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Edited Transcript of ALT.PA earnings conference call or presentation 5-Sep-19 7:00am GMT

Half Year 2019 Altran Technologies SA Earnings Call - Morning Session

Paris Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Altran Technologies SA earnings conference call or presentation Thursday, September 5, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Albin Jacquemont

Altran Technologies S.A. - Executive VP & CFO

* Dominique Cerutti

Altran Technologies S.A. - Chairman, CEO & President

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Conference Call Participants

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* Anna Patrice

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Laurent Daure

Kepler Cheuvreux, Research Division - Head of IT Software and Services Research

* Peter Testa

One Investments S.A.G.L. - Analyst

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Presentation

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [1]

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Hello. I'm Dominique Cerutti, Chairman and CEO of Altran. Thank you very much for joining us this morning for the 2019 first half result of Altran.

I guess everyone are as over the phone, the presentation, otherwise, you can load it in the financial section of our website. I will start the presentation with the highlight of the prior year before handing over to our CFO, Albin Jacquemont, and I will then come back to the proposed acquisition of Altran by Capgemini. And we will conclude before opening for questions.

So I am moving to Page 5. As you can see, first half 2019 was a solid and strong quarter. In terms of growth, we posted an economic growth for the semester of 8.5% economic growth, that is 7.4%, despite the effect of the cyberattack that we had to cope with in the first quarter. Albin will give you full detail of the impact at each line of the P&L.

As a consequence of this solid growth, the operating margin stands at 11.2% of the revenue. It's an expansion of 110 bps, which is -- versus last year same period, both driven by Europe and Americas equally. Our adjusted net income is at EUR 64 million, which is a plus 10.8% versus H1 2018, again in spite of the cyberattack. The free cash flow stands at minus EUR 31 million, which is a solid performance owing to improved personnel performance and the deployment of our cash program, again, you're going to get plenty of detail. And last, we have seen in the first half, and we continue to see across the board a good commercial momentum, and that's mostly due to the deployment of our diversified service model, we will come back to that.

Let me go to high-level figures. I'm on Page 6 before Albin goes into detail. Revenue at EUR 1.594 billion. It's a plus 16.1% reported, as I said, plus 8% -- 8.5% in term of economic growth. Operating margin at EUR 178 million, which is a plus 28.7% versus last year. You can see the leverage as a consequence of the free cash flow, which stands at 3.2 debt-to-EBITDA. And we're almost 49,000 employees, you will see when we will give you the detail that net hiring has accelerated significantly versus last year same period, which is a good prospect.

Page 7 gives you as usually the mix across geographies and sectors. We will come back to that if you have question, but you can, of course, see on this chart that [for adjusting bond, and if you can bond,] we could over the last year derisk our business model by well-diversified portfolio. Americas on the left side, outstanding, more than 25% of our revenue. We've put a foot in Asia, and we are going to start growing this very small footprint, well-balanced on the left side, and the same on the right side, you can see, for instance, that the dependency to the Automotive sectors has been gradually reduced over the last couple of years, standing now at 18%, it's a well-balanced portfolio, and we're making progress across the board.

I'm on Page 8, that is depicting our, what we call diversified service models, on the upper side Mainstream Engineering Services, which is our historical business. On the lower side, on the left side, high-value Next Core, which is between EUR 500 million and EUR 600 million a year portfolio. On the top -- bottom right side, Industrial GlobalShore, which is our GlobalShore footprint, which is also same size. I am, of course, not going into detail all those client wins, but across the semester, we recorded multiple client success stories, which is very encouraging for our growth. If I point just to couple of them in the interest of time, in the Mainstream Engineering, I would point, for instance, a very large framework with STE in the Network Rail’s Group, which is capacity augmentation but multiyear. In the high-value Next Core, we are particularly pleased with multiple projects that we won in the software framework with 5G. We will come back to that, we have invested significantly in 5G, and we start turning around the communication sector, driving growth through 5G, which is very encouraging for us, we have multiple clients. As you can see, NXP, FHK or Lenovo. And on the Industrial GlobalShore, I could pick for instance what we are doing for the largest semiconductor European chip company where we signed a new strategic partnership for an automotive chip design services. But again, we will come back to all those examples or illustration if you need, during the Q&A.

Let me move now to the core of the presentation with Albin Jacquemont, who is going to give you the details of the financial results. Albin?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [2]

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Dominique, thank you very much. Good morning, ladies and gentlemen. I'm going to take you through the financial highlights of the first half of the year with a special focus on the dynamics in our second quarter. And I will provide you the key headlines of revenues in each of our geographies, and we will then spend a bit more time on the key elements of our income statement.

I will then update you on where we are and the execution of our cash generation program. And finally, on our working capital position and net debt. Last, please note that we adopted the new IFRS 16 standard on lease accounting as per its effective date on the 1st of January, 2019, whilst the 2018 figures are not restated as we elected to use the modified retrospective approach.

I am now on Slide 10, on which I will spend little time. However, I would like to stress out that these figures have to be read keeping in mind that they include the impact of a cyberattack, which is now fully behind us. I want to specify how the cyberattack affected the figures presented here.

Revenues lower by EUR 15 million ballpark, mostly in Q1; operating margin lower by 20 basis points, bench of circa EUR 10 million and remediation cost of EUR 9 million, partially offset by insurance down payments of EUR 3 million. All costs are reported as non-current. Despite these descriptions, we are pleased to report a good performance in the first half of the year. We had solid organic growth in the half with revenue up 7.4%, reported revenue is up 16.1% and operating margin up 28.7%, reflecting progress under strategy execution. And our recent contribution for the full period. Operating margin expanded 110 basis points to 11.2%. Adjusted net income rose to EUR 64 million, up 10.8%.

Free cash flow in the half is a negative EUR 31 million and net debt excluding IFRS 16, is slightly above EUR 1.4 billion. Financial leverage ratio is 3.2x EBITDA, significantly down year-on-year. However, I'm going to come back with you with some more comments on both of these topics later in the presentation.

Slide 11 presents our usual top line bridge starting with economic growth and finishing with reported growth. As usual, first thing to say when referring to revenue evolution is that we are comparing periods with less working days, resulting in negative calendar impact for both the half and second quarter. Foreign exchange impact was slightly positive as a result of U.S. dollar appreciation. Overall, organic growth of the half is pleasing, all the more, given the cyberattack.

Let's now look at the performance of each region on Page 12. Starting with Western Europe, H1 growth was in the high single-digit with acceleration in Q2 at 9.6% economic. Momentum in our -- in Aeronautics, Energy, and Telecommunication was strong. Like Dominique said, we did well in terms of recruitment, particularly in France.

Growth in Northern Europe was in the high single digits. U.K. performed well across the board, with Cambridge Consultants benefiting from expanded capacity and other British units enjoying continued client appetite for our offers in analytics, communication and industrial and consumer.

The Automotive context weigh in revenues in the Netherlands and Scandinavia, growth is expected to resume by year-end in Scandinavia.

Central Europe's economic growth was 8% in the half and 3.9% in the quarter. Despite the German Automotive context, we made further progress in Automotive. You may recall, for reference, we made last year due to some large contracts, involving some subcontractors. As some of these largest projects have come to completion, we are anticipating another quarter of reduced growth before momentum resumes. With its large offshore footprint, Altran Germany is uniquely positioned to serve clients in the current business context.

Southeast Europe boosted double-digit economic growth, both in the half and in the quarter. We benefited from 5G investment ramp-ups. Revenue development in financial service was good as well. Iberia grew revenue by 14.8% economic, whereas we are executing against strong comparable revenues last year. Business was strong across all verticals.

Americas, now our 2nd largest region, posted a solid performance, achieving 4.9% economic growth in H1. We had committed to bringing Aricent back to growth in Q2. Aricent Core, which excludes the large software outsourcing deal contract, which by nature does not grow, grew by 10% in reported growth that is in Europe. After correcting the exchange rate effect, Aricent Core increased by 4%. This is due to the particular dynamism of Aricent's communication sector that grew in the second quarter, thanks to 5G spendings after a soft start to the year. Frog did well in the second quarter too, offsetting some temporary softness in semiconductor and industrials.

Dynamics at Lohika remained exceptionally strong, while other businesses in North America are growing too at a lower pace though.

Page 13 shows the dynamic recruitment policy we are implementing. In the 6 months between end 2018 and end June 2019, we had net hiring of close to 2,000 people to reach in excess of 48,500 employees worldwide.

I'm now on Slide 14. So before going into the details, a general comment, you should keep in mind our recent financials are included into our financial statements from 20th March 2018. Therefore, a number of our items in our P&L reflect this change of parameter.

In the half, while revenues increased by 16.1% to EUR 1.6 billion, operating margin expanded by 28.7% to EUR 178 million, so that's 11.2% of revenues, thereby reflecting our operating discipline. After taking into account the other operating expenses, which I will comment later on in more detail, operating income stands at EUR 94 million, up 36.9% year-on-year. Effective tax rate of 32% is a little better than last year, and I do not have any particular interest to call out in the first half compared to last year.

Going straight to the net income line, in comparison with 2018, the P&L is distorted by the acquisition of Aricent. I, therefore, encourage you to go to Page 17 to get the real picture when comparing 2019 to 2018 and identify the adjustments to make, when we adjust the net income for exceptional items, we posted a net income of EUR 64 million, up 10.8%.

Page 15 goes into the next level of details for operating expenses and other expenses. Starting with the net operating expenses, there is not much to explain on the cost of revenues side, expect that it includes for EUR 15 million of amortization of a software outsourcing asset Aricent had acquired before the change of control.

Moving to the other expenses. The amortization of intangible assets arising from business combination is purely an accounting entry that has no cash impact. Share-based compensation expense EUR 9 million in the half reflects change in the number of guarantees and an adjustment based on performance and share price. For the year, we expect share-based compensation to be between EUR 10 million and EUR 12 million.

Restructuring came out slightly lower than last year. Litigation and miscellaneous include the EUR 16 million of remediation and bench cost related to the cyberattack. The cost of disposing our aggregate business in Germany as of 1st of January, and some litigation incurred in the ordinary course of the business.

Just a couple of quick comments on Page 16. Cost of net debt was EUR 34 million, up EUR 7 million year-on-year, reflecting Aricent financing over the full 6 months and in line with our expectations. Other financial items include EUR 6 million interest related to right-of-use and interest pertaining to pensions and payable to Iberia. In 2018, other financial items were mostly fees related to the refinancing.

Page 17. So I already touched upon the adjustments made on net income to compute the adjusted net income showed on Slide 14.

Page 18 presents the impact of IFRS 16 applied at 1st of January, 2019, on accounting for leases. On the balance sheet, the impact was EUR 234 million in lease liabilities at the opening 1st January. There was no impact on leverage. On the P&L, we anticipated the positive impact on EBITDA, which amounted to EUR 35 million at the end of June. The impact on operating margin was marginally positive EUR 4.2 million, while net result showed slightly negative impact of EUR 1.7 million.

Page 19 gives an update of the cyberattack we experienced in Q1 2019. This was brilliantly managed by our teams. And I want to use this opportunity to thank them again for a brilliant work, always keeping our clients' best interest in mind. In the half, impact of disruption from the cyberattack for the company boils down to lost revenue, mostly in Q1 EUR 50 million and it's related bench of EUR 10 million cost and incremental remediation cost of EUR 9 million.

Additional upgrade costs are expected to occur in H2 and estimated to be nonsignificant. An advance payment of EUR 3 million from the insurance was received, leaving a net impact of the cyberattack in H1, nonrecurring expenses at minus EUR 16 million. The net financial impact after insurance compensation is expected to be much lower as insurance payments to cover business interruption damages and cost should be received before year-end.

Page 20 illustrates the evolution of our balance sheet in the last 6 months, nothing to highlight here.

Now let's turn to Page 21 for a couple of quick comments on cash flow and working capital. New items appear on this table as a result of the implementation of IFRS 16. Overall, the impact of IFRS 16 is neutral on free cash flow as of EUR 31 million of amortization of right-of-use, offsets the lease interests and liabilities reimbursement.

As mentioned earlier, our overall cash generation in H1 improved to minus EUR 31 million compared to minus EUR 225 million in the year prior. Two points to make here: One, working capital outflow was minus EUR 71 million in the half. As you know, outflows are always seasonal at Altran, with first half seasonality estimated at minus EUR 80 million. It is safe to say the cyberattack had some impact on working capital, although it is difficult to estimate precisely. This was offset by a onetime R&D tax credit disposal for EUR 34 million, usually performed in the second half and further progress along our cash improvement initiatives.

Nonrecurring cash items mostly reflect restructuring and payments relating to the cyberattack. And last, stepping back trailing 12-month free cash flow was EUR 275 million. This includes EUR 135 million R&D tax credit inflows and EUR 70 million payment on large software deals.

Moving on to Slide 22, on the -- to the net debt bridge, some quick comments here. Net cash flow from acquisitions represents the payment of globalized earn-out. As of the end of June, there is no more earn-out sitting on our balance sheet. Dividend payment does not appear in the bridge since dividend was paid in July. And Altran use of factoring was slightly lower this year compared to last year.

Slide 23 highlights the structure of our net debt, which amounted to EUR 1.429 billion at the end of June, representing a 3.2x leverage ratio. This is a slight increase of over 3x EBITDA figure posted at the end of December 2018. However, this was expected and typical of the seasonality that we experienced every year in H1. It does not jeopardize our plans to achieve our midterm leverage guidance. And as part of our balance sheet management, we will endeavor to pay back some debt in the second part of the year. At the end of the appendix, there is a chart highlighting the maturity of our debt. We have no long-term debt maturing until 2025.

That's it for me. Back to Dominique, who will come back on the proposed acquisition of Altran by Capgemini.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [3]

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Thank you, Albin. Let me move indeed to section 3 and Page 25. This is the first results around publication post Capgemini announcement. So let me come back briefly on the proposed transaction. You, of course, remember we have announced on June 24 that Capgemini approached us in a friendly move with the intention to acquire Altran with a cash offer at EUR 14 per share. This will allow us to create a global leader in the field of digital transformation with a group that will have a top line above EUR 17 billion post closing in revenue and more than 250,000 employees. We do believe that our unique ability to meet the differentiated needs of our clients through our service models that have been built over the last year and the wiring of the company will integrate -- will help us to integrate seamlessly with Capgemini's expertise.

Some significant milestones have already been reached since the announcement. Capgemini has commented that recently. On August 11, we signed a tender offer agreement with Capgemini following the completion of the required information and consultation process of the walk on sales, both Capgemini and Altran. And in the following weeks or month, Capgemini will seek all usual regulatory approvals before no further comment is filed.

So we can say that the process is on track with the completion of the transaction expected by the end of the year.

This takes the session to conclusion. I'm on chart 27. We remained with a good confidence in our business outlook, again, thanks to our diversified portfolio of offerings to address client needs. By that I mean that even in the pure -- like, auto Germany, where we see a price pressure, Albin commented that, we believe that our industrial group offshore -- outsourcing, offshoring model is helping us to capture further market share and expand our profit, so we are particularly pleased with what we built over the last years to cope with the evolution of global economy. But again, good confidence in our business outlook.

Point number 2, continuous improvement in our operating performance that we'll continue in the second half will lead to further deleverage. So we are reconfirming our deleveraging track that was announced in the Capital Market Day in June 2019.

And point number 3, we are focusing to deliver our midterm objectives by leveraging our service model. In that, we are encouraged with the progress made over the first semester 2019 despite the cyber, Albin gave you the detail, that has been a shock on our business, but we got through, fixed it and still delivered a solid quarter. It's completely behind us, so we will continue to focus.

That takes the formal presentation to conclusion. We're going to pause and take your questions. Stéph Bia will either take the question in the room or over the phone because I'm told that we have kind of 80 person over the phone.

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Questions and Answers

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [1]

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Laurent Daure, Kepler Cheuvreux. I have a couple of questions. To start on the Aricent side, you commented on the softness in semis. I think you had a big ramp-up with the last customer in that vertical. So can you give us a little bit more details on what's going on? Because I was expecting the Intel deal to compensate for the rest of the business.

And then still on Aricent, you mentioned it was excluding the large software deals. So can we have also the number? Because I think the large software deal was expected to be more or less flattish over the long run. So does it mean that this doesn't lead up to your expectation on this site? And then I have a couple of follow-ups.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [2]

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Okay. Let me take this opportunity to deep dive a little bit on Aricent auto, it is very likely the last standard where we can report Aricent because we're now completely integrated. So -- and I will expand my answer because I'm sure we will get questions.

We are encouraged with the progress we're making across the board and still we have a few things to go -- work and fix. The first thing is that as we said, we could grow communications sector through 5G, leading-edge stuff. A couple of points, roughly 3 points. We do not intend in the future to report by segment, but for this obligation, we are going to be upfront to fulfill our commitment. So communications sector, which was an issue, is growing a few points and we seen a pipe of great quality that should continue to accelerate that. Same token for frog, that has a kind of volatile performance over the last quarters or years. We are posting good growth. Expanding the profits, still a lot of progress to make in frog in terms of profit, but we know we'll make it. The new leader, Andy Zimmerman, is doing a great job and we see the pipe developing nicely.

SEMICON, you need to dissect that into what came from Aricent and what came from Altran. In net, we -- as Albin said, we are very confident that we will, of course, given the backorder we have signed, we will grow this business. It's a transition effect. I already commented that in the previous quarter, so no surprise. We are basically with very large clients, eliminating or eradicating the timing material purposely with damages managed. And we're losing more on both sides, that's what we can build in the center of excellence. There is -- it's a timing effect, so we have a couple of quarters where we are slowing down. It was slightly growing in the first quarter. It is declining in the second quarter. We're not going to give the numbers. But by the end of the year, it will be done, the transition. It's a managed transition. So nothing to write home about. We are very confident with what we are doing. And we're doing that to get the profit expansion. And with the large plant we have mentioned, it is done together. They like the model we are executing. So that's SEMICON.

In the large software deal, you mentioned the clients, no one correcting something. You may remember that we said that our assumption in our model was minus 5 per year. Now I'm repeating nothing that we do not want to disclose, but you cannot appreciate those (inaudible) by quarter. It is impossible. It is depending of the SKU and the end of the another quarter, of the semester that IBM is doing. They didn't have a good second quarter, to tell you the truth. They had a decent first quarter, and we are checking those contracts since inception. Otherwise, we cannot manage that. A quarter doesn't mean anything. And the actions we are taking to boost the business with IBM in terms of road map development or quality rolls or incentives don't heal immediately. It's a big ship. They will yield in the overall quarter.

Still, it's remained a contract, which is challenging on the top line, but good -- very good on profit. And you see the expansion that we are making. It means that the core Aricent, again, it is the last time we go in that kind of detail, as Albin said, which is everything, excluding the IP deal with IBM, is growing in reported second quarter north of 10%, but that's mostly due by ForEx. If you correct the ForEx and you take the organic growth, it is north of 4%, which is what we said we would do, that's it. You had another question, Laurent?

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [3]

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Yes. I have a couple -- 2 more. Just to go a little bit deeper on your answer. If I remember well, this part of the business with IBM was very highly profitable. Does it mean that the slowdown you had in Q2 had an impact on your Aricent margin and you compensated on your scope effects?

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [4]

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No. We do not report the profit by subsegment, but we are -- Aricent margins are -- former Aricent margin, because we do not discuss Aricent any longer, Laila Worrell is leading Altran North America, it's integrated. Again, it's last quarter where we could trace barely Aricent, we want to do that. But we have no issue on the profit. We have done in North America what we wanted to do and we can manage the profit of the IBM contract.

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [5]

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Okay. And the last 2 questions. You mentioned briefly Germany and some pricing pressure and moved to offshore. You had a road map to probably see the increased profitability in your region. So just wanted to check the first half was in line with your medium-term expectation.

And my last question is, I want to make sure I understand right, on the insurance in the second half. Is it right that you expect to recover most of the EUR 19 million cost before the end of the year?

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [6]

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Yes. So Germany, we are reconfirming what we said we will do on profit, and we did what we had to do in first half in it. The first half is always lower than the second half. But the team is committed to go deliver the profit. The slowdown in the top line, to be completely candid, is both market pressure, but also the fact that we are more selective now that we have rebuilt the footprint in what we do to precisely get the profit now. Nothing to write home about because you remember that in terms of profit, profit is what we did last year, which was slightly negative, we said 1.5 per semester, which would lead you to something like 3% or 3-plus-something, so we're working to get that done. And we have no reason to think we're not going to make it. So that is Germany.

On the insurance, which is a sore subject. Let me, and Albin will come back with more detail if what I'm saying is too high level, we have EUR 19 million of nonrecurring cost that target into remediation cost, things that we spent to go fix the issue and what we call cyber bench, people that could not work. So both subjects have been worked through claims with the insurers. We have 2 insurers -- insurance, I don't go into detail.

EUR 3 million, of those EUR 19 million have already been paid -- prepaid. The insurers are now checking the detail of our files. We have -- expect working on that, and we expect the EUR 16 million to come by the end of the year. Our evaluation, because we cannot front-run that, is that most of it should come. Knowing that we have 2 insurances, it's a sequential stuff. The first insurance, the cyber insurance, is going to walk first, and we have a (inaudible) insurance that will walk just after. So if we don't get everything, it will be a timing effect, but we at this point of time think that we should be able to recover most of the EUR 16 million, not EUR 19 million because became EUR 16 million.

No question in the room at this stage. Any question over the phone?

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Operator [7]

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(Operator Instructions)

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [8]

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Unusual, but we would respect that. We're going to wait another few -- we have questions over the phone coming, so we're going to wait for that.

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Operator [9]

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We have one question from Mrs. Anna Patrice from Berenberg.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [10]

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A couple of questions from my side, follow-up questions. On the Germany, can you comment once again what was your growth in the first half of this year? And what do you expect that to be in the second half of the year? And how do you see the ongoing trends across segments, actually not in Germany but overall? So if you can comment on how do you see the overall development for your automotive, for telecom, for aerospace, et cetera? And if you can provide some growth -- underlying growth numbers per segment, that would be quite useful. Another question is on the profitability. Just to double check, the H1 that you presented, EUR 178 million EBITDA, is it pre-IFRS or it's after IFRS? And then the final question...

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [11]

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Anna, park your question, if you have more but -- so that we can -- so I'll take the IFRS and then I will come back on Germany and the segment. Could you repeat your question, Anna, please, as the sound was scattered? Yes.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Can you just double check...

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [13]

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The IFRS one.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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Yes, that the EBITDA, EUR 178 million, it was before or after IFRS?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [15]

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Sorry, I do not understand your question.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Published EBITDA that was half 2018, EUR 178 million.

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [17]

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Well, our accounts have been prepared taking into account IFRS 16 in 2019 and 2018 has not been restated.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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Okay. So underlying EBITDA margin progression was 90 basis points or slightly less than what you -- that is reported, right?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [19]

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Sorry, I'm not sure...

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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Out of 110 basis points margin expansion?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [21]

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Yes. IFRS, on the operating margin, IFRS accounts, well, EUR 4 million. So it's a pretty not significant.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [22]

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Okay. Germany, you check the deck. We grew -- let me discuss economic growth, which is the most relevant to judge the business. We grew first half 8%. We grew second quarter 4%, 3.9%. We expect third quarter to further slow down. And we expect fourth quarter to get back on tangible growth. We have the pipe, it's signed. So we are confident to go achieve that. That's what Laurent just asked. That's enough to enable us to deliver what we have to deliver on the profit.

Across the industry, which was your other questions. So in fact, you would have to dissect the industry and the geo, so I'm going to try to be short. We continue, and there is no order in what I'm saying, we continue to see significant demand and growth in the high tech and software. We're doing a record on software engineering, fueling profit by the way. We see good demand in SEMICON with the transition, which is a [mid tier] transition. It's not a market issue. It's a transition which we are managing with large clients. So we again expect -- the demand is here. We expect that to grow again by the end of the year.

Communication is very encouraging. It's a segment that you should see as we have -- remember, as we said, we are seeing with equipment providers and network providers, we're making progress across the board. It will further accelerate, mostly due to the investments we've made in 5G, SDN and other software framework. So demand is picking up and we're doing fine.

Automotive, we have a slowdown, which is mostly driven by Germany. The rest doesn't -- is not a concern at all. We can discuss the auto segment globally. It has to be segmented to be relevant.

Aerospace is doing fine. From a demand standpoint, it's not on new programs. It's most on the, what we would call, industrial manufacturing that we are -- we see the demand.

And Energy license is, of course, a great sector, we see demand.

If I made the point, I guess your question, Anna, is on the outlook on the market. Except auto in Germany and in China, I just finalized my deep dive, this review, last week. I think all the teams being back. We do not see softness, again, except in China auto and Germany auto. And Germany auto is not an issue of demand, it's a price pressure given what the German carmakers have to cope with. They are not diminishing their R&D spending. There is more and more things to go do. So they're trying to get price reduction to do everything they have to do. And it's true that they are exposed to the Chinese market. You know that 25% of the cars sold in 2018 in China were German. So they are suffering from that. But again -- so China is a bad market in auto at this point of time. And in Germany, it's a price pressure. So except, I would say, Germany in our portfolio auto, we do not see any slowdown. It's continuing to be what it was first half.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [23]

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And so basically, to take it all into account, it means that second half of the year, you will see pretty much similar organic growth trends plus some support from the number of working days.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [24]

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Yes. With little variation, as I said, in Germany, that is going to further slow down third quarter and rebound in fourth quarter. So we have some volatility in dynamics, but overall, yes. We -- let me make a point. You remember, our plan was to deliver 6 to 8 across the strategic plan 2018, 2022. We said we would start by 6 and finish the project by 8. So we will maybe get between 6 and 8, that's what we do.

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Anna Patrice, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Okay. Understood. And a couple more questions. One, on the net debt chart, you're showing outflow for the M&A. Are there any more earns out to be paid this year or in the coming few years?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [26]

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No. It's a very good question. Thank you very much, Anna. There is no more earn-out sitting on the liability side of the balance sheet. So no more earn-out.

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Operator [27]

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We have one other question from Mr. Peter Testa from One Investments.

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Peter Testa, One Investments S.A.G.L. - Analyst [28]

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I have 3 questions, please. I go one at a time. Firstly, on the hiring, can you give an understanding of what the split in the hiring increase is between low cost under primarily India and the rest of the operations? And the extent to which -- or just the motivation behind this -- the continued step-up in hiring in terms of the pipeline?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [29]

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Yes. When you look at our -- when you step back a minute on our net hiring, so 2,000 employees, that compares well with what we have last year. Even if you strip out the recruiting, which has started in Q1 at Aricent, the bulk of improvement of net hiring is located in France. And France includes both French territory and our engineering centers offshore, and we did very well on both sides with good recruitment and a slightly lower attrition in France. So pleasing results in France, pleasing results in Morocco and Portugal.

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Peter Testa, One Investments S.A.G.L. - Analyst [30]

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And in terms of the motivation behind in terms of the business pipeline, which is driving that hiring?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [31]

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For us, what matters is to be sure that we had the capacity to fulfill the demand. That's why we are adamant to keep hiring on a very good trend because the demand is there. We continue to view the business as dynamic.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [32]

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So let me just elaborate without being too complex. The way we're managing the business is the following. Each, we still operate by country in which we have representation of the industries and the 3 models that we are taking to the clients, which is the mainstream, local and next core and IGS. The question is on IGS. So we are managing the capacity with local hiring because we need front offices that we will then gradually move to near shore and offshore, that is managed by Daniel Chaffraix, who is in the room here. So we know which clients we are working on. The local business, which is mostly mainstream, which we then transform as to be fulfilled by local hirings. So here, we're managing traditionally the capacity and I would say in that domain, the net hiring depicts rather well the growth. It is becoming a bit more complex because on the IGS front, there is no, I would say, such things, knowing that we are working with productivity mechanisms, which we call over under in our -- absorbed in our service model. So Daniel will never add any people in the GEC if he has not brought the utilization rate and sometimes over 100%. It's looks bizarre. So that's the way what we are managing. So Daniel is managing his capacity in the 5 GEC a certain way. And the local guys from mainstream are managing that all way where you have a direct correlation with growth, which, by the way, your question is relevant because the net hiring, as all in our model, doesn't really depict the growth we can do. In fact, we can do more growth than the net hiring because Daniel most of the time in the GEC as a recent work of the top line expansion with that hiring, which is the beauty of the model.

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Peter Testa, One Investments S.A.G.L. - Analyst [33]

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That's very helpful. The second question was just on the working capital and cash flow. Looking at the Page 32, the expansion in trade accounts and other receivables and customer contracts is quite a bit lower this year in the first half than last year. I was wondering if you could give some further thoughts as to accounts receivable or DSO performance expectations as the Altran cash program takes hold and what you'd expect, let's say, going forward, i.e. the extent to which it's being now embedded in the contracts, embedded into collections. Just some understanding as to how this is a structural rather than, say, a recovery from last year's challenging June?

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Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [34]

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Yes. First, I think the right way to look at our working capital movements is on the half. And we ended last year in a quite good position. So -- and you didn't see the first half any reversal in terms of the progress that we have made. So that's a key takeaway on working capital.

Second, the working capital improvement program is comprehensive. And like you're rightly highlighting achievables, a great number of actions, be that of early invoicing, better cash collection and also managing better balance sheet and liabilities. What I would like to highlight, if we go a little bit into the detail, is that if you look at our deferred revenues on the balance sheet and our deferred revenues evolution in H1 2019 compared to H1 2018, we are in a better position than last year, which leads me to state that our working capital movement is of better quality in H1 2019 than what it was in H1 2018. And we are -- with Dominique, we are adamant that we should progress further.

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Peter Testa, One Investments S.A.G.L. - Analyst [35]

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Right. Okay. And then the last question relates to the Capgemini situation. In mid-August, you announced that you were hiring a valuer to provide a report. And I was wondering if you could give any sense as to when you thought that report might become available and the extent to which you would make that report publicly.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [36]

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So it's difficult to say. Being very accurate, we would expect that in the next 2 weeks, I would say. First, it's a lot of work for the expert. And two, as you may have observed, we have a few comments from market agents, which we take into consideration. The expert has to take that into consideration. So for everybody, in case you are not familiar, the way it works is that we have in French (foreign language), so independent Board members committee. We have appointed an expert, independent working for this committee, was to provide report before the independent committee recommend to the Altran board their view on what we call a reasoned opinion, which has to be provided before we help -- kept file, and so on. So that's the report we're talking about. And again, Peter, this report should be issued, I guess, between 1 and 2 weeks depending what the expert, who is completely independent, has to go study.

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Peter Testa, One Investments S.A.G.L. - Analyst [37]

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Will they issue the entire report so that we all see it?

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [38]

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Yes. In fact, this report is then provided to the independent committee, in turn was going to issue a recommendation to the Board. And then we are going to -- I'm sorry, I'm going to speak in French, I don't know what it is in English, write what we call in (foreign language). So it's an answer to the note that will come from Capgemini, that's a typical process. So -- but we have read that we would write a common note, this is nonsense, [kept] our -- the acquirer. They're going to write a note in answer that is typical, right? We're going to write a note in answer and joined to that, you will have the report of the expert, of course, in full.

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Operator [39]

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No more questions by phone.

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Dominique Cerutti, Altran Technologies S.A. - Chairman, CEO & President [40]

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Okay. So thank you very much. If -- we have no more questions, Stéphanie? So no more questions on the phone, we do, of course, understand. Thank you for your attention, and we remain at your disposal. Thank you very much.