Earnings Transcript for BVI.PA - Q1 Fiscal Year 2023

Operator: Good day, everyone, and welcome to the Bureau Veritas First Quarter 2023 Revenue Conference Call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Hinda Gharbi, Deputy Chief Executive Officer. Please go ahead.

Hinda Gharbi: Thank you, April. Good morning, good afternoon and good evening to everyone. Thank you for joining Bureau Veritas today on the webcast and on the call. Francois Chabas, our group CFO, is here with me to present our Q1 2023 revenue and answer your questions. The group has delivered a strong start to the year, thanks to our decyclicalized and resilient portfolio. I would like to thank our teams around the world for these very strong results. On the transition front, as you know, I should be succeeding Didier at the AGM in a few weeks.

Looking at our revenue. In Q1 2023, revenue for the quarter was EUR 1.4 billion, up 8.9% year-on-year. The organic increase was 8.5%, showing a very solid underlying performance year-to-date. Five of our businesses delivered particularly strong organic revenue growth ranging from 7.7% to 13.5%. Consumer products continued to be impacted by slow consumer demand across developed economies, in line with the trends we experienced in the second half of last year. :

The scope effect was a positive 1.5%, reflecting the impact of the bolt-on acquisitions realized in the past few quarters. ForEx had a negative impact of 1.1% in Q1, primarily due to the depreciation of some emerging market currencies against the euro. From Q2 onwards, we expect an additional impact due to the weakening U.S. dollar. :

Moving to the portfolio. Our diversified business mix and Bureau Veritas global footprint underpin the resilience of our organic growth. :

Looking at the mix this quarter. Marine industry, B&I, certification and agri-food and commodities continued their strong growth momentum, in line with the previous quarter. From a geographical standpoint, the Americas, Africa and the Middle East are leading the pack, while Asia's organic growth picked up sequentially as China started to open. :

Before going through the Q1 2023 business review, I would like to say a few words on the progress of our CSR performance indicators. Health and safety is a top priority for myself and for the management team and for our colleagues, so we continue to take measures to ensure the health and safety of all our employees. Our gender diversity actions are yielding results with a number of women in leadership position, reaching 29.6% in Q1 versus 25.4% in the same quarter last year. :

In terms of decarbonization efforts, we are committed to reducing our CO2 emissions. In the last 12 months, our CO2 emissions per employee reduced by 7%. :

Turning to the revenue growth by business for the quarter. We delivered broad-based growth from the conversion of our backlog, positive pricing realization and high demand for sustainability and energy transition solutions. Our businesses grew high single digits or double digits organically, except in the Consumer Products division. :

Let me share with you more details for the quarterly revenue performance by business. For Marine & Offshore, we continue to convert our solid backlog, which stood at 21 million gross tons at the end of the quarter. The business delivered a strong 13.5% organic revenue increase. Core in-service activities grew double digit, benefiting from COVID-19 delayed occasional surveys and positive pricing. Services and new construction activity saw mid-single-digit growth. For Agri-Food & Commodities, the business reported an organic growth of 7.7% in Q1 with all activities performing well. Oil and petrochemicals, metals and minerals and Agrifoods delivered mid-single-digit organic growth. They benefited from higher volumes in most commodities and from price increase in some geographies. Government Services grew double digit, thanks to the ramp-up of several large contracts. :

Moving to Industry now. This business line delivered organic growth of 12.5%. Power & Utilities business continued their strong momentum around grid OpEx business in Latin America and nuclear power generation in Europe. In renewables, we grew high double digits. In the U.S., Bradley Construction Management acquired in 2021, a specialist in solar energy construction project, was a strong performer. It benefited from easing supply chain restrictions and early opportunities from the inflation reduction at investment plan. In Oil & Gas, the performance was strong with OpEx benefiting from a high conversion of the sales pipeline and in CapEx from the startup of new projects. :

For Buildings & Infrastructure, our B&I business continues to show the benefits of its diversified mix, recording 9% organic revenue growth led by the strong performing Americas region. In China, the activity remains subdued, but the sales pipeline is on an upward trend. From a mix perspective, construction-related activities grew faster than buildings and service activities driven by new projects in the Americas and in the Middle East. :

For the Certification business, business growth was supported by both volumes and robust price increases across most countries and scheme. High organic growth was delivered in countries where the services have been expanded with new schemes. This was illustrated by high double digits in Brazil, Vietnam and China to name a few. Consumer demand for brand protection, data transparency and social responsibility assurance all along the supply chain continued to support the growth for our solutions and services globally. For the quarter, we reported a 17.8% growth in our sustainability services. These were driven by high demand for verification of carbon emissions and supply chain audits around ESG. Finally, our new solutions in cybersecurity grew by more than 30%. :

For Consumer Products, we continue to see slow consumer demand coupled with delayed product launches. This impacted our testing volumes, which led to the overall drop in revenue. This performance was moderated by the contribution of our newly acquired businesses. :

In soft line, hard lines and toys, high inventory levels led to lower testing volumes even if activity in China has started to improve following the easing of COVID restriction. This resulted in an overall mid-single-digit organic revenue contraction. Technology was affected by the global decrease in demand for consumer electronics and wireless equipment as well as the reduction in new product launches. We continue to build resilience in this portfolio as we opened a new lab in Hanoi, which will be fully dedicated to connectivity and wireless testing. :

In health and beauty and household, we delivered solid double-digit organic growth in Q1. This promising performance is complemented by the successful ramp-up and integration of Advanced Testing Laboratory and Galbraith Laboratory, which were both acquired last year in the U.S. This helps strengthen our position in this growing sector. :

Moving now to the portfolio business highlights. As you know, sustainability and energy transition are an important component of our group growth potential. BV Green Line includes all our solutions and services and sustainability enabling sectors like the new energy space. It also encompasses our solutions to support our customers in their sustainability or ESG management journey. Today, the BV Green Line represents 55% of the last 12-month sales. :

Continuing the trend from last year, all our sustainability customer solutions are in high demand, and we continue to expand and to innovate to address new customers' needs. To give you some examples of innovative new customer solutions we have recently launched, we rolled out a new certification scheme dedicated to renewable hydrogen. This scheme will help our industrial customers transition to cleaner, safer and more sustainable energy sources. The group also developed an audit framework for the climate neutral data center pack. This will help data center owners and operators implement a sustainable and efficient compliance strategy with various regulations. :

Most recently, Bureau Veritas obtained from French regulators the accreditation to certify and deliver the anti-food waste label. The first certification was granted to French retailer, Carrefour. This label recognizes best practices in reducing waste and product disposal. :

As I discussed last year or last quarter, we have continued to expand our portfolio of services to respond to our customers' needs. We wanted to share with you a few examples that illustrate these new services and solutions. In consumption and traceability, we were recently awarded a food safety and quality controlled contract in Saudi Arabia to support regional farmers and producers to meet the standards and regulations of a new sustainable city. :

In new mobility, we have issued an approval in principle to Viridis Bulk Carriers, the world's first zero-emission shipping company. This is a new standard for zero carbon short sea bulk logistics, utilizing ammonia as a fuel. This represents a major milestone for the decarbonization of the marine industry. :

We have been accredited by UKAS, the U.K. National Accreditation Body to deliver either certificates to control quality throughout the external service chain of the nuclear industry. We will continue to develop our green line suite of services as we pursue growth in the sustainability and energy transition spaces. :

For the outlook now. Based on the healthy sales pipeline, near-term customer demand expectations and sustainability-led growth opportunities and considering evolving current macroeconomic uncertainties impacting our clients, we expect for the full year 2023 to deliver mid-single-digit organic revenue growth, stable adjusted operating margin, a strong cash flow with cash conversion above 90%. :

To conclude. we delivered another strong top line performance this quarter, thanks to our agile, reliable and resilient portfolio and strong execution by our teams around the world. As I have explained just now, we have expanded our services in the sustainability and energy transition markets and believe we will continue to grow. :

Looking forward, we are sharply focused on what we control, specifically delivering superior customer service, addressing customers' new needs. And we are pursuing a disciplined execution of our business plan, in particular our pricing programs. :

Thank you all for your attention. Francois and I are now ready to take your questions on the call or on the webcast. :

Operator: [Operator Instructions] And we'll take Suhasini Varanasi, Goldman Sachs.

Suhasini Varanasi: I have a couple please. In the first quarter, can you please comment on how the pricing has contributed to organic growth? I think at the end of last year, you commented that pricing had contributed 1.5% to 2% to growth. Just wanted to get a sense on where it is today.

And the second one is on the outlook. Given the strong start to the year and maybe slightly easier comps going into second quarter, I appreciate that maybe comps are a little bit tougher in second half, but feels like a strong start. Is it just the usual caution that is preventing you from raising your guidance on organic growth at this point in time? :

Hinda Gharbi: Thank you, Suhasini, for the question -- for the 2 questions. I'm going to take the question on the outlook, and I'll let Francois comment on the pricing question. Look, I think there's no secret that we like to deliver on our commitments, and a measure of caution in uncertain environment is not necessarily a bad thing.

Since we last spoke with you in February, I think the uncertainties haven't really changed materially or reduced, so we still consider that the macro remains quite uncertain. Having said that, we did start with a very strong performance in Q1. Stronger than expected, for example, for our Marine & Offshore division, where we have seen some one-offs that boosted the growth there. We also, as you mentioned, have second half comparables that will be more challenging considering the strong H2 last year. :

So if you take all these together, and you consider where we are in the year, we consider that it's a bit too early to have a different view. And therefore, we elected to maintain the outlook as is. It's a cautious position, but I think it's a reasonably cautious position considering all these factors taken together. I'll let Francois comment on pricing. :

François Chabas: Thank you. So on the pricing, first of all, we've been pretty pleased with, I would say, the various action taken in Q3 and Q4 last year to adapt to a pricing structure to the new realities, especially in the U.S. and Europe. So when it comes to the first quarter, what I can tell you is there is no change when it comes to our plans. We confirm that the price component will be higher this year than where it was the year before, and we confirm it is already the case in Q1. So no bad surprises on that front. I think plans are delivered as planned in more supported geographies.

Operator: Our next question will come from Will Kirkness of Societe General.

William Kirkness: I had 3 please. I just wondered if you could talk a bit about the consistency of the growth you've seen through the quarter. And perhaps I'm most interested in consumer products, if you could maybe just talk about the exit rate relative to that minus 3.5% you saw for the quarter overall.

Secondly, just to follow up on pricing. I assume given contract structures and lags that, is it reasonable to assume that actually pricing continues to accelerate as a component of revenue growth for this year? :

And then the final question was just with regard to B&I. So when you look at the pipeline, I just wondered if you're seeing anything on projects, canceled deferrals, just thinking about financing and particularly in relation to the U.S. :

Hinda Gharbi: Will, thank you. Yes, just to be clear because you broke up a bit at the start, you're asking about consumer products. I didn't touch the early part of your question there.

William Kirkness: The first part was just for the quarter overall, whether you could give any color or context on the organic growth rate through the quarter. And then particularly, I was interested in consumer products, whether that minus 3.5% was better by the end of the course.

Hinda Gharbi: All right. Got it. Thank you. Look, I think what we have seen is a broad-based growth across all the divisions, except consumer, and I'll get to that. And it's really -- it's built on a conversion of our backlog across most of our divisions. It's also built on -- there are elements of pricing, which I'll let Francois comment on. And we have some, I would say, one-offs or upside activity, particularly in the Marine side that contributed to that boost in Q1, and it's quite similar to what we have seen in Q4. Mostly these are delayed work, periodical work or occasional work that normally takes place distributed throughout the year that got backed up because of COVID-19 restrictions. And as things opened up, we started seeing some of that work being done.

So that's really how it all panned out. If you look at the growth, 2/3 of that growth came from 2 divisions, B&I and Industry. So that is a strong component from that. Of course, on the other end, you have consumer products that continue to suffers from a backdrop of the consumer slowdown that we see both on the soft line, hard lines and toys, but we also see it on the technology front. That's affecting volumes in general, and that basically contributed to that contraction you have seen in consumer. :

Now there was some opening in Q1. But remember that Q1, we still had the Chinese New Year, which was a bit earlier this year, but it's an activity that was reduced. But even with the easing of COVID restriction, we're not -- we still have that slowdown of consumer demand. So yes, we don't have the absenteeism and the limited activity for the volumes at hand, but the volumes overall in the consumer space are lower just because of that slowdown and those high inventories in developed countries that continue to affect demand. I'll pass to Francois on the pricing. :

François Chabas: On the pricing, so overall, you're right. We expect the pricing momentum to get a bit stronger as the year goes by. There is as well a component of size of the quarter. Q1 is a relatively small quarter in size in terms of overall revenue for the reason that Hinda mentioned, in particular with the New Year in Asia. So the pricing component in euro will obviously get a bit stronger over Q2 and then the rest of the year.

But I think what is to us good to see is that those actions, which are, as you may imagine, pretty much time consuming in terms of focus of our team, have been delivered already in Q3, Q4 last year. So we are pretty confident on that front. :

Hinda Gharbi: Yes. Thanks, Francois. Look, on the B&I, I think it's important to reiterate that the mix we have is a balanced mix and a resilient mix. And therefore, what we have seen, we've seen a very -- we've seen a growth of 9% of B&I this quarter. The Americas platform continues to deliver, both from the Latin America region, particularly Brazil in this case, but also from the U.S., where we have a strong mix across our project management activity, our in-service inspection, our data commissioning. So that richness of portfolio is helping us actually manage to deliver this kind of growth.

We also have seen very good growth in the Middle East region. We are participating in a number of very large infrastructure -- buildings and infrastructure projects that are very important in -- particularly and notably in Saudi Arabia, and that's really contributing to that growth. So solid mix, resilient portfolio, and that's why we have delivered that 9% on the B&I. There's also some elements of pricing as well in there. :

Operator: And next, we'll hear from Annelies Vermeulen of Morgan Stanley.

Annelies Vermeulen: Just a quick follow-up on the pricing as well. It's very clear that you said you've delivered or achieved higher pricing relative to '22 and particularly Q4. I'm just wondering whether there are any divisions achieving those higher pricing increases has come through more rapidly versus other divisions. You just mentioned, obviously, in Building and Infrastructure, there's a good pricing element in there as well. So any kind of divisional commentary on pricing would be helpful.

And then secondly, you mentioned in the release in Consumer Products, the non-Asia regions are benefiting from some structural near shoring market trends. I'm just wondering whether you can comment at all if you're seeing any of that in China. I realize it's perhaps tricky given the slower consumer volumes overall and disaggregating that near-shoring or reshoring element. But if there's any examples you can give us where you've seen that shift, that would be very interesting. :

And then lastly, any update on the cost inflation side, particularly wage cost inflation? Are you starting to see that abate in any geographies? Or has it remained strong into the start of the year? :

Hinda Gharbi: Thank you, Annelies. Let's go in order here. I think I would say pricing, as we explained last year, and I'll let Francois maybe complement any specifics, that in the mass markets, it tends to be faster and easier, so any businesses that have significant mass market elements that will benefit from that. But in general, I think the pricing is -- will vary through geographies and through businesses. I don't -- we wouldn't normally guide on pricing by business line, but I'll let Francois...

François Chabas: To further comment on this when it comes to the speed of implementation, I think it's very highly relative to the geographies. We have something which is more like a machine, which our operation in Latin America, which have kind of lived with inflation for years. So here, of course, it goes as usual. We are pleased to see that the action we have taken in Europe and the U.S. have been delivered on time. So in terms of speed of execution, I think we are very happy about it.

If I have to make a more moderate comment, this is the AsiaPac region, which for various reasons and you're touching upon China, notably, is in some geographies more reluctant to get through a price increase mechanism for reasons that inflation over there is a bit lower as well. So -- but by and large, things are under control on our hands. :

When it comes to cost inflation, we don't talk about margin in the Q1 call, but fair to say that the wage increase we had budgeted to foreseen have been delivered without major surprises or variants to the expectations. I can't say much more for this call. You would understand. :

Hinda Gharbi: Thanks, Francois. On the consumer -- on your specific question on nearshoring, and I think for us, we -- for a number of years now, we have reconfigured our footprint to actually take advantage of some of the sourcing shifts we have seen. So for example, we have a footprint now in Turkey, which basically serves the European market. We have our Southeast Asia, South Asia footprint that caters to retailers and producers who have moved around the production from China. So we believe we have addressed some of that today.

But really, the challenge today, like you've alluded to, is just the consumer demand is slow. And it's both on the soft line, hard line, but also in the technology for slightly different reasons. But -- so we don't see for us today the challenge being the actual footprint. We believe we have made that move. Having said that, as we look to the future, geographically, of course, we have looked at expanding into North America, and you've seen us doing some acquisitions last year to shore up our activity in the health, beauty and household. And we'll continue to pursue our expansion in North America. :

Operator: Our next question comes from Oscar Val of JPMorgan.

Oscar Val Mas: Just 2 questions from my side. The first one that you called out twice kind of a one-off impact in Marine and Offshore carrying over from Q4. Could you possibly quantify how significant that was at a Marine and Offshore level? And when do you expect that to end? That's the first question.

And then the second question is going back to consumer. You've talked about pricing being a bit more difficult in Asia. Are you seeing any pressure on market share? Or any more competitive dynamics? How are the competitive dynamics in Consumer Products? :

Hinda Gharbi: I think just on the M&O, these occasional surveys are giving us some additional revenue. I wouldn't give exactly the exact number, but these surveys normally take place distributed. They get planned ahead. But because they couldn't be executed, they just basically -- they ended up being performed in Q4, and we have seen some in Q1. We expect them to ease down, and we expect also the comparables later on this year to be more challenging considering what we have seen last year. So that's why we believe we'll have healthy growth with M&O, but these levels we're seeing are on the much higher side.

On the pricing, did we -- do you want to comment on the Asia? I didn't think we were very specific on Asia pricing. But look, I think on consumer, of course, with the reduction in volumes, the competitive situation is very, very tenuous, and there is some positioning to make sure to -- one keeps important contracts, and that's how we work around the situation today. :

We're very focused on serving the accounts we have. We are being competitive on accounts we want to get after, and we are ensuring that we keep our volumes as high as we can. I can't give you specifics on pricing compared to competitors on that, but that's the situation today. The important thing, though, is we are expanding our offering in the sustainability side. That's an important part of our activity, and that's growing healthily, and we continue to expand that in consumer. :

Operator: Next, we'll hear from Karl Green of RBC.

Karl Green: Just a couple of questions for me. Just following on from the M&O comment about the occasional surveys. You said, I think, that you're expecting to ease down over the balance of the year. Are you excluding the possibility that we end up with another strong organic growth print in Q2? Or is the bulk of that now kind of washed out in Q1? That's the first question.

And then the second question, just on certification. I mean that's seeing a material step-up in growth versus pretty much every quarter in fiscal 2022. I mean what kind of changed there? Was it principally volume and activities in areas like sustainability and cybersecurity? Or was there something else going on perhaps on the pricing side? That would be useful color. :

Hinda Gharbi: All right. I'll let Francois take the M&O. So Francois, go ahead.

François Chabas: So on the M&O side, this business, 60% is in service, 40% is new construction. On the 40%, the whole trend we have is built on our backlog, and you know it's up 5% against last year.

On the service side, this is the point that Hinda mentioned, you have this bulk of equation surveys, hitting the P&L in Q4 and in Q1. That really, for sure, most probably, there was still a bit in Q2, and that will kind of disappear rates, too. So you should expect a lower H2 for sure. :

Hinda Gharbi: On the certification -- I'll have to ask you later for your third question. But on the certification, we have very healthy growth as you have seen the double-digit there, Karl. And 2 things. We are -- this year, we are basically back to what we call a normal year, where we're restarting survey. We had a bit of a trough last year, but that's a normal cycle, if you like. So that's the first one.

The other thing, which is I'm very pleased with and I shared in the prepared remarks, is we have a number of new schemes we're introducing. We're very, very active with customers to understand what voluntary schemes they're interested in. I gave you a number of examples in the prepared remarks, and we have in the press release as well. :

So we're seeing good momentum there. We're seeing on the food inspection side. There's a lot of work on the sustainability. We are growing in the sustainability part of certification at 17.8%. So all the different streams of certification are growing very healthily, and that's -- and we expect that momentum to be consistent in general. :

Operator: Next, we'll hear from Neil Tyler of Redburn.

Neil Tyler: A couple of questions, please. Firstly, back to B&I and specifically North America. On the projects or the project pipeline that you're working on and thinking about things like data center commissioning and EV charging stations, can you share with us perhaps your confidence or level of visibility of what -- of the sort of longevity of that pipeline, how confident you are there?

It seems like there's an awful lot of work to be undertaken. And with that in mind, how you're finding starting that work because there's obviously very significant growth in your business, very significant activity across those end markets and presumably creating quite a lot of attention in the skilled labor market there. And so how you're coping with that? Those are the first 2 questions, I suppose. :

And then the second is on consumer product testing. And there, given what you've -- how you've described the competitiveness of pricing in, well, I suppose, in the China business, are you seeing a margin accretive effect of moving that business to areas after in the world, where are you benefiting from the nearshoring? Is that effect benefiting your margins in that business? :

Hinda Gharbi: Thank you, Neil, for the question. So look, I'm going to start with the B&I. So the nice thing with our B&I platform, it's a diversified platform. So we have code compliance activities. We have in-service activities. We have the commissioning, like you mentioned. So that diversification, if you like, is giving us a nice hedge in different activities. So we're very comfortable with some of these activities. In code compliance, for example, we've been growing healthily. We've been growing healthily in our in-service. The activity in the project also continues to grow.

Where we have seen a bit of a challenge, and I think we talked about it in the past, is on the transactional side of these activities, There's, of course, a slowdown of real estate transactions in general, which has a slight effect on us, but we were able with the growth in other parts of the portfolio to manage that. So we were quite pleased with how we are managing that at this point. :

In terms of staffing, look, we are very vigilant to how the situation is in regards to skills in the U.S. It's very competitive. And therefore, we design our retention programs and our compensation schemes to address that. So far, while it's very intense and very dynamic and competitive, we have been able to deliver on our plan. I'll let Francois maybe comment on the margin. :

François Chabas: Well, Neil, I'll try and answer your question without commenting on the margin. So it's difficult, but let me give you some -- I think that the question is very valid. So my statement will relate to 2022, that to make my life easier, if you don't mind.

What we see in the repositioning of our activities within the consumer testing business is that the platform we have in south of Europe, so Turkey, Italy, Spain, and the platform we have in Latin America are delivering margins which are accretive to the division. :

So by and large, the strategic move towards near-shoring is a good one, no doubt about it. Whether it is less price, say, market competitive or price competitive than other geography, I'm not sure I could really comment here because all the players are going that road. The key aspect here is speed and the capacity to mobilize resources in the right places. And I think we're done already a part of the way, we would continue, and that's really all what I can say. :

Operator: And we will now take a question from Paul Sullivan of Barclays.

Paul Sullivan: Yes. Just a big picture. One for me, Hinda. I mean as you approach your first anniversary, how has your perception of the group evolved? What do you like? What don't you like? Or what do you think you could do better as a company? And what are your thoughts on the shape of the portfolio and mix going forward?

Hinda Gharbi: Yes. Thank you, Paul, for that. Look, as I mentioned, I still like the things I've liked last time I got this question, which means that our footprint is an advantage -- is a competitive advantage both in terms of global geographical footprint, in terms of skills, breadth, if you like, and customers' footprint as well and the capabilities we have. I consider those group advantage that should be leveraged.

I think the work done for the -- on the portfolio for a number of years has given us a resilient decyclicalized platform to work with. And what's important as we look forward is to continue to increase the gap in leadership between ourselves and others and to really consolidate our leadership. So these are the areas I feel we have a great opportunity. :

And then, of course, we have a lot of work done over the years on the sustainability front. I do believe that is an area that will be growth enabling for the future. And therefore, how we weave that into -- across our portfolio transversely is an important part of building momentum in our growth as well. So as I said, there is quite a bit of advantage. And of course, we have to be vigilant to ensure that we are monitoring carefully our portfolio to continue to have that momentum of growth. So portfolio management, if you like, is an important part of what we need to be doing. I hope that answers your question, Paul. :

Operator: And it appears there are no further questions at this time. I'll turn the call back over to Hinda for any additional or closing comments.

Hinda Gharbi: All right. Thank you, April. No specific closing comments. Thanks, everyone, for listening, and we'll talk to everyone in July. Thank you.

Operator: And that does conclude today's call. Thank you all for your participation. You may now disconnect.