U.S. Markets close in 2 hrs 52 mins

Edited Transcript of ALT.PA earnings conference call or presentation 5-Sep-19 12:15pm GMT

Half Year 2019 Altran Technologies SA Earnings Call - Afternoon Session for US Investors

Paris Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Altran Technologies SA earnings conference call or presentation Thursday, September 5, 2019 at 12:15:00pm GMT

TEXT version of Transcript


Corporate Participants


* Albin Jacquemont

Altran Technologies S.A. - Executive VP & CFO

* Dominique Cerutti

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




Operator [1]


Ladies and gentlemen, welcome to Altran conference call. I now hand over to Mr. Dominique Cerutti, Chairman and CEO of Altran. Sir, please go ahead.

(technical difficulty)


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


Okay. All right. I apologize for all participants. Apparently, we got problem with the lines. I was speaking for the last 3 minutes. So I'm going to be [even softer before all this.]

It's Dominique Cerutti. I'm with Albin Jacquemont, the group CFO; and Stéphanie Bia. We are on the deck that we posted this morning. This call is for the U.S. investor. Thank you very much.

I'm on Page 5. H1 2019, as we said, strong focus on execution yielding result. Solid growth, economic 8.5% for the first half despite the cyber-attack. Albin will give you all detail on the cyber-attack in a few minutes. So I'm not going to comment on that. Operating margin at 11.2%, which is a good result, an expansion of 110 bps, driven equally by Europe and Americas. The adjusted net income at EUR 64 million, growing almost 11% versus last year, in spite of the cyber-attack.

Free cash flow is solid at minus EUR 31 million despite the seasonality effect that we could partially overcome. That's due to the deployment of the Altran cash program yielding result. And last, we'll come back on if you have question on the demand side. We continue to see a strong level of demand across the Board with one exception, which would be auto in Germany. We will discuss that. But frankly, the market remains quite well oriented.

Page 6, quickly before Albin goes into detail. You have the numbers in absolute value, EUR 1.6 billion revenue, up 16.1% reported, 8.5% economic. Operating margin at EUR 178 million, up almost 29% versus last year. The net income and free cash flow, I have already discussed that. It's leading to leverage which is 3.2x debt-to-EBITDA at the end of June despite the cyber-attack, which means we are on track to further deleverage accordingly to the track we have committed.

And in terms of employee, we are north of 48,600 employees as we speak with a significant acceleration in net hiring, almost 2,000 people. Albin will give you the breakdown but that's a good step. I'm going to skip in interest of time, and we'll come back to that if you have questions.

Page 7, which is the geo and industry mix, well balanced, derisked as we go along across geos and industry. I will skip as well to Page 8, which is a representation of multiple client success stories across our service model, namely what we call mainstream, which is mostly the capacity augmentation business model, as you recall, where we continue to do very good. But more notably, the high-value business is working really well with few great wins, as you can see, in particular, to illustrate, in the communication sector and the 5G arena. We'll come back to that again if you have question.

In the same token, our Industrialized GlobalShore business is working really well, both high value and GlobalShore are growing double digit and yielding part of the margin expansion. Again, we will comment on that if you have question.

I'm going to pause here because, in interest of time, I think the biggest value is Albin to provide financial detail.


Albin Jacquemont, Altran Technologies S.A. - Executive VP & CFO [3]


Yes, sure. Thank you, Dominique. So on Slide 10 now, which I will spend little time. However, I would like to stress out that the figures have to be read keeping in mind that they include the impact of a cyber-attack, which is now fully behind us. So revenues were impacted by EUR 15 million ballpark, mostly in Q1.

Operating margin was lower by 20 basis points. Bench was of circa EUR 10 million and remediation costs of EUR 9 million, partially offset by insurance down payments of EUR 3 million, and total costs are reported as noncurrent. Despite the disruptions, we are reporting a good performance in the first half. I will not repeat the numbers set out by Dominique. I will, of course, come back with some comments later. Slide 11 is a classic top line bridge. You are finding your ways. So maybe we can go quickly to Slide 12, highlighting the performance of each region. So starting with Western Europe, H1 growth was in the high single digits, with acceleration in Q2 at 9.6% economic. Momentum in aeronautics, energy and telecommunications were strong. We did well in terms of recruitment, particularly in France.

Growth in Northern Europe was in the high single digits. U.K. has performed well across the board with Cambridge Consultants benefiting from the new building and other British units enjoying continued client appetite for our offers in analytics, communication and industrial and consumer. The automotive context was quite a drag on the revenues in The Netherlands and Scandinavia. We expect growth to resume by year-end in Scandinavia.

Central Europe, economic growth was 8% in the half and 3.9% in the quarter. Despite the German automotive context, we made progress in automotive. And you may recall the reference we made last year to some large contracts involving subcontractors. As some of these large projects have come to completion, we are anticipating another quarter of reduced growth before momentum resumes. That said, with its large offshore footprint, Altran Germany is uniquely positioned to serve clients in the current business context.

South East Europe posted 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 revenues by 14.8% economic, whereas we are executing against strong comparable revenues last year. Business was strong across all verticals.

Americas, which is now our second 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 a large software outsourcing contract, which by nature doesn't grow, grew by 10% in reported growth. After correcting for the exchange rate, 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 the soft start to the year. Frog did well in the second quarter too, offsetting some temporary softness in semiconductor and industrial. Dynamics at Lohika remained exceptionally strong, while other businesses in North America are growing too, at a lower base though.

Resources, we are on Page 13. You see the dynamic recruitment policy we're implementing. The important number here is a net hiring, which is better than what we had in H1 2018.

Moving to Page 14 on operating performance. I think there is not much to say except that our effective tax rate of 32% is a little better than last year. And I do not have any particular changes 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 so I would encourage you to go to Page 17 to get the real picture when comparing 2019 to 2018 and identify the adjustment to make. When we adjust the net income for exceptional items, we posted the net income of EUR 64 million, up 10.8%.

Slide -- Page 15 goes into the details of operating expense and other expense. Just a quick word on share-based compensation expense, $9 million in the half, which reflects a change in the number of grantees and an adjustment based on performance and share price. For the year, we expect share-based compensation to be between EUR 12 million and EUR 20 million -- sorry, EUR 10 million to EUR 12 million.

Restructuring came out slightly lower than last year, and litigation and miscellaneous include EUR 16 million of remediation and bench costs related to the cyber-attack and the cost of disposing our [Aviation] business in Germany as of 1st of January and some litigation incurred in the ordinary course of the business.

I propose to skip, in the interest of time, net financial expense. Just to say that we are perfectly in line with expectations. Our debt is capped in terms of interest rates and other financial items includes EUR 6 million expenses related to the right of use.

Slide 17, I already touched upon the adjustment we made on the net earnings. Slide 18, IFRS 16 accounting for lease. So on the balance sheet, the impact was EUR 234 million in lease liability at the opening of 1st of January. There was no impact of IFRS 16 on leverage. On the P&L, we anticipated a positive impact on EBITDA, which amounted to EUR 35 million at the end of June. And the impact on operating margin was marginally positive at EUR 4.2 million.

Page 19. We are providing you with an update on the cyber-attack, so -- which was well managed by our team in the half. Impact of disruption from the cyber-attack for the company boils down to lost revenues in Q1 about EUR 15 million and its related bench of EUR 10 million cost and incremental remediation cost for EUR 9 million. Additional upgrade costs are expected to take place in H2, but they are estimated to be nonsignificant. An advanced payment of EUR 3 million from the insurance was received, leaving a net impact of the cyber-attack in H1 nonrecurring expense of 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 costs should be received before year-end.

On Page 20, you're provided with balance sheet and there is nothing in particular to highlight this year. So we now turn to Page 21 for a couple of comments on cash flow and working capital. On the table, you have a new item that appears as a result of the implementation of IFRS 16. Overall, the impact of IFRS 16 is neutral on free cash flow, adjusted -- cash generation.

As mentioned earlier by Dominique, our overall cash generation in H1 improved to minus EUR 21 million compared to minus EUR 225 million 1 year ago. Two points to make here. First, 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 cyber-attack 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 initiative.

Nonrecurring cash items mostly reflects restructuring and payments linked to the cyber-attack. And last, stepping back for a second, trailing 12-month free cash flow was EUR 275 million. This includes EUR 135 million R&D tax credit inflows and EUR 70 million payments on large software deal.

On Page 22, we provide you with the net financial debt. Just a quick comment here. Net cash flow from acquisition represent the payment of globalized earn-outs. 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 early in July and Altran's use of factoring was slightly lower this year compared to last year.

Slide 23 highlights the structure of our net debt, which is a number a little bit more than EUR 1.4 billion at the end of June, representing a 3.2x EBITDA leverage ratio. This is a slight increase over the 3x EBITDA figure posted at the end of December 2018. However, this was expected and typical of the seasonality that we experience 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's a chart highlighting the maturity of our debt. We have no long-term debt maturing before 2025.


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


Thank you, Albin. Let me do the Page 25 before we close and open for Q&A, if any.

That's the first publication after the announcement of the Capgemini offer on Altran. So I'm going to just spend 1 minute on Page 25, 5 points. You, of course, remember that on June 24, we have announced that Cap has approached us to -- with an all-cash transaction to acquire Altran at EUR 14, which was approved by the Board at unanimity. We're now in the process -- or Cap is in the process to obtain regulatory approvals, namely, few of them, CFIUS, antitrust and work council approval. Starting with the latter, those have been obtained both on Capgemini side and Altran side.

As a consequence, we signed in August a TOA with Capgemini. We have appointed a committee of independent on our side in the next step, which is now working, aiming at providing to our Board from the independent committee reasoned opinion that would be issued between the next 1 week or 2 weeks. That's up to the experts go do that. We don't control the timing exactly.

Capgemini as they have announced have made great progress on the antitrust. They could obtain, yesterday, you have seen that in the press, the Indian antitrust, and they're now working on the U.S.A., Morocco and EU. So they will update the market when this is done. And the same on the CFIUS regulation on the U.S. side. But again, we could conclude at this stage that the deal is well on track and progressing [nominally]. No need to repeat what the combination will provide, but it will be a super champion with a top line of EUR 17 billion or north of that, more than 250,000 highly educated employees working on the digitalization and what we call, with Capgemini, Intelligent Industry, which is an exciting agenda. If you may have question otherwise, we will come back on that.

I'm going to pause here in interest of time, and we will then take your questions, if any.


Operator [5]


(Operator Instructions)


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


That's -- we, most of the time, do not get question on this second call in the day. We, of course, understand why and respect that. If no question, I would thank you in advance. We will be on the road with Albin, Stéphanie, starting with Paris and then Frankfurt and U.S.A next week. So maybe we will see some of you. Thank you very much for your participation and see you soon. Buh-bye.


Operator [7]


Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.