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Edited Transcript of BAMNB.AS earnings conference call or presentation 22-Aug-19 8:00am GMT

Q2 2019 Koninklijke BAM Groep NV Earnings Call

Bunnik Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Koninklijke BAM Groep NV earnings conference call or presentation Thursday, August 22, 2019 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 & Member of Executive Board

* R. P. Van Wingerden

Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO

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Conference Call Participants

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* Andre F. M. Mulder

Kepler Cheuvreux, Research Division - Analyst

* Bart Cuypers

KBC Securities NV, Research Division - Financial Analyst

* Christophe Beghin

Kempen & Co. N.V., 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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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [1]

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Good morning, and welcome to the results meeting of the Royal BAM Group for the first half 2019. My name is Rob van Wingerden, CEO, and with me is Frans den Houter, our CFO.

Let's start with the main points of the results. We announced on 8th of July that we are facing higher costs for some construction projects and a civil project in Germany and an international construction project, which we regret. It's a very disappointing second quarter and therefore a first half year.

The total amount involved is EUR 94 million, which is a bit higher than the provisional numbers we originally told you. EUR 65 million relates to the projects in Germany and EUR 29 million to the international project. In the press release today, we also gave you the breakdown of the EUR 94 million by sector and by country. We are confident that we will recover a significant part of this amount through settlements, but at this stage we are uncertain about the amount and the timing. There are 2 main reasons for these reported losses, a part of the EUR 94 million relates to 3 projects where there is a timing difference between incurring the extra costs and recovering part of the amount from the client. It's a feature on the market, especially in Germany, where recovery can be a lengthy process.

The other part is due to specific issues on project execution at our German construction business: BAM Deutschland. 3 years ago, we made a strategic decision to refocus BAM Deutschland from being a small company in a big country to concentrate on key cities. This was the right thing to do, but the strategic change absorbed a lot of management attention at the expense of operational excellence while the transition took place. We are now, of course, taking measures to improve the operational performance in BAM Deutschland.

The rest of our construction and property activities made a good contribution to the group result, especially Dutch residential property development. The picture at Civil engineering was a mixture of pluses and minuses, and PPP once again delivered a solid performance. Our cash position remains strong, and our trade working capital efficiency ratio improved slightly to minus 9.1%.

Let's go through the sectors, starting with Construction and Property. Out of the total EUR 94 million additional costs I described, EUR 72 million related to Construction and Property. This was the main factor to explain the negative result of EUR 13.3 million from the positive EUR 52 million in the prior period. This impacted mainly Germany, partly BAM International, and a small amount for BAM Ireland, which is working in joint venture on the international project. On the positive side, our Dutch residential activities made a strong result, mainly from property development and the overall Dutch Construction and Property activities performed well and ahead of last year.

There were solid results in the U.K. and Ireland. The result in Belgium was lower than the first half 2018, which had included some claim settlements. The trade working capital efficiency for the sector improved to 13.9%.

On this slide, you see the new headquarters for the UK Hydrographic Office based in Taunton, delivered by BAM Construct UK. Architects, AHR, have designed an inspiring office building of 11,000 square meters, providing one of the world's leading marine geospatial information agencies with a high-spec office, staff restaurant, gym and meeting facilities.

In the residential market, BAM delivered 16 semi-detached houses in Hilversum in the so-called characteristic old Dutch architecture from the van BAM Wonen collection. The houses are very energy-efficient with a standard EPC of 0.4 and can be made more sustainable to an EPC of 0, so that they can receive the certificate for highly energy-efficient new build homes. We are preparing phase 2 for another 21 homes, which will start in November.

Let's look at the property development in more detail. We sold 1,379 homes in the first half year, in line with 2018, and we are projecting a pickup in the second half to give an increase of around 10% for the full year, which is above the guidance we gave in February.

The gross property position reduced by EUR 31 million to EUR 533 million. This was mainly driven by the completion of a large project in Amsterdam.

BAM Civil Engineering result for the first half 2019 included the EUR 22 million impact from the project in Germany, which is executed by Rijkswaterstaat in joint venture which -- with our Dutch civil company. Here, we have a number of discussion points with the client, discussions on scope, design responsibility and timely decision-making by the client. Independent arbitrators gave us already favorable ruling about an extension of time. However, it's still a lengthy process to conclude on the corresponding financial compensation for us. But I'm convinced that results in this project will improve.

The total loss on the sea lock IJmuiden project for BAM in the first half of 2019 was EUR 7.5 million, of which EUR 3.8 million was in the second quarter. This was caused by weather-related issues in the first quarter and precautionary measures for the immersion of the second bigger caisson the second -- in the second quarter. Our share of the cumulative loss is now EUR 140 million.

The immersing is proceeding on track, and we expect that this operation will be completed within the coming months. The rest of the activities, excluding these items, showed a mixed picture. The Dutch civil engineering market remains competitive, and we work hard to improve the risk/reward profile going forward. The order backlog declines, also because we are more selective in tendering. We are continuing discussions with our public clients in order to achieve and improve risk/reward balance on new projects in our portfolio.

U.K. had a slow start in terms of results compared to 2018. However, expected -- we expect a strong recovery second half. Belgium improved from last half year and shows a modest profit. We still have to make additional steps to improve the profitability within our strategic range. And International civil engineering was also a small -- in a small positive territory. In July, the Pulse consortium, including BAM, reached financial close on the Cross River Rail project in Australia. Construction revenue is expected of approximately EUR 100 million per year for 5 years.

Next to International, our German subsidiary, Wayss & Freytag Ingenieurbau and our British Civil engineering, BAM Nuttall are involved. Trade working capital efficiency in the Civil engineering for the rolling 12 months deteriorated to minus 2.9%, which also includes an effect of the deconsolidation of the Argen in Germany at the end of last year. We forecast a recovery for the remainder of the year.

To witness the progress on the sea lock IJmuiden during the second quarter of this year, I would like to show a short video that has been produced by our client, Rijkswaterstaat.

(presentation)

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [2]

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Okay. Moving on to PPP. The PPP sector had a good half year with a result of EUR 10.8 million from the portfolio. And during the first 6 months, no equity stakes were divested, and BAM PPP is preferred bidder on 2 projects. And on one, we reached financial close. Our pipeline of opportunities and active bids remains healthy.

On this slide, you see an artist impression of that Cross River Rail project. And now I hand over to Frans.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [3]

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Thanks, Rob, and good morning, everyone. First, some comments on IFRS 16. BAM adopted IFRS 16 leases with effect of January 1, 2019, which prescribes that all leases have to be capitalized on the balance sheet. The adoption of IFRS 16 has no impact on our economic prospects, strategy or cash flow. In the income statement, there is an increase in the line depreciation of EUR 49 million and interest costs by EUR 2.6 million. This is offset by a decrease in operational costs.

The impact on the balance sheet is an increase of EUR 280 million of right-of-use assets and EUR 283 million on the related lease liabilities. The lengthening of the balance sheet reduced the capital ratio with 0.9%. In the cash flow statement, the total cash flow of the company do not change. However, we have some reclassifications, which I will explain later.

Let's look at the income statement. If we work down from the sector results, the group overhead this first half of the year was EUR 0.8 million negative, and the interest line increased due to the IFRS 16 as described. There is a noncash impairment of EUR 10.3 million on intellectual property for the gravity based foundations for offshore wind turbines. The market has not developed according to our original plan and we have decided to exit.

The income tax line is -- for the half year, includes a EUR 7.5 million noncash impairment on deferred tax assets, which was primarily triggered by the additional losses on the German project. All in all, the net results attributable to shareholders in the first half year was EUR 52.4 million negative.

On trade working capital, BAM's rolling trade working capital efficiency ratio was minus 9.1%, a small improvement this quarter. Days of sales outstanding reduced somewhat versus the comparable period last year, and we also paid our suppliers, on average, somewhat faster. We expect a further improvement of working capital in the remainder of the year while we continue to pay our suppliers on time.

The net cash flow result of EUR 38 million for the first half of 2019 includes an increase by EUR 49 million following the adoption of IFRS 16. There was a negative impact from IFRS 16 on -- of EUR 44 million on the line investments in intangible and tangible assets. The remaining EUR 5 million is included in the line item Other.

As stated at the previous slide, trade working capital improved versus the comparable period last year, also due to the restart of the prefinancing of the sea lock IJmuiden, which impacted the first half year by EUR 9 million versus a EUR 53 million cash out in the comparable period last year. Next to the cash dividend lines, the cash outflow related to the buyback of shares to prevent dilution reported in the Other -- in the line Other, the total dividends distributed was EUR 36 million. The overall outcome for the half year was a seasonal cash outflow of EUR 295 million.

Let's move on to the financial position. The cash position remains strong. During this year, so far, we have not drawn on our EUR 400 million RCF facility. Our net cash position before leases was EUR 161 million, which improved versus the comparable period last year, also supported by a lower debt position. Our capital ratio deteriorated to 15.1%. Without the effect of IFRS 16, the capital ratio would have been 16.0%. The rate -- the capital ratio was also impacted by noncash items. We took the opportunity to derisk our pension obligation, which resulted in an equity impact of EUR 28 million. Also lower interest rates had a negative impact on the valuation of the remaining pension liabilities of EUR 37 million and on the hedges of EUR 29 million.

Our full year outlook implies that the capital ratio will improve at the end of the year. We are well within the limits of our bank covenants, which are based on the frozen GAAP, so there is no impact of IFRS 16. Back to you, Rob.

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [4]

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Thank you, Frans. Let's go to market conditions. Most of our markets are stable to positive. However, there are uncertainties in external environment, which could affect us. In the Netherlands, the housing market remains tight due to a shortage of supply. As I've told you before, the main problem is the delays to get permitting. Also pressures in the supply chain push up costs, which makes houses less affordable. Recent court decisions regarding the PAS Nitrogen Approach Program could make it more difficult for construction in protected natural areas affected by nitrogen overload. The construction industry closely cooperates with the Dutch government to work out how to deal with the situation, which threatens to make the housing shortage worse and to delay important infrastructure projects.

We are closely following developments on Brexit. Our U.K. and Irish order books are generally strong, and in the U.K. construction and property, we are seeing some slowdown in the market and in our order intake.

In the U.K. civil engineering market, Brexit uncertainty is affecting mainly the commercial sector where we have limited exposure. Major public infrastructure works continue to come forward. But as always, there is some political risk.

In Germany, the parts of the construction markets we are -- we operate are generally stable, but competitive. And Belgium presents some opportunities in Civil engineering, and construction is improving on the back of anticipated higher demand for public sector. In international, we are still facing a lack of opportunities in offshore and nearshore oil and gas.

On this slide, you see the Julius Nyerere International Airport Terminal 3, Dar es Salam in Tanzania, a project recently successfully completed by BAM International. The project for the main terminal building, facilitating 6 million annual passengers, included parking lots, access roads, platforms and taxiway. The order book is benefiting mostly from the positive markets while we maintain our tender discipline to get the risk and reward balance right and improve contract conditions. We are in discussion with public sector clients, not only in the Netherlands, to improve the risk/reward balance for new projects. In the first half, it was agreed to stop the contract for the Hoevelaken road project in the Netherlands. The Civil engineering order book growth related mainly to the Cross River Rail project and good order intake in the U.K.

Again, we regret the additional project costs that led us to revise our outlook for the current year. Our new executive committee is strongly committed to accelerate our strategic agenda, which should result in improved predictability and performance of our business. We are confident that this acceleration will enable us to realize BAM's strategic target of a pretax adjusted margin of 2% to 4% in 2020.

For the full year, we expect an adjusted result before tax margin of around 2 -- of around 1%, with revenue slightly higher than 2018. And now we will take your questions.

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Questions and Answers

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [1]

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Martijn den Drijver for ABN AMRO. The first question is on project reviews. Initially in July, the announcement was EUR 90 million. You announced now EUR 94 million. So have you done a complete review of all material projects or is there still some risk there? Can you elaborate a little bit? And then with the sea lock, another EUR 3.8 million in the second quarter. You mentioned that it will be completed in a couple of months. Can you be a little bit more precise, especially given these preparatory costs that you've now taken a provision for, what is really the risk in these remaining months? And then my third question, Civil engineering, EUR 19 million pretax loss, if we add back to EUR 22 million and the EUR 7.5 million for the sea lock, you get to EUR 10.4 million positive. Last year, that was EUR 22.2 million. So can you elaborate a little bit on what has been going on there? And what has happened there in terms of the deteriorating profit?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [2]

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Yes. It's correct that the exact amount, which we announced on the 8th of July, being approximately EUR 90 million is now EUR 94 million. And that is because we have to be compliant with the announcement of profit warnings, which we are. And of course, that triggered the review of all large projects. Again, we do this on a regular basis, but we did the review again on all the larger projects and what we know is now in the result.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [3]

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Just for you -- if I may, when you say larger projects, what is your materiality limit?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [4]

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Yes. We say above EUR 100 million, EUR 150 million, everything is large. EUR 3.8 million extra on the lock, again, the first quarter, it was for weather conditions, but the second quarter is also to take precautionary actions. We are now approximately halfway. And depending what we encounter in the soil, sometimes there's debris, so we are a bit cautious in exact planning. That's why we say coming months, but that's the -- I'd like to stay with this level of position.

And you're right, Civil engineering, EUR 22 million and EUR 7 million, it's still modest. There are a couple of reasons for that maybe. Frans?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [5]

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Mainly driven also by our English engineering organization where we saw slow start of the first half year. So for the outlook, we are comfortable that we can deliver on the plan there, but we just saw a bit more than normal seasonal pattern.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [6]

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Bart Cuypers, KBC Securities. Yes, just briefly touching upon IJmuiden, one last time. So you mentioned the extreme weather in the first quarter. In July, going into August, weather was also extreme in the other direction, very hot. So has that also impacted construction over there? Can we expect an additional cost for the third quarter due to this? That's the first question. And then secondly, the impairment of offshore wind foundations, yes, you exited there. Can you perhaps give a little more color on that thing that everything that is outstanding that has been impaired right now and maybe some additional information on that?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [7]

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Okay. IJmuiden weather, the hot weather, which was extreme, the hottest we had ever in the Netherlands, it could have had what some impact, but not material. It's more the precautionary measures in the second quarter. What we expect in the third quarter, yes, then we get more wind again. But we also try to make an estimate of the weather, but when it's more extreme then we probably have some extra costs. But at the moment, we try to always make an estimate of the weather. And the seasonal pattern, the normal seasonal pattern of the weather coming into autumn, again, is included in the planning normally. Only when it's extreme, then we may have some slippage. But on the other hand, if it's better, then we are also benefiting from that.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [8]

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So at this moment, no initial indications for material and like in second quarter, was the case for the third quarter for IJmuiden?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [9]

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Not relating to the weather. Everything we know of the cost we put in the forecast, of course. But the project is not finished. I think getting this huge caisson down, you talk about flat building, apartment building that is within the precision of millimeters going down halfway, this is very promising. It's not fully down yet, and there's 2 years to go. So it's ready when it's ready, but this thing is a major thing, of course.

And the GBF, yes, we looked at our -- at the wind energy, and it's very competitive. It's very volatile. Sometimes, subsidies, sometimes not. And within that market, we have a niche product that's the Gravity Based Foundations. And looking at the opportunities in the market, compared to the effort we have to put into it, lengthy process to come to a conclusion, we decided to exit this and the amount now taken is the full amount. So that's all, there's nothing more.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [10]

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Again, on the sea lock, if you compare where you currently are compared to, let's say, 3 months ago, has it lived up to your expectations? Any statement on where you think it will be finalized, that second order?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [11]

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When? The second caisson, you mean? Yes. Like I said, we are careful with the exact forecast because you never know what you encounter. But everything we learned from the first caisson, we did in the second caisson, it's also double the size. So far so good halfway. And I -- so I take a little bit of space here, the coming months, we will finalize it.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [12]

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But overall, you would say it's in line with what you thought after the Q1 numbers?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [13]

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Yes. A little bit more debris here and there, but it's within the range we anticipated.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [14]

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We're not there yet, but the year has already progressed, you might ensure your forecast, any statements on dividend?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [15]

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Dividend. We have a dividend policy, and that policy remains unchanged. And normally, we decide that at the end of the year. So nothing to report on this at this moment. The policy is still out there.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [16]

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Tijs Hollestelle, ING. Yes. I have a question about your solvency ratio. You explained the impact from the IFRS, it includes the convertibles. I can remember in the past that at these levels, BAM with also other construction companies were taking countermeasures in order to increase it. So what is your stance on the solvency ratio? And what is the contingency plan in case there might be further losses in the second half?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [17]

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Yes. So I agree. Good morning, Tijs. The large gap to bridge versus the original target we had for solvency, I think we have to bear in mind that meanwhile we had IFRS 15 and 16, so both joint impact is about 4%. So yes, taking that into account, still not where we want to be. We do are confident with the current forecast for this year and the outlook for next year, and we will grow the solvency back in the right direction. So from that point of view, that is the course and if we -- also driven by the cash position, there are no other alternatives that we are considering or don't see the necessity for that in this stage.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [18]

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Yes. Okay, because in the past, it seemed to be an issue, not so much the technicalities, but it seems to hamper you in your commercial activities, but that is no longer the case because overall, the balance sheet is stronger compared to, let's say, 5, 6 years ago, correct?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [19]

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Yes, correct.

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [20]

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It is a factor -- 15, but corrected with all the other things, it's still within -- also what commercially is acceptable. So no danger zone, and the way is up now.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [21]

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Okay. That's clear. And then still followed -- but, it's a bit technical and I don't understand these things myself, but if you look at the, how do you call this, the statements in changes in equity, you have these fair value cash flow hedges and the actual gains and loss on pensions, both, for us, not -- we cannot really predict it, but it was quite a negative impact on the equity, so I assume that on the pensions, it's -- you're derisking the pension fund is an impact I'm seeing here in the EUR 65 million?

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

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Yes. So there are 2 elements in there. One, driven by the lower interest rate, we see a noncash effect on our pensions of EUR 37 million. And that's also driving the EUR 29 million on hedges, negative, also noncash effect related to lower interest rates. And then in the U.K., we had the opportunity to derisk a pension scheme and sell the liability to ensure that a noncash exposure, and that was an impact of EUR 28 million on equity, which is in line with our policy to derisk pension schemes.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [23]

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Yes. So -- and timing-wise, you felt comfortable doing it right now because it's a bit under pressure, it looks to me. So -- but this is not a problem?

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

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No. I think this is the right decision. As I said, from a risk point of view, it was a good opportunity. There's no cash impact. I agree, 0.3% impact negative on solvency with the other setbacks we had, it's not convenient to say, but the derisking preferred and also the element of it being non-cash, we feel it's the right decision.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [25]

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Yes. So I can also assume that with interest quite low now that future negative impact is limited?

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

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So interest rate volatility will always impact pension valuations, hedge valuations. So yes, for the derisk part it's derisked, if you refer to that. So in that sense, that part is out of the -- has not impacted anymore. But of course, we also have remaining pension liabilities, which are still exposed to interest rate changes.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [27]

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And is there also -- might also be an impact from the FX within the euro and the pound?

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

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Yes. So with the Brexit, the exchange rate is under pressure. So also the translation risk there is something we carefully look at going forward. But I think, also, in terms of solvency, let's not forget for the second half of the year we plan to strongly recover our bottom line, and with that increase the solvency. That should be the main driver.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [29]

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Okay. And then also link to dividend, the last question.

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

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I can imagine.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [31]

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We've some leeway. Yes. I also had a question, your remark on -- you expect a strong recovery in the second half in the U.K., that is based on what exactly?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [32]

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It's a seasonal pattern always. And this year, the seasonal pattern was slow in the beginning. So it's phasing, it's timing. Hence, we will recover in the second part.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [33]

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Yes. But it is still down EUR 10 million year-over-year, so...

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

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Yes. It's EUR 8 million, I think. Something like that? Yes, correct. So we -- we picked that up in the second part.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [35]

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It's more specific, I mean, what do the U.K. guys tell you then on the second half?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [36]

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That is -- the seasonal pattern was a bit worse in the first half, and it will pick up in the second part. It's not related to 1 or 2 things.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [37]

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Okay. So similar to second half last year then?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [38]

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Yes. We're a bit better. Yes. We have to pick up.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [39]

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Yes. And then also, basically, the same question for the comment on the further improvement expected in trade working capital, based on what?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [40]

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Based on -- so trade working capital isn't there. We have 10 operating companies that forecast how they think they will perform. And with that, we are confident that we can work our way further up towards minus 10%. Also driven by a trade working capital improvement program that we have in place, very keen on paying our suppliers on time, but also have the right billing into force there. So billing frequency is something that we can improve in. So we have all these efficiency programs to get to the minus 10%.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [41]

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And so it's really based on management, data information systems and not on just what the people on the ground tell you because it's...

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [42]

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No, no, no. It's based on management. We are implementing a software tool. So we have also a central view on that across the whole business. And I think it's also good to bear in mind that minus 9.1%, if you compare it with last year, we've taken out the Argen, that we explained. So basically, it's 0.9% better if you would still include the Argen. So from that point of view, we are doing pretty good, I would say.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [43]

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Luuk from Banque Degroof Petercam. My first question is about residential where you expect a pick up in the second half, bringing full year to plus 10%. But at the same time, you mentioned a couple of challenges for the medium term, I think, which is the permitting, but also the declining affordability due to the rising cost levels. So can you also give some view on the longer term, how you see the housing market, which is the key driver of profitability growth so far developing?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [44]

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Yes. The plus 10% is because we know a little bit ahead how the projects will come to the market. So that is pretty accurate planning, maybe some delay or so, but this is -- we're pretty confident on that one. The medium term is a bit more uncertain. It's also driven by the nitrogen impact. We are still investigating. Everybody is still investigating what is the impact of that. So there are some factors that makes it a bit more uncertain. In general, it looks good. We need 75,000 houses a year. The ABN report this morning says this could impact 10% of the production if we do not deal with it. So not 75,000, but 7,500 less according to ABN AMRO. It's not materialized. I also said this morning on the radio, I think it's important that we sit together and investigate what the impact is, how we deal with it. I also say that BAM is very much into sustainability, so it also -- we support the fact that we look at it from a sustainable way to our build environment, but to make -- to cut corners very short or full hit the break is not very effective for the market. So that's why -- also by (inaudible) the branch organization and the big companies and everybody basically involved are talking how to deal with it because it could have -- could be impactful. But it's not yet materialized. Oud-minister Remkes, who's now on advice committee, he conferred short-term solutions somewhere next month. Longer-term solutions in the next 9 months. So we have to wait and see in that. We participate in that thinking how to come to a solution. It's also an opportunity for innovation. So there are also opportunities. But I think we should take it serious. Again, short term, okay. In general, the market is okay. There is demand in the market. So from that side it's okay, but so the problem is on the supply side, the suppliers, but also these regulations, the permits, that's where we have to deal with. So a little bit more uncertain towards the future than I would say without the nitrogen.

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Luuk Van Beek, Banque Degroof Petercam S.A., Research Division - Analyst [45]

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Okay. And then on the -- obviously, when you announced the losses, you set forth measures to avoid such things in the future, now you've had a -- done a more thorough review and had more time to think about it. Have you come to any new conclusions and new measures that you're taking to make sure that results become more predictable in the future?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [46]

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Yes. Everything we do is focused on being more predictable, but it's very clear that we are not there yet. IFRS 15 is not helping it. We announced when it was introduced that the volatility could be a bit more. Part of the loss we take, we expect to come back because we're in negotiation with clients. The new regulation really requires that you have a high probability on the income before you can recognize it, and we take the costs when we see it. So -- and if you have that coincidentally on 3 projects in the same quarter, then it has a big impact on the bottom line.

But we continue to negotiate and get it back, so that's that part. And through our tendered stage gate procedure and our more selective tendering, you can see underlying that the quality of the order book is improving. But I understand that it raises questions when you come with this quarterly results. So I understand the sentiment, but I keep saying we should keep cool and work on our order book because it's improving.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [47]

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Maarten Verbeek, The Idea. You just mentioned the IFRS 15 is making results more volatile, you have to stabilize going forward because it has just been introduced, makes it very hard to see the underlying development of profitability of BAM. What is a good measure to look at BAM and to judge what the underlying development of profitability is?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [48]

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Yes. Interesting. [Cash is] effect. So that's maybe one of them. Working capital. But of course, longer-term results in the projects should at a certain moment show, again, it's not the case yet. So I understand that.

Yes. What else? Quality of the order book. I also see that we exit markets like the Gravity Based Foundation, that's -- it's not picking up. Making more choices, where do we want to play, where do we want to earn. I think going forward, we will be working on that one to be even more selective, not only during the tender, whether we tender -- what projects, yes or no. I would say it's a combination of measures. But it's top of mind, I understand the question, of course. You have any?

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

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No. I would answer in the same line. I think it's good to say that quality of the contracts and the operational execution of the contracts determines the performance of the company. And IFRS 15 brings some volatility, but we also should not push all the answers to us that, that would not be making sense. So then I would go back indeed to what is the target margin that we want to operate in, and that translates in cash and also trade working capital, I think, is a good measure on how we are in control of our business.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [50]

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In the press release, you stated that you will or expect to deliver on your 2020 mid-term strategic profitability of between 2% to 4%, but there are more targets that you've set in the past, what about all these other ones?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [51]

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Yes. We haven't left them, of course. Return on capital, property, EUR 533 million, we said EUR 500 million is good, still within reach. So overseas a bit of a stretch, but also because of the '16 IFRS and some other things. So that's -- our target is towards 25%. So there's a bit of space. That's a bit of a stress, but the others, I would say, are definitely still within reach.

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Christophe Beghin, Kempen & Co. N.V., Research Division - Analyst [52]

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Christophe Beghin from Kempen . I have a question related to the full year guidance. You stick to the 1% PBT margin for the full year.

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

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That's adjusted.

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Christophe Beghin, Kempen & Co. N.V., Research Division - Analyst [54]

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Yes, adjusted, of course. Assuming slightly growing top line for the full year and taking into account the first half year results, you should assume H2 to realize an adjusted PBT margin of around 2.6%. It seems it's a bit historically high as well. Where is this improvement margin coming from year-on-year? And how confident are you here, where should the growth come from?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [55]

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The second half is always the better half, and definitely this year, I would say. Last year, we did, I believe, from hard EUR 95 million. We have to do now EUR 100 million -- yes, about EUR 100 million plus. So it's in reach. So in that sense, it's not way off. It's similar to last year, a bit better, which we see is doing well.

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Christophe Beghin, Kempen & Co. N.V., Research Division - Analyst [56]

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Okay. And then I have last question, also. Previously, you have stated that there are no legacy projects anymore in the portfolio. Is it still the case? And what was actually the definition of a legacy project?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [57]

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Yes. Well, we don't come back to old projects or legacy projects because that's gone now. That was pre '15, pre '16. And what you see in the results on the projects are now -- I would not immediately relate to older, some basic -- by the way, are the older projects. But it's also, like we explained in the discussion with the clients, it's some construct-only projects where the client wants changes, alterations. And it's always simple, if somebody wants an extra door, you pay for the door, but then we have to explain that the moment you came with that extra door, we were almost closing the wall, so we have extra costs. And then you get into discussion because it is one door, it's simple, but the fact how it disturbed your planning, how it disturbed your process, that's where all the discussions are all out, and that can be lengthy, and even up to court, especially in Germany, which is sometimes the case or arbitrators. Yes?

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

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Tijs Hollestelle, ING, follow up. If I remember correctly, when the first sea lock provisions were announced of EUR 60 million to EUR 70 million, these provisions went into the trade working capital positions on the liability side. What exactly happens in the first half with the loss provisions you announced early July?

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

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Yes. So we have -- predominantly, the cash out is an effect there, of course. So we have EUR 9 million cash out in the first half of this year on the lock and then we still have EUR 6 million to go for the remaining of the year. And the total to go is EUR 20 million. So it gives you a bit of insight comparable period. Last year, we had a EUR 58 million impact in mid-'18.

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

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Yes. Okay, that's clear. And -- because I'm not always understand it myself, but the loss provisions announced in July on the German projects and then the projects in the Middle East, is that now -- do I see that in the balance sheet on the liability side in the trade working capital?

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

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Yes.

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

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The full amount? And that cash is expected?

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

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No. That is partly because we estimate that half of the costs are already incurred. So there are -- they are cash out and they run through the P&L already. So we still think that 50% is to come in the coming period, and that is then not this year or next year, but it's in the coming year. So from a cash -- and that also gives you the cash point of view.

And then related to Rob's earlier remark in discussion with clients, conversation for this, there is the opportunity to recover some of this.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [64]

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Yes. That remains to be seen, but there is still -- on the trade working capital, will be in the future, kind of a slight negative impact because that money is still going out into apartment.

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

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Yes, yes. That's correct. If there is nothing coming out of the conversation. Since that is being feasible, not translated into the balance sheet yet, there may be a damper there.

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

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Two additional questions, Martijn den Drijver for ABN AMRO. I'm reading in your legal proceedings, and I'm not familiar with this element, court ruling on NEN norms, you mentioned it is not material, but can you please enlighten me, what is this all about? That's the first question. And I remember that at -- with the full year results, Philip Ngotho had a lengthy discussion about capital ratios, and the fact that your net cash recourse was improving, working capital's going to go in the right way. He said, well, we still have working cap swings, and that's why we dip into the RCF, but you haven't done that in the first 6 months. So I'm revisiting that subject. What do you think about that element right now?

And then the third one, maybe to help with that, Heijmans says there's new slide that they introduced, 12 month net debt development on a 12-month rolling forward -- rolling back rolling forward basis, that would help as well with BAM, would you consider adding such a slide as well? But then, obviously, for net cash recourse.

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

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Maybe a bit more words on the first question, I did not fully get that.

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

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The first question, it says on Note #7, Page, I don't know, legal proceedings, BAM is currently reviewing the potential impact of the court ruling on NEN norms to review these reforms on a contract by contract basis, no material impact deemed, but I don't know what this NEN norm is.

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [69]

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Oh. Yes. That one, sorry. It's the special concrete floors that still are under investigation. What will be the final new rules for designing those floors that were in the parking garage in Eindhoven for instance. Okay. So that triggered the whole industry discussion. It was not BAM, it was not the project, but it triggered the whole industry discussion, how should we calculate those floors because that was something to be adjusted.

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

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And you say your management will monitor developments in the second half, I guess, that means that there are still some projects under review or your order portfolio, which may then have to be...

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [71]

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Yes. We have investigated everything and the thing that's now remaining is how do we repair it, how do we solve it. But that's -- I think we had the major part. So that's one thing. And the second thing is, how does the industry deal with these floors, going forward, in new construction.

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

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Okay. But that does sound like there is an additional cost element, so -- and given that...

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [73]

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We do not expect that to be a lot, no, because we have already inside a lot of repairing measures. We've tested that. So we wait now for approval or additional investigation. My best guess is that they will not be impactful.

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [74]

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Then maybe on question number 2 and 3. So if you look at our net cash position versus last year, so (inaudible) basis, that has improved. I think you refer to discussion with your colleague, Philip Ngotho, that we had last year, where he basically looked at the year-end cash, and we had a discussion, okay, what should be the view on that. And I think there are 2 elements important, the best (inaudible) sort of profile through the year in the -- of a typical company in this sector needs to be catered for. So the year-end cash is heavily overstated, I would say, and you see that in the numbers. And the second thing is the volatility on a day-to-day basis, so that working capital is necessary to drive the business with joint ventures, joint operations and also making sure we can deal with volatility in cash on a project level.

Putting that aside, we have mentioned we have not used the RCF. So you say, what's your comment on that, I would say that's a strong point, that improves -- that's a signal for a stronger cash position through the cycle. And then I understand your question, I also saw the slide of Heijmans where they showed a profile through the year, and it's something we are considering because we'd like to be also a bit more transparent going forward on that.

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [75]

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Andre Mulder, Kepler. Another 3 questions. Firstly, on Brexit, you said that it so far only had an impact on the commercial side. Is there anything visible in the balance sheets of your U.K. subsidiaries in terms of lengthening payment times, maybe you have to put up more provisions to cover the debt situation.

Secondly, on the tax situation, looking at losses in Germany, looking at the tax loss carried forward, should I assume that most of the tax refers to, let's say, The Netherlands and U.K.? And last question on the order book, you said that the margin on new intake is well within the range, so could you provide us with a bit more insight on how this order book splits over '19 and the following years?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [76]

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I will take the first two. So Andre, yes, on your first question, so there's, at this point, no direct effect of Brexit in our balance sheet. While you see some pressure on trade working capital in the U.K. in the civil sector, that's more driven by legislation, pay-when-paid clauses so that, that would be a trend in the U.K. that is directly linked to the numbers you see. Your second question, we have about EUR 150 million of deferred tax assets in the balance sheet. The majority of that is related indeed to the Dutch fiscal entity, about 2/3. And maybe in order book you can...

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [77]

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You did already both questions?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [78]

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No. There was 3. And there was one on order book, you wanted tax asset.

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [79]

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The order book, you say the remainder of the year?

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [80]

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Yes. (inaudible)

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [81]

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For the remainder of the year, of course, it's in the outlook for the revenue, which will be slightly higher and the result, your -- one of your colleagues made the calculation, I did not do that, but it's better than 2%, 2.6% adjusted. So that's in there.

And for the next year, everything in the order book is now -- which is coming in the order book is in that range. At least the projects start. And so we work to get on the execution of the projects that becomes more predictable. This was the discussion we had before. I'm not sure if I...

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [82]

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But any statement on how -- what amount of the order book refers to, let's say, sales of next year?

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [83]

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Ah, the profile. The -- you mean, you want to have outlook on the volume of next year?

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Andre F. M. Mulder, Kepler Cheuvreux, Research Division - Analyst [84]

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Yes, what's in the order book already (inaudible)

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L. F. den Houter, Koninklijke BAM Groep nv - CFO & Member of Executive Board [85]

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Yes. How much is secured for next year. I don't have it top of my mind. I'll take it offline later.

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [86]

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We have, of course, these numbers, but I don't have them top of mind.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [87]

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Maarten Verbeek, The Idea. You mentioned, you looked through portfolio. You exited the Gravity Based Foundations. Most likely, you also not accept any specific contracts anymore to do work for particular clients because they're not paying well or whatever. That is all a bit nitty gritty, let me address like that. Do you also consider to make larger steps in bringing more focus into your company?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [88]

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Yes. We are now starting the new strategic period for the next 5 years, and that will be one of the topics. The first 5 years, we really try to get -- it's a fundamental change here, but maybe it's not very known, but the DNA of people is going from project to project. And now we want to make it a learning organization with a scalable learning, so we can benefit better from the scale and the knowledge of the group. We focus really on the tender stage. But there's one important step forward, and that's the portfolio selection. So where do you want to play and how do you earn your money. And that's really on top of mind for the next months to make their choices and see if we can improve as well. It's a step-by-step approach, I understand. But again, this bringing the DNA of people, project people to a level that we share more, learn more, learn collectively rather than individuals, that's already a big step. So -- but I fully agree with you, and that's why I say in the next strategic agenda that we'll have a very big focus.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [89]

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You mentioned portfolio selection, could it also incorporate a country selection?

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R. P. Van Wingerden, Koninklijke BAM Groep nv - Chairman of the Executive Board & CEO [90]

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Yes. Okay. Then many thanks for your questions. To all of those who followed our webcast, thank you for your interest in our company. We will publish our trading update for the first 9 months on November 7. Thank you for your attention and your presence here in the room.