Nomura Holdings Inc

TSE:8604

Everybody, welcome to the trading update for the third quarter. A lot of things changed in the recent weeks. First of all, this is the first call in many times without Jilko. Jilko just left and actually started his new job today. Another change is that with me in the room is Ingrid Prins, our new Head of Investor Relations, who joined us 1st of October. And it's also the first quarter in 12 quarters that we were not able to achieve revenue growth. Let's go to that directly.

The core of what Brunel does is provide flexibility and specialism to projects to our clients and mainly investment projects and R&D projects. And with all the uncertainty in the world, to name a few, the Middle East, continuing war in Russia, Ukraine, trade discussions between China and the rest of the world, the U.S. elections, we see that a lot of clients are a bit hesitant to take bigger investment decisions at the moment. At the same time, we do see a lot of tender activity, and we actually also win quite some new projects, but they are all planned to start early next year.

So as a result, our activity level is a bit lower than earlier this year, and that's demonstrated in the revenue development, where we are more or less in line with the revenue we achieved last year, but a slightly different composition. And obviously, everything that's going on in the automotive industry in Germany has a huge impact on that, where we were pretty resilient until Q2 in Germany, it really weakened in Q3 to stabilize after that, but it's hard to predict what will happen in the next couple of weeks. End of year are always interesting periods in these circumstances.

Overall, our EBIT ended up slightly below last year, EUR 17.3 million versus EUR 18.8 million, supported by the execution of the cost reduction program we executed in Q3 and that's completely executed now. And that will reduce the cost by EUR 20 million on an annual basis. But we've also shown in the past that there's always more room for cost agility when necessary. But we'll get to that later when we look at the respective regions. So overall, a slight slowdown in activities, but still a very promising pipeline.

Moving on to most eventful region in Germany, everybody read the news that came out in Q3 of Volkswagen, the recall that BMW had to do, the issues with Bayer, issues with BASF, and that's reflected also in our headcount in Germany, where you see in the yellow line that the trend that was slowly downwards earlier this year has dropped further. But once again, stable for now, but hard to predict what will happen in the next couple of weeks. What we've seen in the past that in these circumstances, some clients decide to shut down factories in December or those type of things. We haven't seen that yet or haven't heard it yet, but yes, hard to predict.

Under these circumstances, we are still really proud that we managed to achieve 11% EBIT in this region as you can see here. Of course, the market is weak, but it's still very profitable. So if the market, yes, recovers, then we'll definitely benefit from that. And there are -- it's not the entire German economy that is struggling. We do see pockets also in our activities that are growing. And the big best examples are obviously anything in the defense industry, but also anything energy related, both conventional and renewable, but also the related grids.

Moving on to the Netherlands. Historically, we always managed to achieve all the growth in the Netherlands in the second half of the year. And that was also what we expected earlier this year, but 2 things changed in this quarter. We saw some anticipation of the tighter application of the new law -- law for freelancers happening. And we were a bit surprised that some of our clients decided to hire the freelancers themselves instead of asking us to hire them.

Another element is that a bigger client in the finance industry also moved up on hiring our people. So that has offset the growth that we achieved in other parts. But also in the Netherlands, our EBIT remained pretty stable with a small growth year-to-date in revenue. Strong organization, finding the right opportunities in the market.

Australasia, even there, we saw hiring decisions being postponed, as you can see in the development of the yellow line that was flat in the third quarter. The projects in Papua New Guinea are continuing and will continue to ramp up next year, but probably will be pretty flat this year. But in Australasia, yes, very strong growth year-to-date. And we're now working on -- supported by the cost reductions to also get the operational leverage reflected in our numbers to bring the EBIT percentages to our target level for this region for '27 of 4%.

Middle East and India, you noticed a steep decline in headcount. That's mainly in India, so that's a big number in headcount, but has a lesser effect in revenue. Pretty resilient activities, especially in Qatar, where we are doing really well and continue to do really well, have a strong market position with a high profitability in this market. And we're about to start our activities in Saudi Arabia, which is obviously a huge market in our industries.

Moving on to Americas. Also there, a slowdown in hiring in the U.S. But the same development, a lot of underlying activity, but hiring decisions being postponed to early next year. So I expect this line to also remain flat. In the U.S. or in Americas, we do see the operational leverage, and there's more to come. And this is not close to our target level for the EBIT yet. We are targeting an EBIT of 6% for '27, and we will see a steep increase next year towards that development, but continued revenue growth and a nice improvement of the gross margin for the full year to date.

Asia, we already announced in our Q2 results that we experienced delays in new projects being started. That delay got a little bit -- or the impact got a little bit bigger with some projects that were expected to go -- some contractors that were expected to go from one project to another project, and now there's a gap of 6 months. That explains why we are guiding for a slightly bigger impact on our Q4 results for everything that's happening in Asia.

But interesting enough, the most wins we experienced in this region for yard construction work in China and Indonesia. So still very optimistic about '25, but we're not going to see anything contributing in Q4. And with the lower activity, that also impacts our gross profit, while we keep our organization in place with the pipeline that's there that we need to deliver next year.

And Rest of the World, a pretty stable headcount development. This includes Taylor Hopkinson, where we are happy that their performance remains pretty stable after a tougher year last year and a lot of new projects in the pipeline that will also support our permanent placement activities for Taylor Hopkinson. And because the slightly lower-than-expected performance, also our earn-out obligation has been reduced for the settlement of the final shares that we need to buy. So there's no cost related to that earn-out included in Q3, where we, in previous quarters had EUR 700,000, and we won't -- we don't expect any related costs in Q4.

And that supports the improvement of the EBIT in this region. Revenue is slightly lower because of some bigger projects, offshore wind projects in Taiwan being finalized. But yes, nice improvement in gross margin and yes, contributing in EBIT now.

That brings us to our overall results. Revenue 1% below last year, but a bigger impact on EBIT because of the mix. So the lower performance in Germany is partly offset by other regions, but not entirely. Still 5% EBIT this quarter and 4% revenue growth year-to-date.

Then we did have a very strong cash flow in Q3, especially because we have -- we were able to improve our collection. That means that our cash balance is now back to over EUR 20 million, where we were in a net debt position earlier this year. We expect to be at a similar level as last year, so around EUR 31 million. Happy to see that improvement.

Then the gross profit by vertical. First of all, conventional energy and mining are still growing, but especially future mobility and renewable changed compared to earlier this year. In the first half year, our gross profit from future mobility, so mainly automotive for Germany was pretty much at the same level as last year, where we are now year-to-date, significantly below. In renewable, the impact is slightly lower. We do see issues that happened in that industry last year also impacting new projects starting. They will start later than earlier expected, but we'll definitely see that coming next year.

Then some organizational matters. Supervisory Board is still working on finding a new CFO. We are looking externally for a candidate. The search is ongoing. And as soon as we know more, we obviously will inform you. And the other part is that we are proposing to appoint Mr. Aad Kuiper as a new member of the Supervisory Board. Mr. Aad Kuiper has a long history with Hunter Douglas, and that company has some similarities in dynamics as Brunel does. We really think he's a unique candidate to strengthen our Supervisory Board.

Then the progress on '27 targets. I've been challenged a lot on these targets if these are still relevant. But supported by the cost reduction we did earlier and our cost agility and our strong pipeline, we're still fully confident that we will be able to achieve these targets in '27. It won't be a straight line there. We will show a bigger improvement next year and then continuation after that.

But before we get to that, we first have to manage through the fourth quarter. I don't expect any big changes in trends in most of the regions. The only thing is that the DACH or Germany is a bit harder to predict and the impact or the negative impact will get slightly bigger in Q4 than it was in Q3.

That's a very brief summary of our results. So then I want to invite all of you to ask any questions you might have.

[Operator Instructions] And the first question goes to Marc Zwartsenburg of ING.

The first question on the DACH region. So Peter, can you maybe share a bit more color on the impact from the decline in automotive, what the impact is on your idle time? So your gross margin impact, can you share us the percentage of bench now versus maybe even Q2 or a year ago to get a bit more color on how that's developing?

And also, if I look to the graph on DACH, the automotive sector was still up in Q2, and now it's down 33%. So there's a strong weakening through the quarter then. While I think when we had the results on Q2, things were still going pretty stable, not falling off a cliff, but when I look at those numbers, it must have been falling off a cliff in September. So maybe you can give a bit more color there.

And I think you mentioned in the call earlier that you saw a weakening in Q2 indeed and then a stable trend. So maybe a bit more color on Q4 also for the automotive sector. Do you want them -- to take them one by one? Is that easier?

No, no. Please continue.

Yes. The other one is the Asian project, so that's delayed by 2 quarters. Can you maybe share a bit what the EBIT impact is from that delay on Q4 and the impact on Q1, something that we lost? So that's more a simple question.

And then, yes, you mentioned that you expect still a strong improvement in 2025 towards your 2027 targets. But yes, if you see you have a miss on Q3 and things are looking pretty -- quite a bit weaker also for Q4, that means that the starting point for next year is quite significantly lower than I think what we expected maybe a quarter ago.

So -- and of course, you will have maybe EUR 14 million of extra cost savings next year. But yes, if you already miss, say, EUR 3 million, EUR 4 million on the quarter of Q4 and you multiply it by 4, just simply doing that, it means that all the cost savings are gone. So how convinced are you that you can still see a strong improvement in 2025, given what's going on now?

And maybe a last one, if I can squeeze it in. If I look at the verticals, I did know that renewables was still up in Q2 and now it's down, but also life sciences is going down rapidly. So maybe you can share a bit on the verticals, what is happening, because I don't get the feeling that things are then pretty stable. Those are my questions.

Okay. Good questions. I'll address them in order. So the bench in Germany, you are very right. If we see a lot of projects ending, that always causes our bench to increase, where our bench in Germany normally is just over 2%. It now went up to almost 3.5% in Q3 just because of the earlier terminations of projects. And that's connected to the automotive trend.

If you look at the headcount graph, and I might have explained it by wrong quarters, you see the headcount really decreasing basically after the end of June throughout the quarter. And where I said it's stabilizing, it's stable at the moment. But yes, that's just 4 weeks after Q3. But at the moment, it's stable, but yes, very hard to predict at the moment.

The Asian project, so it involves close to 150 people that are working in Indonesia, where we miss -- yes, where we will miss the revenue in Q4 and Q1, and that will have an impact of roughly EUR 0.5 million EBIT per quarter. That automatically brings me to the question on the starting position, where I said I'm still confident that we will be able to achieve our '25 targets. I was especially referring to the targets on EBIT percentages and conversion levels. Starting position will be lower than expected, obviously. So we might need to look a bit more at cost to be a bit more cautious there, but we don't need any big programs.

And once again, we have done -- shown that we have quite some cost agility. We did show that in the past, and that's still there. So that makes me comfortable that we will achieve the 27% EBIT percentage target and already see a quite big improvement there. The revenue for next year, it's a bit too early to guide because it's -- yes, all depends on when all the projects will really take off. But again, supported by cost agility and more focus on our margins, I'm confident that we will see a big improvement in EBIT percentage for next year.

And then the final question on the verticals. So last year in Q3, we still had a huge workload on offshore wind projects around Taiwan and in the year-on-year comparison, that's -- yes, those projects are stopped, so that explains part of that. And again, we saw all the issues in the renewable industry in the second half of last year, and that also resulted in a slower start-up of new projects and that we see happening now.

So there's a bit mismatch in timing of new projects starting and the perm placements by Taylor Hopkinson are making up a little bit for that. And life sciences is mainly also affected by Germany, where we see, yes, not just automotive sector being weaker, but also other sectors, but also some positive developments in, once again, the defense industry and other energy industries.

Does that answer your questions, Marc?

Yes, sure. Maybe you can give a bit more color on the defense industry, how big it is currently of your mix.

Yes, it's still pretty small. So I think we have 45 people working in the defense industry for now, but we just started that. So I'm happy with the progress we've made so far. And some of our clients were pretty reluctant to use agencies until earlier this year, and we see a change in behavior because they struggled to get the right people in.

Yes. You were mentioning at Q2 that you were in this process to become a preferred supplier for, I think, Rheinmetall. Is that the case? Is that already...

Yes, no, we have people working there. Yes.

The next question goes to Konrad Zomer of ABN AMRO - ODDO.

A few questions from me as well. The first one on the Dutch business. I think your profitability in Q3 was actually quite good. I think the overall performance was also quite good.

My question is, does it include any fees you might have collected from transferring freelancers directly to the clients? And it's something that has happened before. Do you think that trend will continue?

And then on Germany, even though, obviously, you don't give specific guidance on your performance in Q4, but you've mentioned a few times in your remarks that you are -- it's hard to predict and you're quite cautious. It looks like some factory shutdowns are likely because it has happened before. Is there a way for you to anticipate on that? Because obviously, some of these people are on your books, the bench risk is increasing. What can you do now if these people are still employed at some of the automotives, if you think they might be out of a job in December?

And my third question, you mentioned that you're very positive about significant growth in the U.S. or North America next year. What makes you so positive on that statement?

Yes. Thanks. And thanks also on the -- recognizing the performance in the Netherlands. Unfortunately, for transfers of freelancers, we don't get a fee as it is also not strictly considered a transfer technically by our clients. Whether the trend will continue is hard to predict. In the past, we have always assumed that most of the freelancers will be pretty reluctant to be employed by some of our clients. And for the majority of our freelancers, I expect that will be -- still will be the case.

And also because the freelancers we use or yes, contract are genuine freelancers and should not be affected by the tighter monitoring of the law. So we are pretty optimistic that we continue to contract them as a freelancer, perhaps with other clients. But yes, honestly, I don't fully know, but I assume that it will be okay for, yes, the foreseeable future.

On Germany, on the factory closures, we did see them in the past and managed that by asking people to take leave for at least part of the time, and that really reduced the impact. And that's pretty common practice. Also what our clients ask is, because it will be a factory closure and then people can resume working in 1st of January. So it will only be the December impact and that can be largely offset by people taking leave.

And finally, U.S.A., why we are so optimistic? U.S.A., there's so much underlying activity, especially on the shale -- in the shale area, where they try to get projects approved just before next week on Tuesday. But the last couple of weeks, there has been a standstill in anticipation on what -- who will be elected President. But either way, the shale projects will continue because the U.S. needs that to remain independent on an energy basis.

But it's just, yes, a standstill before the results of the elections are announced. And it's also based on feedback. I was in Houston 3 weeks ago, and our clients are only looking for more people. So that makes me confident that we will continue to show strong growth in the U.S. And it's also because looking at the U.S. energy market and our position in that, we are still so small, and we see improvement on improvement in our organization. So we also see the returns on that.

Right. Maybe just one other question on your cost savings. I mean, your cost level was down 8%. Your revenues were down 2%, so I think that's a great achievement. Can you remind us of the quarterly development of that EUR 20 million, please? I mean, maybe I should know, but I don't. And I'm wondering if the full EUR 20 million will be in 2024 already or some of that will flow through into next year.

So in Q3, we -- that includes already EUR 3.5 million of cost savings, where we -- slightly more than we had forecasted because the project was executed faster than expected. We will see a bit more impact on -- in Q4 with a further decrease in operating expense and the full impact from 1st of January. So that basically means that out of EUR 20 million, you already see EUR 8.5 million in this year.

The next question goes to Maarten Verbeek of The Idea.

Maarten Verbeek of The Idea. Just continuing on Konrad's question about the cost savings. When you announced those cost savings, the market was not as depressed as it is today. So what are the odds that you do some kind of step up and try to save a bit more cost in the near future?

That's also why -- thanks, Maarten. That's also why I referred to our cost agility. And a lot of that flexibility is pretty much around postponing new hires or replacements, and that also provides -- already provides a lot of flexibility. And based on what we know now, that should be sufficient to achieve the improved results for next year.

And when you would implement those, that would more or less also not require a lot of exceptional costs like what we have seen with this current program?

No, because it won't be a big program. It's, like I said, especially a delay in hiring new people or replacing people that left us. So I don't expect any cost.

Okay. Referring to or mentioning the '27 targets you have, you mentioned specifically that you feel you are on track with respect to the EBITDA margin. But you also communicated different targets, particularly also on growth. Do you think these are still -- or this target is still achievable to realize by 2027?

Yes. So the high single-digit revenue growth, obviously, we're not going to achieve this year. But it's a bit too early to tell, but I expect that we will achieve that next year. And then definitely, we will see the renewable market grow. So yes, I'm pretty optimistic that we will return to high single-digit revenue growth from next year onwards.

Okay. But I do believe that it was on average until the period of 2027. So if that average is still achievable, is then questionable. But as of next year, you're more confident that it will be achievable?

Yes. Especially considering the circumstances, I want to be a bit prudent in promising that we will achieve the high single digit on average until '27. But I'm also definitely not saying that it's not achievable.

And maybe one add-on. Because you mentioned that for the growth, you see a lot of opportunities, a lot of big projects, large projects. But what gives you the guarantee that these will be executed, and these will be executed when they have communicated initially? Because now we've also seen that initially, you thought you would have a back-to-back project, which now shows a gap of some 6 months. What kind of guarantee do you have that this won't happen in the future again?

I don't obviously have a 100% guarantee, but a lot of those projects are linked to commitments of our clients to their ultimate clients on moments that equipment needs to be delivered. And I don't expect that those projects will be canceled at all.

And the deadlines for the delivery of those items is getting closer and closer. So for many of the projects, they cannot afford much more delay anymore. And I don't expect the projects to be canceled at all. So that means that they need to start producing early next year.

Thank you. We have no further questions. I'll hand back to Peter for any closing comments.

Okay. Well, thank you all very much for joining this call. It's been an eventful third quarter, and it will be, yes, interesting fourth quarter to get ready for a much better next year. I hope to see you all soon. Have a nice day.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.