Earnings Call: Q3 2018

Oct 25, 2018

Afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Bureau Veritas 2018 Q3 Results Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. I must advise you the conference is being recorded today, Thursday, October 25, 2018. I would now like to hand the conference over to your first speaker today, Didier Michel Daniel. Please go ahead. Thank you. Good morning and good evening to everyone. Thank you for joining Bureau Veritas Q3 revenue 2018 call. I'm on Page 5. I'm delighted to be joined by Francois Chabat, our new CFO since beginning of September. Some of you may have met Francois during our recent watch shows. Francois has been with BV for 15 years during which time he has held a number of managerial positions in both financial and operational roles. His experience means he has excellent knowledge of the group, our operations, our clients and our people. Okay. Let's move to the key highlights regarding the Q3. Q3 stood at €1,200,000,000 up 8.6% at constant currency. Organic growth was 4.8%, up from 3.5% in H1. All 6 businesses are now growing organically. Our late cyclical markets, Marine and Offshore and oil and gas CapEx are bottoming out and showing the first signs of recovery. Our growth initiatives performed strongly, generating a 7.9% increase in revenue organically. Our full year 2018 outlook is confirmed and our transformation plan continues on track. Now I will hand over to Francois for the financial review. Francois, please? Thank you, Didier. Good morning, good evening to all. So I'm on Slide 7, starting with the revenue bridge for the 1st 9 months of 2018. Organic growth reached 3.9 percent. Acquisition had a 3% positive contribution. And as previously noticed, ForEx had a negative impact of minus 5.7%, mainly due to the appreciation of the euro against the dollar and peg currencies. For the full year 2018, at current spot rates, we continue to expect around minus 4% in revenue and minus 6 percent on adjusted operating profit. All in all, for these 1st 9 months, revenue growth has accelerated 6.9% at constant currency. Moving or taking a closer look to our Q3 2018 performance, Slide 8. We see that organic growth has accelerated to 4.8 percent to be compared to 2.6% in Q1, then 4.4% in Q2. So this is Bureau Veritas' best quarterly organic growth in 6 years. Acquisition had a 3.8% contribution to the top line growth. ForEx, a bit more limited minus 2.9% negative impact after a minus 7% in the first half of the year. So all in all, revenue growth moved up 8.6% at constant currency. Now turning to growth by business on Slide 9. As you see and as mentioned by Didier, all of our businesses delivered positive organic growth in the 3rd quarter. B and I, Agri Foods, Consumer Products all delivered growth. Worth specific mentioned though are certification, which as you see recorded close to 15% organic growth, thanks to the positive impact from the revision of standards. Industry, which confirmed its return to positive growth after posting a 3.5 percent organic growth supported by both our OpEx growth initiatives and the stabilization of the CapEx markets. And third, Marine and Offshore, which is now bottoming out, achieving the 1% organic growth after almost 2 years of decline. Moving to Slide 10 and focusing again on the Q3, you see that the growth was fueled both by the base business, accounting for 2 third of the group revenue and our 5 growth initiatives. Base business is up 3.2% in the quarter organically, so showing a gradual recovery as you see on the chart. While our growth initiative, which represents 1 third of the group revenue, delivered a strong growth, up 7.8% organically in Q3, in line with our ambition to grow at a high single digit rate. Looking further at the 5 growth initiatives. B and I on slide 11. B and I performed well, up 5.7%. OpEx confirmed the improvement that we've seen already in Q2, with a strong 15.1% organic growth in the 3rd quarter, thanks to the ramp up of large contract wins. Agri Food grew 1.9 percent with strong performance in Food offset by some poor market condition in Agri Europe. Automotive recorded 9.9 percent organic growth, led by Connectivity Testing, while finally Smart World grew 0.9%, but this compared to a particularly strong performance in Q3 last year, which for the record was up 17.3%. So overall, our total growth stands at 15.4% and 20.1% at constant currency. I will now hand it back to Didier for the business review. Thank you, Francois. Thank you. Okay. We move to Page 13, starting with Marine and Offshore. The business delivered positive organic growth in Q3, Q3, up 1%. Confirming the recovery in the sector, new orders amounted to €4,800,000 at the end of September 2018 compared to 4,100,000 a year ago. New construction benefited from improvement in the new equipment certification services. Core in service was slightly down, but this is compared to a very strong Q3 last year. Offshore was driven by the expansion of the services offering and the stabilization of risk assessment studies. For the full year 2018, we continue to expect full year organic growth to be slightly negative. The in service activity should remain resilient. For new construction, H2 should be positive benefiting from the ramp up of recent order wins. Moving now to Agri Food and Commodities. The business continues to improve with revenue up 5.3% organically in Q3. As a reminder, it was up 4.8% in Q2. By sub segments, Metals and Minerals confirmed its strong recovery, up 8.8% in organic growth. Upstream activities grew 14%, notably in Africa and in the Americas. Trade achieved low single digit growth after a good Q3 last year. Agri Food grew by 0.5% organically. Food delivered strong growth, but this was offset by the weak Agri segment in Europe. Growth resumed in Latin America with the end of the truckers strike in Brazil, which had impacted exports. Oil and Petrochemicals was up by 2.4% organically with robust performance in Europe, thanks to new services and market share gains. North America remained stable in the period. Lastly, Government Services were up by 12.6%, thanks to the ramp up of VOC and single window contracts. For the full year, we expect improved growth versus 2017, fueled by recovering metals and minerals markets, healthy agri food businesses and stabilizing government services. Turning to industry. The business confirmed its positive growth, up 3.5% organically, A result of our successful diversification, Oil and Gas CapEx related activities being 16% of divisional revenues have now stabilized, being slightly up in Q3 after a decline of 12% in Q2. Oil and Gas OpEx recorded double digit growth with strong volume increases across all geographies, largely offsetting price pressure. The recent Qatar Gas contract has also been a key driver. We achieved 7% organic growth in Power and Utilities OpEx with the ramp up of flat contracts in Latin America. For the full year, we expect positive organic revenue growth overall for industry as our diversification strategy continues to pay off. We are also seeing the early signs of recovery in oil and gas CapEx where markets are expected to improve. Some details about industry on Page 16. This recovery is at this stage being driven by new small size CapEx projects. This is where we are currently seeing the tendering activity. Again, considering the lead time on this project, we would only expect the benefits to flow into our P and L in a meaningful way towards the end of 2019 early 2020. In Building and Infrastructure now. Revenue increased by 4.6% organically with a broadly similar organic growth in both construction related activities and on buildings in service activities. Organic growth performance was good in Europe, led by high single digit growth in France, 39% of revenue. OpEx related activities performed particularly well in France, which benefited from one additional working day. Good in the Americas, now 22% of divisional revenue, thanks to solid performance in the Code Compliance market in the U. S. As well as in South America. Finally, in Asia and China, the pace of growth was solid and prospects remained strong in Chinese infrastructure projects. For the full year 2018, the outlook for the business remains positive overall with good growth in Asia, Americas and Europe, driven by both CapEx and OpEx. Certification, Page 18. Certification was again our top performing business in Q3, posting a 14.9% organic growth. We experienced double digit growth in Europe, Asia and North America. Supply Chain and Global Certification grew by double digit. Some details on the Certification business. As you can see Page 9, on the left hand side of the slide, starting from Q4 2017, we have enjoyed strong growth in our Certification business, driven by the revision of standards for which the transition deadline was September 15. This has generated strong revenues, but is obviously now dropping off. As announced earlier in the year, we expect H2 to be much lower than H1, implying a negative Q4. Looking ahead, we expect the next main drivers for the growth of this business to lie in the corporate risk area. Certification concerning data privacy, cybersecurity, brand reputation, etcetera will be where we will notably focus our growth efforts. Moving to Consumer Products. Consumer Products recorded a 3.2 percent organic growth across all major service categories. Softlines delivered mid single digit growth led by the ramp up of new contract wins in Europe. Carblands achieved growth below the divisional average as this compares to a very particularly strong Q3 last year. The Electrical and Electronics sub segment grew low single digit, primarily driven by Automotive and by South Asia and Europe. The classical electrical products experienced a slowdown both in China and in the U. S. The implementation of tariff increase has led to some wait and see attitude among some customers and triggered the postponement of some product launches. Nevertheless, the Chinese domestic market continued to develop steadily. For the full year, we expect Consumer Products to maintain mid single digit growth, reflecting strong growth in Southeast Asia, Europe and led by automotive initiatives. Some words on the tariff increase. I wanted to take the opportunity of this call to put U. S. Trade tariffs on China into context for broad data. 1st, tariffs concern only our consumer product business, which represents 14% of group revenue. Of this, 95% of business is today outside the scope of U. S. Tariffs. We estimate that around 5% of Consumer Products business is within the scope of tariff increases. Secondly, we are closely monitoring the situation and we have engaged proactively with all our clients. In the past, we have supported them in new manufacturing countries such as Cambodia, Vietnam, Bangladesh and Turkey. We have the capacity to follow any manufacturing relocation. We are working on various scenarios to accompany them. Thirdly, this may also provide an opportunity for us as our services will become even more important to ensure that quality of products is maintained. Lastly, as the demand for tick services for the Chinese domestic market is increasing, we are well positioned to seize this opportunity. We have taken some measures to accelerate our development in the Chinese domestic market and outside of the U. S, in Southeast Asia and in Europe notably, but also in Africa eventually. Moving now to the outlook and to conclude Page 23. So to conclude, for full year 2018, we confirm our outlook. We expect an acceleration in organic gross revenue compared to full year 2017, a slightly improved adjusted operating margin at constant currency and improved cash flow generation at constant currency. Thank you for your attention. This concludes our presentation. Francois and I will now answer any questions you may have. Thank you. We will now begin the question and answer session. Your first question comes from the line of Edward Stanley. Please ask your question. Hi, evening, guys. I've got 3, please. I guess we've got to ask on the trade war. Do you have any feeling for quite how much of a drag it has been in Q3? And I'm just trying to gauge if 95% is currently outside the scope and it was an 80 bp drag or a 50 bp drag in Q3. I'm just trying to think how that might play into next year. Secondly, on the marine ramp up and the new business you're winning there, is that a favorable mix, I. E, is that tending to be higher margin newbuild ship construction? And thirdly, on a question for Francois, I'm interested to hear what's top of your priority list for 2019 to get done first. Thanks. Okay. Thank you, Edouard, for your questions. Let's start with your first question on the drag of the Q3. It's very, very, very small, close to new in fact. The only drag we have for the moment is some postponements from some clients, which are just thinking about what could be their future supply chain. But they are moving progressively back. So for the month, the impact is extremely small, extremely small. For the marine ramp up, maybe Philippe you would like to answer the question. Philippe Dangeuet is with us. He's inside of the Marine and Offshore business. It might be the best solution for him to answer your question, Philippe? Yes. The question about the mix of the new orders is relatively good since we had contributing to our growth in H1 new orders for LNG fueled container ships for CMA CGM and several cruise ships as well as a strong demand for LNG carriers. So these are rather high value vessels, which in turn should lead to relatively good margin when we deliver the construction of those vessels. Okay. Philippe, thank you very much. Francois, your good question on your priorities. Thank you. Thank you, Edouard, for the question. Well, I'll do the I'll make the same statement that I did with a lot of you guys that I have met over the last few weeks. My priorities are twofold. It's very easy. It's about making sure that the company shows operational leverage in terms of margin. As you know, we have a guidance which is into our plan 2020, which is to show at that stage a margin of 17% at 2015 exchange rates, which in a nutshell stays 16.5% today. So we have some action here to be taken, and I will make sure they are taken. And the second one is to improve the cash generation of the group, to bring it back to where it was perhaps a couple of years ago. Thank you, Francois. Another question? Your next question comes from the line of Tom Sykes. Please ask your question. Yeah. Good evening, everybody. A few, please. Could you maybe just make some comments on your French businesses overall and particularly B and I in France and whether the rate of growth there is going to continue where it is. Could you maybe just say at the group level, do you expect your Q4 organic growth to be same above or higher or lower than where you were in Q3? And just clarifying some of the comments you had on consumer, because you're saying for the full year that you expect mid single digit organic growth. So just to clarify, you were at 4.4% for the 9 months. So are you expecting that to improve a little bit despite the trade drag? It's just not quite clear what you're saying there, please? Yes. So there is no as I said, for the moment, at least there is no impact due to the tariff. Clearly, we confirm our mid single organic growth for Consumer Products, okay? So this is confirmed for the year. The second question was about the French operations. 2 months ago, Francois, you were still in charge and the CFO for Europe. So you know France very well. Maybe you would like to comment and give some answer to this question to Tom. Sure, Didier. Hi, Tom. Hi, Francois. When it comes to B and I, France, as you know, is made up of 2 components. The CapEx part, as mentioned earlier on, is a bit disappointing on those sides with a moderate growth. However, as mentioned by Didier, it's more than compensated by our OpEx activities on which we have posted for the 1st 9 months a very strong growth on the back of several large contracts. Obviously, what we have ahead of us is a bit tougher in terms of last quarter. We have a very high comparable on the OpEx side as this growth has actually started mid end of last year. So to be within the level of comfort I can give to you will be more mid low mid single overall for the last quarter. Thank you, Francois. So your first question about was about Q4? Yes. Just the group level organic growth, yes. Yes. So in light of our 1st 9 months performance, of course, confirm our 2018 outlook, acceleration of the organic growth versus last year. We achieved 3.9% organic growth in the 1st 9 months. We cannot expect it to be so high in Q4, as Q4 twenty 17 was particularly strong. And second, of course, as you know, there will be 2 main moving parts. The first one, one positive coming from Marine and Offshore, but which could probably not compensate the negative on certification. So we can expect Q4 probably a little bit down to Q3. But overall, we confirm our organic growth performance for the year, meaning acceleration against last year. Okay. Thank you. Sorry to be a bit of a pedant about this, but you mentioned 3.9% at the 9 months and then you said you would be slower. I'm sorry, are you saying you expect to be below 3.9% in the Q4 or you just expect to be below the Q3 level, which could be above 3.9%? With the detail of information I have today, but need to be confirmed because of course we are still Sure. Because after 1 month, we think we could be probably a little bit less than 3.9. Okay. No problem. Thanks very much, Thierry and Francois. Your next question comes from the line of Alexander Mees. Please ask your question. Thank you. Good evening, gentlemen. Three questions, please. Just on Certification first up, I wonder if you can give us some thoughts about the outlook for 2019, whether it's realistic to expect positive organic growth then? Secondly, on Marine and Offshore, it's great to see moving into positive territory on organic growth. I wonder what your visibility is for the ongoing recovery over the next few quarters. And finally, if you could just remind me what proportion of your Chinese business is focused on the domestic market rather than the export market, please? Thank you. Okay. I'm going to start with your first question. For the moment, again, it's too early and we will discuss in February. But we anticipate certification probably to be negative next year. But as you may know, we launched a lot of new certification schemes, which could compensate a part of the fact that this year we had to our clients had to update their certification against the new standards at the end of September. So too early to talk about it. We will discuss in February. But again, when you look at the fantastic performance we had this year, you could anticipate probably something which can be negative, but too early to talk about it in certification. Okay. The second point is Marine and Offshore. Maybe, Philippe, you would like to answer? I think we expect the market, at least from a new orders perspective, to remain at the same level, which is about between €50,000,000 to €60,000,000 gross ton new orders in the market, difficult to predict beyond as usual in marine. And still some uncertainty about the impact of the new regulations, notably the sulfur regulations for 2020. It is currently being debated at the MEPC or IMO whether they will enforce it as of Jan 1 or have a transition period. So that can impact the pattern of new orders. And for the time being, it is creating some uncertainty among shipowners. Okay, Philippe. Thank you. Nairo, I'll comment on the questions about China. So I would say it's fifty-fifty, 50% domestic, 50% export. As you know, we have several businesses in China. I count in the export, the job we do for the belt on road program outward China that we do with some Chinese clients. And of course, the Marine business, because the new building is mostly in the shipyards in China. But when you look at it, it's fifty-fifty today domestic and export. Regarding B and I, it's 100% oriented to China today. That's very clear. Thank you very much. Thank you, Your next question comes from the line of Rory McKenzie. Please ask your question. Evening all. Just 2 for me, please. Firstly, on the industry ongoing recovery. Can you talk about the trends you're seeing in Q4 on both the oil and gas CapEx and OpEx side? In particular, what type of projects are you seeing in CapEx? And what discussions might be coming through there? And then the other area I wanted to ask about was actually in agri food and commodities. Again, sorry to mention oil and gas again, but can you talk about the price pressure you're still seeing in oil and petrochem and whether there's any signs of that easing? Thank you. Okay. Regarding your question about industry, we can clearly see a recovery and you can see it on the presentation made today. There are 2 main points I would like to make. The first one is our strategy to turn to more OpEx in Oil and Gas and Power Antilities is paying off. We are now winning some nice contracts in OPEC. Qatar Gas is a good example. And we are still winning some very nice contract in Power and Utilities OpEx, good news for the resilience of the company. And you know that it is a clear organic growth initiative that we took in 2015 to increase the resilience of the company. Regarding now the CapEx in Oil and Gas, clearly, it's accelerating with more tenders compared to what it was at the beginning of the year. So these are not the same type of contract that we enjoyed in the past, which is probably good news. In terms of value, I mean lower value, more oriented to onshore or offshore in shallow waters, more oriented to Middle East and the U. S. We are working on these standards. We will give you more color, of course, in February. But clearly, the Industry business is growing again and is recovering. Q4 will be, of course, okay, but we anticipate, of course, industry to continue to perform in the future knowing that we bottomed out in oil and gas and now we have new projects. So next year industry should start to have to enjoy a better organic growth. On the Agri Food and Commodities business, So it depends. You are talking about mostly oil and petrochemicals business. We have what you asked actually. So we have the same price pressure. There is nothing more, nothing less. I would say it has stabilized at a certain level now. I cannot say it's more, I cannot say it's less today. So as you know, we enjoyed the 2.4% organic growth in oil and petrochemicals. It has stabilized a little bit compared to what it was when the oil price was extremely low for obvious reasons. But now it seems that it has stabilized at a level which should stabilize the margin for the year. But I'm not going to talk margin now. I'm talking about the one for Oil and Petrochemicals. Yes. Okay. Sure. And maybe one more on the Agri Food division, if I may. The weakness in Agri in Europe, do you think that's just kind of a temporary issue given some of the seasonal patterns? Or do you think you'll see a bounce back into Q4 into next year for the agri in Europe? It depends on the weather. As you know and I think it's very well, it's totally linked to the weather. Less water in the U. S. You know that we have the very warm weather and of course less crops due to the fact that there was less rain this year in particular in Germany and in Ukraine. So it is purely the impact of the weather. Okay. So there is no impact of kind of contracts losses in there or anything like that? No, absolutely not. Okay, great. Thank you. My pleasure. The next question comes from the line of George Gregory. Please ask your question. Good evening. I'll go with the traditional 3, I think. Firstly, just on consumer, I perhaps I didn't fully follow this, but should we expect Q4 growth to be slightly higher? I'm not clear on how the comps are in the sub components in the Q4. So the Q4 growth last year was a little stronger overall, but I think there were some working day fluctuations there. Secondly, on MNO, Philip, you gave us some useful color there in terms of the sulfur regulations and the potential transition period. I just wondered if you could maybe elaborate on that. Is that impacting current orders? And have you seen a more recent slowdown in IMO led orders, which had already picked up. Maybe just a bit more color around that discussion would be helpful. And finally, Francois, on the currency impact, I think your prior guidance for the year was or maybe your predecessor's guidance was down for revenue and a bit more on margin. I just wondered if you could update us on your full year expectation for both revenue and profit please? Thank you. Georges, we like the free question, the traditional free question, now it's becoming like this. Okay. Maybe Francois would like to answer first on the currency impact and after Philippe and I will finish with the consumer. Thank you. Well, to make it simple, we maintain our guidance on the impact. As you know, so the approximately 4% 6% that you've mentioned, you know as good as me that we are very exposed to USD and emerging markets. The trend have kind of reversed in the Q3 compared to H1, But by and large, it remains within our guidance. So at that stage, we really confirm the guidance that was given by my predecessor, as you kindly mentioned. Thank you. Thank you. Yes. The question today that you have in the market, as everybody knows, is about this new regulation for the 0.5% sulfur content and the decision to install scrubbers or not. And some ship owners already have decided, some very big ones, to put scrubbers for the new constructions and to retrofit the old ones. I would say that some perhaps midsize notably bulk carrier owners are perhaps waiting to see whether there will be a transition period or whether they have to rush now. It has not vastly affected the market because big players already made their choice to go either to low sulfur fuel or to install scrubbers and has not slowed down the decision. Okay, very clear. Thank you, Philippe. On the core product side, clearly, I'm not going to give a quarterly guidance, but I confirm the mid single digit for the full year 2018. So I know you all will be very good to do your math for Q4. Okay. Thank you. Thank you. The next question comes from the line of Andy Grobler. Please ask your question. Hi, good evening. 3 from me as well, please. Hi, Andy. Yes. Just on Government Services, which picked up very nicely in during the quarter, given that was driven by some new contract wins, is that now pretty set at high single digit, low double digit growth rates through the next 6, 9 months would be first. Secondly, just going back to tariffs, and you mentioned that only 5% of that business was in scope for the tariffs. When you talked about some clients postponing decisions through Q3, were those clients that have products that are in scope? Or is it kind of a more general caution that maybe the scope will increase? Or other kind of realities of trade between those two regions will come into play? And then thirdly, just in terms of oil and gas, the CapEx is back to growth, which is excellent. What's the pricing environment like? As there's a bit more activity, are you getting some pricing tension back in the market? Or is it just too early for that to be a reality? Thank you. Okay. Thank you for your questions. Of course, I'm going to start with your last question. You are right, it's a little bit too early. But of course, as long as there is more volume, the prices will be better because you know the story of the market and supply and demand. So the volume coming back, we could expect of course the price to be better. The good news, as you know, is that CapEx has always been with a better margin than OpEx. On the tariff, it's a very good question. I met in fact a lot of our clients when I was in the U. S. 3 weeks ago. And I had the opportunity because we decided to have like a function with a lot of retailers. So I had really a lot of discussions about the tariffs. It was interesting by the way to see that one client I cannot mention of course said to me, but this is fantastic for bureaus beta because 10% more means that we could have an issue of quality. Your job is to be sure that the quality is going to be at the same level, because we don't want the Chinese manufacturing to work on quality to find the 10%. So I thought it was a very good point. And today, when you think about the actual market conditions, the scope is the one we gave to you, meaning 5% could be impacted, which has not been the case yet. On the Government Services, we did very well. In fact, we have some good contracts in VOC and single window, which are ramping up. Expecting double digit over next year is probably not sustainable, but we should we are back on track with good contracts and we are quite happy with what is happening now with the Environmental Services business. Okay. Thank you. Just going back to the tariffs, I know it's a very broad question. But just when you talked about some clients postponing decisions, Were those clients that were directly in scope? Or were they in other areas? They are mostly to be extremely transparent with you in electronics. They are not in the soft line for the North neither in our lines, mostly in electronics products. The good news is that we test all the soft in Taiwan. So it has no impact. It's more on where or what do they do in terms of the manufacturing of the product in the future. It's always on why for the launch it has no real impact on us because the testing is done in Taiwan, not in China. But some of these clients are just already thinking about why not shifting their supply chain in some countries. The good news is we are already in Cambodia. We are in Vietnam. We are in India. We are in a lot of countries where they could decide to shift, but it's too early to talk about it. It seems again, I'll take my point with precaution. When I discussed with them, they said about 10% at the end of the day depending on the evolution of the RMBs probably not such a big impact. Of course, I'm talking about the actual market conditions. Okay, great. Thank you very much. We have no further questions at this time. Please continue. Okay. Thank you very much. I wish you all good afternoon and good evening.