Bureau Veritas SA

PAR:BVI

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Bureau Veritas Q3 2019 Revenue Call. My name is Charlotte, and I will be your coordinator for today's event. [Operator Instructions] I am now handing you over to your host, Didier Michaud-Daniel, Chief Executive Officer, to begin today's conference.

[Didier Michaud-Daniel]

Thank you. Good morning, good afternoon and good evening to everyone. Thank you for joining Bureau Veritas' Q3 2019 Revenue Call. I'm joined by François Chabas, the Group's CFO. In the third quarter of the year, we have continued with our solid momentum growth following on from the first half. Everything is on track, and we confirm our objectives for the full year. I would like to spend some time on the quality of the Group's portfolio. The diversification and reorganization we set out to achieve in our 2020 strategic plan is largely in place. It makes Bureau Veritas much more resilient. We are a much stronger group, far less exposed to the ups and downs of different business sectors and various economies, both globally and regionally. Our performance over the past year has illustrated this resilience more than ever. This resilience sits on 3 strategic cornerstones. The first one is strong franchise. We are recognized as a Tier 1 player in the TIC sector. We've known for our high level of expertise, our global reach and the quality of our brand. Second, the balanced geographic footprint across Asia, the Americas and Europe. Third, a very well-balanced portfolio from a cyclical perspective, with nearly 80% of revenue not exposed to Capex projects. Resilience is at the core of Bureau Veritas operations. Within our largest activities, we have now a very balanced mix between OpEx and CapEx-related work. In buildings and infrastructure, 27% of Group revenue, 55% of our business is generated by Opex-related activities and tightening regulations across various geographies. The Capex activities are supported by positive long-term drivers, aging assets in Europe and the U.S. and increased urbanization in China. I would like to remind you that 100% of the B&I business is based in local operations. In industry. 22% of Group revenue. 59% of our revenue is Opex-driven across many end markets, with 5-year contracts on average. The Capex side today provides additional growth. In Marine & Offshore, 7% of Group revenue. 60% of our revenue is in-service inspection of existing vessels, a recurring business with high retention rates. On the Capex side, our healthy backlog of orders ensures 2 years of visibility. The full benefit of the diversified and resilient portfolio play a key role in ensuring the growth we have delivered in Q3. Let's talk about Q3 now. Revenue for the quarter was EUR 1.27 billion, up 6.2%. 5 out of 6 businesses generated average organic growth of 4.6%, bringing our overall organic revenue growth to 3.9%. Among our best performers were Industry at 6.8%; Marine & Offshore, 6.5%; and Agri-Food & Commodities, 4.4%. In Q3, the external growth net of disposals was 0.8%. Concerning currency, the impact is positive at 1.5%. With this solid performance, our full year 2019 outlook is confirmed. François will now take you through some of the detailed numbers. François, please?

[François Chabas, Executive VP & Group CFO]

Thank you, Didier. Good morning, good afternoon, good evening to all. Starting with the revenue bridge for the year-to-date. We have delivered EUR 3.7 billion for the 9 months, with an overall growth of 6.2%. Organic growth reached 4%, with broadly similar growth in Q3 as we saw in the first half of the year. We have now seen a steady 4% organic growth over the past 5 quarters in a row. External growth delivered 1.1% on the net scope basis. As far as ForEx is concerned, we had a slightly positive impact of plus 0.9%, which is mainly attributed to the appreciation of the U.S. dollar against the Euro, while mitigated somehow by the weaknesses of some emerging countries' currencies. Turning to the revenue growth specific for Q3. We delivered 3.9% organic growth, as mentioned by Didier, and 4.7% at constant currency. External growth contributed 0.8% on the net scope basis. This reflects, in particular, the disposal of our nonstrategic consulting business in North America, which has been deconsolidated from Q3 onwards. ForEx had a slightly stronger 1.5% positive impact, mainly benefiting from the appreciation of the U.S. dollar and pegged currencies against the Euro. Turning to the organic growth by business. In the third quarter, 5 out of our 6 businesses reached a steady pace of organic growth of 4.6% on average. Those 5 businesses represent 93% of the Group revenue. Industry outperformed the average at 6.8%, with good growth across the board following an already solid first semester at 4.8%. Marine & Offshore continued to recover, up 6.5%, benefiting from the recovery in new orders that we saw since the beginning of the year. Consumer Products grew 2%, in line with the first half. And as expected and mentioned already, Certification declined 4.8%, which is a reflection of a transitional year post revision of standards. Taking a brief look at M&A now. We continue active portfolio management with objective of seizing attractive acquisition opportunities and divesting nonstrategic businesses with below-par margins. In the first 9 months of 2019, we closed 5 transactions, supporting growth initiatives mainly in Agri-Food and Building & Infrastructure and adding EUR 46 million of annualized revenue. In the third quarter, we concluded the acquisition in August of Q Certificazioni, an independent certification body, specializing in organic food certification in Italy. It positioned Bureau Veritas in one of the largest organic food market in Europe. I now hand it back to Didier for the business review.

[Didier Michaud-Daniel]

Thank you, François. Thank you. Starting with Marine & Offshore. Organic revenue growth totaled 6.5% in the third quarter, continuing to benefit from the growth in new orders. Double-digit growth in new construction, led by the equipment certification business in Northeast Asia. Mid-single-digit growth for core in-service benefited from favorable timings in the scheduling of inspections. Offshore was penalized by a challenging comparable despite the extension of services. New orders totaled 4.9 million gross tons at the end of September 2019, up 2.7% year-on-year, reflecting the Group's ability to gain market share in a market that remains down year-to-date. Bureau Veritas benefits from its strong positioning in the most dynamic market segments, namely LNG, LPG and passenger cruise ships. Our order book stood at 14 million gross tons, stable compared to December 2018. The outlook for 2019. We continue to expect Marine & Offshore full year organic growth to be positive. For Agri-Food & Commodities now, revenue increased by a solid 4.4% organically in Q3. By subsegment, Metals & Minerals confirmed its recovery, with organic growth up 6.4%. Both upstream and trade activities performed steadily across more geographies against more challenging comparables. Gold and base metals continued to be strong performers. Agri-Food. Agri-Food recorded a strong 9.8% organic increase coming from both Agri and Food products. The Agri business grew double digit, thanks to new contract wins in Brazil, Africa and Asia. The food business maintained strong trends, primarily fueled by Asia and Australia. Oil & Petrochemicals was largely stable. Lastly, government services grew 6%, continuing to benefit from the ramp-up of VOC and single-window contracts. Outlook for 2019. We expect slightly higher organic revenue growth compared to 2018, with solid Metals & Minerals markets, robust Agri-Food businesses and improving government services. Turning to Industry. Organic growth accelerated to 6.8% in the third quarter, up from 4.8% in the first half. This has been driven by gradually improving market conditions in Oil & Gas and the benefits of our successful diversification towards Opex in non-Oil & Gas markets. Oil & Gas CapEx-related activities grew 6.9% in Q3. Growth was primarily led by the U.S. Oil & Gas CapEx, Opex was slightly up compared to last year when a number of large contracts were at their full run-rate. Growth was fueled by Latin America and South and West Europe. We delivered 10.8% organic growth in Power & Utilities Opex, with a ramp-up of several contracts in Latin America. The outlook for 2019. We now expect the business to achieve a higher organic revenue growth versus 2018. Our strategy of Opex Services diversification will continue to pay off. Oil & Gas Capex markets will continue to improve. In Building & Infrastructure. The business delivered a solid 4% organic revenue growth in Q3, up from 3.1% in the first half of 2019. We recorded high single-digit organic growth in Asia Pacific. It was essentially driven by China, up 8.5%, thanks to strong growth in Energy and Infrastructure project management assistance. Japan also delivered robust organic growth, led by Opex-related services. U.S. grew 7.3% organically, benefiting from strong dynamics in data center commissioning services. Growth in Europe was slightly up, with France showing some improvement. The country started to benefit from an accelerating trend in recruitment, enabling to ramp up delivery on its healthy order book of Opex-related works. For the full year 2019, we expect the business to achieve slightly lower rate of organic revenue growth compared to 2018, with an acceleration expected in H2. Turning to Certification. The business continues to record negative organic growth in 2019 as expected, minus 4.8% in Q3. You will remember, last year, we benefited from an exceptionally high level of activity due to the September compliance deadline for new QHSE and transportation standards. Elsewhere, growth was strong, driven by an overall rising customer demand for brand protection and trustability. In particular, we grew double-digit in social audits, sustainability and in the corporate risk management. New services launched to continue to be a key contributor to growth. At the end of Q2, we launched Circular+, a new service offering, built on a comprehensive suite of training, auditing and certification services to help companies transition to a circular business model. This offering is already gaining traction amongst the Group's customer base. The outlook for 2019. Certification is expected to record negative organic revenue growth, including positive organic revenue growth in the last quarter. For Consumer Products, the business delivered 2% organic growth in the third quarter, similar to the first half. The Electricals & Electronics segment grew low single digit. Here, growth came from mobile testing. The temporary slowdown already observed in Q2 2019 ahead of the 5G launch continued to weigh on the level of product launches. Softlines was nearly stable. It reflects strong momentum in India, Vietnam and Cambodia, still benefiting from the outsourcing -- from the sourcing shift out of China. It also reflects weak trading conditions in the U.S. Hardlines performed below the divisional average compared to the strong growth in the same period last year. As regard the tariff issues, we continue to see a prolonged wait-and-see attitude from some customers delaying new product launches. In 2019, we expect Consumer Products to deliver lower organic growth compared to 2018. Following the first 9 months, we confirm our full year 2019 guidance to deliver solid organic revenue growth, continued adjusted operating margin improvement at constant currency and sustained strong cash flow generation. With solid Q3 highlights, once again, the successful transformation undertaken over the past 4 years, we now have in place much of the growth profile and cyclical resilience we were looking for. Thank you for listening. François and I are now pleased to answer any questions you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Tom Sykes from Deutsche Bank.

[Thomas Richard Sykes]

Just on the look into Q4, so you're up against some tougher comparators. Do you think you can maintain the growth rate at the 4% level going into Q4? And has there been any working day effect in Q3? And would you pick one out in Q4, please? And then I just...

[Didier Michaud-Daniel]

Your answer, Tom. So we saw you can...

[Thomas Richard Sykes]

And I was just going to ask on B&I in France, what's the scale of the potential improvement? And in China, what's the scale of the degree of slowdown that you think you might see, please?

[Didier Michaud-Daniel]

So I'm going to start with the -- your last question. So I do not see any slowdown in China. As you know, we have decided to focus our Building & Infrastructure in China on energy and infrastructure, not on residential. And we know that China today, urbanization rate is still 57%. A lot of people are moving to the cities, and we are doing very well in China. This year, in fact, we delivered a growth, which is above the GDP growth of China. And in Building & Infrastructure, we are doing extremely well, and we continue to do well because these projects are long-term projects that are not going to stop tomorrow because there is a need for more airports, for more runways and for more energy and more highways. So...

[Thomas Richard Sykes]

So is that Q3 in China, this rate is about the rate you think you can sustain?

[Didier Michaud-Daniel]

We will. We will, yes. There is no slowdown, absolutely not. I mean, we are -- now you can see that our strategy is paying off. By being on this market and being, by the way, the leader of this market now, we knew that the projects are long-term, and we are winning good projects with some companies that we joint ventured with, SPM, for instance. So we know we have a good backlog, and it will be like this for, I think, quite a long time. On the Building & Infrastructure in France now, it's a good question. In fact, in Q3 -- first, we need to know that in France, we have a very, very healthy backlog. The point is to -- is about recruitment. France, as you know, now, 2/3 of the business is Opex-driven, meaning that we have a very resilient and steady business in France, which is growing at good pace. We have to restructure -- just for your information, we have to recruit 1,000 people in France to deliver the backlog, meaning that progressively, we will see -- I'm talking about the Opex backlog, by the way, we will see a progressive catch-up in terms of organic growth. We know the backlog. We know -- we are recruiting, you need to know, for instance, that in September, we recruited 200 people, so we are talking about big, big recruitment. Now your first question, there is no working day issue for Q4. And this is the same working -- same number of days. And regarding now your question about Q4, I confirm the solid organic growth for the year.

[Thomas Richard Sykes]

Okay. But obviously, in a small...

[Didier Michaud-Daniel]

I'm not going to give you -- I'm not going to say 3%, 4%. I just confirm my guidance for the year.

[Thomas Richard Sykes]

Okay. And sorry, just on the working days in Q3 and Q4. So you're saying there's no working day issue?

[Didier Michaud-Daniel]

I expect there is no more or not less working day in Q4.

[Thomas Richard Sykes]

Okay. And sorry, Q3, did that have any working day benefit versus last year?

[Didier Michaud-Daniel]

Q3 was one, if I remember well, one day more than last year. But I mean, I think it was even -- we need to check that if that was in August, or -- Laurent?

[Laurent Brunelle, Head of Investor Relations]

September.

[Didier Michaud-Daniel]

September. September. A day more than last year.

[Operator]

The next question comes from the line of Rajesh Kumar from HSBC.

[Rajesh Kumar, Analyst]

Just on the consumer business, can you give us a bit more color on what sort of hiatus you're talking about in new product development? Are customers trying to figure out where to put in new CapEx for new products geography-wise? Or are they just not developing products because they are unsure about what pricing and demand levels they might see? And the second one, just on working capital targets for the year. How confident are you of improving working capital in the year, given the run-rate of growth you've seen in Q3?

[Didier Michaud-Daniel]

So this is a session on revenue. I'm not going to give you any answer on working capital, refer to the guidance. I'm coming now on your first question on the Consumer Products. So on the Consumer Products -- and you are right, by the way. In fact, what is happening today is, some of our clients are waiting for the output of this negotiation, commercial negotiation, between the U.S. and China, okay? In that, they are waiting regarding their supply chain, not to launch product but to be innovative on product. As you know, we helped them a lot. We knew the international standards, we knew their own [indiscernible]. And they are just waiting a little -- waiting for the output, which is understandable. Before, let's say, they were asking us to work on their innovation program.

[Operator]

The next question comes from the line of Rory McKenzie from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

My first questions are on Industry where these -- those new contracts continue to drive good growth. But I think you've slightly lowered margin expectations for this year. So can you just talk about how those new contracts will ramp up in margin terms and if they'll mature to be in line with the division average next year? And then secondly, in Certification, I think your organic decline was probably a bit less bad than feared. Can you talk about the areas that drove the new growth? And in particular, anything you can say about the new Circular+ service and how material those new services could be?

[Didier Michaud-Daniel]

So your second point is very pertinent one. And clearly, you could see it on Certification, as you say, is better than expected. In fact, we know what happened with the standard. What is important for you to understand is the fact that now Certification is moving more and more toward what I would call second [indiscernible]. And we launched some clear new certification and Circular+, for instance, but on sustainability, on social leads, on the food, on enterprise risk management, and clearly, these offerings are now responding to the need of the client. In fact, the obsession of our clients today is to protect their brand. And you have also the fact that the board of the various companies wants to be sure that what their management announced in term of improvement in CSR, in sustainability, in trustability, it is going to be certified because, for markets, it's self declaration. So we have a huge demand, and we are working on it. And today, for instance, on social audits and sustainability, we grow double digit. And this trend will accelerate, meaning that the ISO traditional business will deliver more in Q4 compared to what happened, of course, at the beginning of the year because of those standards update in last year. But what is going to give us the growth in -- already today and in the future, and it's the reason why we are better than expected, is all what I call the second [indiscernible] which is, again, huge demand for our clients. So I'm not supposed to talk about margin, I'm coming on Industry now because it's a goal which is called for revenue. So I'm not going to say more, and you will get more information after the first -- after the end of the year.

[Rory Edward McKenzie, European Support Services Analyst]

I will just try again, though, because in your statement this time, you said that in Industry, you anticipate a stable margin for this year. And previously, you expected, I think, a small improvement in the industrial margin. So is it just the new contracts that's changed that?

[Didier Michaud-Daniel]

So what is interesting? So I am not going to give you a precise answer. But what's important for you to know is as we decided to move on Opex business, and I can say today that it's quite a success. You can see the organic growth at 6.8%, which is very good. As long as we move to this type of business, of course, there is a mobilization period. And the margin -- it takes some time before the margin improves. But the good news for us is we get more growth, and we get more contracts, okay? So each time the margin is improving and after it goes a little bit down and it's going to improve and it was because we are really growing on this market, okay? Our margin guidance is unchanged. [Foreign Language]

[Operator]

The next question comes from the line of Edward Stanley from Morgan Stanley.

[Edward Stanley, Equity Analyst]

I've got 3, please. On the product launch, just so I understand this, when you say that the 5G continued to weigh on Q3 like it did on Q2, I was understanding last quarter that, that was a Q2-specific issue. Is this part of the wait-and-see driven by tariffs and everything else? Or is this part of the 5G cycle just taking longer to come through than expected? The second question, can you give a bit more detail on your Chinese domestic growth versus your Chinese export growth? And third, on the growth initiatives, it looks like Opex was -- across your divisions was okay, but looking at the growth initiatives slide that you put near the back, it looks like Opex might have slowed down quite significantly in Q3, and I was wondering which division or part of the Group was behind that slowdown?

[Didier Michaud-Daniel]

In fact, I'm going to be very transparent with you. We are not going to talk about the growth initiatives anymore because it's now extremely difficult for us to understand what is coming from the growth initiative and what is coming from the business by itself. So your point about Opex, for instance, is a very good one. When you grow the Industry business by 6.8%, it means that all the boost we put in our operations to grow, again in Industry, is paying off. So you will see it. In the future, we will talk about our 6 activities and not about the initiative by themselves because they are embedded now in the activities. On the Chinese domestic growth, it's, of course, a very good question. Regarding CPS, because you are talking about export and for us, export means Consumer Products, the growth is stable. Now regarding the Chinese domestic, we grow above the GDP growth, which is, if I'm right, at 6% today. So we are still doing very well. We are doing well in Building & Infrastructure. We are doing very well in food. We are doing well in Commodities, and we are doing well in Certification for the domestic market in China. And we are, right now, more than 16,000 people in China. So we are growing in China, and we will continue to grow in China domestic. And more and more, strategically-wise, our team, my team, is working on the domestic market. On the product launch, it's exactly your point. You're 100% right. It's right -- right and wrong because it's no more wait and see, we need to be capable to deliver 5G connectivity testing. We are working on it. But of course, we need to build the capacities. We are working on it. We'll be ready at the end of the year to deliver this type of service. And at the same time, there is a little bit of wait-and-see, so it's a mix of both. It's a mix of both.

[Operator]

Your next question comes from the line of George Gregory from Exane.

[George Nicholas Gregory, Research Analyst]

Just following up on consumer. You mentioned, you partly answered the question there around the 5G delays. But maybe just in terms of the wait-and-see attitudes, maybe just for some context, how long can your clients defer the decisions before having to start testing? Are there specific timelines in mind in terms of upcoming selling seasons that we should have in mind? Or rather, can the product launches just keep being deferred indefinitely, please?

[Didier Michaud-Daniel]

Maybe you are going to -- my answer is to this one. Imagine that you are a board member of a company which wants to launch a new product or innovate on a new product in China. So if you are a board member, you say because of the supply chain, which is going to be behind. So when the -- I think when the commercial negotiation will be ended, whatever the output will be, decision will be made to test products while it could be in different countries. But China, and in this case, the growth will resume because, for instance, and we see clearly today with the Softlines. The Softlines are moving from China to Bangladesh to Vietnam to Cambodia, and we have a very good footprint in these countries. To give you just a flavor, Vietnam grew by 16% with CPS, with Consumer Products division. So I think that it is clear, but it cannot be for such a long time. We are approaching Christmas, for instance, we will have to make some decision on products that we'll be selling at Christmas time. And after, we have new collection and so on. So that could not be like this for a long time. And you could see it now. You can see that -- and again, I'm not going to tweet anything this night but they try to find a solution.

[George Nicholas Gregory, Research Analyst]

So you -- but you wouldn't argue that there is any sort of backlog of testing being built up as such?

[Didier Michaud-Daniel]

Probably yes, but because if you think that they probably hold on certain projects and certain product launch or innovation, yes, probably, yes. But after they need to -- some of our clients need to know what the supply chain is going to be for these products, so before asking us to test them in a country or another. But it cannot be for so long now. I mean, time is -- I think that some decision should be made before the end of the year, which would impact I hope, but we will discuss it after the end of the year.

[George Nicholas Gregory, Research Analyst]

Understood. And apologies, maybe just going back to the 5G points. You mentioned today that you're working towards building up your capabilities. It sounds like it's perhaps taken a bit longer than expected. Do you think that your competitors have seen similar issues? Or rather, do you think they're perhaps capturing some of that business currently?

[Didier Michaud-Daniel]

Let me be clear on that one. We are a leader in connectivity testing. So -- and when I say leader, it's really leader of the market. So we will be the first, clearly, on the 5G connectivity test. First impact will be in Q4 and accelerate in 2020. As expected, we are on our plan. Not behind, not before. We are just where we want to be. After, as you know, it's coming mostly from clients in China so we will start with these clients. But I couldn't say we have a high pressure. We are now following the demand of our clients. And again, as we are the leader in terms of connectivity testing, we are, and we will continue to be ready when needed. We are on what I wanted it to be.

[Operator]

The next question comes from the line of Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

Just a few for me please on the Marine segment. You mentioned that in Q3, Marine benefited from favorable timing on the core in-service segment. So effectively, does that mean that Q4 will see a slight slowdown there? And generally, in Asia, you've mentioned that the pickup is coming from Asia in the Marine segment. What's driving it? Is it the same pace on LNG or is it something else? And last one, please. How is the pricing in this market? Because the growth has obviously come back this year but you're guiding for margin improvement to come from restructuring and FX, effectively no operating leverage. So at what point would you expect the pricing to actually help with the margins? Is it next year, year after? Do you need a few years of continuous growth?

[Didier Michaud-Daniel]

If I might, I want to be sure, you are talking about Marine business?

[Suhasini Varanasi, Equity Analyst]

Yes, only the Marine business, yes.

[Didier Michaud-Daniel]

In-service Marine business?

[Suhasini Varanasi, Equity Analyst]

The core in-service, I think the comment was that you -- it benefited from favorable timing on the core-in-service business in Q3. So just wondering, does that mean that Q4 this year will see a difficulty around because you pulled some levers and this is a...

[Didier Michaud-Daniel]

Okay. Very clear, thank you. François, you want to take this one?

[François Chabas, Executive VP & Group CFO]

Yes, thank you. Just in a nutshell, on the first part, you're right, when it comes to the in-service business. As you know, it's a very sticky business, where usually the growth is -- and the visibility is well known. We had a seasonality or strong synergy in the first 3 quarters so you may expect on the fourth one to have not exactly the same profile. Again, we maintain our guidance for the total Marine, but your assessment is correct. Second element, when it comes to what is driving the growth in Asia, it's not so much FPSO, it's mainly driven by LNG and the results of the shipyards in China in this segment. On which that is strong, which is LNG dual propulsion passenger ships in Europe. So this is the sign that our strategy has been the right one. We've moved away from those carriers, which have suffered price-wise and volume-wise, and we focus on those ones where the value is higher and it's picking up. And why it is this as simply for -- this is where the production capacities are. So it's nothing specific to the Asian market, it's more that's where the shipyards are.The third point, when it comes to pricing. The pricing remains difficult in the new construction. You know the index, as good as I know them, you see that the market is suffering. We have a very strong order book on this side. We are currently beating the market by far because of our positioning. The pricing capabilities we have on the in-service where we've demonstrated, and we said earlier on this year, our capacity to bring the prices at a higher level, we've done it once in January, we've done it again in July. And so far, the in-service plans are positive, which would have an impact margin-wise.

[Operator]

There are currently no further questions in the queue. [Operator Instructions] Okay. There are no further questions, so I'll turn the call back to your host.

[Didier Michaud-Daniel]

Okay. So thank you very much for your attention. Good morning, good afternoon, and good evening to everyone.

[Operator]

Thank you for joining today's call. You may now disconnect your handsets.