Guidance

Oct 18, 2018

Press Release

Good evening to all of you, and thank you for joining us in such short notice. With me in the room is Mr. Philippe Marion, Deputy CEO of Bouygues for a thirty minutes call, including Q and A session. I would now like to turn the call over to Philippe Marion. Thank you, Karine. We just sent a press release and organized this call this evening because as mentioned in our H1 twenty eighteen 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 Energy and Services have uncovered 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 UK, 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 Energy and 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 a current operating margin higher than normative level. As a consequence, the current operating profit at Bouygues Construction should decrease by around €150,000,000 in the first nine months of twenty eighteen compared to the 2017. In the future, Bouygues Energy and Services has decided not to bid anymore for biomass plants or more generally for thermal plant projects. This activity will be continued by and Lagen, a subsidiary of Alpiq Engineering Services. Indeed, Kraft and Lagen has been building thermal power plants for a long time and therefore benefits from an extensive experience on this activity. Second at Colas, the French Rail business is experiencing a tough situation since end twenty seventeen. This situation worsened starting in Q2 twenty eighteen due to negative direct and indirect impact of strikes at SNCF. As 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. But 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 coated 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 twenty eighteen results. In that context, the current operating profit at Colas is expected to decline by around €25,000,000 in the first nine months 2018 compared to the first nine months of twenty seventeen. 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 Roads Maintenance France at Colas will perform well in the first nine months of 2018. Moreover, Alpiq Intech and Kraft and Lagen 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, Bouygues confirmed 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 business on November 15 when we release the nine months results and accounts. Thank you for your attention. I'm now available to answer any questions you may have. Operator, please open the Q and A session. Thank you, sir. We have a first question from Jacob 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. So it's becoming back very soon after with a sort of guidance revision. At least the impression is that you exited the quarter, perhaps quite weekly. I mean should we sort of see this 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. And definitely, we don't anticipate any deterioration in the Q4 and definitely a better situation for Q4. So that's for us, it's clearly one shot events around these projects. We were already difficult in the Q2, but definitely with at the end of Q3 more bad news than anticipated for sure. And if I can maybe just ask a follow-up, There is 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 terms of accounting in case of difficult projects, second. And 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. I mean it looks like you're going to have a margin in the 2s. When you sort of think going forward for 2019, do you think you can get a margin back in the 3s in terms of current operating margin? Or do you think this is sort of We a new 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. An accident of one or two or three contracts is always possible. But definitely, thanks to the backlog, to the general environment, we continue to consider that we will be able to improve our margin. And 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 Thank in you. Thank you. Our next question is from Josef Pujal from Kepler Cheuvreux. Please go ahead. Yes, hello. I had three questions please. The first one on Colas Rail, you talk about the need of restructuring it. I guess at that stage you have not taken into account the charge that this will generate. Can you confirm that? And do you have an idea of the range of those charges? How much are we talking about? And when should they be booked? The second question is about, well, understanding how this is going in Bouygues Energies and Services. You have provisioned 100% of the cost overruns and I would say also at spec at Colas. You have provisioned everything and 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? And my third question is just checking what you are guiding today is roughly minus €180,000,000 decline in EBIT for the full year and minus let's say if we take taxes out minus €130,000,000 at the net profit level or should we take into account the impacts? Thank you. Okay. So 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. So 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. So the overrun is totally on the in the accounts. It's also true for the data center because the data center is terminated. So we have only the risk regarding the liquidity damages asked by the client. So definitely, we will we had taken into account all the overruns at the end of the Q3. Regarding recovery, 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. But again, we are just at the beginning of the dispute, so it's very difficult to have a clear idea. So we don't anticipate today a recovery. And when I say that we will be able to increase our margin in the future, obviously, we don't take into account any big recovery coming from these cases. Regarding the recovery of Colas Rai, 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. So 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. And 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. And your last question? The fears. Was about the impact yes, the figures. The impact of these elements on the net result, today what we say to you is the fact that we have in the Q3 an impact on 140,000,000 on the nine months for Bouygues Construction 25 in Colas compared to what was your model previously. So it is the reason why we give you these figures. You are now able to modelize correctly the figure. In terms of net impact, obviously, these figures will have a negative impact on the net result. But for the group as a whole, remember that we will have also some disposal and capital gain, especially around the CELNEX disposals. So it's not so direct than the direct link in the net profit. But again, start to your current model and take into account what we have said in terms of deterioration compared to 2017. And you probably you will have a good estimate of our Q3 and full year results on operating point of view for sure. Thank you. Because we have no other news than this one compared to your model, various models. Thank you. Thank you. Our next question comes from Nicolas Couer from HSBC. Please go ahead. Hi. One question on Colas. You mentioned €25,000,000 lower EBIT. Is it including Miller McAsphalt positive contribution in Yes. Q3 twenty Okay. Yes. And obviously not taking that into account pro form a last year, right? So it's just we're just saying Miller McAsphalt in Q3 twenty eighteen? Yes. Okay. Thank you. It means that the deterioration on this project is more than €25,000,000 for sure, because we have the positive impact of Miller Motte Castle. Obviously. Definitely. Yes. And obviously, you don't provide numbers for just Energy and Services. But with the losses of €140,000,000 does it mean that is almost the negative impact at the Bouygues Energy and 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. So but eventually it means that there is the profits at Energy and Services is down to zero, right? Even negative. In fact, we are in a lost situation in Bouygues Energy and Service Because for delta of EUR 150,000,000 40,000,000 doesn't lead to be positive in Bouygues Energy and Services. Okay. Obviously, yes. Because the deterioration for Bouygues Construction is 100% at the Bouygues Energy and Services level. Okay. But 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. No, yes. Do no, no, seriously, it's not unhope. We have these three difficult projects. Clearly, we stopped this activity handled by Bouygues Energy and Services. So because the market is there, so it's a good market, but we will move this activity to Carsten Lagen for which it's one of their key expertise. But maybe another way ask the question is, if I take the total of the 140,000,000 and 25,000,000, what would be the cash impact? And how does it impact your net debt guidance, which was to be close to 4,000,000,000 at the end of this year? In fact, 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 cap variation in construction than anticipated. So obviously, these losses will be translated in a cash out one time. But compared to the improvement we have in the working cap compared to our anticipation, we don't anticipate any impact negative impact in terms of cash situation and free cash flow after working cap generation. Okay. That's very helpful. Thank you, Philippe. Our next question comes from Jean Salamond from Three Bridges Capital. Please go ahead. Hi, there. Thanks so much for doing a call so soon after your press release. I just want to confirm, sounds like almost everything you're saying is really one off in nature. So 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 upfront and that 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. But definitely, as I have always said, in this business, we can face from time to time this kind of situation. It's not good. We are not happy, but it can happen. But it's definitely a one off effect. Thank you. Our next question comes from Nicolas Didion from Berenberg. Please go ahead. Hi, good evening. I have two questions, if I may. The first is, maybe in order to understand a bit how you discussed with auditors, there are things that are linked to what I would say shit happens in construction. But at the other side, there is a bit of real one offs. And you have a line in your P and L that is one off in a way. So I wanted to understand when is an industrial accident or cancellation by client entering the one off category and what is current or if from now we have to consider everything will always be mean, in current? Well, it's very clear. It's very clear. And evolution in term of project result is definitely current business and so in our current operating profit results for sure. There is no discussion about that. We put on non current event, very specific disposal for instance, which in term of IFRS must be in result of the rationale, the operating results. But to be clearer to the market, we don't consider that these elements are totally linked to the regular and current business. But these ones definitely are totally in line with our regular operation. It's only losses on projects. Yes. Okay. We have never put losses on projects in an exceptional line, never. Okay. Understood. Then the second question is about I mean, the qualification of the four elements you're mentioning in the press release as kind of a one off in Q3. But 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 these projects will be handled by Carsten Lagen, which is not Bouygues Energy Service. 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 plants and the expertise of Kaft and Lagem will be very useful for us. So we don't say that we stop this activity. We say that we no more handle this project under Bouygues Energies Service, but under Carft and Lagem. Which is located where in the group? Which is in Bouygues Construction. You know that we bought Alpiq and Engineering and Services. Craft and Lagen is one of the subsidiary of Alpiq and Engineering Services Group. And this acquisition has not been made by Bouygues Energy Service. It is at Bouygues Construction level. So for the Energy and Services activities, we have in fact three companies, Bouygues Energy and Service, Kraft and Lagen and Alpek Engineering and Services. Okay. we don't stop the business. We put the business in the team for which they have the 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 these clients for the first time. It was not a good venture clearly, but we absolutely don't want to stop the data center business. We will continue. And again, on many contracts, only one was a bad one. Got it. Maybe And the last thing Colas Rai, clearly, 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, but we have to redesign the way we work with SNCF. So it's not a problem of market, it's not a problem of stopping an activity. It's an issue to be more adaptive in our contractual relation, in our way to handle this business, to adapt the situation to the SNCF environment. To up, these elements are one shot in term of accounting and don't change the long term and medium term view we have on this business, please. Got it. That But we have to adapt, obviously, but as you need any businesses, 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. So 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. But the fact that we adapt permanently our strategy, our positioning, the team which handles the business, it's our job on a daily basis. And we don't speak with you of all these situation. This one was very particular, but again, no impact in term of our general strategy and future strategy. Okay. So if we put the Energy and Services aside, still I mean the ambition to have the contracting margin in let's say 2019 to come back to 2017, Italy 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 only some adaptation with only with no long term effect or structural effect. Hello? Yes. Maybe I can ask my question then. Sorry about that. Just one question on Colas high. So I understand that for the biomass project, will be taken Craft and Naggen will take care of that and the data center and the SPAC project are achieved now. But for Colasse, 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 not we will have obviously impact of the low level of activity in Colas Tri, but totally anticipated in our what was not anticipated is the difficulties the big difficulties in Q3 only. Okay. So again, I don't say that Colas Rai 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. In Q4, okay. That's clear. And you confirm that the SPAC is a pipeline project is achieved now and the data center Yes. Is achieved now as It is unfortunately the reason why we have this huge overrun Okay. Okay. On this And maybe could you disclose the level of activities you generate in the freight business in Colas? No. No. No. Okay. Sorry, Alf. Thank you. Okay. Thank you. Apologies for my absence. We have no other questions. Sorry, we don't hear you. What do you say? We have no other questions for the moment. Okay. Okay. So 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. We there is no change in our medium and long term view on construction. Thank you very much, and have a good night. Bye.