Koninklijke BAM Groep nv

Good morning and welcome to this analyst call for Royal BAM Group. Following the publication of our trading statement this morning, I am Ruud Joosten, the CEO.

With me are Frans den Houter, our CFO; and Michel Aupers, our Investor Relations Manager. For our opening slide, we show you the C-lock of Sassafras container.

On 11 October, the lock was officially opened by King Philippe of Belgium and King Willem-Alexander of the Netherlands. With a length of 427 meters, width of 55 meters, and depth of over 16 meters, this is one of the longest locks in the world, the largest locks in the world.

The lock will enable a smoother flow of marine traffic between Belgium, France and the Netherlands. We are proud of BAM’s contribution to the realization of this engineering achievement, which we completed in close cooperation with our joint venture partners.

But to be clear, this type of high-risk one-off project does not longer fit in our portfolio. Looking at our financial performance in the first nine months, revenue was slightly higher than compared to 2023.

This was mainly driven by the division Netherlands. Most of BAM’s activities performed well in the third quarter.

We reported an adjusted EBITDA of €203 million, somewhat above the level of last year. This amount translates to a margin of 4.4%.

In the third quarter, the result included a €9 million positive contribution for the revaluation of our earn-out in Invesis. Frans will come back to this in more detail.

Let me highlight the developments per division. In division Netherlands, the performance of the residential activities further improved.

The Dutch residential market is strong and we sold 1,233 homes, which is above the level of last year. This is the result of a high-quality portfolio and leading position in the market, supported by solid consumer confidence, due to a combination of increased salaries, continued low employment and stabilization of the interest rates.

We remain positive regarding the opportunities in the residential market. In September, we officially opened our factory for the industrial and circular production of our wooden floor homes and we have completed the first 13 homes of our Wickford project West of Amsterdam.

This innovative housing concept is well-received by the market. At this moment, we have already sold more than 300 floor homes.

Floor is not just a factory to produce homes. Our intellectual property is the digital model and the integral concept from design, planning, manufacturing and installation.

In the division Netherlands, in this quarter, the contribution of non-residential was impacted by cost overruns and the delayed completion of two schools in Denmark. Operational performance of the civil engineering remained solid, also supported by the robust demands related to the ongoing energy transition.

For instance, in the third quarter, BAM was awarded a multiyear contract with TenneT to upgrade the electricity grid. In the division United Kingdom and Ireland, Civil Engineering UK delivered strong results, supported by high activity levels.

Also, ventures in Ireland continued their solid performance. Last month, we met with the Irish Minister of Health.

During this meeting, we confirmed that it remains BAM’s priority to deliver the National Children’s Hospital for the benefit of the children of Ireland and their families as quickly as possible. Delivery is expected mid-next year, provided that the client is not requesting for additional variation orders.

The performance of Construct UK continued to be impacted by earlier reported project delays and supply chain issues. The UK construction market continues to be competitive.

On a positive note, there is an attractive pipeline of several education schemes. And last but not least, our activities in Belgium delivered satisfying performance.

Over to you, Frans, for some more background regarding the financials.

Yeah. Thank you, Ruud.

I’m also pleased that the majority of our portfolio performed well, resulting in a modest increase of our revenue and a stable adjusted EBITDA. Our strong backlog is a confirmation that we are well positioned for the future.

Our liquidity position remains solid at €0.5 billion and it’s good to see our trade working capital efficiency stabilized at minus 11.4% at the end of the third quarter. That is in line with our view that we expect trade working capital efficiency to stabilize during the second half of the year.

Our capital ratio improved to 25%. This is explained by the net results generated in the third quarter, which was partly offset by the effect of our share buyback program that is nearing completion.

As mentioned by Ruud, in the third quarter, our result was reported by €9 million due to the revaluation of the Invesis earn-out. Let me give you a bit more background.

At the end of 2020, we divested 50% of Invesis to PGGM. Part of the agreement was an earn-out scheme that rewards BAM for the success of Invesis to add new projects to the PPP portfolio.

The €9 million earn-out confirms that Invesis is on track to deliver on the business plan. Finally, I would like to mention that we extended our €330 million revolving credit facility by one year to 2028.

This is a clear sign of confidence from the financial markets and all banks decided to participate. Back to you, Ruud.

Frans mentioned already the positive development of our order book, which increased by almost 20% during the first nine months. We continue to focus on margin above volume and on projects with a strong sustainability aspect.

Also in the third quarter, our book-to-bill ratio was well above 100%. Most of our recent project wins are in line with our strategic objective to expand in sustainable solutions.

We are confident that our strategic roadmap will deliver value to our clients, create development opportunities for our employees, and generate attractive returns to our shareholders. Looking ahead for the full year 2024, we reiterate our outlook to deliver an adjusted EBITDA margin within the strategic range between 4% and 5%.

Now, let’s open the line for your questions.

Was there a material impact from the data?

Martijn? Martijn, sorry, Frans, we missed your opening, so we just picked up.

Good morning.

Good morning, gentlemen. I apologize.

Maybe a technical glitch on my end?

Okay.

Good morning, gentlemen.

Hi, there.

I have a few questions and I’ll take first two small ones to get to the more important one. With regards to the Danish schools, was there a material impact in Q3, and I would qualify material impact as between zero and €5 million?

Yeah. In that definition, you can call this material.

We mentioned already during the half-year numbers the material impact of our results of the Dutch biotechnique part of the business by the Danish schools. We are in full operation to finalize the four schools and we finalized two.

We are now at the end of, let’s say, the last two schools, and there are, of course, at the end of these projects, always pluses and minuses, and so also in Q3, there was that impact.

Okay. Moving on to the same type of subject, the delays and supply chain issues in BAM Construct UK.

Same question. Material, so zero to €5 million, yes or no?

Yes.

Okay. Now, let’s say that I take your -- now that the real question comes, I’m a little bit puzzled by the remarks about the positive trends in the Netherlands’ performance and the strong performance of the UK and Ireland, because if you take the €4.6 million, which is your reported EBITDA minus the Invesis revaluation, and you add back €10 million, it’s still below the EBITDA margin of Q2, and it’s below the EBITDA margin of Q3 of last year.

So I’m puzzled as to how you can call this positive trend and strong performance, while on a sequential and year-on-year basis, you’re reporting a declining EBITDA margins?

Yeah. Of course, it has to do with the definition of EBITDA.

We consider the EBITDA coming from the revaluation of Invesis as an operational result, because it’s based on the performance-based revaluation. So in that sense, probably to a degree on the definition of adjusted EBITDA.

And yeah, let’s say when I look at the total business, I’m really happy with the progress in by far the biggest part of our portfolio. If you look at the Dutch division, in all Dutch activities, we see very good progress.

This time mentioned the increase of the sales of the homes in the Netherlands, a big percentage. Organic growth, which is really nice, but also civil doing really strong.

Also looking at the order book for the Dutch division, very positive. Outlook for residential, also positive, going into 2025, 2026.

But also specials doing a really good job. So the Dutch, let’s say, region is doing really good.

Of course, there is this impact of the Danish schools that we are now at the end table. So I have to be positive looking at the results of all the real Dutch activities.

In the UK, a bit of the same story with the exception of the mentioned earlier UK Construct developments, where we see, yeah, the mentioned projects in the end phase. And yeah, how that goes.

We need to come to some resolutions with customers at the end. What I do see on a positive note is that, let’s say, after this project or a few projects in Construct, I see a positive trend coming up.

Also reiterated by the government last week in the budget meeting in the UK on investment in educational schemes. There we, in the UK, we have a solid position.

So looking forward, I’m also, I’m not too negative about UK Construct for BAM. But it’s also clear that at this moment in time, the commercial construction business in the UK is still extremely competitive and you see a lot of companies going broke and bankrupt within the supply chain, and clearly, we are also hit by that.

That is also fair to say, I think, at this moment in time.

Okay. Clear.

Just one follow up on the delays in supply chain issues in the comments you just made. Would it be fair to assume that this could also still impact Q4, Q1 or is it really fading off, fading away?

Yeah. I’m looking at Frans as well.

We are at the end of these, let’s say, risky projects that we mentioned already in Q2, where some of these aspects are more focused on, I think. But maybe Frans is also pointing out that he would like to respond.

Yeah. I think you were referring to the bankruptcies, Martijn, in Q4.

You said Q1, but you meant Q4, I assume.

Yeah. I’m aware of the higher rate of bankruptcies in the UK, and some impact you, some don’t.

But I was just wondering whether the effects will fade away, let’s say, in the coming quarter or two quarters, or should we take this into account for a longer period? Just your thoughts on that statement.

No. We remain very focused on this.

It’s difficult to forecast, of course. And as Ruud just said, we experienced some bankruptcies in the supply chain that costed us money, also in Q3, specifically in Construct UK.

And I think it would be -- yeah, I think we have to see how that evolves in Q4, but that’s difficult to forecast, of course.

Yeah.

We remain very focused on managing our supply chain very carefully. So really making sure we allocate the risk in our procurement properly to preferably solid partners.

But then you see in Construct UK, two smaller suppliers tipping over. You have to go to the market again and there’s…

Yeah.

… some impact that we see in Q3. So we keep very close track on it and we will give you an update in Q4 on this one.

Okay. Two other questions on the trade working capital.

It actually improved in Q3, whereas I think, pretty sure actually, that you guided for trade working capital to move closer to the 11% instead of now actually improving. What should we expect for the year?

Is that deterioration still in the books or is this the level that we should take going forward?

I’m very happy with this question because we discussed a delta of 0.2% here, coming from minus 18% and having guided to say we will be around minus 11%. This is exactly the type of discussion I was hoping for.

So we’re in the minus 11% range. And yeah, if we look at how we see our portfolio and clients’ behavior, then we expect to stabilize going forward.

It is not possible to forecast that on 0.2%, but stabilization around this level.

Yeah.

So no cash out anymore on normalization of trade working capital that we have seen in past quarters or years maybe even, is a very important next step for us.

Okay. And then following up on that, if trade working capital remains at this level, and usually your Q4 is the best quarter, what are your thoughts on share buybacks and capital allocation beyond M&A?

Yeah. At this moment in time, we don’t make any remarks on that as usual.

So we’ll look at full year results and come up with our proposal. And then come back to you probably Feb, half of Feb, 2025.

All right. I have a few more questions, but I’ll move back into it.

Yeah. Let’s do other people on the line a round first.

Sure.

Thanks for your questions, Martijn.

Yeah. Thanks, Operator.

Good morning, gentlemen.

Hey.

Good morning. Yeah.

Sorry to also bother you on the UK Construction and Property business. I still find it, let’s say, difficult to understand, because if I look at the last 12 months operating losses, over €50 million, and then it’s on a €1 billion of revenue, so I guess that there are also projects which are profitable.

So the losses, let’s say, accumulated close to €80 million or €85 million. There is something else in it than, let’s say, a few bankrupt suppliers.

So what are the project losses? And like Martijn was asking, what can we expect for the second half?

And I understand that you also have, let’s say, limited visibility, but you do have a very good sight on the implied project risks. So is it, again, minus €20 million?

And is it, let’s say, compensated by very healthy infrastructure performance, because I do recognize that the overall performance of BAM improved massively. So you can now, let’s say, back up these kind of losses by, yeah, let’s say, better performance in some other areas.

But the unpredictability of this makes me feel like the old BAM and it doesn’t give me a lot of comfort, the answers you so far gave. So guidance on this would be really helpful.

Yeah. Thanks.

Good morning. Frans.

Let me maybe start with reiterating the numbers we shared on this, give a bit more context. So indeed, we struggle with this segment and we’ve discussed that in the past four quarters and recognize the numbers you mentioned.

Yeah, Ruud already commented on the market as such. That is challenging.

But in terms of numbers, we have disclosed the results on Co-op, the Manchester arena in the first half being a loss of €30 million. So, yeah, if you’re saying, okay, here’s supply chain bankruptcies, that doesn’t reconcile it for me.

Let’s also make sure that that €30 million reported in H1 is still on your radar and then supplemented in Q3 by the items we just discussed. Maybe for going forward, you want to add something on Q4, Ruud or?

Well, I fully agree that this year is a difficult year for UK Constructs, because they’re extremely competitive market circumstances with these bankruptcies in the supply chain, but also the planning and the delays we had on Co-op arena, which is by far the biggest impact on our results. Till now, we are now finalizing that project.

The last details are being implemented now. And of course, clearly, these kind of projects will not do in the future anymore.

That’s also very clear. We’re much more focusing on already mentioned educational schemes where we build series of schools, let’s say, in the same kind of concept, much more aligned with our industrial way of thinking.

And happy to say that also the UK Government is going in this direction, and of course, the focus will not be any more on these high-risk one-off arenas like we built in Manchester. So strategically, that doesn’t fit our portfolio and we’ll go further with these kind of projects.

And this can also lead to a further restructuring of UK Constructs and re-engineering it to the size we expect it to be and necessary for 2025. So that’s in progress.

And indeed, it’s also very clear that there is a very good tailwind in civil engineering activities also in the UK, like in the Netherlands, with a big stream of tenders coming through in the energy transition area. It really fits our way of working with contracts that fit our way of working with a customer that can pay the bills, which is really important as well.

So that’s clearly fair to say, I think, where we are today. Still, UK Construct long-term is in a good position to take advantage of the investment, especially by government, in healthcare and education and very picky on projects in the commercial arena.

Yeah. That’s quite helpful.

Because indeed, if you then subtract the €30 million from the first half, then it would have been a low but positive result, which is reflecting market -- difficult market conditions. And in the current portfolio, because the Co-op arena was a bit of a surprise for me, it was not on my radar screen in terms of risky projects, but are there any other of these kind of significant projects in execution running into the second half, especially also next year, that could give this kind of trouble?

Well, we tried to give an overview in Q2 or half a year of the remaining big projects as we see them going forward to report to you guys. We mentioned them when we started this strategy, something like 23, 25 of these huge risky projects.

Yeah.

We see going forward, well, we mentioned the list, New Children’s Hospital, Crossrail, National Children’s Hospital, and the Fehmarnbelt as the key ones to discuss with you guys, if possible and that’s where we are. So you don’t see other of these kind of commercial construct projects in that list as we speak.

Happy to say that, yeah, well, happy to say, we mentioned that we talked to the Minister in Ireland on the New Children’s Hospital. We are expecting to finalize that project half of 2025 with the, let’s say, remark that we don’t need any more changes by the customer in that respect, but that’s where we are.

So Fehmarnbelt will be on that list for, let’s say, the next six years or seven years, but luckily there we are only 12.5% of that list. So long answer to your question.

So you’re correct. The answer is no, but we are also very transparent on the remaining projects that are still in this portfolio where we have question marks.

Yeah. All right.

Yeah. That’s clear.

Thank you.

Yes. Thank you very much.

Simon van Oppen from Kepler Cheuvreux. I’m filling in for Tim Ehlers this morning.

I have one question about the margin improvements in Q3. Where are the margin improvements across the two divisions?

Can you please give a little bit of flavor on that?

Yeah. So normally we don’t give margin details per division in Q3, Simon.

I think what is important is the overall message that we give and the coloring that we did in the introduction on the segments. So we see improvement in residential.

We see non-residential in the Netherlands impacted by the schools in Denmark. And we see continued solid performance in civil in the Netherlands.

So those are the three segments comments in NL. In the UK, and I’m just repeating it, we are very happy with the results in civil.

Very solid performance in ventures in Ireland. And then, yeah, we discussed extensively the headwinds we still have in Construction UK.

And as such, that taking on to the mix, we come to 4.4% year-to-date and a re-confirmation of the output.

Thank you.

Good morning. It’s Maarten Verbeek from The Idea.

A couple of questions from my side, please. Firstly, you obtained the earn-out fee of €9 million from Invesis.

That has now been completed. So there’s not an additional earn-out fee to be expected in this respect?

Good question and good morning, Maarten. Yeah.

Well, no is the answer because that mechanism is in place till the end of next year. We agreed a business plan at the time and we now see that we’re on track in delivering on it.

That’s why we’re able to take the €9 million in Q3. Yeah, and then up to see how the portfolio will further evolve in the coming five quarters till the end of 2025 can result in an additional amount on earn-out that we can recognize.

The cash on this will then only be received in 2026. So that’s a year later.

So the mechanism is still out there for five quarters to come.

Okay. Thanks.

You sold a nice number of houses in the Netherlands in Q3, which gives you also more confidence about what you have stated earlier. What you’ve stated earlier still lives up to what you stated today.

You stated approximately 1,700 and that is more than the 1,670. But still underlying, it feels that you are even a bit more optimistic about this 1,700 number.

Is that correct?

Underlying, the answer is yes. But on the other hand, you always have to realize as well that in the last quarter, there can be big transactions coming through with Invesis, for example, with big numbers of homes integrated in these deals.

So in that sense, we are a bit, well, not a bit, we are conservative. Of course, I’m really happy with the increase we show organically over the first nine months.

That’s also true.

But I also hear that it’s more timing than something else. That underlying, it’s performing pretty well.

Well, I think more importantly, the underlying market is really strong and with the positions we have and the investment we did in the flower factory, for example, there’s a lot of opportunity going forward. So it’s not like that the market is not there or that’s restricting our sales.

I think we all know that this is much more linked to permitting in the Netherlands and having all kinds of objective -- objection possibilities by everybody in the Netherlands to stop projects and that’s much more, I think, having impact on the number of homes we can sell in the future. So I think stabilizing interest rates, increasing salaries and a very big demand for homes will be there for a very long period in the Netherlands, which is very attractive for BAM.

And then with the industrialized way of producing these homes with our flower factory, we are in a very strong position. So that number is not restricted by us in that sense.

It’s restricted, and also not by the market. It’s restricted by the opportunity we get to build these homes and to develop them within the total area of the Netherlands.

And I think that’s not only our problem, that we see, I think our colleagues are having exactly the same statement on this. It’s a very attractive and positive market going forward.

And luckily in the first nine months you see our increase in the number of homes being sold and that can continue, but it would not be realistic to come with very exact numbers on that based on the permitting situation and the availability of land to build these homes. So that’s why we stay realistic on the short-term and try to deliver what we promise to the market, but with a very positive view on the future.

Okay. Thanks.

And lastly, we discussed the working capital and even if it improved in this quarter. Well, initially you stated it would arrive towards minus 11% at the year end.

Now you say more or less we expect it to stabilize at the current level. Do you also dare to more or less change your target of better than minus 10% to better than minus 11%, but you -- because earlier you stated better than minus 10%, but what you stated now, you also dare to improve that statement to better than minus 11% going forward?

No. So, yeah, so maybe as I said, I like the discussion, but forecasting trade working capital up to decimals of percentages in a construction company is difficult.

I see it as additional guidance, better than minus 10% and now managing the market stabilization around minus 11%, because it’s very depending on also behavior of clients and supply chains, specifically at year end. We’re also open to external influences.

What do interest rates do? It all has an effect.

So better than minus 10%, expect it to be around minus 11%. And with that, what is more important, we don’t have these significant cash outs on the normalization of the trade working capital anymore.

That’s not what we expect. And I hope that that helps you.

Thanks so much.

Yeah. Thank you, Operator.

I just wanted to come back to some incidents. We’ve had the bridge incident in what was it, Holter Haaksbergen [ph].

We had the train incident. Did that have any impact in the first nine months at all?

And now that certain investigations have been concluded, is that something we should continue to follow in terms of a possible impact or can we move on from that?

Well, the impact is huge on the company. Absolutely clear on that one.

Of course, it reinforces the idea that safety is first priority. But also the dangers within a construction company like this are substantial.

And as management here, we spent a lot of time over the last nine months thinking about this and we started an internal project to come up with more strict safety rules for BAM. We’re in the end phase of delivering that and that will be implemented during 2025 because it’s unacceptable for us to take the responsibility for a business that is so dangerous and we have to do our utmost to improve that safety culture within our company, but within the whole market because we’re also dependent there on subcontractors and customers.

It’s a big, big issue. And I can assure you that it’s more important than anything else in the company at this moment in time because the shock this year was extreme when we had the Lochem incident, as you can imagine.

So from a financial point of view, that is not key, obviously, but from a financial point of view, has there been any impact that we should take into account or could still take into account, should still take into account?

Yeah. And it’s irrelevant because in the context that you just described, but just to reconfirm that financial impact is not deemed something to discuss.

It’s only impacting our insurance costs going forward, which is something you have to deal with.

Yeah. And then we haven’t heard a while from our friends at the Fiscal Investigation Services or whatever you want to call it in English, the FBIS.

Have there been any new inquiries? Has there been radio silence?

What can you tell us? Are you just in the blind as to what’s happening there?

Well, blind is maybe a big word, Martijn, but…

Yeah.

… indeed this is fully in the hands of the Dutch Government, the Dutch Justice Department and we are indeed listening to a radio silence there as well, just like you. So, yeah, of course, we hope to, just like you and everybody else, I guess, to finalize this as soon as possible, but completely out of our hands.

No. I appreciate that.

Still dealing with it. That’s from 2019.

Moving on. Just coming back to the questions of Maarten with regards to the Dutch resi.

I understand your cautiousness, but maybe can you talk a little bit about waiting lists? Waiting lists are a key indicator of consumer interest.

Are those still lengthening? Do you see the return of investors?

What are the housing corporations telling you? Are they doing business with you?

Can you elaborate a little bit more on granular points that you can actually witness, apart from expectations?

Well, the first regular point, of course, and by far the most important probably, is the increase in the numbers. So you see this increase in the number sold.

That’s a very important point. Secondly, again, indeed, what you see is that there is a waiting list or a big number of people to buy our homes.

So that’s back to that kind of situation a couple of years ago, that it’s not a problem at all to sell homes. So that situation is back on the market, which is a clear signal that you can sell your homes if you can produce them going forward.

For the rest, I think, yeah, I think everybody can read the newspapers that there’s a lot of political pressure as well to increase, let’s say, flexibility and increase opportunity to build homes in the Netherlands. What I’m a bit more reluctant on or more pessimistic on is these investors.

I think if you push them away, like we did in the Netherlands to a certain extent, by new legislation and tax legislation, you cannot expect them to come back within three months. I think they also have their strategic planning and their capital allocation planning.

And yeah, I think that will take more time to have them back in the Netherlands. So I think that’s a big problem.

For one part of the market, in the consumer market, of course, there’s a difference. So in the consumer market, that looks much more positive and that demand is extremely strong at this moment in time and it will continue to be extremely strong going forward.

Clear. Clear.

Now, you briefly touched upon the outlook for 2025 and mainly in resi NL and also in civil engineering, but more generally speaking, where we stand today, what should we think about building materials and wages still in an upward trajectory, but less so than in 2024? How should we think about that?

Is that tailwind or headwinds?

Yeah. You see globally, of course, and also in the Netherlands, a flattening of inflation, but you also see there are quarterly surprises in that respect.

Let’s say the very high double digit kind of increases are off the table, I think, but we still expect some increase in wages…

Yeah.

… and in building materials, but much more plannable, I would say, fitting into, let’s say, normal course of business. It’s also more complex, of course, because on one hand, increase of salaries is a cost in our payroll, but on the other hand, it’s also positive for people, for consumers to be able to buy a home.

So these are more complex aspects, as you can imagine.

Got it. And then my final question, just to follow up on the Danish schools, will they be completed before year-end 2024?

No. They will not be completed this year.

There are two schools left. One school is at the very last part of completion, so that will be somewhere around that date to be finalized and the other one a little bit later.

Got it. Thank you very much, gentlemen.

Thank you.

Thank you.

Yeah. That brings the call to an end, ladies and gentlemen.

We hope to welcome you in our analyst meeting for the full year results February 13th. [Abruptly Ended]