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Edited Transcript of AKA.PA earnings conference call or presentation 20-Mar-19 10:59am GMT

Q4 2018 Akka Technologies Se Earnings Call

Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Akka Technologies Se earnings conference call or presentation Wednesday, March 20, 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

* Steven Nickerson

AKKA Technologies SE - CEO of AKKA North America

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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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Good morning, everyone. Thank you for your presence. We gathered to make an announcement regarding the year 2018 and the prospects with Nicolas and Cash. We will start with 2018, our financial statements. I'll give the floor to Nicolas.

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

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Thank you, Maurice, and good morning to everyone. So 2018, we have 2 major points. First of all, we have an excellence -- we had an excellent year with huge performances and the foundations it lay for the CLEAR implementation, the operational result, is EUR 118 million compared to EUR 100 million announced during the PACT17. Our objectives have been surpassed, and the turnover is in organic growth by 9.5%. And the cash generation is huge and higher than our objective of 4.5 percentage.

When we look at the key indicators of the group, we see that the consolidated growth is by 12.8% by including PDS Tech consolidated on November 1. This growth will be -- is also pushed by our 3 BU. Our operational result is progressing by 24% to EUR 118 million. Our transformation rate of -- a, in cash progresses to 60% compared to 30% in 2017, thanks to our free cash flow. And we did 2 structuring acquisitions, 100% of PDS Tech and 35% of MBtech. The prices we negotiated are very good and would allow to have a good balance with a gearing of 108% and a leverage of 2.2. The solid dynamic of recruiting will push the growth in 2018 -- pushed, sorry, those in 2018, and we'll do it for 2019. The headcount raised to more than 5,500 people, and our EPS is in progression by 27.5%. And finally, our return on equity is at a high level, 21%.

When we look at the activity per segment, we see that we're a leader in the mobility sector, which represents 79% of our turnover, and that benefits from a solid growth, thanks to the auto, aero and rail sectors. And also, we have the digital strong expertise and growth by 37%.

If we have a thorough look at all the sectors in the automotive sector, 40% of our revenue. As we told you, we privileged the progression of our margins and the solidity of our relationship with our clients. And in conformity with our strategic plan, we are following the deepening of our relations with Daimler by focusing on the strategical projects of Daimler. And we have a huge growth with the main manufacturers as Volkswagen, Renault and BMW. We have also a good growth with the equipment manufacturers as Bosch and Continental.

For the aeronautic sector, we see a 2-figure growth, plus 11%. A significant growth, we see it in T4, 9% in 2018. We're continuing with Airbus Group. In addition, we have a 2-figure growth as well with Leonardo, Bombardier and Zodiac. The prospective in the U.S. are very good in this sector.

And the rail sector continue -- we would say continuation of the progression by 14%, Alstom a growth of 8%. Other main sectors are in growth. Energy and life science continue to grow.

When we look at the revenue by BU, the first point is the solidity of the performances. First of all, France registers an excellent organic growth of 11.5% with a turnover of EUR 615.1 million. This dynamic is supported by the net recruiting of more than 880 engineers per year. Germany, there's a turnover of EUR 511 million with a growth of 5.1% for 2018. It's a great performance that is accompanied with great improvement on margins. And our international activity, we have a turnover in 2018 of EUR 379.2 million, so it was a growth of 27.9%. And PDS Tech is consolidated since November 1, 2018. And except PDS Tech, the organic growth is 13.2% in 2018. This dynamic is mainly supported by North America, Italy, Spain and United Kingdom. International activities have a huge potential in developing namely the United States.

Let's look at our operational profitability and P&L. We see that the margins of 3 BU, operational BUs, continue their progression. The cumulative margin is 8.9% in 2018 compared to 8.2% in 2017. France progresses by 20 BP to reach 8.3%. The margin progresses by accelerating its prerecruitment for the 2019 growth. We need to add the [salaries] CIR, and we will reach 11.2% for France. This is for the year 2018.

Germany overpasses and goes beyond its objectives. The objective was to reach a margin of 9% in Q2, and it has been done. This progression is maintained by the improvement of TACE by 110 points, and the transformation plan launched at the end of 2016 allows us to deploy all our expertises. As a result, to date, Daimler is EUR 280 million of turnover, EUR 90 million for Volkswagen Group and EUR 35 million for BMW, and they are in our top 10 list. The acquisition of the remaining balance of 35% of MBtech will allow us to accelerate this transformation to finalize it and to continue to improve our margins.

The margin of our international BU progresses 9.3% in 2017, 9.9% in 2018. The BU other decreased slightly. It costs EUR 12.7 million and regroups all the corporate costs, including the holding cost, the investments linked to CLEAR and so on. As a total, the operational launch with constant permitted progresses by 80 points in 2018 to reach 8%, which is in conformity with our objectives.

The objective of this slide is to show you the trend. You know that the objective of CLEAR 2022 is to reach a margin of 10% to 12%. And clearly, we see this trend on the slide with a margin of Germany, 10.6%. Globally, we have seasonality 2018, which is coherent with the other precedent years.

Now let's look at the lower P&L. The performances are good. First of all, the nonrecurrence, in phase with what we said, about EUR 18 million. They include the M&A cost, integration of recent acquisitions, finalization of the transformation of Germany with a passage to 3 regions and the 1 brand, 1 AKKA still in Germany, the launch of CLEAR and the investments in the AKKADEMY. The cost of the stocks and free shares is higher than we announced. The performance of the MIP plan led to distributing more than -- more shares to our main managers, so 350 main managers of the group. And the residual impact of MIP will be EUR 4 million.

The financial result is minus EUR 17 million, which is stable. Our financing cost is low at 1.9%. In average, 2 reasons: we have good acquisitions; and we are predictable and reasonable because we also announced what we are going to do several years before that. And the banks trust us, and we can get good conditions on the market. The IS rate is 27.2% compared to 25.6% in 2017.

The result of the group is going up with a minority interest. It's an interesting financial consequence, following the acquisition of 35% of MBtech in September 2018, and they're representing about EUR 5 million in 2017. As a result, the net result progresses by 20.4% to EUR 53.1 million compared to 3.3% of our turnover in 2017. EPS progresses by 27.5%.

Our balance sheet is quite healthy. We have a good strategy, and we're always respecting our commitments. So we have a net debt of EUR 279 million with a leverage of 2.2 compared to 3 in 2017 and a gearing of 108%. You have the details of the debt on the slide and also in the appendix.

We have a very strong cash generation at the end of 2018 at EUR 272 million. Three main elements to bear in mind. You will see them also in the appendix. First of all, a great generation of operational cash. The CAF multiplied by 2 to EUR 129.5 million which leads to EUR 100 million of cash flow or 6.6% of turnover in total. The FCF will be EUR 69.4 million or 4.6% of our turnover. This turnover will help you for your projects. To recall, our objective in 2018 was 4.5%, and in 2017, the rate was only 2.2%. The factors that explain that are in conformity with what we told you during the presentation of H1, the stability of [BFR]. Stable DSO to 53 days is a factor -- stable factor, always 51 days. And CapEx, lowering at the end of the investments. And the second center of electromagnetic tests out (inaudible), they're representing 2% of our turnover in 2018 compared to 2.9% in 2017.

Second point explain this is the deduction of 2 structuring acquisitions that explain -- well, that reach that cost, about EUR 126 million, so the acquisition of PDS and 35% of MBtech. Also, we reimbursed EUR 100 million if you remember was the EURO PP 2013. So we have 2 structuring acquisitions, the launch of CLEAR '22, and the group shows a good result of EUR 271.7 million. If we combine this financing capacity, we'll reach EUR 780 million to pursue our growth strategy. So great dynamics in 2018 and we're waiting for the growth in the year 2019. We're waiting for a organic growth of 6%, a margin of 8%, thanks to the advanced integration of PDS and an FCF of 5%.

So let's go back to our successful elements. So we have a unique DNA. We became an international group with impressive figures. Revenue of EUR 1.7 billion multiplied by 13 and international revenue multiplied by 100, that represents 60% in total. Everything has a yield, a return of average equity of 20%. And we reached the capitalization of EUR 1.1 billion compared to EUR 84 million during the IPO in 2005. We worked on our average liquidity superior to EUR 2 million, Euronext plus other platforms. And in January, we reached the -- a compartment and the SBF 120.

And to illustrate what I've just said, I took 2 examples. First of all is the capacity of our group to do structuring operations, not too expensive. A good example is 2014 when we announced that the objective was create a best-in-class leader -- a leader -- an unavoidable leader. We did structuring acquisitions. We always were in need of a recovery, but it allows us to have them at a good price. It was very important to reach a fast -- a quick win. Also, a compatibility of cultures, a better top line and a good, strong positioning on the market. As a result, we doubled our activity. In 4 years, we doubled the operational result to 8%, and we generated a good FCF. A gearing max of 108% and leverage of 2%. So clearly, these are good results.

Another example is that when we deploy on a new strategy -- when we deploy, sorry, a new strategy on a new region, for instance, the German example, we integrated AKKA to Germany. We mixed MBtech with AKKA. It was a great strategy without risk, with a great value. And you see it on the slide, we developed progressively. We developed a good relation with Daimler. We're very profitable. Finally, following our implementation in Germany, we spent EUR 100 million to buy EUR 250 million of turnover that allowed us to create a leader of EUR 511 million that generated an ROA of EUR 45 million in 2018.

So our objective with this slide is to tell you that we won't change. This is what is going to happen with PDS again, and we'll talk about it later in details.

And I'll give the floor to Mauro to talk about our prospects.

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

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We can't be satisfied with what Nicolas just said. And as we have said during last meeting, we have a big chance to be there on the market and to be able to lead the change sustainably, lead sustainably step-by-step. We have precise rules we abide by like CLEAR 2022. It's nothing exceptional. We have ambitious target, EUR 250 million, EUR 150 million result, EUR 2.2 billion turnover. But in the end, what we want to do is to focus on customers even more, try to understand them even better and try to build organizations which allow these developments. And in 2019, we want to work on organic growth by selling all our services to customers. We have invested a lot in digitalizations in some regions. We need to offer all services throughout the world, all the world, all our customers in order to be truly organic. We will focus on 20 customers because when we can reach major volumes with some customers, let's say the example with Airbus, we are the most important actor with Airbus. Well then, we talk about very sensitive issues. And as a consequence, we work much more with them, and we have much better ties with them. So our ambition is to have some EUR 50 million with smaller customers, but with bigger customers, have a turnover of EUR 200 million per customer. And so we will have to invest.

And then on leadership, leadership in innovation. Well, we have demonstrated over tens of years that we can go, we can find, we will introduce some project carried out this year with an electric vehicle, and we have brand-new technologies we can use to do this. And the more we work with advanced technology, the more we attract talent, and this is a major stake for us.

In order to develop our service internationally, we need strong technological basis, and I will talk about our excellency centers and our capacity to offer global suggestions and proposals for customers. So talent, I just mentioned it, we need quality projects, we need to work with several initiatives. I will mention AKKADEMY later on. Results-oriented was mentioned by Nicolas. But then internally, a small remark, we often say we buy companies which are in end in life. But when we think about Aeroconseil or MBtech, well, in the end, we bought over competencies. And why did we buy MBtech? Well, because this company never ever invoiced, never ever had problems with management nor banking, but they were very strong and had many competencies in automotive. And it is much easier to work on protocols rather than on developing research and development for new competencies. So we are looking for capacities everywhere for all customers and small companies when they have good technologies. Well, it means it's an engineering and not a specialist in finance with leading underway. So main drivers, well, we want to accelerate. On the digital, in 2011, we introduced Link & Go, so those 8 digital blocks of cars and our customers focused on the car's quality. Those were not that good, but anyhow, we focused on technology and automation and that's what matters for tomorrow. All those protocols we developed, all those centers we developed back in the day. The salon in Geneva recently closed its doors, and we only talked about this automation and technology.

Second, we need to accelerate in Germany. Last year, I was told that, yes, we were working in the automotive sector and depending on it, although this sector is changing a lot. But this sector, this industry is shifting towards automation, and this is good for us. I think figures which have been announced over the last days talk for themselves whether here or in the U.S., we will be carried by this wave. We will rely on our organization which is evolving step-by-step, and we will prepare the second wave, the aeronautics wave. And we will diversify our portfolio of customers. And the fact that Boeing is amongst our top 10 customers shows who are doing it already. All this to say that CLEAR 2022 is an action plan which is quite straightforward. And it shows what we are aiming at, and it shows we have a strong pace. But we are doing it by paving the way and thinking ahead of our customers and customers' challenges. 2014, 2019, we have been able to double figures. Organic growth is our engine. Of course, we will continue acquisitions and on automotive and new technologies, new solutions. It will be a true leverage for other industries as well because we will be able to offer the solutions we have developed to other customers as well, and things go very fast.

Let's now talk about the U.S. Nicolas has said we've shifted from 0.1 million to 1 million in a couple of years' time. In Germany, of course, it's the biggest market in Europe, and we will continue developing ourselves in Germany. And I think there will be even more acceleration in the future because major stakeholders in Germany have turnovers which are very similar to ours, and they have been active for over decades.

Please, a slide. So 1 point -- EUR 0.5 million, and now we can go much faster, thanks to our new contracts with Peugeot, BMW and many others. All this to say that in the end, we are right in 2008. In 2012, we bought over MBtech. We started diversifying our projects in 2015. We standardized organization in 2017, 2018 in order to improve profitability. We increased added value on quality projects in order to attract talent. And today, well, we have the possibility to go ahead in Germany and continue like that EUR 16 billion investment over 3 years' time for several customers there. It should help us in the automotive sector. Not -- but this doesn't mean we won't focus on rail nor aeronautics to major industries in this country as well. And we've been able to develop margins there. And when we launched in 2014, well, we talked about trends, trends in France, trends elsewhere. And today, the question is to know whether we reached our max capacities. Well, we are reaching those max capacities in some countries, France, for example. But in Germany, we have 10% to 12% margin. And in other countries, we can do even more. So for us, well, I think the way is paved. We have all top 20 in mind and we know what to do.

So why are we doing all of this? Well, because we are talking a lot about the volumes generated by the digital. But for me, the digital in the end is just a question of terminology. I already mentioned it last time, but anyhow, when one conceives a product, whatever the product, global architecture, well then, it has to be supported by plastic, by mechanics, engineering. Everything which is mechanical in the end is one of the oldest professions. And then the other part is the management, management of all systems, engines, equipment, et cetera. And there, we need electronics and IT. In the end, today, for embedded systems, we only focused on the functioning and all studies aimed at improving the functioning. But today, we are focusing on an additional layer. Indeed, we try to analyze data to go much further with artificial intelligence, and we will try to -- well, create several directives. And this thinking should help us, and it makes me think about what we said some 30 years ago. 30 years ago, we were used to studying a good and then think about how to produce this good. And then there was simultaneous engineering, how to produce something we are studying. And today, today, well, this process worked very well. And it is easy to conceive globally speaking, and now we go further. We want this additional layer. How will the user be able to use this good differently, more efficiently? So for us, there is no major change in the end. This being said, everyone works on the digital today, and it is trickier to attract talent. And that's why we launched the AKKADEMY, and that's also why we acquired several companies, because we wanted to focus on some jobs and competencies.

So here, we have an example. More often than not, customers want some confidentiality, but anyhow, an example with an industrial who has some dangerous goods in warehouses, a bit everywhere, and they were facing many challenges, facing many challenges on quality. And AKKA has developed a new sensor to see where, well, dangerous containers are put. And well, we use ID cards and say where those containers are put, what the pressure of the different containers have, what the temperature of the different containers is, et cetera. So these are basics in the end, basics but basics delivered by AKKA. And thanks to all these data which can be consulted by an operator on a screen, well, it is much more efficient because they were used to work with checklist. And today, well, thanks to this data, one can ask an operator to perform several actions depending on the context. Likewise, these informations are stored in databases, in a cloud. The huge amounts of data, we are able to manage. And we provide instructions to the operators and also share some information to CRMs for trade or ERPs for management. And this is the cycle in the end. So AKKA's job ends there because, well, we are not in charge of the ERP nor trade. But all the rest, well, we are perfectly coherent and can provide a comprehensive solution. And all of this is completely natural to us, and we can see this throughout our offer provided to customers.

Here, we wanted to show all the digital topics for our customers. We are also working on new engines, all engines with very low gas emissions because, well, we will need some thermic engines. We are also working on new architecture in order to integrate some car batteries more efficiently. And with Daimler 3 years ago, we introduced the first hybrid platform, and now we are working on the next one. And we also have a project on powertrain for hybrids. There are also many digital apps, media apps for vehicles. And we work on management of transportation systems because we can see there is a true shift manufacturers. Daimler, BMW and others created an alliance to, well, manufacture collective vehicles. And now we will be able to rely on this example I have mentioned. We have to know where the costs are if there are pressure problems within the test, et cetera, because, well, the responsibility will be more and more shared. Same story with Volkswagen and with Audi as well because, well, we have a partnership with Audi, a lot of confidentiality there on automation and everything we can develop. Anyhow, we also work with Renault, one of our oldest customers. And there is a true will there to work on electrical cars. All of this to show our volumes. It's quite general, obviously, because all of this is confidential. I cannot dig into details, unfortunately. Yes, some years ago, we could exchange, well, engines and so on, but today, it's not possible anymore. And it's protectionism but not nationalism. So the stakes I have mentioned them already. We need to recruit. And 500 people have been recruited through the AKKADEMY. We today aim at 1,000 new talents. And we have very precise targets so that the engineers are well equipped and operational ASAP.

We have several labels which demonstrate, well, are efficiently, and I think that the AKKADEMY shows that with the group, we try to preserve this high-level quality. Because more often than not, when there is a problem between a manager and a team, I say that it's because, well, the manager is not able to listen efficiently to the teams, because the teams are well equipped, well trained. We need to understand that the new generations have different expectations, and we need to help them embark on this journey.

And we have had a huge success there which is at least as important as figures.

Then, well, on listening, we have to listen to our talents but also to the customers obviously, and we need to consolidate our presence internationally. Our organization has nothing new in the end because, well, in 2007, 2008, 2009, we were able to double our size and we wanted simply to develop coherence to homogenize sales, et cetera. And that's why we have a true organic system here today, a true global organic and structured system. This is our ambition. We want to understand customers and to offer to them all the services we have. If we were able to do this, it would be amazing, and that's what we are aiming at.

So our offer is based on our expertise centers because when we offer something new on a sensitive topic, we need to make our customers understand properly what we are offering. And I think that our expertise centers are true references, which allow us to go much faster on Aeronautics. In Toulouse, we have some 2,500 people working there, true experts. And they have capacities, they are able to build planes. Same in Paris, we have other experts, Stuttgart, a reference in Automotive. And we need to rely on those posts in order to integrate talents and to train talents every day more and more, better and better.

When we talk about the different systems, well, there is the ADAS system. It's quite a new word because the first ADAS system, well, in the end, is the system which was putting some shields 20 years ago. It was just the beginning. We started helping you using your car. But today, the ADAS systems have been improved, and everything we are doing today is just an evolution of the algorithms we develop with the Link & Go. So we are credible, when people go to Paris and they see all this continuity of the development of new technologies would have been developed throughout the years, well, it is crystal clear. Those expertise centers push organic growth and Cash will talk about it later on when he mentions the U.S.

So on innovation, when we developed the Link & Go, people laughed at us because of the quality. But here, we've done things slightly differently because we wanted to be emblematic with your eye (inaudible) in the group. So we developed a car a bit more -- a bit better.

So what are we trying to do with this example? Several things. First as I have said, we wanted to show that we are able to develop show cost. Not everyone knows it, but this projects help us, PR-wise. But it's not only for this reason that we do it. Then we wanted to show a fun electric vehicle, a good electric vehicle, and we wanted to show all -- how all teams within our group can work on one and only project in favor of success. It's a long video, very long.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [4]

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[Interpreted] Thank you. So we started with a smart electric car which was modified. Its behavior, its power have been amended. There is still the powertrain there, the basic powertrain. And we have doubled the system with additional engines in the front wheels. We have been able to combine the batteries within the car. We solve different problems related to temperature because this is a huge concern for manufacturers. We have a smart management of the batteries through IT, and it is also possible to add power in the system.

We wanted to have a speed from 0 to 100 kilometers per hour in 4 seconds' time. But -- and almost with it -- and with the French, with the German, with many others, with a mixed team, we have worked on one and only project to create this vehicle. Today, it is introduced to all car manufacturers, not only, well, to brag but simply to show what we can do. And yes, interior is quite British but we have the capacity to go fast when we look for true solutions in this world which is always evolving. And yes, half is working on batteries, on batteries' performance. But the use of the performance, the optimization, temperature-wise, et cetera, or management of consumption, well, there are only a hand of -- handful of stakeholders who are able to do all of that. And with -- when we have a look at the [whole] architecture of this project, well, we can see that we can deliver something unique. And this is very important.

I will now give the floor to Cash, who will talk about the U.S.

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Steven Nickerson, AKKA Technologies SE - CEO of AKKA North America [5]

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(foreign language) But if it's okay, I continue in English. Good morning, and thank you. I am very happy to be here today to address the status of PDS Tech AKKA in the United States, and specifically, the Aeronautics diversification as part of the overall CLEAR 2022 initiative. First, I want to talk about the tremendous potential for engineering R&D in the United States. And here on this slide, you see the -- soon, you see -- you -- I will talk the potential in the United States is very strong, especially relative to France and Germany. This is a study of the 500 largest spenders in the world on ER&D, and we find that almost 300 are in the United States. This represents 3x the number in France and Germany. Also the demand is growing quite strongly in United States. You will see our growth rate of 8% in the R&D spend compared with 3% in France and 5% in Germany. And the U.S. clients are looking for agility, productivity, innovation and experience.

The complementary expertise originally envisioned, now nearly 1 year ago when we began considering this transaction with AKKA, was that we could take the value-added, high-engineering solutions of AKKA and combine them with the track record that PDS Tech has for 40 years in the United States providing the top engineers to the top aerospace companies, and the brand recognition PDS Tech had to put those 2 together to create an innovation powerhouse for U.S. industry. This was how it was conceived, and this is what's happening.

But we have found it helpful as we have engaged over the past year and very much so in the last several months after the closing of the transaction, it has presented to us a segmentation of the offerings that really reflects how the clients are reacting. And if you look at the left, you have the AKKA U.S. clients and the PDS Tech clients, so AKKA on top and PDS on the bottom of the matrix. And then on the left, you have the service offerings of AKKA, and on the right, the service offerings of PDS Tech. For example, in the upper left box you see an AKKA service offering to an AKKA client in the U.S. and you might ask, "Well, that's strange. How would PDS Tech acquisition help AKKA with its own clients?" But you remember, for a client to take advantage of an opportunity, it both needs your service and it has to think of you. And with the presence in the United States, the AKKA clients are now going to more often think of AKKA because we have AKKA people over now in the United States addressing those clients and their opportunities. So physical presence matters, and the physical presence in the United States of AKKA helps even with AKKA clients and we have many joint clients.

As I move in the matrix to the right-hand top of the box, the offering of staffing services to U.S. clients, this has been an area where we have already seen success. For example, we are putting 100 staffers to work at a major Automotive client of AKKA in the Southeast corridor. So this is already happening, we're already billing revenue on this type of offering. The offering of PDS Tech services to existing AKKA clients.

As I move to the lower-left side of the matrix, this is, of course, the core assumption of the transaction help that we will be able to offer solutions work to the staffing clients. And I think it's instructive here if I give you one story, one example so you can see exactly how this transition can happen. We have a major client that was seeking -- is seeking to change how thousands of suppliers in a supply chain challenge, thousands of parts, thousands of -- hundreds of different suppliers, and this is quite a challenge because you want to not disrupt production while you change these inputs.

They came to us and said, "We need help, we're behind, we need project managers." And this is something we do every day. They needed 4 project managers, but in connection with that conversation, we began to talk about a solution because it turns out, of course, that AKKA has not only done this kind of solution before on an outsourced basis but they have a software that can actually work the process. And this client -- our client does not have a software. And so when I return, we are meeting again with this client and I think they're behind a little bit so they need the project managers, and the project managers have already started working but it's possible a part of the project will be carved out in a solution structure. And the next time they face this challenge or opportunity for the change out, which is often with our clients, we'll be able to bring the full solution with a software. So that's just an example of how the migration from staffing service to actual solution and the ease with which this takes place.

And then on the lower right hand of the box, you see about bolstering PDS offerings in the U.S. and abroad through AKKA affiliation. This is one of our motivations for the transaction, quite frankly. And we could have run the risk of being left behind because 90% of our business comes from 25 to 30 of the largest aerospace companies, right, in the world. And these are global players, and these global players expect a global solution. They don't want to deal with 1 company in the United States, 1 company in France, 1 company in England, 1 company in Germany, 1 company -- they want a global solution because they are increasingly consolidating intelligently their own supply chain. And so this is exciting because we have clients now. We've had 2 clients recently who have told -- which is good for us, told people who want to bid, "Don't bother bidding on this project unless you can bid for us globally." So this global need fits right into the transaction.

This is -- hopefully, you all realize this is a map of the United States. And I will say the aerospace clients on the left, it says AKKA Aerospace, these were virtually all clients of ours as well. There are many exciting opportunities with these Aerospace clients, the overlap is quite striking. And again, the ease of the conversation, like I described with our major client who had the supply chain challenge, these clients are interested in things that AKKA does. For example, certifications, obviously safety has become paramount, again a reminder of the importance of safety, modifications, certifications, all that kind of work these clients are demanding. And in terms of locations, there are 2 primary aerospace corridors in the United States: one up in the Northwest where Boeing, of course, has traditionally operated, up in Washington in the Puget Sound area; and of course the developing areas in the Southeastern United States, the Carolinas down from Florida, where Boeing has put a major plant. You see the red dot in the -- in Charleston, South Carolina. So we overlap quite heavily with Boeing as we've done business with them for 30 years of their 100-year existence.

And then on the Automotive side interestingly again, the Southeast corridor is a very strong in growing Automotive corridor for the United States as all the European companies are putting facilities in the Southeast United States. So the southeast United States is very interesting for the future of AKKA and PDS Tech, both from Automotive and Aerospace, and this is driven in part by lower labor costs and things that drive job creation.

Finally, we have -- I -- we could have got these from virtually every client we have. Clients are quite enthused about this transaction. We have 2 here: Textron, where we helped with a very serious project. It's interesting -- I'll again go just slightly off-script here to give you a sense of another thing that our clients find interesting is when we provide staffing, when we provide workers, it's not unusual that those workers haven't worked together as a team before. And one of the ways that we're now offering value-added services or talking about value-added services like AKKA brings is to say, "Wouldn't you rather have a team that's got experience doing this project instead of bringing disparate resources from different places?" So this is something I think -- that we are seeing resonate with our clients. So Textron, obviously very enthused about the deal.

MITAC, which is mostly Mitsubishi-owned, also partially owned by Toyota, was a client of both companies prior to the transaction. The AKKA people have been working on certification of the Mitsubishi regional jet and PDS had been providing engineers for Nagoya, Japan where this effort has taken place. In fact, we have over 100 engineers working in Nagoya for MITAC. Again, very enthusiastic about the transaction. Happened to have dinner with them last week in Seattle, and there's quite a bit of excitement about the transaction. So thank you very much.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [6]

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[Interpreted] Thank you, Cash. I would like to add something. In 2010 when we talked about our will to go to Germany, we also explained that the market was not mature sufficiently as France, and we won't have a strong acceleration. 10 years later, we see what is the results, limitation of this market. We know that in the U.S., the business model is different. However, the evolution of technology and the wheel that have the OEM to have global solutions will be nearing our solution that we provide, so we will see the same more or less solutions.

Thank you for your attention, and we are ready to answer your questions. Thank you.

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Questions and Answers

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Unidentified Analyst, [1]

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[Interpreted] I have 3 questions. First of all regarding Daimler, the account was done in 2018. As a customer, that had a lot of earnings, and we have seen a huge acceleration. Could we expect in 2019 the same acceleration? And if so, in what segment? Second regarding Boeing, given sort of -- kind of what happened in the crash, is there a risk on the dynamic, short or long term? What do you think about that? And my last question is regarding your new organization that you mentioned. You talked about the expertise centers -- the center of expertise, sorry. Is there a risk to -- do you see any risks on this evolution?

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [2]

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[Interpreted] As far as Daimler is concerned, the answer is yes but no. Yes, we think that volumes will go up, but we have a huge wheel of diversification. With Daimler, today, we do about 30% of the externalization, of the outsourcing. So it is clear that we will be attentive. But what would be the trend, the more recurrent trend as far as the activities in our AKKA's centers, same approach as we had for Airbus. And we stabilized the number of our staff, 2,500 in Toulouse, so we will have more or less the same approach with Daimler. So this is a more complete answer.

As far as Boeing is concerned, a couple of years ago, we explained that we were working with Fiat, and they had some financial difficulties. They have cash, and they have set some necessities to renew their lines. When you have a manufacturer that has difficulties, perhaps because his product is not so good, but renewals and modifications are done quite fast and interesting financial environment. So I'm not really answering the Boeing question because I don't think that 737 is a great -- I think that this is a great plane but I'm not sure what was the problem. Perhaps we will have some modifications required but I think that Cash could add something about Boeing. So I will do it. I will answer for him. They didn't stop. They didn't slow the production. They obviously are analyzing thoroughly this drama as it happened. But yes, that's it.

And the third question, the center of expertise, we don't change them. They are as they are, with the excellence in delivery. We're improving the productivity. We are putting well creating a commercial -- like a strategy that would sell -- that is used to sell solutions. Today, we have a more regional organization so we needed to push more for [transferability]. So it doesn't change the center for expertise. We need more volume, that's it.

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Unidentified Analyst, [3]

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[Interpreted] Just wanted to say something on the margin in the U.S. with PDS because more often than not, I have -- we've been told that there was some 90% staffing and 10% research and development. You said it had developed a lot, and that you had a target of some 3% and we were around 7%. So could you -- now that you can look back, if you are confident if things are happening as expected.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [4]

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[Interpreted] Well, I think Cash's explanation was good, but I won't talk about figures. I will talk about sensation. First, we have observed a strong market dynamic and secondly, there is an interest from customers. They want global solutions. The issue of quality is paramount in the U.S. Then PDS' activity can be improved margins-wise, structurally with volumes with overhead. But the work in itself, well, margins are different but we will have to improve margins than on what we will develop. So when we will make EUR 1 billion, we won't have an issue at hand anymore but we are truly optimistic, truly optimistic. Bearing in mind everything -- what is happening and the integration is amazing.

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Unidentified Company Representative, [5]

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[Interpreted] We will bring you a mic.

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Unidentified Analyst, [6]

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[Interpreted] On intellectual property, how does it happen with your customers? Are you co-owner of the copyrights? Or because -- well, the customer pays you, do they have the rights?

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [7]

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[Interpreted] Well, as you have explained, customers are the rights owners. But everything we develop within the group is, well, on sharing but it's quite rare, at least today.

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Unidentified Analyst, [8]

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[Interpreted] Could you please give us a brief explanation on those cash flow of EUR 100 million and the free cash flow of EUR 69 million, and also talk about absolute figures in 2018 and the guidance and what it integrates for 2019 on billing? Then business-wise, could you please give us the growth expectation for PDS Tech because we have guidance on organic growth? I'd like to know if this trend will be very dynamic as we've seen in 2018 or if things will normalize through time.

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Nicolas Valtille, AKKA Technologies SE - Group CFO, Group MD & Director [9]

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[Interpreted] So the free cash flow is of EUR 100 million. It includes an element which is related to strong actions we have made to get back some credit. It's just a one-shot. And as a consequence, we reached EUR 69 million free cash flow. That's it. Nothing else, nothing more. And we wanted to explain this to you because the performance indicator is of 4.6%. And we were able to find solutions to improve the situation net-debt-wise. We are healthy, we are free and we strike balance.

Then on the impact of different factors, well, we said 51 days. I don't have gross values, absolute values in mind but it's quite easy to find it in the paperwork. And then for the guidance on 2019, well, we expect stability. Is this okay for you? Okay. Good.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [10]

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[Interpreted] On the growth pace, there is no guidance with PDS simply because once we will be more mature, we will give guidance on the U.S. because AKKA was already there. And Cash is leading all Northern America for us, not only PDS. Then the market, yes, it is dynamic. And the guidance is consolidated for the whole group, I'd say.

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Unidentified Analyst, [11]

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[Interpreted] Could you please give us a brief explanation on the human resource policy and its evolution with your internationalization ad for recruitment, et cetera? And then could you please tell us if you aim at developing competencies for other customers, won't you be facing in the end, well, some walls because of the different developments and different problems?

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [12]

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[Interpreted] Well, then, on recruitment. On recruitment, the AKKADEMY's ambition is to recruit youngsters, youngsters with a digital profile and to create groups. We have many seminars where we explain to the Germans that they need to work with the French, and we explain the same thing to the French, to the Italians and so on. And then when we have projects, well, we realize that management were -- well, focuses on margins, et cetera, well, you know how it goes. And we have demonstrated with the smart that when we work with technical teams and then when -- well, they work together, there are no borders. And that's what we do with AKKADEMY because they spend 1 year together. And yes, we all work in English within the AKKADEMY. And then -- well, they don't know where they'll end up when they enter the AKKADEMY. And they don't -- they know what they will end up doing but they don't know where they will end up. So we want to avoid borders. We want to avoid someone from Paris recruiting someone else from Paris. So it's not instantaneous, obviously, because we are building this Europe. We want step-by-step within the company.

And same for -- the second, please, second question? Oh, yes, so the China wall, well, it's in our DNA. If we have some know-how and some specific solution for one -- from one customer and want to sell it to someone else, that's not for us to do it but we have the capacity to work on several sensors, on algorithms to provide solutions. And we do not have to take to -- take what's been made by the neighbor, and we don't do it. We have different approaches today with digital offers. And yesterday, well, with the embedded systems, there are China walls, it's part of our DNA. And we protect engineers, groups within Aeronautics, within Automotive. And we have standards which are even higher than the standards within the military.

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Unidentified Analyst, [13]

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[Interpreted] On the margins, you stressed the fact that everything almost already had already been done in France. So now you will have another target, Germany, then the rest of the world. You've also seen that you have some perspectives, growth perspective and margins which are even more important than -- for Germany. And today, we are at 9.9%. So could you please give some additional explanation so that we could know what you are expecting for growth-wise internationally? And could you please explain how you aim at developing internationally?

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [14]

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[Interpreted] Well, on Germany, we will continue developing ourselves there. There are some contradictions. So the more markets are mature, the trickier it is to go there because the services are there, customers or structures. When we are working on innovation, there are less references and we are able to have bigger margins. And smaller countries are interesting. When we have a country with 50 million, well, the manager has a very straightforward organization. And it goes far beyond the market, and it is possible to be much closer to clients. And in the end, well, when they are small, when they are small investments, it is tricky because when customers become mature, then it is very interesting in this macroeconomic context. But then we need to bear in mind that if we have a look at big Indian firms, well, they mainly are behind other stakeholders which have front offices in the U.S. or in Europe with big industrials. And the Indians, well, in the end, they have less added values and they have some margins of 20%, between 15% and 20%.

Globally speaking in Europe and in the U.S., if we reach 15%, well, we are very happy. So if we look in the future and consider that tomorrow those Indian companies, if they want to avoid depending on us and want direct access to OEMs, they will have to invest in front offices and it will have consequences on their margins and their margins should be reduced drastically. The more we are international, the more we need to be able to produce where production costs less. And so our profitability should increase. We will need to strike a balance. I don't know how yet but this is what you need to bear in mind.

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Unidentified Analyst, [15]

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[Interpreted] I have 2 questions. First on the underlying results. You have talked about turnover of EUR 1.7 billion, but could you also give us a view on profits and the leverage, the structural debt in EPS and the different acquisitions? Second question, you have the ambition to reach in 2022 a turnover of EUR 2.5 billion based on the organic growth. If I'm not mistaken, well, this means you'll need acquisitions of EUR 500 million. Do you have some leads? Could you tell us where you want to develop yourself?

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [16]

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[Interpreted] Go ahead. On acquisitions? Well, I can start on acquisitions. So today, things are crystal clear. We have 2 major access: Germany and the U.S. diversification-wise for Aeronautics. Then we also aim at reaching critical mass in different European countries. And it does not only depend on acquisitions. So we have -- we are following several leads, a bit everywhere. That's it.

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Nicolas Valtille, AKKA Technologies SE - Group CFO, Group MD & Director [17]

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[Interpreted] Then, well, we have pro forma indicators we will share with you. But PDS' profitability is around 2-point -- 3.5% for 2018. So if you have a rule of 3, well, you can do the computation quite easily.

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Maurice Ricci, AKKA Technologies SE - Chairman of the Board of Directors & CEO [18]

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[Interpreted] Very well. Thank you very much for your attention. I think there is a small reception next door where we will be able to have informal chats. Enjoy your day.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]