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Edited Transcript of BVI.PA earnings conference call or presentation 27-Feb-20 2:00pm GMT

Full Year 2019 Bureau Veritas SA Earnings Call

Paris Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Bureau Veritas SA earnings conference call or presentation Thursday, February 27, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Didier Michaud-Daniel

Bureau Veritas SA - CEO

* François Chabas

Bureau Veritas SA - Executive VP of Finance & Group CFO

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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* Ed Steele

Citigroup Inc, Research Division - Director

* Edward Stanley

Morgan Stanley, Research Division - Equity Analyst

* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Patrick Jousseaume

Societe Generale Cross Asset Research - Head of Mid and Small caps Europe Research

* Paul Daniel Alexander Sullivan

Barclays Bank PLC, Research Division - Director & Analyst

* Suhasini Varanasi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Richard Sykes

Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research

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Presentation

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [1]

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Good morning, good afternoon and good evening to everyone. Thank you for joining Bureau Veritas full year 2019 results on the webcast and on the call. François Chabas, our group CFO, is here with me to present our full year results.

We closed the year with excellent operational and financial performance. Record revenues and cash generation were delivered. We achieved the highest quarterly organic growth for 7 years, which took our revenues through the EUR 5 billion mark for the first time ever. Cash generation was close to EUR 620 million, a record performance cementing our strong financial credentials.

2019 was the fourth year of the rollout of our strategic plan, and the momentum has continued. We made further significant steps in the diversification of our portfolio with selective bolt-on acquisitions and targeted disposals. The growth momentum across our businesses demonstrates the strong fundamentals that have been built over the past 4 years.

Building & Infrastructure grew 6.8%; Agri-Food & Commodities, 7.9%; Industry, 6.3%; while Marine & Offshore achieved 5%. We have delivered all the objectives we set for 2019. Bureau Veritas delivered 4.3% organic growth in 2019, accelerated compared to 2018; a margin of 16.3%, up 20 basis points at constant currency; a strong free cash flow of EUR 618 million, representing a record of 12.1% of the group revenue.

Looking at our portfolio at the end of 2019. It has much better resilience than 4 years ago and is well balanced from a cyclical perspective. We estimate that as of December 2019, 45% of the group revenue is from OpEx and Systems derived from existing assets. Here, we are talking about high-visibility, repeat business, driven by regulations or standards. 33% is Products-related. It comprises our Agri-Food & Commodities business, which is volume-driven with notably healthy prospects in food, and Consumer Products, which relies on innovation and technological changes. Lastly, 22% of our revenue relies on our clients' CapEx decisions, a combination of new buildings and infrastructure spread across many geographies, new energy projects and new ships. All these markets are today recovering with the visibility ensured by a solid backlog.

A growing pillar to our resilience and building long-term relationship with our clients is in supporting their regulatory and voluntary CSR commitments. Ever since founded in 1828, Bureau Veritas' ambition has been to build trust between businesses, governments and clients. In this field, we do far more than verify compliance. We act as independent impartial guarantors and thereby play a crucial role in building and protecting companies' reputations. Our clients expect us to understand their complex business environments and risks. For example, the traceability of their supply chain, concerns around the technological advances impacting the various industries, the regulations, making them responsible for the recycling of their end products. They need impartial experts to ensure quality, safety and sustainability, vital to remaining competitive.

To assume this role, Bureau Veritas must lead by example. To this end, we are focusing on 4 key CSR areas: safety, ethics, inclusion and environmental protection. I believe that BV is uniquely positioned to shape the trust between our clients and society and to help them promote more responsible progress.

François will now walk us through the excellent financial performance. Thank you, François.

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [2]

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Thank you, Didier. Before doing a deep dive into the numbers, a few words on the key financial achievement for 2019.

We continue our active portfolio management strategy by divesting nonstrategic businesses. This contributed to margin improvement. We delivered another year of strong free cash flow, thanks to the continuing positive effect from our Move For Cash program. This contributed to a material decrease in our leverage ratio down to 1.9x, which is the lowest level since 2014. We pursued a proactive and opportunistic financing strategy, allowing us to optimize the cost of our debts, delivering a 20 bps decline compared to last year to 2.8%. And we have also lengthened the average maturity of the debt and now have maturities which are [no longer there] until 2023.

Looking at the revenue bridge. We delivered EUR 5.1 billion in full year 2019, breaking the EUR 5 billion threshold for the first time with an overall growth of 6.3%. Organic growth reached 4.3% in comparison with 4% in 2018. This illustrates the steady resilience of our portfolio. Indeed, we have consistently delivered above 4% organic growth over the past 6 quarters. External growth contributed 1.2% on a net scope basis. And finally, ForEx had a slightly positive impact of 0.8%, which is mainly attributed to the appreciation of the U.S. dollar and pegged currencies against the euro while slightly mitigated by the weaknesses of some emerging countries' currencies.

Turning to the revenue growth by business for the full year. 5 out of our 6 businesses reached a solid pace of organic growth of 4.8% on average, only Certification remained indeed in negative territory. Agri-Food & Commodities and Industry both clearly outperformed the average at plus 6.7% and plus 6.4%, respectively. We benefited here from strong drivers in Agri-Food and an excellent performance in energy-related activities. At the same time, our Marine & Offshore business recovered, up 4.9%, thanks to our positioning in the most dynamic segments. Consumer Products grew 2.3%, notably affected by the wait-and-see situation triggered by the tariff discussions. And finally, as expected, Certification declined minus 1.5%, reflecting the transitional year post revision of standards.

In the last quarter, if we zoom on it, we delivered 5.3% organic growth. This is our best quarterly performance since the third quarter of 2012. In the quarter, all businesses grew organically without exception, with Industry the best performer, up 9.3%, delivering the full benefit of the balanced OpEx- and CapEx-related activities. Agri-Food & Commodity is maintaining a strong 6.6% organic growth, notably fueled by a double-digit growth of our Agri-Food business. And finally, Certification was up plus 6.7%, benefiting from strong momentum on new schemes.

If we focus on the M&A now, we continue our active portfolio management with the objective of seizing attractive acquisition opportunities and divesting nonstrategic businesses with below par margins. In 2019, we added EUR 46 million of annualized revenue with 5 acquisitions, notably reinforcing our footprint in the U.S. and in Asia. They support our Building & Infrastructure and Agri-Food growth initiatives. In parallel, we completed the disposal of our consulting business units, providing HSE services in North America. We also divested a number of laboratories and offices, notably in North America and in Europe, and focused on underperforming units. Moving forward, we will continue to deploy a very selective bolt-on acquisition strategy, alongside targeted disposals.

Now a few key points regarding the full year 2019 results. I will comment on the numbers after application of IFRS 16 on the leases as this is now the new norm. Adjusted margin increased by 50 basis points to 16.3%, of which 45 basis points at constant currency. It is fully consistent with our full year guidance 2019. Adjusted net profit is up 8%, free cash flow is up 29%. And we'll come back to the detail of cash flow in a minute. Adjusted net debt is down minus 14% versus last year, benefiting from the strong free cash flow performance of the year.

Turning to adjusted operating margin. In the full year 2019, it improved to 16.3%. It reflects a combination of 13 basis points of organic improvement, 7 basis points of scope impact as a result of our targeted disposals and 5 basis points positive ForEx impact. Finally, 25 basis points from IFRS 16. So an overall gain of 50 basis points versus 2018.

Focusing on the businesses. Three out of them posted improving margin at constant currency. This was driven by a significant improvement in Agri-Food & Commodities, plus 120 basis points. Marine & Offshore contributed plus 90 basis points and Building & Infrastructure, plus 30 basis points. This improvement is the result of a combination of operating leverage, strict cost control, restructuring payback, of course, and active portfolio management. For Consumer Products and Certification, lower organic gross margin and negative mix weighted on the performance.

Looking at operating profit on Slide 19. It is up 13.2% at EUR 721 million. In 2019, we further implemented structural margin improvement actions and continued to adjust our cost base. This resulted in a restructuring charge of EUR 24.4 million, materially down from EUR 42.1 million in 2018. Action we have taken in commodities-related activities, Building & Infrastructure operations and Industry businesses. Net financial expenses increased in 2019, mainly due to IFRS with a EUR 16.8 million impact; second, a slight increase of financial charges, mainly due to the higher average gross debt following early debt refinancing; and third, the depreciation of several emerging country currencies increases the ForEx impact from minus EUR 5 million to minus EUR 10 million.

Looking at the tax rate now. The adjusted effective tax rate of the group was down 20 basis points at EUR 33.1 million. This decrease is mainly explained by the new rules for the tax deduction of interest applicable in France from 2019 onwards. For the full year 2020, we expect our adjusted ETR to remain at 33%.

Moving now to the 29% increase in free cash. On Slide 22, the underlying improvement beyond the IFRS 16 impact has been driven by an increase in profit before income tax, mainly led by higher operating profit and lower restructuring, a disciplined approach to CapEx, which stood at 2.4% of the revenue compared to 2.6% in 2018. And we expect this to be slightly below 3% for the full year 2020. Obviously, the growth acceleration in Q4 held back the working capital improvement.

Focusing on this in more detail and looking at it on Slide 23. In 2019, we continued to deploy our Move For Cash program. We further reduced our working capital ratio by 20 basis points versus December last year to 8.8% of group revenue. Since December 2016, our working capital ratio has been reduced by 120 basis points. Working capital reduction remain a top priority for the group. We will continue and reinforce our action moving forward.

Regarding now our financial structure. The adjusted net debt stands at EUR 1.8 billion, down 14% from December 2018. A healthy financial profile at the end of the year reflects a strong free cash flow generation of EUR 618 million, a disciplined M&A strategy with EUR 99 million of spend net of divestment and reduced dividend outflow of EUR 97 million, given the strong take-up rate from the scrip dividend in the first semester 2019. So we closed the year with a leverage ratio of 1.87x, down from 2.34x in December last year and far below our 3.25x bank covenants.

As regards our debt profile. It's been lengthened to an average maturity of 5.8 years and with no maturities before 2023. So we will propose a dividend of EUR 0.56 per share for 2019, payable in cash. This corresponds to a payout ratio of 55% of adjusted attributed net profit. To conclude, after this strong set of 2019 results, margin focus and cash will remain our top priority in 2020.

And I now hand it back to Didier for the business review.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [3]

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Thank you, François. Thank you very much. Let me now share with you the key 2019 highlights and 2020 trends for each of our 6 businesses, notwithstanding the COVID-19 impact.

Starting with Marine & Offshore. The business delivered a solid 4.9% organic revenue growth in 2019 as it benefited notably from high single-digit growth in new construction. New orders grew 7% to 6.5 million gross tons at the end of December 2019. The group significantly outperformed the market, which was down double digit, which highlights our strong position in the most dynamic segments, such as the LNG fuel ships. In 2020, we expect organic revenue growth in this business to be positive.

For Agri-Food & Commodities, the business achieved strong organic growth of 6.7% in 2019. This reflected double-digit growth for Agri-Food, led by new services and new lab openings, and high single-digit growth in Metals & Minerals. In 2020, we expect the Agri-Food & Commodities business to deliver solid organic revenue growth, although at a slower rate compared to 2019.

Let's move to Industry. Revenue accelerated to 6.4% organically in the full year 2019 from plus 3.5% in 2018. In the last quarter, the business delivered a strong 9% organic growth. This was driven by the diversification into Power & Utilities, the repositioning towards OpEx, the improving oil and gas market environment throughout the year. In 2020, we expect the business to achieve solid organic revenue growth. Our strategy of OpEx services diversification will continue to pay off. Oil & Gas CapEx markets will continue to improve.

For Building & Infrastructure, the business achieved an organic growth of 3.2% in 2019 spread across Asia and Americas. Growth was particularly strong in China, led by energy and infrastructure project management assistance. The U.S. benefited from strong dynamics in data center commissioning services. France saw some improvement in Q4. In 2020, the outlook for the business is expected to improve overall, thanks to the recovery of France, backed by the delivery of a healthy backlog of OpEx-related services. It will be mitigated by the negative impact from the COVID-19 on operations.

For Certification, as expected, the business recorded a slightly negative organic growth of 1.5% for the full year 2019 following the end of the 3-year standards revision period. In Q4, the growth resumed with a strong organic performance of 6.7%. Growth is driven by new services, meeting the growing demand from customers for brand protection and traceability all along the supply chain. In 2019, social and customized audits, sustainability and organic food certification grew double digit. In 2020, the Certification business is expected to deliver a solid organic revenue growth, led by sustainability and ESG topics, food schemes and specialized standards related to risk management.

Consumer Products. The business delivered moderate organic growth of 2.3% in the full year. Our Softlines business grew low single digits with very strong momentum in South Asia and Southeast Asia, continuing to benefit from an accelerating sourcing shift out of China. A new laboratory was opened in Vietnam. In Hardlines, stores were stable, cosmetics experienced double-digit growth and the momentum for social and CSR audits continued across all regions. The new international e-commerce platform for mass market suppliers gained traction among the group customer during the year. For Electrical & Electronics organic growth, it was flat. The activity suffered from difficult trading condition with large U.S. retailers and the effects of several bankruptcies.

In 2020, we expect positive organic growth with strong momentum in South Asia and Southeast Asia, moderate growth in Europe and more challenging conditions in both the U.S. and China. As regard to COVID-19, we expect the growth of our Consumer Products business to be negatively impacted in Q1 due to containment measures.

As the CEO of Bureau Veritas, I have been following news of the COVID-19 outbreak with deep concern. Safety is an absolute at Bureau Veritas. It means doing everything we can to keep our people safe and our clients' people safe. We are monitoring the situation every day in real time and have set up a dedicated crisis committee. We expect a material negative impact on the group's activity from the COVID-19 due to the economic inactivity, primarily in China, 17% of group revenue and potentially elsewhere. Both the group's testing-driven consumer goods activity and audit and inspections activities are affected. In the current circumstances, the impact on revenue is expected to be in the range of EUR 60 million to EUR 100 million. We are focusing on protecting our profitability.

Our outlook now. The group's strong fundamentals remain unchanged and clearly demonstrate the soundness of the ongoing strategy. We have now a force majeure with the COVID-19 outbreak, which we will monitor. In the current circumstances, the first quarter of 2020 will be primarily impacted. Overall, for 2020, we expect to achieve solid organic revenue growth, focus on protecting the adjusted operating margin at constant currency, generate sustained strong cash flow. The strong 2019 results illustrate the extent of the transformation of Bureau Veritas since 2015. We now have put in place much of the growth profile and cyclical resilience we were looking to achieve in our 2020 plan, together with cash flow generation and a deleveraged balance sheet.

So to conclude, we are extremely pleased with the strong momentum in the year 2019. With these strong fundamentals and restored financial profile, we can now look to the group's structural development, which we will share with you in September, precisely on September 29 in Paris.

Thank you for listening. François and I are now pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question in the queue comes from the line of Tom Sykes from Deutsche Bank.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [2]

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Congratulations on the results. But clearly, you're facing some headwinds now. So just to dive in a little bit into the COVID guidance. I wondered whether you can say just how much of the suspected lost revenue is lab-based versus non-lab-based. And how much of it is of lost discretionary testing, if you like? And how much of it would be mandatory, which you may expect to come back in the second half?

And then obviously, on cost mitigation, presumably the drop-through on this is going to be relatively high, especially at the early stages in your high margin there. But what cost mitigation can you actually do? Is there differences in, I don't know, holiday provisions or something? Or what degree of cost flexibility do you have? And then I have a follow-up on the U.S. retailers, please.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [3]

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So of course, your question is excellent. In fact, all businesses are affected in China. If you think about the labs because you asked a question specifically about the lab, the -- I had a call this morning with the boss of the Consumer Products division, who is, as you know, Chinese, Catherine Chen, based in Shanghai. And today, 70% of the employees are back in our laboratories. I do not see today, but again, in 1 month, we may have a different perspective on the business. But today, I do not see any real catch-up regarding the testing in our laboratories in China. Because, first, it's too early to talk about it. And second, I would say the reaction of our clients is still not clear for -- for instance, the next collection, the summer collection. So we are waiting for them as now our -- all our laboratories in China are open again to see what they are expecting from us. Now regarding the cost containment plan, maybe François, you could give more -- probably more details.

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [4]

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Yes. Thank you, Didier. So there are practically 2 type of cost containment. The first one is what we are doing in China as we speak, which is by far the region which has the strongest hit. And here, we've implemented a cost containment program regarding travel ban, regarding hiring freeze, anything that is not necessary is simply stopped. Obviously, as you understand, we are respecting the Chinese regulations here. And the Chinese state has been very clear that there should be no restructuring, no technical, so much technique. We don't have any flexibility on the cost base when it comes to salaries. And we will respect this, obviously. So there is a limited element of cost savings we can do here in China.

What we are looking more into the detail now is discussion with the China authorities on -- to where it has potential tax reductions and some reduction in the lease of our labs which are owned by state-owned companies. So that's for China, I would say. And then we're implementing group-wide a number of actions on which we are currently working to protect as much as we can the margin. And this is, in this case, beyond the Chinese geography and in practical terms is actually affecting all non-necessary expenses while preserving the key investment for the group. Obviously, this is a very fine balance we keep on having with Didier and the Executive Committee.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [5]

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Yes, we were extremely reactive. And just for you to know, we started to implement this mitigation -- cost mitigation action already 3 weeks ago. Immediately, in fact, we thought that the situation could be serious. So we made some good decision to protect the margin. The second point I could make about China is more than 50% of the people in commodities, industry and facilities are back. I had a phone call also with the commodities, industry and facility leader this morning. So they are back to work. And the good news, we had 2 guys affected in the province of Wuhan. One is out of the hospital and the other one seems to be okay and should be out of the hospital in the next day. So -- and as you can imagine, as the CEO of a company, your first concern is about the safety of its employees, of course.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [6]

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Exactly. Well, that's good news. And then just to follow up on your comment on U.S. retailers and the issues that there may be happening. Obviously, there's a couple of high-profile bankruptcies. But is there something that you're seeing some stress as you sort of go down the tiers of suppliers? And do you think you're well positioned sort of e-commerce versus, I suppose, traditional retail when you look at the consumer business, please?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [7]

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In fact, there is nothing really new. It was the case already in 2018. It continued in 2019. Of course, the online business is now becoming a competitor to these retailers. The good news, of course, is that now the consumers are looking for even more quality even for the online business, meaning that clearly we are going to do more inspection, more audit and more testing even for the products which are sold through e-commerce.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [8]

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Sorry, why do you pick it out now if it's -- obviously it's been effectively e-commerce versus traditional retail for a period of time. But why pick it out now? What's particularly happened over the last few months?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [9]

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We do it already. We looked at it in the detail. We feel that probably already something like 15% of the products which are sold through e-commerce are tested, inspected. But we can clearly see now because of the strengthening of the regulations in most countries an acceleration. And this acceleration will continue because as there is more business through e-commerce, of course, consumers are more demanding in terms of quality. So we can see clearly now and for the future an acceleration in testing and inspection as well.

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Operator [10]

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The next question comes from the line of Paul Sullivan from Barclays.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [11]

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Just a couple for me. Firstly, just to be clear, and I appreciate how difficult it is to forecast at this moment in time, but in terms of the proportion and how we should think about the proportion of the EUR 60 million to EUR 100 million and where that falls. Because I'm -- by division, because I'm not sure how -- I'm trying to reconcile your comment about consumer growth with the EUR 60 million to EUR 100 million. I'm struggling to see how that fits together because I would imagine that the vast majority or high proportions only impacts the consumer business. And then just in terms of the parameters of how you've calculated it, should we view that as a Q1-specific impact at this stage and largely related just to China? Are you seeing any other impacts in the Southeast Asia region, for example?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [12]

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Indeed, of course, Paul, it's a very good question. And today, of course, I'm talking about today. As of today, this is a situation as we see it. We are talking, of course, mostly about China because it's quite -- I would say even if it's difficult, quite easy to understand what is happening in China because after the New Year -- the Chinese New Year vacation, they prolonged it by 1 week for -- so you know that our people were not working. So there was no activity. Now people again are coming back progressively. Of course, it affected CPS, Building & Infrastructure and commodities activities in China. And again, now we have 70% of our people in our labs. All labs are open for our Consumer Product division and even for the food business.

And regarding the Building & Infrastructure and commodities, again I had the boss of China this morning and he told me that a little bit more than 50% are back working again for Bureau Veritas. Some people on top are going to come back progressively as long as the projects are restarting. So it's the reason why we -- in fact, when you look at the range EUR 60 million to EUR 100 million, it's quite a large one. But we are still -- we took some assumptions, and we are still evaluating, of course, today what could be the assumption. Today, of course, Q1 is impacted. But we still believe that we should come back to a normal situation in Q2, Q3, Q4. So -- but in February, several weeks were lost. And for the moment again, maybe I'm too prudent, but I do not see any catch-up. It's too early to talk about it. And again, I'm probably too cautious. You want to add something, François?

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [13]

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No, I think we've decided, together with Didier, to be very transparent to you guys and to the market. Because we are looking at this situation in a very, very precise manner with, let's say, more than weekly calls, as you may imagine, with our team over there. China is a material part of our business. And we thought it was the adequate manner to tell you what our risk assumption is. When it comes to the assumptions, we factored in business disruption throughout all of February and a good chunk of March and with a step-by-step ramp-up somewhere in the middle of March to get then to more of the normal by April. And what we've put here is what we know as of today. We can only say what we know. And this is what we estimate being the best assumption with some signs of activity starting back again in China, as mentioned by Didier. It's early, still early. But we thought, at that moment, it was important to share that with you and the market.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [14]

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Appreciate the transparency. And just to follow up, with your back-to-work rate between sort of 50% and 70%, would you say that's indicative of your client -- of clients' behavior as of today? Or is that clearly lagging?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [15]

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It depends on the clients. Some have already -- we started full speed. I could take a good example on the food business. Of course, you can imagine that if they do not restart, that could be a disaster for China. So on this type of testing, I'm talking about food, of course. It had to restart very quickly. Some other, it will take a little bit longer. But we can see -- and again, I have, I would say, daily call with our team in China. There is a clear encouragement from the local authorities to restart and to restart 100%. So -- and again, in our assumption, we thought that February, we would not work at all and part of March. So this is the way we decided to work on it to give -- to be as transparent, as François said, as we could. But today, there is no indicative, I would say, decision from the client that they are not going to restart. It's the opposite now. They are really accelerating the restart. Of course, when you close a factory for 2 or 3 weeks, it depends on the production because it can be more complex or less complex, so -- but progressively, clearly it is restarting.

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Operator [16]

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The next question comes from the line of Edward Stanley from Morgan Stanley.

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Edward Stanley, Morgan Stanley, Research Division - Equity Analyst [17]

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I've got 3, please. On the Marine division, can you give us an idea of how much the margin, the 55 basis points of organic margin upside are related to restructuring that you've done in the past and whether there is more of this sort of restructuring benefits to come through in future periods? On the Industry division, clearly that was -- certainly, it took me slightly by surprise in terms of how good the growth was there. And just to get a feeling for the sustainability of growth in the industry, could you give us more of a feeling on price and volume, both for the sort of OpEx markets you've got and the CapEx market just to see what the trends are slightly beneath the surface? And finally, in food, you talked about several initiatives that allowed you to grow well ahead of the market. Could you just quickly tell us what your view on how fast the market is growing, what your growth rate in food is and what these initiatives are that allowed you to grow in excess of the market?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [18]

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Thank you, Edward. So I'm going to start with the number two and number three question and François will give an answer to you regarding the restructuring. On the Industry, it's clearly the consequence of the strategy that we implemented in 2015. As you know, we decided to work a lot on an OpEx solution in Oil & Gas but also in Power & Utilities. So we won very, very good contracts in Power & Utilities, in particular in Latin America. When we talk about the contract in Latin America, just to give you a size, we are talking about contracts which are between EUR 20 million to EUR 60 million over a period of 3 or 4 years. And in fact, we did so well that now we are replicating the successful recipe of what we did in the country, because we started with Chile, in other countries by going and meeting the client.

The second reason of this very good result, of course, is the fact that for 3 years, the oil companies decided to freeze any investment on the oil and gas, I mean, in terms of CapEx. And in fact, it has restarted. And clearly, we can see an increase, and we are talking about approximately 10%, 9.8% in 2019 to be precise. So the good news for me that this CapEx is not the one we enjoyed in the past, meaning that there were very big CapEx in the past. When you stop it, you have immediately a problem. In this case, it's not the case at all. In fact, it's more, I would say, some big CapEx maintenance because they did not do anything for 3 years. So of course, they had to work on the quality and safety potential challenges.

And the second, of course, is that there are new CapEx just because we still need -- if you think about the new CapEx to work, in particular on gas, in particular on LNG projects, there are strong gas field. And we are -- as you know, we have a very, very good leadership position on gas. So it's the reason why we are doing so well in Industry. On the food business, we did superbly well last year. We outperformed the market, 10% growth. In fact, the strategy that we adopted some years ago was to be essentially in Asia. And we opened some lab in Asia and in the U.S., by the way. We also made some acquisitions. We have now a very large hub in Singapore. And our footprint now is probably one of the best one on this Asian market. You remember, we made this acquisition with DTS about milk product testing. And thanks to it, we are developing further with dairy products all across Asia.

So in fact, strategically-wise, the fact that we decided to be in Asia, which is a fast-growing market today, was a good decision, knowing that in Asia, consumers are more and more demanding. As it was the case before in Europe, it's now clearly the case in Asia. Today, 80 labs for food across the globe. In 2015, the number was not at that level by far. So we are now clearly a player in this domain. On Marine, there was a question from Edward regarding the margin evolution, François.

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [19]

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Yes. On the margins, so you spotted right that, that's a significant improvement, which was a little bit hidden, if you remember, at the end of H1. Because at the end of H1, the margin was still down because of a comparable related to some releases of accrual in 2018. So by the end of 2019, we now see the operational full picture. And as spotted, it has been proved significantly. Like in any good story, it's a mix of actions. But to try and answer your question, the most precise as possible, on Slide 18, you have the split of margin improvement, whether it is scope or organic. And you will see there that the scope part of Marine, 35 basis points, is, if I want to make it simple, practically the impact of our restructuring.

Then the other part, which is 55 basis points, it's a combination of 2 elements. The first element is a mix aspect. Our new construction activity, if you remember, Marine, 60% in service OpEx, 40% new construction. New construction activity has restarted strongly in 2019, thanks to good backlog we had in 2018 and despite the fact that the market was down. And the second element, we've used pricing power on the OpEx part of the business, so the other 60%, for which we had implemented on the 1st of January 2019 and then again in July 2019, pricing increases on the surveyance inspection of the BV fleet. So in a nutshell, this is really the key moving parts that explain the significant increase in profitability, which, if I would conclude, I would say it's -- we are back to where we should be. This is a profit, around 22%-plus for Marine, is the expected profit margin we have for this business.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [20]

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Yes. And then you are totally right, François. It's true that we -- the fact that we are very well placed on technological ships, I'm thinking about LNG, where we have very strong market share, and the market is there, yet the dynamic is there. All the passenger ships is helping. Because these ships, of course, as they are more sophisticated, the margin we can get is higher. So we have, today, a good -- everything is coming together in the Marine division.

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Operator [21]

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The next question comes from the line of Suhasini Varanasi from Goldman Sachs.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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I have 2, please. One, on the impact that you mentioned, EUR 60 million to EUR 100 million due to the virus, I wanted to ask, have you seen any slowdown in Europe because of China, among your client base in Europe? And secondly, if you think about the CapEx to sales number, it has been coming down quite steadily over the last 4, 5 years, under 2.5% of sales in 2019. I think you're guiding for a little under 3% of sales for 2020. Given you're more OpEx-based, is there a reason why it should not be around 2.5% of sales medium term? Are there any special investments you're doing in 2020, please?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [23]

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So about your first question, maybe before answering it, I would like to reiterate the fact that thanks to the good job we did in the past 4 years, the fundamentals are clearly very robust today. And we are confident that after the situation, of course, we will be back to a good normal, and I should say a better normal in fact than in the past. It's too early to say about any slowdown today, and we have not seen any. Again, we are very carefully monitoring the situation. Cost containment measures are in place and taken all across the group. But today, I say today, we have not seen any other consequence elsewhere. The second question which was raised, François, about CapEx, could you answer it?

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [24]

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Yes, CapEx-wise. So percentage-wise, you're right, we went down from 2.6% to 2.4% and to -- from 2.8% the year before. From a pure amount in euro point of view, you see, like me, we've kept the CapEx spend actually flat, EUR 124 million in 2018, EUR 123 million in 2019. So what is true is that we are very cautious when it comes to capital allocation. And we made a decision that we've -- actually, we've communicated upon already for the last 18 months that we are expecting a payback in a very selective and disciplined manner. Projects with a payback lower than 15 months have a very hard time in our CapEx committee. So selective is one of the answer why we have managed to keep this level of CapEx around the EUR 120-ish million.

Then coming to next year 2020, we still do expect to have a number of investments to make, which are around, I would say, 3 main areas. First area is 5G. We had already a good chunk of the investment done in Q4 2019. There is another half to do in 2020. The second element is CapEx that we believe are bringing growth and margin in line with BV strategy. We are talking here mainly about full laboratories. And third, CapEx related to the digital transformation of the group, where we will accelerate. So that's why we guide, and you're right for something, I would say, in the area of 3% or slightly ahead of what we are doing today. But we will still do it in the same very disciplined and focused approach when it comes to CapEx spend.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Just one quick follow-up, please. You mentioned you want to start food labs. Any particular regions in the world where you want to start it?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [26]

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Well, we have decided to start some food labs in the U.S. for a simple reason, I can be very transparent with the financial community. If you think about the U.S. operations today, if you want to buy a lab, the multiple is becoming totally crazy. So I can tell you that the payback is a lot better when you go for greenfield, though this is what we have decided to do. In Asia, it's a different situation. And we will probably have the opportunity to discuss it again before the end of the year. We are looking at starting greenfield labs, but also buying some other labs. In particular, of course, in China, we have 2 labs today and we want to have more, but not just in China. We know that the population of Asia will be probably 70% of the worldwide population in 2050. So of course, we are now clearly working on extending our footprint there. Today, in China, we have 3 labs, in fact, and to be very clear. And we are looking at making some other acquisition or again why not starting from greenfield.

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Operator [27]

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The next question comes from the line of Alexander Mees from JPMorgan.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [28]

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Two questions for you. So firstly, on the consumer business, it's dropped off the headlines. But I wonder what your clients are saying to you now about the U.S.-China trade access. Are they continuing to look to shift their supply chain out of China into South and Southeast Asia? And I wonder if that has implications to your CapEx and M&A strategy, if so. And then secondly, I just wonder if you can give a sense for how material a part of your Certification business your environmental and sustainability activities are. I can imagine you expect to see accelerating customer demand for these services in 2020. But I'd love to hear your views on that.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [29]

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So thank you for your question, Alexander. I'm going to start with the second question because there is no -- I'm used to meet a lot of clients. I think it's part of the business -- of the job of a CEO. And each time I meet a CEO of a company, he is asking me, "Didier, could you help me on the CSR?" And could you -- in fact, the point here, today, a lot of companies decided the KPIs and committed on some, let's say, numbers or achievements with their Board and with their consumers. And now the Boards are asking for evidence. So we are very well placed to do the audits and proper certification label -- or you see -- showing that what they are saying is true, in fact. And you are totally right. The market is really booming. And we will have the opportunity to talk about it in our Investor Day in September. But you will see probably that in the next months, we will launch a very important certification around this business.

Your first question about the consumer business. Even without the trade war and even before the supply chain was moving from China to Southeast Asia and to -- and in fact, when you think about the evolution of the salaries in China, it was obvious that it would happen once. I'm talking mostly about the Softlines in this case. And the good news is that we decided to build some labs in Vietnam, in Cambodia, in India. And now we are -- and we opened a lab last year, for instance, in Vietnam. I could give you another example. I met a client in New York City. It was now 1.5 years ago. This very large clients said, "Didier, could you accompany me in Ethiopia because we are going to open a big factory there." We are opening a lab in Ethiopia. So clearly, you can see that even if this trade war had not happened, the move would have accelerated.

And it's still the case, and we are following our clients. The good news is, in some cases, we were even before our clients, which is good news. So we are totally ready to work, of course, with our clients, with their new supply chain. After, is there an acceleration? Honestly, today, no, of course. Because, first, as you know, this war was a little bit, I would say, stopped or deferred. And there were some discussions. I did not see any acceleration. What I can see clearly on the Softlines is a change because of the cost in China and looking for countries where the cost is just lower.

After -- if you think about your second question about environment and sustainability, you have also a new market trend which is accelerating a lot, which is brand protection. Each time there is a scandal with a problem with a brand, the brand could be destroyed with the social media. You have a problem anywhere in the world, everyone knows the day after. So our clients want to protect their brand and their reputation. So it's about sustainability. But not just sustainability, it's about, I mean, the age of the people who are working for them, the diversity. So we do sociologies. We do risk management. We do quality assessment, quality inspection. And this trend is clearly accelerating faster.

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Operator [30]

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The next question comes from the line of George Gregory from Exane.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [31]

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I had 3, please. Firstly, going back to the coronavirus guidance, this -- I think this question was asked previously. But just trying to reconcile the guidance of EUR 60 million to EUR 100 million with guidance of growth in consumer, if we assume, let's say, half of that impact at the midpoint is in consumer, you would need to offset over 5% dilution to your revenue. Just some help in reconciling that guidance would be helpful.

And secondly, on the margins, Didier, in the past, you've given us some qualitative color of how you would expect margins to evolve over the coming year. If you're able to do that, that would be helpful. And finally, one for François. I mean, obviously, working capital progression this year was offset by the strong organic growth. Just wondered if you had any additional thoughts on the targeted reduction and expectations for 2020, please.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [32]

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So George, on the margin, I'm going to give you an answer that could surprise you. But in fact, if we not had this issue with COVID-19, our guidance would have been improving margin compared to last year. And in fact, our guidance would have been probably to achieve the margin which was in our plan when we launched it in 2015. So it's not the case anymore, of course, because China is, as you know, the largest country for us. And the second reason also is that the margin coming from China, mostly because of CPS, is a high one. It's too early to give a precise guidance in fact. We put a lot of cost containment plan in place. We need to wait until the end of Q1 to really understand what's going to be the impact. But what you can be sure about is that we are really, I would say, implementing all action you could imagine to mitigate this Chinese COVID-19 issue. On the working capital, I'll let you answer in, François?

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [33]

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Yes. Thanks, George, for the question. Here, I would say, in a nutshell, first, what I've indicated for now 1.5 years is that our ambition is to achieve 8% by the end of 2021. One thing we could be happy about is that at least we've gone into the 8% area for the first time now after several years at the 9% and 10% level. Now you're right, the -- frankly speaking, the strong organic growth hasn't really helped, especially when it's done at Q4, which is above 5%. And let me disclose you something that, that Laurent, that you know well, will not be happy about. But December was even above 7% due to, I would say, a number of days, working days, et cetera. So when -- and again, I'm very consistent to what I've said. Because 1.5 years ago, I say if this group grow above 5% on a quarterly basis that would be very tough to achieve the 8%. So imagine when we grew 7% in December. I am actually very proud of what has been done and the fact that we went down to 8.8%. That's for the first part.

For the second part, it doesn't mean we're happy with it. It's a journey. And as I mentioned several times, there is no factoring. It's pure healthy work with our cash collection team, with our suppliers as well. So it's plain vanilla working capital reduction. And as usual, when things are done in a normal manner, it takes a bit of time. So that's why we haven't promised in 12 months to bring it back to 2%. It's a journey. We're on it. We are well on track. And I'm very happy with what has been done this year.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [34]

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Thank you, François. I come back on your first question. And the EUR 60 million, EUR 100 million range is for the group overall, not just only CPS. So -- and again, it is as it is today and it's what we know today. But it is for the group, not just for CPS.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [35]

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Okay. But if we take half of that or a proportion of that, it would seem to suggest quite a big chunk out of the consumer revenues. I think we're all a bit surprised, I suppose, that consumer can still grow despite that sort of quantum of headwind in the first quarter.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [36]

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We will see what the second quarter or the third quarter and first quarter will be. I can understand your point. But today -- I mean, at a certain point, our clients are going to come back in our laboratories, for sure. And there are today already. And clearly, if you take the example for H2, for instance, we knew that the growth could be fueled by the 5G positive impact. So there will be some positive impact. There will be -- so clearly, for the moment, this is a guidance that we can give to you today, okay? At the end of Q1, when we'll communicate again in April, you will have more flavor.

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Operator [37]

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The next question comes from the line of Patrick Jousseaume from Societe Generale.

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Patrick Jousseaume, Societe Generale Cross Asset Research - Head of Mid and Small caps Europe Research [38]

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I have 2 -- one follow-up question, first, on the margins. So you mentioned that without the COVID-19 impact, you would have been able probably to reach your target for 2020, which was 17%. But this 17% was with the ForEx of 2015 and with previous accounting standard. So could you give us the figure with current ForEx and current accounting standards, first question? And second question, regarding the number of the laboratories and offices that you have divested, could you give some color about the impact on revenue and margin, if any?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [39]

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Okay. So pre IFRS, 16.4%, so it's very clear. And by the way, I communicated it last year, 16.4%. And you are totally right, by the way, Patrick. It's because of the impact of the effects are from 2015. So we made the calculation at the end of last year. If we had and we would have achieved 16.4% at transport freight, pre IFRS, we would have achieved our numbers. So I think this is a very clear answer. Post IFRS 16, the guidance would have been 16.6%, in fact. Regarding your second question, François?

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [40]

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Yes, regarding the divestments, the -- I would say, the impact overall of those divestment operations are, to make it pretty simple, not material in terms of revenue as we are talking about EUR 35 million of divestments on a yearly basis, yearly revenue, annualized revenue. This is roughly 250 FTEs. But at the bottom line, this improved the margin by 10 basis points. There is no big piece of it, no big division, whatsoever. We have performed the portfolio analysis now several years ago. And we are -- actually, we have identified already what is underperforming, what is not in the [BV co] business as per our 2020 plan with the growth initiatives that you know. And then we are opportunistic about the divestment.

If we find a good offer, we sell. If there is no good offer on the market, we keep. Because those businesses usually remain profitable even though they are below, obviously, the, I would say, the group average. But they are still interesting assets. So we go about it in a very detailed manner. But that's the only way actually to make progress and at the end of the period to get portfolio of activity, which is consistent with the ambition of Veritas with our initiative of growth. And it's -- I would say it's a healthy discipline. There is nothing exceptional here. It's the healthy discipline of a group that is in 140 countries, has been acquiring companies for the last 15 to 20 years. And on a regular basis, decide to divest what is not key any longer. Nothing more, nothing less.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [41]

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Portfolio management.

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [42]

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Healthy portfolio management.

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Operator [43]

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The next question comes from the line of Andy Grobler from Crédit Suisse.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [44]

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Three for me, if I may. First one, just on CapEx, Oil & Gas CapEx, which performed very well through the year, could you just talk a little about which regions were performing? And particularly, one of your competitors in the oil and gas market seemed to have a much tougher time through 2019. Secondly, and just following up from a previous question on CSR, if within that Certification division, how much of it is -- of that division is really focused on CSR-related things rather than some of the more traditional Certification operations?

And then thirdly, and apologies for going back to it, in terms of COVID-19, you've given the guidance of EUR 60 million to EUR 100 million. Pre any of the other things you're doing across the group in terms of travel bans and so forth that you talked about, how much of the cost within that EUR 60 million to EUR 100 million is fixed versus flexible, i.e., what is the drop-through going to be on that EUR 60 million to EUR 100 million as you see it right now?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [45]

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François, you answer the third question. And I will take the...

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François Chabas, Bureau Veritas SA - Executive VP of Finance & Group CFO [46]

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Yes, Andy. I don't want to disappoint you, but I will be quick and fast. It's too early to say. I mean, frankly speaking, we are in the middle of implementing those measures. And I mean contrary to some other companies, we are giving you, as we speak, a very clear guidance about the impact in revenue. You would understand that the margin part will be for later on. At the moment, as Didier mentioned, the company is focused in mitigating the impact clearly. And when you have the number of employees that we have in China, you understand that it's better the management is focused at mitigating the impact more than making, I would say, a gut feeling impression about what the margin could be.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [47]

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Yes, it's a good point, François. And coming back on your first question, which is about Oil & Gas CapEx, so last year, we grew this business by 9.8%, so quite a good growth coming essentially from the U.S. and from LatAm and also from Africa. Now when I say LatAm, it's excluding Brazil. When you look at it in the detail, it's a lot about gas and LNG. So -- and again, it's because we have a great expertise in this domain. And our clients know it. It's the reason why they come to us to -- for help on this big CapEx. And we know already that we are working -- we are still working on CapEx projects. And there is a very, very healthy pipeline with this type of CapEx and good opportunities for the future. So this is good news. It does not stop. I don't see it stopping. Because again the production, in some cases, will not start before 1 or before 2 years. So these projects have started, and I think that they will be completed.

The second question was about the CSR. It's not an easy question. On the Certification business purely, I consider 8% of the Certification business, which is sustainability today. But sustainability is not enough. As we discussed, CSR is corporate social responsibilities. This is more than just sustainability. And in fact, across the group, you could imagine that some other services are embedded. For instance, we do a lot of social audits for our clients in the U.S. and Europe with the Consumer Product division. Yes, I think it's a good example. Now if I take purely Certification and this 8% business linked to sustainability, last year, we grew it double digits, so high double digit. So we can clearly see that this market is moving very fast. And again, the demand from clients is very important. We will have the opportunity to talk about it again as we launch a new product, and we'll have more details about it in the months to come.

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Operator [48]

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The next and last question in the queue comes from the line of Ed Steele from Citi.

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Ed Steele, Citigroup Inc, Research Division - Director [49]

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Only one question for me. The oil and natural gas prices have fallen a lot in the last few weeks and couple of months. The oil majors share prices have fallen a lot as well. Presumably, their P&Ls are going to start coming under quite a lot of pressure as they print the first quarter numbers and their cash flow statements as well. Why do you not think that will not have any knock-on effect for your 2020 guidance in your Industry division, please?

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [50]

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Let's say 2 main reasons. The first one, many projects remain profitable at that level. And the second one is mainly -- we are talking mainly about onshore projects. Maybe I would like to add a third one, which is the fact that some of these projects now are becoming mandatory. And in this case, for 2 reasons, the first one to replenish the reserves. The second one is because again in terms of reliability, safety of the platform, there are CapEx maintenance projects that cannot be postponed.

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Ed Steele, Citigroup Inc, Research Division - Director [51]

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Okay. Obviously, in previous times, we've had these sorts of commodity price declines. Companies have pushed out some of these obligatory inspection workload. But you think that, that won't happen this time.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [52]

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In fact, you can do it for a while, but you cannot do it for so long. And they did it, and you are right now about the past. For, I would say, too long time now, this is not becoming an option.

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Operator [53]

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We have no further questions in the queue. So I'll hand back over to the hosts for any closing remarks.

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Didier Michaud-Daniel, Bureau Veritas SA - CEO [54]

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No, I just would like to thank you for your attention, and I wish you good morning, good afternoon, and good evening.