scope? Or were they in other areas?

Yes. They are mostly to be extremely transparent with you, in electronics they are not in softlines for the moment, neither in hardline.

Mostly in electronics products. The good news is that we test all the soft in Taiwan.

So it has no impact. It's more on where -- or what do they do in terms of the manufacturing of the product in the future.

It's always for the moment it has no real impact on us, because the testing is done in Taiwan, not in China. But some of these clients are just already thinking about why not shifting their supply chain in some countries.

The good news is we are already in Cambodia, we are in Vietnam, we are in India, we are in a lot of countries where they could decide to shift, but it's too early to talk about it. It seems, again, and take it -- take my point with precaution.

When I discussed with them, they said that 10% at the end of the day, depending on the evolution of the R&B, is probably not such a big impact. Of course, I'm talking about the actual market conditions.

Okay. Thank you very much.

I wish you all good afternoon and good evening.