Hello, welcome to the Bureau Veritas Q3 2019 revenue call. My name is Charlotte and I will be your coordinator for today's event. For the duration of the call, you will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 to register your question at any time. If at any point you require assistance, please press star 0 on your telephone keypad and you will be connected to an operator. I am now handing you over to your host, Didier Michaud-Daniel, Chief Executive Officer, to begin today's conference. Thank you.
Thank you. Good morning, good afternoon, and good evening to everyone. Thank you for joining Bureau Veritas' Q3 2019 revenue call. I am joined by François Chabas , the Group 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 the various economies, both globally and regionally. Our performance over the past year has illustrated this resilience more than ever. This resilience sits on three strategic cornerstones.
The first one, a strong franchise. We are recognized as a tier 1 player in the TIC sector, renowned for our high level of expertise, our global reach, and the quality of our brand. Second, a 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 & 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. 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 five-year contracts on average. The CapEx side today provides additional growth. In Marine & Offshore now, 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 two years of visibility. The full benefits 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%. Five out of six 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.
Thank you, Didier. Good morning, good afternoon, good evening to all. Starting with the revenue bridge for the year to date. We've delivered EUR 3.7 billion for the nine 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 five quarters in a row. External growth delivered 1.1% on a 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 US 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 a net scope basis. This reflects, in particular, the disposal of our non-strategic consulting business in North America, which had been deconsolidated from Q3 onwards. For ForEx, at a slightly stronger 1.5% positive impact, mainly benefiting from the appreciation of the US dollar and PAC currencies against the euro. Turning to the organic growth by business in the third quarter, five out of our six businesses reached a steady pace of organic growth of 4.6% on average. Those five business 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 product grew 2% in line with the first half. As expected and mentioned already, certification declined 4.8%, which is a reflection of a transitional year post provision of standards. Taking a brief look at M&A now, we continue our active portfolio management with the objective of seizing attractive acquisition opportunities and divesting non-strategic businesses with below par margins. In the first nine months of 2019, we closed five transactions supporting growth initiatives mainly in Agri-Food and Buildings & Infrastructure, 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.
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 current service benefited from favorable timings in the scheduling of inspections. Offshore was penalized by challenging comparable despite the expansion 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 books 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 sub-segments, metals and minerals confirm its recovery with organic growth at 6.4%, both upstream and trade activities performed steadily across most geographies against more challenging comparables. Gold and base metals continue 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 maintains strong trends, primarily fueled by Asia and Australia. Oil and 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 and 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 gradual improving market conditions in oil and gas and the benefits of our successful diversification towards OpEx and non-oil and gas markets. Oil and gas CapEx related activities grew 6.9% in Q3. Growth was primarily led by the U.S. Oil and 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 and utilities OpEx, with a ramp-up of several contracts in Latin America.
The outlook for 2019, we now expect the business to achieve higher organic revenue growth versus 2018. Our strategy of OpEx services diversification will continue to pay off. Oil and gas CapEx markets will continue to improve. In Buildings & Infrastructure, the business delivered a solid 4% organic revenue growth in Q3, up from 3.1% in the first half of 2019. We recorded a 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, -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 traceability. In particular, we grew double digits in social audits, sustainability, and in the corporate risk management. New services launched 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 electrical and electronic 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. Softline was nearly stable. It reflects strong momentum in India, Vietnam, and Cambodia, still benefiting from the outsourcing for 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 we gather 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 nine 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. This solid Q3 highlights once again the successful transformation undertaken over the past four 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 question you may have.
I will begin the Q&A session by reminding everyone, if you would like to ask a question, please press star one on your telephone keypad. Please ensure that your line remains unmuted locally. You will then be prompted when to ask your question. The first question comes from the line of Tom Sykes from Deutsche Bank. You are now unmuted. Please go ahead.
Yeah. Good afternoon. Good evening. Just on the look into Q4, you're up against some tougher comparators. Do you think you can maintain the growth rate at the 4% level going into Q4? Has there been any working day effect in Q3, and would you pick one out in Q4, please?
Yes, sorry, Tom. You can
No, I was just going to ask on B&I in France, what's the scale of the potential improvement? In China, what's the scale of the degree of slowdown that you think you might see, please?
I'm going to start with your last question. I do not see any slowdown in China. As you know, we have decided to focus our Buildings & Infrastructure business in China on energy and infrastructure, not on residential. We know that China today, urbanization rate is still 57%. A lot of people are moving to the cities. We are doing very well in China. This year, in fact, we deliver a growth which is above the GDP growth of China. In Buildings & 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 railways, and for more energy and, more highways.
Is this Q3 in China at this rate is about the rate you think you can sustain?
We will.
Yeah.
We will.
Yeah. Okay.
There is no slowdown. Absolutely not. Now you can see that our strategy is paying off, by being on this market and being, by the way, the leader on this market now. We knew that the projects are long-term, we are winning good projects with some companies that we joint ventured with, SPM for instance. We know we have a good backlog and it will be like this for, I think, quite a long time. On the Buildings & Infrastructure in France now, it's a good question. In fact, first you need to know that in France we have a very, very healthy backlog. The point is about recruitment. France, as you know now, two-third of the business is OpEx driven, meaning that, we have a very resilient and a steady business in France, which is growing at a good pace.
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.
Yeah.
We will see a progressive catch up in terms of organic growth. We know the backlog. We are recruiting. You need to know, for instance, that in September we recruited 200 people, so we are talking about big recruitment. Now your first question, there is no working day issue for Q4. This is the same number of days. Regarding now your question about Q4, I confirm the solid organic growth for the year.
Okay. Obviously, small changes in the.
I'm not going to say 3%, 4%. I just confirm my guidance for the year.
Okay. Sorry, just on the working day issue, Q3 and Q4, sorry, you're saying there's no working day issue?
I said there is no more or not less a working day in Q4.
Okay. Sorry, Q3, did that have any working day benefit versus last year?
Q3 was, if I remember well, one day more than last year. I think it was. We need to check. Was it in August, Laurent?
In September.
September.
Okay.
One day more than last year.
Okay, perfect. Thank you very much indeed.
My pleasure.
The next question comes from the line of Rajesh Kumar from HSBC. You are now unmuted. Please go ahead.
Good evening, guys. 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're unsure about what pricing and demand levels they might see? 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?
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 product. On the consumer product, 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 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 help them a lot. We know the international standards, we know their own referential, and they are just waiting for the output, which is understandable, before, let's say, asking us to work on their innovation program.
Understood. Thank you.
My pleasure.
The next question comes from the line of Rory McKenzie from UBS. You are now unmuted. Please go ahead.
Hi, Olia, it's Rory here. My first questions are on industry, where those new contracts continue to drive good growth. I think you've slightly lowered margin expectations for this year. 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? Secondly, in certification, I think the 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? Thank you.
Your second point is a very pertinent one. Here you could see it, certification, as you say, is better than expected. In fact, we know what happened with the standard and so on. What is important for you to understand is the fact that now certification is moving more and more to what I would call a second-party audit. We launched some key new certification, Circular+, for instance, but on sustainability, on social audits, on food, on enterprise risk management. 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.
You have also the fact that the board of the various companies wants to be sure that what their management announce in terms of improvement in CSR, in sustainability, in traceability is going to be certified, because for the moment it's self-declaration. We have a huge demand, and we are working on it. Today, for instance, on social audits and sustainability, we grow double-digit. 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 the standards update in last year. What is going to give us the growth already today and in the future, and the reason why we are better than expected is all what I call the second-party audit, which is again, huge demand for our clients.
I'm not supposed to talk about margin. I'm coming on Industry now because it's a call which is a call for revenue. I'm not going to say more, and you will get more information after the end of the year.
I will just try again, though, because in your statement this time, you said that in Industry you anticipate a stable margin this year. Previously you expected, I think a small improvement in the Industrial margin. Is it just the new contracts that's changed that?
What is interesting, so I'm not going to give you a precise answer. 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 it takes some time before the margin improves. The good news for us is we get more growth, and we get more contracts. Okay. Each time the margin is improving, and after it goes a little bit down, and it's going to improve, and it goes down. Because we are really growing on this market. Okay. Our margin guidance is unchanged.
Got it. Thank you very much.
At the group level.
Okay, understood. Thank you.
Yeah.
The next question comes from the line of Ed Stanley from Morgan Stanley. You are now unmuted. Please go ahead.
Evening. Thank you. I've got three, 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 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? Third, on the growth initiatives, it looks like OpEx 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.
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. 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. You will see that 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, for us export means consumer products.
The growth is stable. Regarding the China domestic, we grow above the GDP growth, which is, if I'm right, at 6% today. We are still doing very well. We are doing well in Buildings & 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. We are, if I'm right, now more, 16,000 people in China. We are growing in China, and we will continue to grow in China domestic. 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 are 100% right. It's 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.
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. At the same time, there is a little bit of wait and see. It's a mix of both.
Okay. Thank you.
Pleasure.
Our next question comes from the line of George Gregory from Exane. You are now unmuted. Please go ahead.
Hi there. Just following up on consumer. I think you partly answered the question there around the 5G delays, 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?
Maybe you are going to find my answer is a bit strong, but 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. If you are a board member, you say, "Be cautious because of the supply chain, which is going to be behind." I think once the commercial negotiation will be ended, whatever the output will be, decision will be made to test products, but it could be in different countries but China. In this case, the growth will resume because, for instance, and we see it clearly today with the soft lines. The soft lines 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 Product division. I think that it cannot be for such a long time. We are approaching Christmas, for instance. They will have to make some decision on the products that we'd be selling at Christmas time. After, we have new collection and so on. That could not be like this for a long time. You could see it now. Again, I'm not going to tweet anything this night, they try to find a solution.
You wouldn't argue that there is any sort of backlog of testing being built up as such?
Well, probably, yes. Because if you think that they probably hold on certain projects and certain product launch or innovation, yes, probably, yes. After, some of our clients need to know what the supply chain is going to be for these products. Before asking us to test them in a country or another. It cannot be for so long now. 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.
Understood. 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?
Let's be clear on that one. We are leader in connectivity testing. When I say leader, it's really leader of the market. 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. We will start with these clients. I could not say we have a high pressure. We are now following the demand of our clients. Again, as we are the leader in term of connectivity testing. We are, and we will continue to be ready when needed. We are on what I want it to be.
Very good. Thank you.
My pleasure.
The next question comes from the line of Suhasini Varanasi from Goldman Sachs. You are now unmuted. Please go ahead.
Hi. Good evening. Just a few from me, please, on the Marine segment. You mentioned that in Q3, Marine benefited from favorable timing on the core in-service segment. Effectively, does that mean that Q4 will see a slight slowdown there? 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 FPSO and LNG, or is it something else? 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 ForEx, effectively no operating leverage. At what point would you expect the pricing to actually help with the margins? Is it next year after? Do you need a few years of continuous growth? Thank you.
If I might, I want to be sure you are talking about marine business?
Yes. Only the marine business. Yes.
In-service Marine business.
The core in-service, I think the comment was that it benefited from favorable timing on the core in-service business in Q3. I was just wondering, does that mean that Q4 will see a bit of a slowdown because you pulled some into Q3?
Okay. Very clear. Thank you. François, you want to take this one?
Yeah. 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 and the visibility is well known. We had a seasonality, a strong seasonality in the first three quarter, so you may expect on the fourth one to have not exactly the same profile. Again, we maintain our guidance for the total of Marine, but your assessment is correct. Second element when it comes to what is driving the growth in Asia, is not so much FPSO. It's mainly driven by LNG and the restart of the shipyards in China in the segment on which Veritas is strong, which is LNG dual propulsion passenger ships in Europe. This is the sign that our strategy has been the right one.
We've moved away from bulk carriers, which have suffered price-wise and volume-wise, we focus on those one where the value is higher, and it's picking up. Why it is Asia? Simply for, this is where the production capacities are. It's nothing specific to the Asian market. It's more that that's where the shipyards are. Third point, when it comes to pricing. The pricing remain 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 our side. We are currently beating the market by far because of our positioning. The pricing capabilities we have are 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. So far, the answer of our clients are positive, which will have an impact margin-wise.
Okay. Thank you.
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Okay. Thank you very much for your attention. Good morning, good afternoon, and good evening to everyone.
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