Bureau Veritas: Organic revenue growth confirmed in H1 2017 / FY 2017 outlook reaffirmed - 421.6 KB - PDF

PRESS RELEASE

July 28, 2017

2017 First-Half Results

• Organic growth of +1.3% in H1 2017

  • All Businesses apart from Marine & Offshore on improving trends vs. FY 2016

  • Certification (+6.1% year-on-year), Consumer Products (+5.2%) and Building & Infrastructure (+4.0%) performed the best

  • All 5 Growth Initiatives gaining traction, + 7.1% year-on-year

  • Adjusted for calendar effect, growth trends were similar in Q2 compared to Q1, despite Marine decline

• External growth of +3.3%

  • €100 million in annualized revenue with 4 strategic acquisitions completed YTD, supporting the Building & Infrastructure / Agri-Food /SmartWorld Growth Initiatives

• Currency impact of +1.6%

"We are on track with our strategic journey to transform the Group. Since the beginning of the year we have further progressed on our Growth Initiatives, with an accelerated organic growth and four targeted acquisitions. Our commercial efforts, notably towards key accounts, are materializing in significant wins. Finally, in many of our activities, the Group's digital transformation is now clearly visible for our people and customers. As a result, our organic revenue growth in the first-half is confirmed.

All our businesses are on improving trends, apart from Marine & Offshore, which is currently facing a market downturn. Consumer Products is accelerating, Certification remains robust and Agri-Food & Commodities is gradually improving. Industry, our largest business, is now close to stability as adverse conditions in the Oil & Gas markets are compensated by end market diversification. This encouraging momentum should continue to strengthen our performance.

The Group's 2017 outlook is reaffirmed: we still anticipate a slightly positive organic revenue growth for the full- year with acceleration in the second-half confirmed. We also confirm our full-year objective of an adjusted operating margin of circa 16% as well as higher cash flow compared to 2016.

Bureau Veritas' expansion strategy in targeted sectors and countries is paying off and is making the Group more resilient."

The Board of Directors of Bureau Veritas met yesterday and approved the financial statements for the first-half of 2017 (H1 2017). The main consolidated financial items are presented below:

1. Financial indicators not defined by IFRS accounting rules presented in Appendix 4

2. Growth at constant currency

1. -Growth Initiatives accelerating, offsetting down-cycle activities

   Organic growth was +1.3% in H1 2017 including +0.8% in Q2. Adjusted for calendar effect, growth trends were similar in Q2 compared with Q1. Marine decline had a 1.2 pts negative impact on Group organic growth in Q2.

   In H1 2017, activities under the 5 Growth Initiatives accelerated their pace of organic growth at +7.1% (vs. Q1 up 4.6%). They contributed 2.0pts to Group organic growth. Key performers were Automotive (+26.7%), SmartWorld (+12.9%) and Opex (+7.1%).

   Other activities had a negative 0.7pts contribution to the Group's organic growth. This is mostly the reflection of markets facing down-cycles, including Marine & Offshore (8% of Group revenue) and Oil & Gas Capex-related activities. The latter, representing now less than 5% of Group revenue, further declined by 12% in H1 2017.

   This set of figures supports the Group's emphasis on its targeted Growth Initiatives, which are delivering additional growth and the diversification the Group is focused on.

2. - Proactive cost management

   The Group continues to adjust its cost base in businesses faced with challenging market conditions, including commodities-related divisions (Oil & Gas, Upstream Metals & Minerals and Government Services) and Marine & Offshore. In addition, it is also making structural efforts to improve its margin in the future. This has led the Group to book a restructuring charge of €31.4 million in H1 2017, essentially headcount reduction protecting margin as early as H2 2017 onwards.

3. - Four targeted acquisitions completed, all supporting the Growth Initiatives

In H1 2017, the Group completed four acquisitions, representing around €100 million in annualized revenues, or 2.2% of Group FY 2016 revenue. Acquisition growth was 3.3% in H1 2017, combining the contribution of acquisitions made in 2017 and the acquisitions finalized in H2 2016.

• The acquisition of Shanghai Project Management1 further secures BV's leading position in energy and infrastructure project management in China.

• The acquisition of Siemic2 enhances BV's presence in SmartWorld and Automotive, both in China

  and the USA.

• The acquisition of Schutter3 expands BV's footprint in agri-commodities in Europe, South America and Asia, aligning synergies with the Group's existing network.

• The acquisition of CCC4 reinforces BV's Construction Code Compliance and building safety portfolio

  in California, a state that has strongly embraced outsourcing.

  Analysis of the Group's results and financial position
• - Revenue up 6.2% year-on-year

  Revenue in H1 2017 reached €2,360.1 million, a 6.2% increase compared with H1 2016.

  • Organic growth was +1.3% in H1, with similar growth trends in Q2 compared with Q1 adjusted for calendar effect. Marine decline had a 1.2 pts negative impact on Group organic growth in Q2.

    Solid commercial wins spurred by the 5 Growth Initiatives, softer rates of decline in Oil & Gas, as well as a firmer upstream Metals & Minerals market enabled the Group to return to organic growth in H1 2017. All businesses, with the exception of Marine & Offshore, are on improving trends.

    By geography, activities in Europe, the Middle East, and Africa (43% of revenue) are up 1.3% organically. This reflects muted growth in France including a negative calendar effect, and a slight decline in Eastern Europe. Business in Asia Pacific (31% of revenue; 0.6% organic growth) is impacted by the end of large contracts in Oil & Gas and the decline in Marine & Offshore, however compensated by healthy growth in China and Japan. Activities in the Americas show an improvement (26% of revenue; 2.3% organic growth), led by Latin America as the strategy of diversification outside of Oil & Gas is starting to pay off.

  • Acquisition growth was 3.3%, combining the contribution of acquisitions made in 2017, which are supporting 3 of the 5 Group Growth Initiatives, as well as acquisitions finalized in H2 2016.

  • Currency fluctuations had a positive impact of 1.6%, mainly driven by the appreciation of USD and pegged currencies as well as some emerging countries' currencies against the Euro, in particular the Brazilian real that more than offset the impact of the GBP depreciation.

• - Adjusted operating profit of €359.4 million, margin at 15.2%

  H1 2017 adjusted operating margin was down 60 basis points to 15.2% compared to 15.8% in H1 2016. Adjusted for foreign exchange impact, margin declined by 50bp year-on-year.

  The organic decline was mostly attributable to the Marine & Offshore division (-30bp) due to lower volume of activity notably for Certification of equipment and Offshore Services. In addition, price pressure and a

  1 Consolidation as of February, 2017

  2 Consolidation as of January, 2017

  3 Consolidation as of March, 2017

  4 Consolidation as of June, 2017

  change of mix in Industry cost another 20bp to the Group margin. The latter is explained by the fact that Oil & Gas capex was historically a high margin contributor and that Opex contracts typically require a ramp-up phase, as the Group mobilizes resources to deliver on the contract. The impact of cyclical pressure was mitigated by the benefits of the Group's Operational Excellence program.

  Other operating expenses increased to €73.2 million in H1 2017 vs. €47.0 million in H1 2016. These include:

• €40.1 million in amortization of acquisition intangibles (compared with €32.0 million in H1 2016);

• €31.4 million in restructuring charges, with actions taken principally in government services and commodities related activities (compared with €11.5 million in H1 2016);

• €1.7 million in acquisition related items (€3.5 million in H1 2016).

Operating profit came to €286.2 million, down 5.7% compared to €303.5 million in H1 2016.

1. - Adjusted EPS of €0.43, stable year-on-year at constant currency

   Net financial expense stood at €60.7 million compared with €43.4 million in H1 2016, reflecting mostly foreign exchange losses (€10.9 million vs. foreign exchange gains of €1.3 million in H1 2016) due to significant depreciation of currencies in some emerging countries.

   Net finance costs increased to €46.7 million (vs. € 42.3 million in H1 2016) due to average net debt increase, partly offset by lower interest rates.

   Other items (including pensions and other finance charges) stood at €3.0 million, marginally up from €2.4 million in H1 2016.

   Income tax expense totalled €80.0 million in H1 2017, compared with €93.6 million in H1 2016. This represents an effective tax rate (ETR) of 35.4% for the period, compared with 35.9% in H1 2016.

   The adjusted ETR is 33.9%, down 70bps compared with H1 2016, mainly resulting from the positive impact of utilizing previous tax losses (essentially in Australia).

   Attributable net profit for the period was €130.2 million, versus €159.6 million in H1 2016. Earnings Per Share (EPS) stood at €0.30, compared with €0.37 in H1 2016.

   Adjusted attributable net profit totalled €187.6 million, versus €193.9 million in H1 2016. Adjusted EPS stood at €0.43, a 3.0% decrease versus H1 2016.

2. - Improvement in underlying FCF, excluding one-off tax items and restructuring cash out

H1 2017 operating cash flow stood at €149.9 million vs. €161.2 million in H1 2016. The change in working capital was stable compared to last year despite the increase in revenue.

Purchases of property, plant and equipment and intangible assets, net of disposals (Net Capex), amounted to €58.2 million in H1 2017, vs. €57.3 million in H1 2016.

The Group's net capex-to-revenue ratio stood at 2.5%, which was similar to the level in H1 2016 (2.6%).

Free cash flow (available cash flow after tax, interest expenses and capex) totaled €28.4 million, versus

€43.7 million in H1 2016, penalized by one-off items. Adjusted for one-off tax items and after cash impact of restructuring, the underlying FCF increased by 21.7 million euros in H1 2017 compared to the prior year.