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Edited Transcript of BAMN.AS earnings conference call or presentation 20-Aug-20 8:00am GMT

Q2 2020 Koninklijke BAM Groep NV Earnings Call

Bunnik Aug 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Koninklijke BAM Groep NV earnings conference call or presentation Thursday, August 20, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* L. F. den Houter

Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board

* Michel Aupers

Koninklijke BAM Groep nv - Manager of IR

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Conference Call Participants

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* Andre F. M. Mulder

Kepler Cheuvreux, Research Division - Analyst

* Luuk Van Beek

Banque Degroof Petercam S.A., Research Division - Analyst

* Maarten Verbeek

The Idea-Driven Equities Analyses Company - Equity Analyst

* Martijn P. den Drijver

ABN AMRO Bank N.V., Research Division - Analyst

* Tijs Hollestelle

ING Groep N.V., Research Division - Research Analyst

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Presentation

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [1]

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Good morning, everyone, and welcome to this meeting for Royal BAM Group first half results meeting. My name is Frans den Houter, CFO and interim CEO. With me today is our Manager, Investor Relations, Michel Aupers. We have a live audience in Amsterdam with social-distancing measures in place and other participants on the webcast.

This has been a challenging year -- half year. Before going into further details, I have to recognize that the performance we announced this morning to the markets is disappointing. The largest impact on the results came from COVID-19. Q2 was a wild ride in terms of managing our operational efficiency in total unprecedented circumstances. Next to COVID-19, the main other dynamics in the second quarter were the company decided to start to wind down BAM International, we settled the legacy issue for the Cologne metro project. We still report underperformance at construction Germany and civil engineering in the Netherlands. This has our full attention. We strengthened our cash position. Our focus has been on reducing cost and CapEx, preserving cash and strengthening liquidity. We drew down the full RCF and obtained a waiver. Our resilience is supported by the solid order backlog.

Let's zoom in on COVID-19. The first chart shows our average operational efficiency during COVID-19. This is an internal benchmark to measure the overall performance versus 100% baseline. We use percentage of open sites and percentage of productivity on open sites, taking into account the revenue contribution of the different operating companies. Since the sudden and severe disruption late March, we learned fast how to adapt. Meanwhile, restrictions eased and our efficiency improved, as today, towards 90%. We are now stable at this level. Assuming no changes in COVID conditions, we see 90% as the new reality for the remainder of this year.

COVID heavily impacted our second quarter revenue and had an even more severe effect on the margin since it takes time to adjust the cost profile to the new reality. Even the countries with less impact on revenue experienced additional cost. Procedures need to be adjusted on our sites to comply with social distancing. Commuting of employees to sites and mobilization of equipment was more difficult. We had to deal with supply chain disruptions and staff had to work from home.

So what was the focus of management in the first half of 2020? First, on financials. We focused on reducing costs, preserving cash and strengthening liquidity. We rigorously cut nonbusiness-critical spend and reduced company tied costs. This remains a key focus and will support our second half results. We improved our business cash flow against a normal seasonal cycle. Our total cash position improved to EUR 1.3 million (sic) [EUR 1.3 billion]. This includes the fully-drawn RCF. As announced, the lenders of our RCF provided a waiver. I will come back later on this.

Regarding our portfolio. As announced in July, we started to process to wind down BAM International. Our priorities during this process are to support the employees and ensure completion of our projects. The discussion with BAM's works councils and the consultation of involved trade unions have started. On strategy, we are discussing the extension of the long partnership between PGGM and BAM with the aim to benefit from growth opportunities in the global PPP market. This allows BAM to leverage experience, which we have built up over the last 20 years in developing and managing PPP projects in combination with our technical skills.

Let's go through the business, starting with construction and property. The largest factor in the first half year performance at construction and property was the negative effect of COVID-19. Within the overall poor sector results, there was a strong performance in Dutch residential construction and property. Net investment in property rose by EUR 20 million to EUR 551 million versus the year-end of 2019. As you know, we have a strategic target for our portfolio of property for EUR 500 million. At this moment, that target is not within reach. At the start of this year, we have planned some large divestments, but these are delayed because of COVID-19.

In the U.K., performance was impacted by a technical setback on a project under construction. A detailed investigations confirmed complicated settlement issues related to the piling within the scope of a subcontractor. Given the uncertainty of the outcome of discussions involving the client, the expert subcontractors and the insurers, a provision has been taken.

Performance in Germany was again disappointing, which is explained by a combination of COVID-19 and additional setbacks in the portfolio. I would summarize these as a number of projects showing, again, deterioration due to cost overruns, extension of time and lengthy discussions with clients. We continue to refocus the business with highly-selective tendering and low risk tolerance. And last week, we have presented our new management team. For BAM International, the largest part of the overall loss for the first half year relates to the projects in the business line.

Now let's look at civil engineering. COVID-19 also had a significant impact on the performance of civil engineering sectors in the first half year. The revenue was only -- was down only by 2%, but adjusting operations in some areas was costly and experienced full lockdowns in Belgium and Ireland. Apart from COVID-19, in the Netherlands, the first half year included loss provisions related to extra cost for 2 long-term maintenance contracts. These contracts relate to availability penalties, which have to be contractually incurred based on the current maintenance planning. Commercial negotiations are ongoing to reduce the impacts. Furthermore, the focus on product-market combination with a more favorable risk/reward balance continue.

In the U.K., revenue increases compared to the first half year of last year driven by government contracts for transport infrastructure. The results in the first half of 2020 versus a low base in 2019 includes some positive claim settlements. The results at our German infrastructure company, Wayss & Freytag, included EUR 36 million loss for the settlement of the high complex Cologne metro. I would like to stress out that this is an important step that significant reduces the risk in the group after so many years. The order book for civil engineering increased as public sector clients continue to invest, even stepping up, like in the U.K.

BAM PPP performance. BAM PPP made an adjusted result of EUR 25.1 million in the first half year. The results from the existing portfolio was 11.6%, which was slightly above the first half of last year. All our availability concessions continued to receive full availability revenues from clients during COVID-19. For example, for school, even if all the children stayed at home, it was available and maintained, so we received the full availability payments. This evidences the robustness of the portfolio, growth strategy and long-term business model.

The current portfolio consists of investments in 35 operational projects and 9 under construction. BAM's interest in the operational projects range from 10% to 100%. For completeness, there are 5 operational projects where we provide management services only. Of the 35 projects in which BAM PPP owns equity stakes, 23 are in a joint venture with PGGM. We already announced the partial transfer of 21 of those investments to PGGM. The transaction on June 30 lowered BAM's interest in 21 projects from 20% to 10%. The other 2 projects were already 10% PPP and 90% PGGM, so the portfolio is currently aligned.

The transaction produces a positive result of EUR 24 million, of which EUR 14 million was recognized in the adjusted results of BAM PPP and the EUR 10 million was taken into equity through recycling of the hedge reserve. This market transaction also confirms the change in accounting estimate for PPP loans, on which I will say more in the financial section. The positive cash effect was EUR 39 million. There were no transfers in the corresponding period other than this one. The future bidding pipeline remains healthy, and we expect 2 preferred bidder decisions in the second half of this year.

BAM PPP future cash flows. This slide gives you the data that we shared with you in the first -- for the first time in February, and we have updated it. These numbers are after the -- partial transfer of the 10% stakes in the 21 ventures that we just discussed and the remained substantial unrealized cash flow in the portfolio. Invested capital in government-backed PPP investments reduced from EUR 80 million at the end of 2019 to EUR 58 million at June 30. The invested capital consists of injected share capital and subordinated loans granted by BAM. This decline is primarily explained by the transaction with PGGM for the 21 investments.

Regarding the transfer of valuation, we cannot disclose the deal specifics. However, the transaction was executed in the more attractive half of the discount rate table. The forecasted nondiscounted cash flows have reduced from EUR 420 million at the end of 2019 to circa EUR 340 million at the end of June this year. Alongside the receipt of the shareholder cash flows in the first half, the future cash flow relates to the 10% transferred and have also been removed from the forecast. The spike in the cash flows in 2030 and '31 is due to several projects reaching their final years when the senior debt is repaid, and there are material dividend distributions.

The group interest charge for the first half year increased compared to the first half of 2019. Since the RCF was fully drawn from March 2020 onwards, there were restructuring costs of EUR 1.4 million related to the U.K. and Dutch civil engineering. There is not yet any cost provision for the intended winding down of BAM International included. The total goodwill impairment of EUR 60 million, which included BAM International, Belgium and Germany, and in addition, there was a EUR 5.5 million impairment on property positions in the Netherlands. Income tax in the first half of 2020 included a noncash impairment on the balance sheet deferred tax assets of EUR 50 million, mainly related to the Dutch fiscal entity and partly offset by the creation of a EUR 5 million DTA in German civil engineering.

Now let's look at the cash flow. First, the business cash flow, which was EUR 78 million positive. This contrasts with the usual seasonal outflow in the first 6 months of the year. Important driver was our focus on reducing cost and CapEx, preserving cash and the transaction with PGGM. There are various moving parts in business cash flow, as we described in detail in the press release. Cash flow from trade working capital was stronger than last year, and we will discuss that on the next slide. Also, the EUR 39 million received from PGGM for the 21 investments is included in the PPP net investment cash flow line.

I would also highlight the positive contribution to cash flow in the first half year of EUR 107 million (sic) [EUR 106 million] in other changes in working capital. This is primarily explained by approximately EUR 120 million of deferred payments for VAT, payroll tax and variable remuneration. Our total cash position was, of course, also supported by the EUR 400 million of the fully drawn RCF. The settlement of Cologne metro and currency exchange rates explain the EUR 46 million in the line Other of the cash flow statement.

Let me now take you through the trade working capital in a bit more detail. BAM continued its strong focus on the payment of receivables, also supportive for some more favorable cash profiles of new projects and the effect that some governments showed more flexibility regarding milestone settlements. At the same time, payables also declined, while BAM continued to fully respect its payment term commitments to the supply chain. Trade working capital efficiency improved from minus 10.3% at the end of the first quarter to minus 12.1% today.

Moving on to the financial position. The EUR 429 million positive cash flow in the first half year raised BAM's half year cash position to almost EUR 1.3 billion. You should bear in mind that this number includes the fully drawn RCF and the deferred payments of EUR 120 million that I just mentioned.

Let's discuss capital ratio in more detail. In the first half year, our capital ratio declined to 11.3% versus 16.5% year-end 2019, which was caused by a lower capital base and a longer balance sheet. First, our longer balance sheet was for an amount of EUR 543 million (sic) [EUR 544 million], and this explained by the RCF drawdown and the temporary insurance funds receivable as part of the Cologne settlement. Without the RCF and the Cologne settlement funds on the balance sheet, our capital ratio would have been approximately 1.4% better, a level of 12.7%. The Cologne settlement was finalized in August.

Second element is the development of our capital base, which declined by EUR 176 million. This is explained by the reported loss and a negative impact of the exchange rate on the British pound partly compensated by the positive impact from pensions and PPP-related items.

Taking a deep dive, there are 3 PPP-related items that had a combined effect of EUR 60 million. The largest of these 3 was a positive effect on equity of EUR 86 million from a change in accounting estimates for PPP subordinated loans. From Q2 onwards, PPP subordinated loans are excluded from the accounting concept of net investments. And with this exclusion, any negative hedge reserve no longer reduces the carrying amount of the subordinated loans on BAM's balance sheet. This change provides improved transparency by better reflecting the investments in the balance sheet. It will reduce the volatility of shareholders' equity in the group in response to future interest rate changes, and it's in line with industry peers.

The partial transfer of 21 investments to PGGM further validated the solid track record of the debt service and level of maturity of the subordinated loans, supporting this change. In addition, the valuation of interest rate hedges related to PPP had a negative impact of EUR 36 million, and the transaction with PGGM had a positive impact of EUR 10 million. Given our outlook for a positive adjusted result over the second half year, the capital ratio is expected to partly recover.

We are evaluating alternatives for the subordinated unsecured convertible bond and aim to announce next steps in due course. Due to the performance of the group, in the first half year, the recourse interest ratio and recourse leverage ratio were below the threshold as agreed with the lenders. And we obtained a waiver for these covenants, which are valid for 4 quarters as from Q2 2020 onwards. As shown on this slide, considering the waiver, the group complies with all financial governance requirements at June 30.

The next chart updates one we showed in February as well, where we reported the weekly net cash position over a period of 5 years. This slide gives an update from the data we shared, and it shows insight in liquidity trend and volatility. Our net cash position in the first half year is significantly above the regular seasonal pattern even after adjusting for deferred payments. Our liquidity reflects the positive business cash flow I described already and our measures to cut cost and CapEx. Overall, the chart reaffirms our trends to improve the resilience of our cash flow.

Now let's look at -- looking at construction and property. The short-term investment sentiment has deteriorated because of COVID, especially from the private sector for new commercial buildings and retail space. The long-term impact is currently very difficult to forecast. The sector order book at the end of June was EUR 5.8 billion, down by 7% in the first half year. Specifically on Dutch housing, the supply is still constrained by delays in permitting, including ongoing uncertainty about nitrogen and PFAS. Interest rates remained low in historic terms, which helps the demand overall, although demand is slowing somewhat in the premium segment.

Our U.K. construction backlog reduced as commercial clients are more cautious because of Brexit and COVID-19, but we have strong anchor point of framework agreements for future public sector construction projects in the U.K. BAM civil engineering order book grow in home countries and by 17% overall. Part of that is because we included the Fehmarnbelt project in order book for the first time due to the client is issuing the commencement notice. That project is included in the growth in order backlog by Germany of 33% and in the Netherlands of 7%. The order book also grew during the first half year because of new public road and rail programs in the U.K., like HS2 and SMART Motorways.

Infrastructure market in the Netherlands remain competitive and the uncertainty regarding nitrogen legislation and PFAS continues. BAM continues discussions with public-sector clients and stays extremely cautious about tendering for large projects. To conclude, based on the current market and COVID-19 conditions and the strong order book, BAM expects a positive adjusted result before tax for the second half of 2020.

Let's now take your questions.

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Questions and Answers

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [1]

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Maarten Verbeek, the IDEA!. First of all, you mentioned that for the remainder of the year, you expect an efficiency rate of somewhere like 90%. And your -- at the same time, you mentioned that for the second half, you expect a positive adjusted result before tax. Normally, you target when it's above, let's say, 100%, the 2% to 4% margin. So when you talk about 90%, at what kind of range do we have to think then?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [2]

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Yes. So I think it's important to touch on this 90% as an important assumption for the second half of the year. So it's very important that the COVID impact remains stable. So adjusting the cost profile to new swings is very costly. We've seen that in the second quarter. And we provide an outlook where we say if this 90% stabilizes, the adjusted PBT of the second half will be positive, and that's the guidance we give. So we're not going to give more numbers on that today.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [3]

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Okay. In your press release, you're also now developing a new strategy that will also be with the new CEO to be appointed or to be at his place at September 1. What do you consider yourself to be the strength of BAM on which this new strategic plan will be presented?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [4]

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Now if you look at the core of BAM, we have a number of very well-operating companies. Of course, there's the impact of COVID-19 that we have to acknowledge and we have 3 opcos where we have specific problems that we are addressing. But we have -- yes, and 7 opcos remaining, where, in the right product-market combinations, we have a very interesting future for this company based on a long track record, reputation and a lot of skills and competencies that we have in BAM.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [5]

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To put it differently, if we would look at those strength in those opcos and those product-market combinations, how much does that represent at this moment, more or less, BAM sales?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [6]

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So I would like to leave it for the second half of the year when we start together with our new CEO to work on the strategy to go into a discussion on specifics on product-market combinations.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [7]

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And then lastly for this moment, you are reconsidering or considering what to do with your outstanding convertible. How important is it for BAM to have a certain solvency ratio of more than 20% or whatever, since your cash position is extremely solid but again, your solvency is fairly low. So how important is it for BAM that your solvency is at a certain level of 20% or so?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [8]

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Solvency is an important element of being a resilient company, but it's not the only one. Of course, order backlog, our cash position are 2 other strong positives. Our current solvency is at a low level, but based on the expectations of positive numbers in the second half of the year, of course, we will work hard to bring this to a higher number. So commitment to bring it to the right range is absolutely there.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [9]

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ING, Tijs Hollestelle. Yes, the comments on the strong order book. If you're in my seat, it's very difficult to just believe that because the, let's say, the 10-year history of BAM providing an outlook based on the order book has not always turned out like the outlook provided. So if I go back, let's say, for 2015, there was quite a radical restructuring and culture change program being implemented at a stage gate, the Board approval for certain contracts, the subcontractor selection, a lot of things, which sounded quite positive. But yes, 4, 5 years later, to me, it does not seem that the culture within BAM has changed. And because the length of executing the orders, I would say that, still a lot of the, how should I put it nicely, bad culture is still being executed today, next quarter, probably next year. So how comfortable are you with that? I mean has there been a major review done by you? You're also relatively new to the company. So how do I get comfort about the order book?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [10]

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Yes. So very important question. And quality of order book and quantity are 2 different things. And I agree with you on that. And I think I want to make a few separate statements on that, and that should add up to an answer. So I think, first of all, if you look at the performance in the past years, as you point out, that's also related to projects from the past, partly. And I'm not saying that with that, everything is resolved. But of course, there are commitments and contracts we need to honor. If those contracts are not of the right quality, we have to deal with that. And that's what we have been doing. Then second point, you touched on that tender stage gate process. I'm really convinced that it's the right tool for BAM to improve the quality of the order intake. And that is done with rigor and commitment. And I think it is part of the performance culture that we have in the company.

On top of that, if you look at performance from -- we have COVID-19, important elements, but also in the mix of the operating companies that we have, we already pointed out, there's 3 specific opcos where we have a very high focus to improve. So let's also look at the order backlog and the quality of the other 7 opcos, which, on par, have been significantly better. And with that and the steps we have taken there, I'm convinced that, that order backlog that we have is one of the anchor points for the coming years for BAM.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [11]

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Yes. Maybe as a follow-up, because for me, the problem is we look at the shares, of course, of BAM. But what I still do not understand after following construction companies after 20 years is that -- how is it possible that I think it was June or July last year, there was a EUR 96 million loss provision on all these projects, which is a significant amount. So normally, you would say that it is more or less de-risking the further execution of the project going forward and difficult to be precisely accurate, but more or less.

Then a couple of quarters, nothing is being reported about that. You're reporting, let's say, Q1 numbers, which is more or less normal profit for tax. And then suddenly, in the second quarter, these things seem to blow up again. So is there -- has it also to do something with the communication of these different operating companies or project managements to the Board? I mean is that something that should be addressed more? Because, yes, to me, it seems that it also surprises the Board of BAM.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [12]

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Yes. So if we go -- that's a good question, Tijs. If we go back to the profit running from last year, that's where you started, there were 3 opcos involved there. BAM Germany construction and property, BAM International, BAM Infra. From there on, we said, these 3 opcos have a high focus to resolve. Now if you look -- if you link it to the press release of today, I would say, there is one conclusion there, that the future of BAM International, with the decision to wind it down, there is a realization that the oil and gas market and the context we operate in is not interesting enough to keep that product-market combination in opco as an anchor stone of the future. So I would take a position, it's a consequence, and there's an action there to intervene.

Then 2 other important elements on Germany and Infra in the Netherlands. In Germany, we have been very cautious in order intake. So we say, okay, we try to de-risk that company. Of course, we have new management starting, which we announce next week. But also, if you look at the work we've done in organizing it more in business units, improving their controls and the setup there, there's a de-risking exercise ongoing in Germany.

In Infra in the Netherlands, it's a bit more complex, I would say, because Infra in the Netherlands consists of a few elements. You have the large projects, the regional projects, Infra consults, rail, energy. You need specific strategic decisions on those product-market combinations to improve the situation there. I think what we do say, and we've said that already in the previous quarter, that we are very shy in tendering for large projects in the Netherlands, since the risk profile we see on those contracts don't have the right risk/reward balance. So yes, there is a relation with last year, but I see what we have today on the table. Also Waidmarkt, the Cologne settlement; BAM International parts of improving the portfolio of BAM.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [13]

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Okay. Thanks for the detailed answer. Yes, one final remark, I would say, what I have also seen in the past year sometimes because construction companies have all these different operating companies and you sometimes see that an operating company is, let's say, generating a 5% margin to you for the last 5 years, which then looks like it's a nice business. But if you analyze the project they were executing, you sometimes can see that this business unit also took major risks, but luckily, it turned out well. Is that also something that's going on? Because you can also be fooled by these results, that it can still mean that next year, one of these operating companies blows up in your face. So it should happen across the total of BAM.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [14]

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I fully agree with that. We'd never operate on luck. So we have a very sophisticated process to analyze risk in contracts that we take on, build on. Do we understand the product, the client, what's the experience with the technology, do we have the right people to execute the tenders? Do they fit the portfolio? Based on that, with careful consideration and multiple stage gates, we enter into contracts. What we do see is some volatility in -- and then there is also an IFRS effect with the relative thin margins that we have. We sometimes see temporary swings that are recoverable, but it's not related to luck. That's related to an accounting effect you see. But overall, on par in the longer term, you should evaluate your product-market combinations on the performance and on the predictability and how do you manage your risk in these segments.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [15]

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Yes. Martijn den Drijver for ABN AMRO. I just want to come back to the question of Maarten with regards to solvency because your actual solvency, not looking at capital ratio, was 8.9%. Your recourse solvency is 19% versus a minimum of 15%. You don't seem overly concerned, meaning you're not going to do anything. You're not considering any actions until you have devised a new strategy with the incoming CEO. Is that the right way to think about this?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [16]

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No, absolutely not. Sorry if that was the impression, that's the wrong one. This is, as I said, an important element of our resilience of our company and the current level is too low. So we need to improve that. And I pointed out 2 routes to do that. First of all, improving the operational contribution of company, very important. Second one, we're looking at alternatives for the convertible, which is also an element in there.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [17]

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And you're not willing to share a number of those options with us today?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [18]

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No, not yet. No.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [19]

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Then with regards to the working capital seasonality, normally, you have a capital -- working capital inflow in the second half of the year. Now we've had a very strong performance on DSO. As you've pointed out, you have the deferred VAT, salary tax payments. How should we think about the seasonality working capital in the second half of the year? And then separate to that, but it's obviously related, those VAT delays, when are you supposed to be paying those back? Will that be in the second half of the year? Or will that be later?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [20]

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Yes. So as you rightly point out, if you exclude the RCF and you look at performance on working capital, we see good numbers driven by temporary support measurements of governments, adding up to EUR 110 million to EUR 120 million. Those will need to be paid back in the coming 3 quarters. So that will -- assuming a stable COVID situation, those temporary prefinancing will run out. Nevertheless, if you look at not all the working capital, but the normal trade working capital, we see there a trend against the seasonal pattern. And that's a result of very high focus on collecting receivables, overdues, but also, of course, focus on cash in the organization. Cost-cutting, OpEx, CapEx reductions has been a really focus point for management in the second quarter.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [21]

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And just a follow-up, if you look specifically at advanced payments, you had a very strong inflow of orders in the Infra book. You also mentioned in the press release that you had some tailwinds. How should we think specifically about? And it was also a tailwind at the end of 2019. How should we think about that element within trade working capital?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [22]

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Yes. So for trade working capital, we always target to be better than minus 10%, which we are today. We also say there are some effects in there in what market combinations or what do your clients prefer. Some pay somewhat more margin, some give you more favorable cash profile. So it's not -- I would say it's not the only prime thing to focus on. You really need to evaluate overall in the context. And you rightfully say, we have currently some projects in the portfolio, which have a relatively cash profile, so that helps us as well. How that will evolve over time, yes, that depends on the orders that we've taken.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [23]

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Okay. And then final question on restructuring. You mentioned several measures in Germany, yet the restructuring charge is relatively modest, what we see today in the P&L. In the press release, you mentioned downsizing in the U.K., 150 staff. We still have to wait for the impact of the wind-down and restructuring of BAM International. If you add it all up, it could amount to a -- well, it will amount to a significant number. Can you walk us through some of your assumptions and maybe provide a bit more clarity and granularity on what type of amount we should take into account in the second half? And specifically to that, added to that, the cash element.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [24]

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So the overall almost answer is it's too early to say. So BAM International is an important element in there, as you rightfully say. We point out, we've started the discussions with works council and trade unions. We have about 600 own staff in BAM International, of which a little over 100 are based in the Netherlands. So you really need to have completed also in other -- in the other countries where we have discussion with unions concluded those discussions and understand what the cash impact of that restructuring is. In the U.K., this is also a Q3 event. So we will come back on that in Q3 report.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [25]

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And in Germany, you don't plan to do anything as material as in the U.K. or...

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [26]

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No. So in Germany, as said, focus has been on de-risking the portfolio, from a balance-sheet perspective, order intake, so we're not growing it. That's definitely the right conclusion. But we have new management coming in, and we're committed to make this a predictable good company.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [27]

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Luuk Van Beek, Degroof Petercam. Well, first, a question about the 90% productivity that you mentioned. You broke that down more or less into projects that were halted due to COVID and projects where the productivity is lower. I can imagine that the first category, if you can use that capacity elsewhere, does not necessarily have a big impact on your profitability, but the latter may be more challenging to realize good margin on. So can you discuss a bit how this 10% productivity loss affect your profitability and also how you expect things to evolve, if, say, the current COVID situation persists, so no vaccine and constant smaller measures to keep it at bay?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [28]

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So maybe on your first question, Luuk. So if you do a complete lockdown of a site, for example, if that's related to a country lockdown, like we had in Belgium and in Ireland for several weeks or months even, yes, you cannot, of course, move staff to other projects. That's a very costly thing because from day 1 to the day 2, suddenly, operations are on full stop. On other sites, we saw, outside those countries where we were in full lockdown, we could move sometimes staff from one location to another project. And so there was some mitigation of cost there. But that's expensive because you have to get organized for that, and it takes time.

Then on the 10%, of course, we've adjusted the way we operate on sites within social distancing, taking that into the operational procedures. That has taken time to learn how to do that. The advantage was that we have a lot of knowledge and experience over the various countries, how to deal with that, so we could exchange that. And that brought us the stable 90%, where we are now. Now for the remainder of the year, in how we see the second half of the year and how we give you also the outlook on that, we assume this is the stable new reality that the company is in. So we don't have taken into account -- of course, we have scenarios that we plan for, but we don't assume it will improve nor we will have new disruptions. If that happens, of course, we are prepared, but then it may have a different impact on the second half.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [29]

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Okay. And then on PPP, you indicated you expand the partnership with PGGM. Is that in countries where you already have experience? Because I kind of imagine that there's also a local component to PPP projects in the sense that you need a local partner to execute it reliably, that you need to know the local government and tax regulations. So to what extent will you enter new countries? And is there any additional country risk for those -- for that expansion?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [30]

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That's too early to comment on. So there is a start of a discussion. We have a very good track record together. There's a lot of belief on both sides, with PGGM and with BAM, that there is a global market that is interesting for us and that we have a unique combination of skills and track record. It's too early to comment on where will that focus on, what continents or what countries. So let us come back on that with more details in the right time.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [31]

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Okay. And finally, on the limitations from PFAS and nitrogen, you mentioned that you're very cautious in new tendering, but there are probably also some things in your backlog that are affected by it. Do you expect any impact or any solution for that in the coming year?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [32]

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No. So we are very cautious on that. Also, the situation around PFAS and PAS has not been resolved yet. Of course, on PFAS, new norms were agreed. Is the problem completely resolved with that, we still need to conclude that. On PAS, the discussion is more lively still. Also in The Hague, how will that exactly land. But if we, today, see delays in permitting, you have PAS, you have PFAS and you have COVID, it's also really difficult to determine what's now actually driving these delays. So to conclude, today, by our experience, what's driving that is too early, but we are very aware that this also may still have an impact on our operations and new operations, specifically, new projects.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [33]

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Andre Mulder, Kepler. A number of questions. First, on BAM International. You mentioned that there are additional losses there. Your previous expectation was a loss of EUR 60 million for the year. Does that still stand? I cannot find it back in the press release anymore. Secondly, do you see any restructuring provisions there or anywhere else so that -- you will have to take in the second half?

Second question is on the project losses. I see some appearing in construction in the U.K. And in the U.K. and Belgium in civil engineering, could you maybe add some details to that in terms of amounts?

Question on the COVID cost. Have you made any estimate of what the direct cost of COVID have been, so -- except for the impact on sales and margins and so on?

Question on your outlook for the second half, you expect a positive result. If I compare it to the previous expectation, what's your feeling there? Will it be higher? Will it be lower? And probably the thousand-dollar question, will it be enough to move you back into a breakeven situation if you strip out exceptionals like BAM International and Cologne?

Question on the covenants. Again, what keeps you from detailing the covenant calculations there? We now only got the outcome, we can make some calculations. But in the past, you mentioned that but it's not in the annual report or in the presentation anymore. So what's keeping you there? If I look at the solvency ratio, you're at 19%. If I strip out the IFRS lease liabilities from the asset base, it means that you have a capital base of around EUR 900 million, of which equity is around EUR 450 million. So the rest is other. How did the pension part develop in that way?

Question on -- what do I have left? The convertible possible buyback. Are you in any way limited, apart from the covenant ratios, in buying back the convertible? Equity wouldn't -- liquidity wouldn't be a problem, but are there any limitations there? Do you need consent from the banks to do so? I think that's it for the time being.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [34]

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Okay. Let me take a sip of water before I go into this one. Thanks for those questions. I think they're all relevant. So let me go through and see if I cover them.

On BAM International, it's been disclosed in the press release on the first page on this. So we say BAM International, loss of EUR 56 million. That has been reconfirmed. So on July 2, we said around EUR 60 million. It's now confirmed a final number, EUR 56 million. So that is within the guidance that we provided. In there, your second question, are no restructuring costs yet because we are in discussion with works council and unions. And the outcome of that will determine what that number will be.

Project losses, you filter out 2. Construction U.K. A specific one also mentioned in the press release. We have a project there where we have settlement issues of the -- setting is the Dutch word. And that's on a scope executed by a subcontractor. There is a discussion with the subcontractor with the insurance company and with the client. But for now, we have to take the cost for this, being the main contractor, and that's a significant number, and that's why we mentioned it there. In the interest of the negotiations with those parties, I cannot disclose the exact number.

On Belgium civil, apart from, of course, the COVID impact, which was significant in Belgium with the full lockdown, also there is a specific element of a settlement with a client on a significant claim that we intend to wind down, and with that, close that discussion, and there were costs related to that.

Then the COVID cost estimate. So yes. So the net cost of COVID, we try to understand, of course, in the company what that is for us. And there are several ways to do that. So we have a number of methods to assess those costs. What is clear, it's very subjective. And that's why we're hesitant to disclose that exact number because you cannot do it accurately enough. What we do say that is the most significant element in the poor results that we report. So it's, i.e., it's bigger than BAM International. It's a significant impact.

On the outlook, you asked for my feeling. I stick to the words that we provide there. So for the second half of the year, based on a stable COVID-19, so that's the real question that's on the table, how will COVID evolve in our -- the markets where we operate, we will report a positive number over H2 in terms of adjusted PBT.

Covenants details. No -- yes, we had that discussion before and we have an agreement with our lenders that dates from 2015. It's under frozen IFRS, and there are a lot of corrections in there. This is really a thick book. It's about pensions. It's about one-offs that are either in or excluded. So we don't try to make it complex, but this is an accurately determined number that we report out versus the covenant -- actually in the covenant, and it reports significant headroom there. So it's not in distress.

And then you asked the question, are there limits in your agreements with your banks in light of the convertible, and there are contractually no restrictions there is the answer.

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Michel Aupers, Koninklijke BAM Groep nv - Manager of IR [35]

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May I suggest a last round of questions for the remaining questions, starting with Maarten, yes?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [36]

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Maarten Verbeek, the IDEA!. Just a couple of clarification. When you say you expect a positive adjusted PBT for the second half of the year, does this include the still-to-announced and made provisions for, amongst others, BAM International and U.K.? Or is that excluding?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [37]

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Yes, so restructuring costs are not included in adjusted PBT.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [38]

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Okay. Could you remind us how much the Fehmarnbelt order was, which is now taken in the book?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [39]

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We -- this are the total -- do -- we haven't disclosed it? I know the number but...

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Michel Aupers, Koninklijke BAM Groep nv - Manager of IR [40]

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It's in the press.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [41]

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It's in the press, yes? So it's EUR 800-plus million BAM share. And there were -- so the story there is that the contract was awarded in 2016. And it has been in a discussion for a long time with the client awaiting permits. So it was unclear when the commencement -- instruction to commence the project would be provided. And that's now clear. It's clear what the schedule is. And with that, we already had a contract but we can also add part of the revenue to the order book.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [42]

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Could you provide some information about the latest status of [OPA A]?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [43]

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Yes. So that has stabled out. So in that sense, work is progressing. And in a portfolio view, it behaves now as a normal project. So there's nothing special report there.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [44]

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And for a while, you have stated that you will announce a -- come up with a new Capital Markets Day. That's all pending the appointment of the new CEO, which again starts his job at September 1. Have you already some thoughts about when you will organize the Capital Markets Day and present your new strategy?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [45]

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No. So that's too early. So I look very much forward to Ruud Joosten joining BAM. So next Monday is the AGM, so we assume a positive support from the shareholders there. And with him, of course, the strategy is a top priority of his agenda. And from there, we will bring further details, timing, if and when available.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [46]

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Tijs Hollestelle, ING. Yes, the question is, where are the wind-down costs or restructuring charge and the loss provisions currently in the balance sheet? Because we have seen them in the P&L effect, but can you give us some indication where these are positioned in the balance sheet? And also, yes, some timing on the cash flow, the cash outflow, and like Maarten was asking, is -- would be helpful.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [47]

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Yes. So for BAM International, the number reported then is the deterioration of the portfolio. So there are no specific restructuring or wind-down costs in there because we are still doing that in Q3 when we have clarity of that discussion with works councils. So these are loss provisions on running projects.

Now the cash-out profile is expected over the remaining rundown period of the portfolio, which is, say, roughly in the coming 18 months for the majority of the products. We have 11 projects in the portfolio there, and the majority, by end of next year, will have been completed.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [48]

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Yes. But also, I can remember when the first sea lock loss provision was announced by BAM and Volker, that the trade working capital positions showed up quite nicely because they were initially also put in somewhere in the trade working capital line item.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [49]

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And you see that effect in here as well.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [50]

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Yes. And -- but how much is that? Because it's now an accumulation of these kind of losses. So...

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [51]

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Yes, the EUR 58 million of BAM International is in there.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [52]

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Yes, but there is also on the other loss provisions from the past, I can imagine that they're still also in cash outflow effect going forward.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [53]

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Okay. The historic number, I have to provide you those details offline. I don't know by heart.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [54]

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Okay. But it is not like EUR 100 million cash outflow on these projects?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [55]

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No, no, no.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [56]

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So it's limited?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [57]

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No. The EUR 58 million in there, which is significant, plus what we have. But I don't have that number at heart with me. So I need to...

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [58]

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But then it's probably not significant.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [59]

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Yes. But we need to define significant together.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [60]

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Yes. One other remark. About the guidance on the adjusted profit before tax. To me, the transaction with PGGM is also a one-off. So please also do not put positive one-offs in the outlook. So it's either the negative or the positive. Because otherwise, I will put in all the restructuring charges and losses also in the outlook.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [61]

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You will not be surprised, I disagree with you on that. But so provide some context there, in the model that we have in how we run these equity stakes, we always do a transfer upon completion of the project. And then 80% of the project is transferred to PGGM and the 20% that we remain generates a margin. That's also taken normally as part of adjusted PBT. The transfers, as we report them, in PPP are reported in this line item and seen as business results coming from our operations. What makes this special is that we do a transfer, which is on a number of ventures in a 1 transaction. And that's why we disclose that very carefully that it's in there. And I agree with you, that should be clear that there's a one-off element in there, but it is part of adjusted PBT.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [62]

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Yes, I do know how it normally works, but it's not me asking. It's the way the stock market looks at this. So it's just better to put these kind of things also as a one-off in order to avoid confusion. Because when the press release landed, the remark that it was already in the outlook, that is not something that investors like. It's not me telling you this. It's what I'm hearing from the stock market.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [63]

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Okay. Thank you.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [64]

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Martijn den Drijver, ABN AMRO. Two remaining. Your pretax loss of BAM International was EUR 14.5 million. So the net loss was EUR 56 million but the pretax loss was EUR 14.5 million. Should we expect a similar amount for the second half? Or how should we think about this element?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [65]

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I think -- I'd really like to stick to the overall outlook we provide for the company because then we go into restructuring elements that are in there, et cetera.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [66]

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No, no, excluding restructuring.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [67]

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Excluding.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [68]

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Yes, we're talking normal operations.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [69]

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Yes. So we assess the project each quarter, and we take them at how we value them into our Q2 -- in this case, Q2 numbers. And with that, we think we can complete the projects with the loss provisions that we have in the books for this portfolio.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [70]

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So no losses?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [71]

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From an operational point of view, this is how we look at these projects in running them down and completing them.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [72]

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So no losses in the second half?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [73]

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Exactly, yes.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [74]

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And then you must have had some sort of furlough support, in a way, support in the Netherlands, U.K., Belgium.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [75]

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Yes.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [76]

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Can you, first of all, tell us a bit how much that has been in the first 6 months? Will that -- and when it -- and will continue in the second half?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [77]

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So we had, in the peak, around 1,400 people in furlough and then predominantly in Belgium and in the U.K. And the cash savings that we report in the second quarter were around EUR 20 million to EUR 25 million. And today, we still have around 400 people in those systems, furlough systems. Luuk?

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [78]

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Yes, 2 questions. First question on restructuring charges and anything we should expect in the second half?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [79]

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No. Yes, as I said, so we have 2 things we announced on that. In U.K. construction and property, we are adjusting the business to the new company profile in terms of revenue, and there's 150 people staff in such a process. And in BAM International, of course, as we discussed, those are the 2 that we have said.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [80]

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On the DTA write-down, is that based on the 25% tax rate or 21.7%? Because now we're -- there's talk again to -- not to let that through to 21.7%. So maybe I would have to reverse it again. And a detailed question on that. Germany, you increase your DTA. Does that have to do with any tax implications or are you becoming more positive on Germany?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO, Interim CEO & Member of Executive Board [81]

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So good question. First one, we calculated this with 21.7%, which is currently the accepted legislation. There is a discussion on increasing it, which would generate indeed a positive effect. On Germany civil, it's basically because IFRS. There are some losses that we can still put on the balance sheet. So it's a technical correction. There's not -- it's a single-digit amount. It's nothing to report other than that.

Okay. Then I would like to thank you for being here this morning. And also the people on the line and in the room. And subject to shareholder confirmation, I look forward to welcoming Ruud Joosten on September 1 as our new CEO. And as stated, we work together on a new strategic plan based on our key strengths. And for now, I wish you a safe and well afternoon, and I look forward to seeing you next time. Thank you.