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Edited Transcript of AKA.PA earnings conference call or presentation 11-Sep-19 10:59am GMT

Half Year 2019 Akka Technologies Se Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Akka Technologies Se earnings conference call or presentation Wednesday, September 11, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Maurice Ricci

AKKA Technologies SE - Chairman of the Board of Directors & CEO

* Nicolas Valtille

AKKA Technologies SE - Group CFO, Group MD & Director

* Walter Cappilati

AKKA Technologies SE - Group EVP of Digital & Strategic Customers

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Presentation

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [1]

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Ladies and gentlemen, good morning. Thank you for being here. I welcome you to this presentation of our H1 results. First of all, I would like to tell you that you can use headphones to English interpreting. So the first half of 2019 was again a very good 6 months for us. The AKKA group continues to improve its operational, commercial and financial performance.

Today, our presentation will be divided into several parts. Nicolas will come back to the figures later, and he will explain the performance of the group. Walter, that joined us today, will talk about the naturally digital orientation of the group and thus exposing the depreciating elements of our group. Nicolas?

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Nicolas Valtille, AKKA Technologies SE - Group CFO, Group MD & Director [2]

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Thank you, Maurice. So the beginning of the year was very good. The group's turnover jumped by 25%. And this growth is mainly driven by France and the U.S., having operating income increase by 23% to EUR 16 million. Our EPS increase is to EUR 1.3 per share, this is an increase of 38%. And our return on equity remains at the level of 22%.

If we now zoom it by sector, in the Automotive sector, we continue to focus on margin growth and strong customer relationships with us -- grew by 6% in this sector. And we continue to deepen our relationship with Daimler. And we have a very strong development with other manufacturers as Volkswagen, Renault and BMW. And also, we are benefiting from the trend increase in their R&D spending. And we're also experiencing strong growth with equipment manufacturers as Bosch and Continental.

In the aero sector, we have double-digit growth of 12%. It's been 9 quarters since we have this kind of growth. This is logical because it is also a consequence of our balanced strategy. We continue to develop there given our often with this group. We have also a double-digit growth in H1 at 13%. Also, we believe in double digits with Leonardo and Bombardier as well as other American players. Railway continues to grow at 18% in this half year, Alstom and Bombardier as well.

If you have a look at this graph, France is experiencing an excellent organic growth of 8% in H1 2019 including an acceleration in Q2 with a revenue of EUR 331 million in H1. Demand is strong in all sectors of activity. Growth is particularly supported by the gain of many digital projects. In the mobility sector, it should continue in the coming quarters.

Germany is experiencing also revenue, high revenue, of EUR 255 million in the first half of 2019. Seasonality shrunk this year due to a low number of working days in H1. It's minus 0.7 points and businesses were -- business was occasionally slowed down, I think, by implementation of the new organization and the adoption of the single AKKA brand. Maurice will come back to this later. We will talk about the new technologies.

In North America, the revenue grew by 18% to EUR 153 million including EUR 137 million with PDS Tech. These dynamics are supported by strong growth with our American and European customers. The organic growth reached 48% for North America. This successful integration of PDS Tech will boost the activities of our North America BU.

Finally, the fourth BU of the group, excluding Germany and North America. So international activities reached a revenue of EUR 153 million in H1 2019. This is an increase of 6.2%. Dynamic is mainly driven by the major centers, which are Northern Europe, Southern Europe and Asia. Also, we are satisfied by the performance of Belgium. There's an increase of 7% in turnover in Q2, driven by some projects in Flanders. The growth is masked by specific difficulties in Switzerland and in Italy. And international activities posted a 10% increase in revenue, in line with the BU's historical growth rate.

Now when we look at the P&L, in terms of operating margin, France's operating margin increased in the first half of the year. The increase in revenue per employee allowed to compensate the weaknesses over the TACE. For Germany, we see an increase of -- by 40 basis points to 7.7% for the first half of the year. The improvement of the productivity and the increase in revenue per employee made it possible to offset the negative impact of seasonality. The BU's margins should gradually benefit in the coming 6 months from the very good relations with the main German OEMs and the expected acceleration in digital.

For North America, the successful integration of PDS reflect a strong organic growth of the operational margin. The profitability of the BU tripled to 3.6% in the first half. This is an improvement that confirms the objective of achieving an operating margin of 7% in 2020 and 10% in 2022.

The operating margin of the international BU continued to rebalance, stand at 11% in the first half compared to 10.7% in H1 2018. PDS Tech, the gross margin increased by 40 basis points. The integration of PDS is very good. The 23% growth in PDS in H1 benefited from the attractiveness of our new positioning in the U.S. around AKKA. The improvements in BU margins benefited from the improvements that we talked about. The more profitable contracts that we can choose, the decrease in SG&A, decrease in salaries, the optimization of premises, so we are gradually deploying all these levers, which will allow us to continue to improve margins and allow us to reiterate our objective of reaching 7% in 2020, as I told you before.

Our performance at the bottom of P&L is also excellent. Our first general comment first. Like all companies, we had to integrate the impact of IFRS 16, which consists in restating leases as if they were fixed assets. This is reflected in the decrease in the rents item and an increase in depreciation and financial expenses. The impact is not very significant, EUR 800,000. EBITDA is more impacted with an additional impact of EUR 16 million or 10% of revenue.

Second point. The nonrecurring amounted to EUR 11.5 million for the first half of the year linked to the integration of PDS Tech, the launch of the Strategic Customers Departments and the finalization of the new organization of the German BU. This should be around EUR 10 million in H2 than the following 2020. The cost of the stocks and free shares amounts to EUR 3.4 million, in line with what I indicated to you. In March, if you remember, there will be no impact in H2.

The financial result is minus EUR 8.2 million. It's a decrease despite the IFRS 16. Our financing cost is low at 1.9% of an average. The IS rate is, as expected, slightly higher at 28.7%. It should be stable in H2 2019.

Finally, the net income increased by nearly 41% to 6 -- to EUR 26-odd million and stood at 2.9% of sales. And the net EPS increased by 38% to EUR 1.3.

Let's have a look at the balance sheet. So as of June 30, the net debt is EUR 368.9 million with leverage of 2.3x and a gearing of 131%. The IFRS 16 impact amounts to EUR 157 million. After taking this into account, the group's net debt amounted to EUR 526 million. We have a more detailed balance sheet as well as details of the composition of the debt in the appendix.

If you look at the evolution of the net cash position, so you will see on this graph, the performance over 12 months. You have a bridge in the appendix if you want to have a look. So the first thing that you need to bear in mind, I'd tell you every time, in September, we've a high seasonality at AKKA. So usually, we see this trend, the seasonality trend.

As of June 30, our gross cash position stood at EUR 187 million, 3 main elements to be taken into account to explain the formation of the cash position. The cash flow from operations amounted to EUR 125.7 million. Also, we had an increase in the WCR by EUR 32.7 million. So the customer payment duration increased to 59 days compared to 55 in H1 '18. A vigorous action plan is underway, and it starts to bear fruit. So as announced, the CapEx has continued to decline. They amounted to EUR 25.6 million over the 12 months.

Finally, operating cash flows amounted to EUR 52.5 million. So for the record, since we talk about 12 months, we have the impact of the acquisition of MBtech 35% and 100% of PDS Tech. That amount for -- amounted to EUR 120 million. So the available cash of the company amounts -- of the group amounts to EUR 187 million, and that confirm our current action plan to reach an FCF of 5%.

Let's look out the capacity. So this -- we took advantage of this summer of a favorable interest rate environment and federal credit conditions. The group is finalizing the implementation of new credit lines for amount of nearly EUR 370 million for initial period of 5 years, which may be extended to 7 years. So we have a considerable strike force of EUR 800 million to pursue our growth strategy.

Thanks to the dynamics of the first half of 2019, we are comfortable with our objectives, and therefore, the -- with expectations of the consensus. So we have an organic growth of 6%, margin maintained at 8%, thanks to the progress of PDS integration and an FCF of 5%.

And I'm giving the floor to Maurice to talk about our strategy.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [3]

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So you've seen the figures that we showed you, now I would like to come back to this strategy. The technological position covers the entire life cycle we reached, designed in the 2000s reached the embedded systems and then we started to invest in digital: a balanced geographical balance, sector balance with big players, and obviously, a financial balance.

So let's come back to the bases. Our job is a company that manufactures and one that produce new products, and I think that one of the elements that reflect our activity is to anticipate and to master technologies that will be used tomorrow: through recruiting, training and so on. And this allowed our group to adapt and to reach all the milestones of the history of our group. In 2000, we were only in the Automotive sector. And then we understand that if we depend only on a sector, actually, we're a prisoner because of the fluctuations of the sector. So we started with the Aerospace. In 2000, our turnover was 0. In 2010, we became the leading supplier of Airbus and obviously its environment. And at that time, in this hall, I was told that you're doing too many things. At that time, 47% of our turnover were within aeronautics. The opposite happened when we bought MBtech. Obviously, the Automotive progresses. Now turnover raised to 46%. And I've been told that you're doing too many things in the Automotive. And now, we have reached a balance between the Automotive and the Aerospace. We will continue to develop in the Automotive because a wave of investment will continue for about 4 or 5 years now. And we're starting to massively invest in the aeronautics, as we did with Boeing, so on, because we're sure that this is the needed position to be able to survive and flourish tomorrow.

When we invest in Germany, we're investing in the cradle of the Automotive sector. Today, when we invest in the U.S., we invest to be able to have diversifying element with Boeing, with Airbus in the U.S. So our strategy is still the same, a comprehension of the needs on the market and being able to supply all the needed products by our customers. We will continue to invest massively in the digital in Germany because we thought that the first rupture will occur in the Automotive sector. And this actually happened when we designed in 2010 the Link & Go. We anticipated all the progress. So we can summarize and say that at middle and short term, we're well positioned. Obviously, in the digital and the automation of the functions, often reflected by autonomous driving will continue to develop massively in Germany and in the United States. And as I told you, as far as our customers are concerned, a huge wave of investments will occur in the following 5 years.

When we look at the technological plan, you can see that some German actors issued some profit warnings, but we cannot compare ourselves to them. We don't have this ambition to build entire cars. We are advising in technology, and we have all technologies that allow us to support the OEMs in Germany.

In Germany, our position changed the investments that we did in Germany. So we acquired several thousands of companies to be able to accelerate our transformation, so we started 5 years ago. And obviously, today, we don't have the same difficulties as that time. And I would like to recall you -- and anyway, I won't do a financial analysis of the German market, but there's a counter that shows the reimbursements of Germany and the debt of France, but when you -- and when you look at the activity of every country, every company in that country, you know what is the power behind. But then we have some OEMs in Germany, and we needed to know what were the volume to be invested in new programs. So I told you during our last meeting, there is no regulated framework on what needs to be the structure in the Automotive -- so the transition is natural, transition in terms of technology. If we have a thermal car, you bring some electricity, you'll have a hybrid. Perhaps in the future, we will do 100% electrical car. So this is reasoning, a technological reason with a difficult -- with a difficulty that you need to understand we are maintaining the cost of the thermal car, we're adding the costs linked to an electrical car and the equation is quite bad. And you heard that Volkswagen finally wants to switch from thermal directly to the electrical, and it will -- they need actually to reconfigure. We talk about one hundred -- about hundreds and thousands of engineers that will need to switch. They used to work with diesel, for instance, engines. And today, we have this ambition to say that we are familiar with the German market, but Germans, they think more than another European countries that started this configuration. So we had to teach it to learn it, and obviously, now we are doing this. We're switching. So we see all these changes, and Walter will talk about it later. But what I wanted to say is that on this slide, you see all technologies that we need in order to support this movement, and we must have all of them.

This slide -- next slide. Thank you. So why am I so sure and confident in the future? In the U.S., we are extremely satisfied with the integration that we did with PDS, integrating an American company. It's a huge company. It's exceptional. Obviously, we always -- we have a strategy that didn't change since the '90s. Every 5 years, we'll present our action plan to accompany our strategies, we always deliver and we will continue to do so.

We have this possibility to have huge, great results in Germany with a great demand. And now in North America, I can talk about a qualitative integration. We were unable to support Airbus and other companies in the United States. We didn't have the capacities to support them. Today, thanks to PDS, we have acquired this capacity -- this capability. And the American customers, the customers of PDS, understand the utility, the comprehensive offer of AKKA, contract growth. So it really shows how we're developing -- deploying, sorry, our action plan.

In CLEAR 2020, (sic) [CLEAR 2022,] we told you that we were focused on 20 customers. We had to better understand their needs and to deploy all possible means. And we created the Strategic Customers Department to understand how we can better accompany them internationally. And I remember, how we implemented this organization for our French customers, and now we did the same thing with more international people and globally speaking, 20 customers that outsource depending on their needs at about EUR 1 billion more or less in the R&D. Like Daimler have more than EUR 1 billion budget that is outsourced.

Today, our position implies the fact that we are at the limits, and they are soliciting us a lot. And we're trying to build new relationships because the customers understood old strategy of balances. They also have a strategy of balances. They want to have 3 suppliers. So if you have 33% of their outsourcing, you reach their limit because the customers will tell you, "You're big enough for us."

A big OEM has a volume of R&D totals that is EUR 1 billion and our target is EUR 300 million. With smaller players, our target is EUR 100 million. And our 20 biggest customers today represent 20% of our turnover. So you can easily understand why we projected EUR 2.5 billion in for CLEAR 2022 because we have customers that we know full well and which technology we master. Of course, we need to organize, we need to work, that's why we are paid, but I emphasize that it will require some work.

What is the result? Well, the performance of that Strategic Customers Department is shown by the big contracts that are shown on the slide. Daimler is around almost EUR 300 million of turnover with them. We have created a new platform for them, a hybrid platform. This is the biggest contract ever outsourced by Daimler. Then we have big contracts with other companies, Volkswagen, for example. We have also to deal with energy, and we've shown that in the different prototypes we have designed with Volkswagen that means almost EUR 100 million. A few months ago, we communicated on a contract of more than EUR 60 million. What is it? Well, it is the Link & Go. It means new sensors, LiDAR and (inaudible), and we are able to control the data and the algorithm in order to master the environment of the vehicle, and we do that for Volkswagen. BMW, EUR 40 million turnover. We are negotiating contract of EUR 40 million. So of course, it won't be on one single year. It will be for 2 or 3 years, but it shows that our work with these 20 customers, it's the same thing for Toulouse, is growing. It is a growing momentum. Boeing was not one of our customers. Today, it is among the top 5, and that we will have a contract of EUR 300 million. We cannot really communicate on that. And with Airbus, we have EUR 220 million turnover with traditional activities to [S activities], so engineering activities. Then it was more IT activities with [MAC V8]. And then we work on both because we cover the whole of the chain in order to give real solutions, digital solutions.

So before giving the floor to Walter, I'll show you a video. You might have seen it already. It's a bit different now. 10 years ago, our baseline was that -- the best way to end it. Let's have a look.

(presentation)

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Walter Cappilati, AKKA Technologies SE - Group EVP of Digital & Strategic Customers [4]

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Thank you, Mauro. That video, I might say, is a very nice transition to talk about the digital because it shows really the convergence of the physical and virtual world that is at the core of digital transformation. Now I would like to talk about the positioning of our group on the digital sector.

And as the title of the slide shows, it is about combining, and I will repeat that several times. It is about combining our engineering, manufacturing and service support expertise with our expertise in the IT technologies. Today, our customers are faced with 3 big challenges. Firstly, more and more products will be connected. According to them, by 2020, 50% of products will be connected against 14% in 2014. So we can see that connectivity is accelerating today. And therefore, these manufacturers, these industrialist rethink the way in which they design, they develop and they protect their products. Therefore, in the digital transformation, cybersecurity will play a vital part. Therefore, we need to ensure a real transformation in companies, a transformation into R&D, in design, in production systems and in the after-sale services. So information and digital technology redefine the processes and the industrial methods. Therefore, it increases the complexity of the environment. And therefore, it will create new necessities for cost and developments and a need to adapt the whole development chain. Therefore, it also creates new needs, new skills needs, new methods and tools needs.

We can see that business models are evolving. Up until now, business models were product-oriented, and now we are shifting towards service-oriented business models because services are currently creating value. And therefore, we are having a real transformation within businesses. As Mauro commented earlier on, that evolution could be qualified as a revolution. It is clearly evident. It is obvious in the Automotive sector with connected cars, autonomous cars, electric cars, these are all priorities for the big players in the area. It also creates new functionalities, new services in that product. And therefore, it leads to changes in the positioning and to new developments that we need to get close to the products and to the processes. This productivity and electric concepts are current hot topics for big players in mobility sectors, Aerospace sectors, railway sector and it is whole ecosystem that has to be rethink -- rethought. It is a whole ecosystem.

So for several years now and quite naturally, faced with those accelerating challenges, our group positioning is benefiting us. We have the skills. We have the expertise from the engineering, manufacturing and support services. And that expertise helps us having the knowledge, helps us know and control our products. And we use them in the software development, in the graphic interface in order to have the connection between the digital and the physical world. And it has to be done without any disruption. Because when you redefine -- the way you work with tools, when you redefine the product environment, of course, the whole chain needs to be adapted. The support service needs also to be adapted, and therefore, the digital continuity is key in the digital transformation.

So information technology and software development for that digital transformation should be seen and construed as integral part of those products. The use case defined by the trade is becoming, therefore, the driver of digital projects. Therefore, it is not a sport, it is rather an integral part of our business, and it is a key evolution. It has to be set.

With our expertise I commented on, we integrated in the development cycles of a project, the methods and tools contributing to the digital transformation of our customers. So you might have heard about DevOps. It is based on Agile methods, but you will hear more and more about DevSecOps because cybersecurity is becoming key in connected applications that are connected to these products and processes. And now we can really create value for our customers or engagement capacity, and it is another key element, can be applied on the whole life cycle of the product. We can, therefore, avoid the disruption within the product cycle, and with digital engineering, we are enabled to reduce the design cycle of the products. Therefore, we can have faster marketing. We can put the product faster on the market, and we can be more flexible in the manufacturing, and we can use new applications with the handling of an -- efficient handling of data, it's called analytics. That also helps us through the whole life cycle to assess the design of the product, and this is the stake today.

In order to address all of those challenges, we have created a portfolio of digital offers. And this was really consolidated by our previous acquisitions through -- in virtual reality, in 3D visualization and it is key in the convergency of those -- of both world. It's called the digital twin with the digital model that is at the core of our efforts. Therefore, we can work for our big customers, and we can support them as industrial partners in their digital transformation. One of the key work is to break down silos between the big functions in companies because it is really helping, enabling the digital continuity, which is key for the digital transformation of all big customers. That positioning helped us get the trust of our customers on issues such as digital engineering with the implementation of new methods, such as model-based engineering, which is associated to virtual solutions. So we are working in the model area, and we use that to -- with these new approaches in connected products, in the IoT, the Internet of Things, in manufacturing in order to optimize manufacturing systems with also analytics in order to offer new services, such as predictive maintenance and analytical maintenance.

So today, more than 8,000 of our collaborators work in those areas, and we are working relentlessly to train all our staff on digital technologies. We are -- we keep on recruiting in a significant way engineers, which have those skills. The AKKADEMY is, by the way, at the core of that effort because every month we integrate 80 engineers with native skills in technologies. And all of those skills is being developed with an ecosystem of technological start-ups and other companies. They also contribute to creating added-value integration, which help us embed those technology in our digital transformation process.

As Mauro said, we continue and we confirm that development on that pillar and you will have understood that it is a key pillar for us.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [5]

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Thank you, Walter. As a conclusion, well, I don't know whether I can call that a conclusion, it is about continuity. We have delivered again in the first half and we will deliver again in the second half. We have a very buoyant market, so we are well placed in order to tap that market with that German and American pillars. And therefore, we can only confirm our yearly guidance and our CLEAR 2022 strategic plan. So if you have questions, feel free to ask them. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]