Good evening to all of you, thank you for joining us in such short notice. With me in the room is Mr. Philippe Marien, Deputy CEO of Bouygues, for a 30-minute call, including Q&A session. I would now like to turn the call over to Philippe Marien.
Thank you, Carine. We just sent a press release and organized this call this evening because, as mentioned in our H1 2018 earnings release, we were facing some operational challenges in the energy and services activity at Bouygues Construction, and in the Colas specialized activities, notably in the French rail business. Those difficulties have deteriorated recently. Let me explain why. First, Bouygues Energies & Services has incurred new difficulties in the completion of the three projects we mentioned in our half-year results presentation. During the testing and commissioning phase of the two biomass plant projects in the U.K., some malfunctions on certain equipment have led to delays and thus additional costs and compensation to be paid to the client.
The data center in Ireland, which was terminated by the client, has entered a new phase of litigation following the request by the client for payment of the maximum amount of compensation. Bouygues Energies & Services has taken all the necessary measures to solve the issues and deliver those projects as soon as possible. In parallel, building and civil works activities are performing strongly over the first nine months, with the current operating margin higher than normative level. The current operating profit at Bouygues Construction should decrease by around EUR 150 million in the first nine months of 2018 compared to the first nine months of 2017. The future, Bouygues Energies & Services has decided not to bid anymore for biomass plants or more generally for thermal plant projects. This activity will be continued by Kraftanlagen, a subsidiary of Alpiq Engineering Services.
Kraftanlagen has been building thermal power plants for a long time and therefore benefits from an extensive experience on this activity. At Colas, the French rail business is experiencing a tough situation since end 2017. The situation worsened starting in Q2 2018 due to negative direct and indirect impact of strikes at SNCF. We already explained to you, strikes at SNCF had a direct negative impact on freight business and rail works in Q2, leading to a strong decline in activity. We have underestimated the indirect impact of those strikes for the rest of the year. To deal with the structural changes on its market in France, Colas Rail needs to redefine its strategic repositioning and adapt its organization. The strategic work plan, which will last several months, is required for return to breakeven. We will get back to you later on this subject.
On the positive side, international projects are doing well. At the beginning of the year, we also told you that a significant pipeline work site in the south of France had been hurt by adverse weather conditions as we were stuck in the mud. The accrued delay has been caught up through the use of significant means, generating additional costs, which weighted heavily on the margin of this project and more globally on Spac's nine months 2018 results. In that context, the current operating profit at Colas is expected to decline by around EUR 25 million in the first nine months 2018, compared to the first nine months of 2017. Given those elements, we have revisited the full-year 2018 outlook of the construction businesses. We now expect current operating profit and current operating margin at the construction businesses to decrease in 2018 compared to 2017.
Previously, we were anticipating an improvement. Of course, that news is disappointing, but current operating margin will remain at a good level as it is expected to be down only by a few dozen basis points. Indeed, we have good news on the remaining activities of these two businesses. Civil and building works activities of Bouygues Construction and road maintenance France at Colas will perform well in the first nine months of 2018. Moreover, Alpiq InTec and Kraftanlagen will strengthen the energy and services activity of Bouygues Construction in 2019. We are thus confident in the prospect of the construction market. We believe we have entered a long period of high demand at worldwide level, and the good news is that the positioning and strength of our construction activities brings us strong competitive advantage within that context.
Furthermore, tying up the least amount of capital, they generate a very high level of cash and offer a resilient model with a steady generation of free cash flow, even though they could face sometimes some difficulties on some projects, as we have always explained. Lastly, we confirm the outlook for TF1 and Bouygues Telecom, and expect a stable or slightly lower current operating profit at group level in 2018 compared to 2017. We will comment in more detail the performance of our other businesses on November 15th, when we release the nine months results and accounts. Thank you for your attention. I am now available to answer any question you may have. Operator, please open the Q&A session.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please dial 01 on your telephone keypad. Thank you. We have a first question from Jakob Bluestone from Credit Suisse. Please go ahead.
Hi, good afternoon. I have a question just sort of in terms of the pace at which you exited the quarter. You obviously had an investor day on your construction business very recently. To be coming back very soon after with a sort of guidance revision, at least the impression is that you exited the quarter, perhaps quite weakly. Should we sort of see this that things are deteriorating into Q4 and this is going to take some time to turn around? Is that a reasonable interpretation that things are sort of getting worse as we go along?
No. Definitely, we have taken into account the bad news of these very specific projects. Definitely, we don't anticipate any deterioration in the Q4 and definitely a better situation for Q4. That for us, it's clearly one-shot events around this project. We were already difficult in Q2, definitely at the end of Q3, more bad news that anticipated for sure.
In fact, maybe just to ask a follow-up-
Clearly, we will not have more deterioration in Q4 because, again, the rest of the business, first, we have taken all the measure for this project, specific projects. First, second, you know that we are always very prudent in term of accounting, in case of difficult projects, second. Third, the rest of the business, building and civil works and road in France mainly, are in a very good shape.
If I can just ask a follow-up question on Bouygues Construction specifically.
Yeah.
It looks like you're going to have a margin in the twos. When you sort of think going forward, for 2019, do you think you can get a margin back in the threes in terms of current operating margin? Do you think this is sort of the new level?
We remain with the idea that according to our backlog and the current environment that we have described in the Capital Market Day, we consider that structurally, we are able to deliver better margin in the coming years. Unfortunately, and we are totally disappointing on that, unfortunately, we had this bad news on this specific project, which is always a possible case, even if we try to manage very properly contract, and an accident of one or two or three contracts is always possible. Definitely, thanks to the backlog, thanks to the general environment, we continue to consider that we will be able to improve our margin. You will see that even in the Q3, you will see that for building and civil works, definitely, we are in a position to improve the margin because we will deliver a better margin than the normative one, even in Q3.
Thank you.
Thank you. Our next question is from Joseph Poujan from Capital Sovereign. Please go ahead.
Yes, hello. I had three questions, please. The first one, on Colas Rail, you talk about the need of restructuring it.
Yeah
I guess at that stage, you have not taken into account the charges that this will generate. Can you confirm that? Do you have an idea of the range of those charges? How much are we talking about? When should they be booked? The second question is about, well, understanding how this is going in Bouygues Energies & Services. You have provisioned 100% of the cost overruns, and I would say also at Spac, at Colas. You have provisioned everything. Maybe there will be, in the future, I would say, you will be able to release part of that or is there a sort, I think that there is a litigation in Ireland, or there is absolutely no hope of recovering anything?
My third question is just checking, what you are guiding today is roughly -180 decline in EBIT for the full year and minus, let's say, if we take taxes out, EUR -130 million at the net profit level, or should we take into account the impacts? Thank you.
Okay. The question on the level of provision and cost for the various projects. Yes, we consider that. We have taken into account 100% of the overruns and the risk we have. We don't anticipate any more overrun. First, because some of these projects are totally achieved. It's the case, for instance, for the Spac project. The overrun is totally in the accounts. It's also true for the data center, because the data center is terminated. We have only the risk regarding the liquidated damages asked by the client. Definitely, we had taken into account all the overrun at the end of the Q3. Regarding recovery, honestly, for the time being, it's difficult to say that we are in a position to recover something. We believe that we have some strong arguments to defend our position.
Again, we are just at the beginning of the dispute, it's very difficult to have a clear idea. We don't anticipate today a recovery. When I said that we will be able to increase our margin in the future, obviously, we don't take into account any big recoveries coming from these cases. Regarding the recovery of Colas Rail, clearly for us today it's more to redefine our strategic positioning and our way to contract and to run business with SNCF more than to close some activities in the railway activity or to have a big redundancy plan. The idea is not to have big redundancy plan. It's more to reposition our strategy and our activity according to what is the French rail environment today and the SNCF attitude.
Regarding people, even if we decrease a little bit this activity, as we have a lot of job out of France, we will not have a big impact in term of redundancy costs. Your last question-
The fears
was about the impact. Yes, the figures. The impact of this element on the net results. Today, what we say to you is the fact that we have, in the Q3, an impact on EUR 140 million on the nine months for Bouygues Construction, EUR 25 in Colas, compared to what was your model previously. It is the reason why we give you these figures. You are now able to model it correctly, the figure. In terms of net impact, obviously, these figures will have a negative impact on the net result. For the group as a whole, remember that we will have also some disposal and capital gain, especially around the Cellnex disposals.
Okay.
It's not so direct than the direct link in the net profit.
Okay.
Again, start to your current model and take into account what we have said in terms of deterioration compared to 2017, and probably you will have a good estimate of our Q3 and full year result.
On operating point of view, for sure.
Okay. Thank you.
We have no other news than this one compared to your models, various models.
Okay. Thank you. Thank you. Our next question comes from Nicolas Cuyar from HSBC. Please go ahead.
Hi. One question on Colas. You mentioned EUR 25 million lower EBIT. Is it including Miller McAsphalt positive contribution-
Yes
in Q3 2018?
Yes.
Okay.
Yes.
Obviously not taking that into account pro forma last year, right? We're just taking Miller McAsphalt in Q3 2018.
Yes.
Okay. Thank you.
It means that the deterioration on this project is more than EUR 25 million for sure, because we have the positive impact of Miller McAsphalt.
Obviously.
Definitely.
Yes. Obviously you don't provide numbers for just Energy and Services. With the losses of EUR 140 million, does it mean that?
Which is almost the negative impact at the Bouygues Energies & Services level.
Okay. That's what I wanted to find out.
As you have the figure for the first half, you are able to have the impact on the Q3.
Eventually it means that the profits at Energy and Services is down to zero, right?
Even negative. In fact, we are in a loss situation in Bouygues Energies & Services.
Okay.
For sure.
Okay.
A delta of EUR 140 million doesn't lead to be positive in Bouygues Energies & Services.
Okay. Obviously, yes.
The deterioration for Bouygues Construction is 100% at the Bouygues Energies & Services level.
Okay. It doesn't say anything about what you should expect in terms of EBIT next year in energy and services.
It means that definitely we will have improvement in 2019, for sure.
That's what we hope. Thank you.
Yes. We do. No. Seriously, it's not on hope. We have these three difficult projects. Clearly, we stop this activity handled by Bouygues Energies & Services. The market is there, so it's a good market, but we will move this activity to Kraftanlagen, for which it's one of their key expertise.
To me, another way to ask the question is, if I take the total of the EUR 140 and EUR 25 million, what would be the cash impact, and how does it impact your net debt guidance, which was to be close to EUR 4 billion at the end of this year?
We will have almost no impact in term of cash, because as you have seen in half year, and the trend remains the same, we will have probably better news in term of working capital variation in construction than anticipated. Obviously, these losses will be translated in a cash out one time. Compared to the improvement we have in the working capital, compared to our anticipation, we don't anticipate any negative impact in term of cash situation and free cash flow after working capital generation.
That's very helpful. Thank you, Philippe.
Our next question comes from Jean Salomon from Three Bridges Capital. Please go ahead.
Oh, hi there. Thanks so much for doing a call so soon after your press release. I just want to confirm, it sounds like almost everything you're saying is really one-off in nature. When we try to think about some of these projects, and you're saying you're 100% provisioning for them, and sort of taking that hit up front and at Q4 already, you're back on track. When we look out to 2019, should we consider these items you're highlighting today as almost entirely one-off in nature? Or should we assume that there will be a lingering margin impact in the outer years as well?
No, it's clearly a one-off effect this year.
Okay. That's very helpful. Thank you.
Definitely. It is the reason why we are so disappointed, because in fact, the rest of the business is totally in line with what we have said and what we'll anticipate for the construction businesses, thanks to the trends we explained three weeks ago.
I understand. Thank you.
Definitely, as I have always said, in this business, we can face from time to time this kind of situation. It is not good. We are not happy. It can happen. It is definitely a one-off effect.
Thank you. Our next question comes from Nicolas Didio from Berenberg. Please go ahead.
Hi. Good evening. I have a few questions, if I may. The first is, maybe in order to understand a bit how you discuss with auditors, there are things that are linked to what I would say, shit happens in construction. The other side there is a bit of real one-offs, and you have a line in your P&L that is one-off in a way. I wanted to understand when is an industrial accident or a cancellation by a client entering the one-off category and what is current, or if from now we have to consider everything will always be in current.
Well, it's very clear. Evolution in terms of project results is definitely current business, so in our current operating profit or result, for sure.
Okay.
There is no discussion about that. We put on a non-current event, a very specific disposal, for instance, which in terms of IFRS must be in résultat opérationnel, operating results. To be clearer to the market, we don't consider that these elements are totally linked to the regular and current business. This one definitely are totally in line with our regular operation. It's only losses on projects.
Yeah. Okay.
We have never put losses on projects in an exceptional line. Never.
Okay. Understood. The second question is about the qualification of the four elements you're mentioning in the press release, as kind of a one-off in Q3. It looks to me there is a bit of an impact in the future. The fact that you're not going anymore to look at building biomass, that you're losing a contract in data center, the fact that you're going to rethink the rail activity. Can we consider that there will be still, let's say, a spilling impact over 2019 and beyond the fact that you have to rethink a bit few projects and some ambitions in some areas in construction?
I take your point. For biomass, what we said is the fact that now these contracts and this project will be handled by Kraftanlagen, which is not Bouygues Energies & Services. It's another company, and it's one of the purpose of the acquisition of Alpiq. We bought Alpiq because Alpiq had some very specific expertise in growing market, and definitely this thermal power plant and the expertise of Kraftanlagen will be very useful for us. We don't say that we stop this activity. We say that we no more handle this project under Bouygues Energies & Services, but under Kraftanlagen.
Which is located where in the group?
Which is in Bouygues Construction. You know that we bought Alpiq Engineering & Services. Kraftanlagen is one of the subsidiary of Alpiq Engineering Services group. This acquisition has not been made by Bouygues Energies & Services. It is at the Bouygues Construction level. For the energy and services activities, we have in fact three companies, Bouygues Energies & Services, Kraftanlagen, and Alpiq Engineering Services.
Okay.
We don't stop the business. We put the business in the team for which they have the expertise. That's for the biomass and thermal power plant. For data center, definitely we have made successfully a great number of data centers throughout the world. Unfortunately, this one was not a great success by far, and we have worked with this client for the first time. It was not a good venture, clearly. We absolutely don't want to stop the data center business. We will continue. Again, on many contracts, only one was a bad one.
Got it. Maybe the last-
Regarding Colas Rail, clearly, we have to adapt our strategy to the current French situation, which is a very specific one because of the freight market and because of the situation of the SNCF. Even if we consider that we will have a good trend in term of market and future project, we have to redesign the way we work with SNCF. It's not a problem of market, it's not a problem of stopping an activity. It's an issue to be more adapted in our contractual relation, in our way to handle this business, to adapt the situation to the SNCF environment. To sum up, these elements are one shot in term of accounting and don't change the long-term and medium-term view we have on these businesses.
Got it.
We have to adapt, obviously, but as in any business, you have to adapt. We adapt a lot of things that we don't discuss with you because the negative impact was not huge. These impacts are very important, we consider that it was our duty to speak about with you, because the negative impact is not able to be offset by other positive impact. The fact that we adapt permanently our strategy, our positioning, the team which handles the business, it's our job on a daily basis. We don't speak with you of all these situation. This one was very particular, but again, no impact in terms of our general strategy and future strategy.
Okay. If we put the energy service aside, still the ambition to have the contracting margin that's in sort of 2019 to come back to 2017 level is still on track. There is no problem on that, right?
Absolutely. The target remains the same. The strategy remains the same. Unfortunately, because of these one-shot problems, we have to make some adaptation, but that's only some adaptations with no long-term effect or structural effect.
Got it. Thanks, Philippe.
Hello?
Yes.
Philippe?
Oh, yes. Maybe I can ask my question then. Sorry about that. Just one question on Colas Rail. I understand that for the biomass project, Kraftanlagen will take care of that, and the data center and the SPAC project are achieved now. For Colas Rail, I don't understand why you don't expect any more impact from the strikes on Q4 on these freight activities.
No. I don't say that we will have obviously impact of the low level of activity in Colas Rail, but totally anticipated in our What was not anticipated is the big difficulties in Q3.
Okay.
Only.
Okay.
Again, I don't say that Colas Rail will be fantastic in Q4.
Okay.
I say that compared to what we have anticipated and the guidance we have given to you, we don't anticipate more deterioration.
Okay. Thank you for Okay. That's clear. You confirm that the SPAC is a pipeline project, is achieved now, and the data center-
Yes
is achieved now as well.
It is unfortunately the reason why we have this huge overrun.
Okay.
On this project.
Could you disclose the level of activities you generate in the freight business in Colas?
No.
No?
No.
Okay. Sorry. Thank you.
Okay. Thank you. Apologies for my absence earlier. We have no other questions.
Sorry, we don't hear you. What do you say?
We have no other questions for the moment.
Okay. Thank you very much. Thank you very much for your attention and your attendance. Again, we are very disappointed of this series of news, but definitely we consider that, and I hope that the explanation I have given to you confirm that, there is no change in our medium and long-term view on construction. Thank you very much, and have a good night. Bye.