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Edited Transcript of ECONB.BR earnings conference call or presentation 5-Sep-19 10:59am GMT

Half Year 2019 Econocom Group SE Earnings Call

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Econocom Group SE earnings conference call or presentation Thursday, September 5, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angel Benguigui

Econocom Group SE - Group Finance Director

* Éric Bazile

Econocom Group SE - Group Financial Controller

* Jean-Louis Bouchard

Econocom Group SE - Chairman & CEO

* Julie Verlingue

Econocom Group SE - Group Deputy CEO

* Laurent Roudil

Econocom Group SE - MD of Services France & Deputy MD France

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Conference Call Participants

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* David Vagman

ING Groep N.V., Research Division - Research Analyst

* Thomas Poutrieux

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Angel Benguigui, Econocom Group SE - Group Finance Director [1]

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Good morning, everyone. Thank you so much for being with us here today with Econocom. My name is Ángel Benguigui. I'm the Chief Financial Officer of the Econocom Group, have been so since the 15th of April for roughly 4 months, but I've been with the group for over 13 years, mostly with responsibilities in Spain.

Today, we're going to give you a presentation in 3 parts. First of all, the quantitative results that I'm going to present, then a presentation, a message from our Chairman and CEO, Jean-Louis Bouchard. And finally, an outlook by our Deputy Chief Executive Officer, Julie Verlingue.

So let's start immediately with figures for the first half of 2019. Regarding the figures, I'll simply confirm what we'd already said at the end of July because there hasn't been any change. Just to give you some extra explanations about a few items or a few figures, figures that we consider to be key. First of all, revenue is a key figure, EUR 1,238 million, up 2.9% like-for-like compared to last year, 1.6% of which organic. Second key figure, recurring operating profit at EUR 40 million, which is 3.2% of revenues for the whole group. Third key figure, net accounting debt at EUR 405 million that we consider to be under control that we'll -- as we'll explain later compared to EUR 395 million at 30 June 2018. This net debt is 90% of the group's equity, so a gearing of 0.9 and 2.5x EBITDA for the last 12 months. And lastly, net cash flow EUR 61 million on a like-for-like standards; that's an extra EUR 20 million compared to the same period last year.

Overall, for revenues and recurring operating profits, our revenues only grew by 1.6% organically and 2.9% overall. This is due to the fact that for the full half year, we took into account the last 2 acquisitions that were carried out in H1 '18 for 2 great subsidiaries, BDF in Italy and Altabox in Spain.

Recurring operating profit grew by 17.2%, which was due to the positive changes in the number of business activities as we'll see later. As regards to the main countries, as you know, Econocom is present in many, many countries, but there's a half dozen countries that really contribute to most of the revenues of the group. There are a few countries that are going very well, which is very good news. As you know, France is, by far, our #1 country, 51% of revenues. Southern Europe, Spain, Italy, 24%. Belgium, Netherlands and Luxembourg's -- Luxembourg, Benelux, 14%. Here, you have roughly 90% of the group sales. I'll only say that excluding the case of Italy that I'll tell you about in a minute, the core countries, France, Belgium, the Netherlands, Spain performed very well and have very robust prospects.

Now focus on Italy. We talked about it at the end of July, talked about Italy on 25 June via Italian authorities. We were notified of fraud in our Italian subsidiary between 2012 and 2018. This fraud would reach an overall amount of EUR 18.6 million. You -- it's worth mentioning that these EUR 18.6 million have already been booked and paid by the Italian subsidiary between 2012 and 2018. In spite of that, there is an indirect impact on business. So we wanted to share with you the -- our estimate for H1, EUR 7 million negative impact on our recurring operating profit because of the indirect sales impact of that Italian case. Similarly, for H2, we think that there will still be an impact, which is estimated at EUR 15 million. However, there are 2 reasons for which we think that these impacts will be offset: on the one hand, through better business than what was budgeted and expected in the main geographies that I've just talked about; and secondly, with the first consequences of a major cost reduction plan that will be presented later.

Let's talk a bit about TMF. For TMF, we had a 3.9% decline, which is mostly due to 2 things. On the one hand, of course, the impact of the closing at the end of H1 in Italy, which was not good for business. And also, on the other hand, we wanted to be selective in the deals that we booked for our EDFL financing captive. This finance captive had revenues of EUR 47 million in H1 2019 versus EUR 59 million for H1 '18. Recurring operating profit, on the other hand, grew compared to H1 last year for TMF, thanks to such deal selectiveness that let us book only the most profitable and interesting deals and also the fact that there were fewer provisions on bad debt. I'm talking about TMF and financing and the group's leasing activity and rental activity, what you are talking about our overall outstandings for leasing contracts that are currently refinanced or self-financed by the group. The amount is EUR 2,800 million with an original purchase price of EUR 6 billion. These amounts have been relatively stable compared to H1 last year. What decreased and what's positive is the residual value. We are cautious about residual value, and at the end of the quarter, we had a EUR 160 million in residual value for the whole of the financing activity of the group. This residual value is due for half of it to what is half of what we book every year via the sale of hardware or contract extensions. So the message I wanted to get across is that, this is a conservative estimate of residual value.

For DSS, there's only good news all around. As you know, DSS is the new way we grasp what used to be called Services and Products & Solutions. Why have we created this DSS business bringing together Services and Solutions and Products & Solutions? First of all, for Products & Solutions, which was our traditional distribution activity. Every time there are more and more countries, more and more affiliates that don't just distribute, they have orchestrated solutions in which they implement solutions with also additional services provided.

Similarly, in Services, more and more, there are businesses and subsidiaries that in the integration operations have operations in which they distribute licenses or hardware. And that's why this world that we call -- is now called Digital Services and Solutions. Digital Services and Solutions, there the growth is very good. The H1 growth is 9.3%, as you can see in the major countries for the group like France or Belgium and Spain. Well, mostly in France, we've had very good news. Having good news for the countries where we have the biggest presence is always very good. We also had a few affiliates in satellites in the group that performed very well for DSS. ROP was also boosted for the same reasons.

Regarding the summary P&L. And just to say that one-offs at EUR 13.7 million, that's a relatively similar amount to last year at EUR 14.2 million. And for EUR 10 million of that, that accounted for restructuring costs. So net income of EUR 5.4 million versus EUR 400,000 at the end of June 2018.

Free cash flow. Free cash flow generation was a bit lower in H1 '19 compared to the same period the previous year, but you need to take into account the fact that there was an increase mostly due to M&A, either payment of puts on acquisitions that were already done, share buybacks as well. We had a slightly negative effect on working capital requirement, which was mostly due to the fact that each time we were building more and more complex solutions, but also more profitable. And the good news that I had already announced of free cash flow -- operational free cash flow of EUR 61 million, much better than last year for the same period.

Regarding the structure of net financial debt, the EUR 405 million should be compared to EUR 395 million at the end of June 2018 in spite of the few issues that we had in Italy and also despite the extra investment for share buybacks and M&A. This debt, we consider it to be under control, EUR 250 million are, for your information, backed by lease contracts that are financed directly by the group, mostly in our captive environment, EDFL. And so they're backed by rents that are booked every month.

Regarding the balance sheet, 2 main comments. For equity, there's a discrepancy that is mostly due to share -- treasury share buybacks and also the refunding of the issuance premium. And well, here on the balance sheet, you can see assets held for sale discontinued activities. As we explained earlier already, there are a number of activities that are up for sale and units that are going to be closed down.

So that was what I wanted to tell you about the figures. In a nutshell, at the end of this session, you'll have an opportunity to ask all the questions that you deem necessary.

And now I'll throw it over to our Chairman and CEO, Mr. Jean-Louis Bouchard.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [2]

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Good morning. Thanks for coming. Thanks for taking an interest in Econocom. What's going on at Econocom? Well, this morning, when I was having a shower, I was putting myself in your shoes thinking, well, Econocom, I've known them for 5, 10, or maybe 3 years. And they were a growth company, making a lot of money, very successful. The share price was increasing quite nicely, and I like it as a shareholder myself. But for the last 10 year -- 2 years, well, boom, 2, 3 years ago, we made EUR 154 million. Last year, EUR 115 million. This year, we announced EUR 128 million. What's going on? Well, the Chairman left. He appointed his own son, then he came back. Is that serious? Is it not serious? What's the market like? Is the business good? On their too many affiliates, is that maybe too diversified out there in the U.S. or not or South America or not? Are they maybe not too European? I'll explain my vision and my view on things because as you know, I left in March as CEO. I left the group in March 1.5 years ago, and I came back with my colleague and friend, Jean-Philippe Roesch on the second row there, and it's lucky he was with me. And we already had 27 years of flying time together, and so we came back fairly hurriedly in October last year because the indicators that we got showed that there were -- there was some drift, especially on cash. And when you know that cash is drifting, you immediately need to take a look at what's going on because cash can conceal some things that are not going very well. So we came back. We actively took care of management of cash, which is now being done. And in our comeback in the -- we found -- we brought back in the luggage, the old timers over here, battle-tested veterans, seasoned veterans. Well, you can [beat] battle-tested in French, but at 25 years old -- but anyway, we have Laurent Roudil here, Ángel, Eric Lucas. And Laurent's been here for 5 years, but he's been in this business for over 20 years. He's in charge of services for the group. Éric Bazile, who's also on the ExCo, he came to Econocom 5 years ago through Osiatis. Eric's been with us for over 20 years. Then Véronique Di Benedetto, also a few years. Bruno Grossi, a few years in the company. Well, also others, I can't see here. Laurent Caparros has been with the group for roughly 20 years. Chantal De Vrieze came back. So Jean-Philippe and myself found people who knew the group inside out, who were operational people who produced most of the profit for the company. And also, thankfully, there was Julie Verlingue onboard, who was recruited by Robert.

So altogether, after bringing the situation under control, in January, we met together and asked ourselves what now? What's happening now? Is that a problem with the business itself? So we looked at all the businesses. We thought that most of the businesses are doing well. There isn't any particular activity that's doing badly. Then there are 2 activities, Synertrade and Aragon, are not really core. They are software publishers. They are not our core business, and it was a mistake to acquire them. They were great companies, Synertrade, in particular, signing great contracts worldwide now, but their expenditure price management structure is not part of our culture. Bruno Grossi here is actively involved in it, but apart from that, all of the other businesses in the group are doing well or even very well. Even the traditional activities led by Laurent Roudil in traditional services were brilliantly turned around, and they're doing very well. As we saw earlier, the business which is to assemble services, software and hardware and then sell these solutions and finance them for our customers is doing very well. We've had great signatures, and now Julie came from the outside, and she knows the strategy well. And she immediately pointed out that the DNA of Econocom, our job is to finance services -- hardware and services, of course. But the backbone of the group where we are present all over Europe and where things are going well is mostly to finance services. That's why for 5 years, we said we wanted to become a service company. In fact, now in the future, we'll be an as-a-service company. So we'll provide a number of products and services to our clients as monthly fees-as-a-service.

So in January, I said, well, I thought the business is doing good, but what's going wrong? So we met for a week with the management team here, and what I noticed then was that the management team was not seasoned. They were fairly young. They had no experience with the group. And so on the management team, we needed to have people with experience. So we set up an ExCo, which, as you already know, is made up of 10 people with operational people representatives, 6 or 7 people from the group. So they make the decisions. There's no difference between a management team, which was not field operational. And now everything is fairly aligned. The other thing that we saw, as Julie will say, is that we spent -- we were spending way too much money. We started the first cost reduction plan and we decided to amplify it. And you'll get details about it, and you'll see that it's significant. The group was a victim of twofold success, commercial success, performance success, which meant that, as you know, success is a bad adviser. You learn more from failure. So too much money, too much profit, especially too much cash, thanks to Valerie Clark, here on the first row, we brilliantly issued convertible bonds, so we no longer relied on bank credit. As you saw, we had net banking cash of EUR 100 million at the end of last year. We still have roughly a EUR 150 million now. So we have bond credit and commercial papers. But as you all know, money is relatively inexpensive now. And so when you have leasing contracts with customers where you have rates of 3% or 4%, and you can borrow at 0, you don't tend to refinance externally immediately. So you keep it on the book -- on the books. And so too much money makes it too easy to spend too much to increase wages too quickly, so that was a difficulty.

In the last 2 years, we had difficulties meeting our guidance. Each time we came before you saying that we expect what the consensus is, the guidance is. But every 6 months, it was a struggle. We really rummaged under the couch cushions, and it's really -- we were fed-up with that. The whole management team and Julie and myself, we didn't come back to have a hard time delivering on the figures we announced every 6 months. So we decided to turn things around with a drastic cost-reduction plan. And so we are comfortable every 6 months with the figures that we announce.

We started working on that in January to decide how we would be working together. We meet every month. We had another important meeting in (inaudible) in April. And in April, we looked at the results where we were there. We saw that there were a lot of money-making activities, but also money-losing activities on the other hand. So we decided to restructure or set off what was the loss leaders. And so we've launched a restructuring and disposal program, which is in full development, so that people know that if at some point, satellites or affiliates or places that lose money, they will be either restructured or sold off. People are fully informed, and it's work in progress. So this part was also brought under control.

In July, we did it again, and when we decided on the plan, looking at the situation at end June, how we needed to work together and what we wanted to do, and that's when we agreed consulting a study mostly done by our internal teams and an external study of the group on the group structure and expenditures. My intuition was that we were spending too much. But overall, are we really spending too much maybe on HR management? We didn't spend that much on that. In communications and marketing, were we spending too much? Yes. On erasers and pencils, we were spending EUR 4 million. Maybe that's a bit too much for the whole group. So we worked on that with internal and external teams, and we went over all the expenditures in July. And this cost reduction plan will now be presented by Julie. I'll throw it over to her, and then we'll take all your questions after that after her presentation.

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Julie Verlingue, Econocom Group SE - Group Deputy CEO [3]

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Thank you very much for that Jean-Louis. Just to reintroduce myself. My name is Julie Verlingue. I've joined Econocom in March 2018. That started off with an international remet -- remit, and then since May, I have become the Deputy CEO for Econocom.

Over the last 10 months, I've been working with Jean-Louis and the ExCom that was just introduced to you, to transform Econocom as a group. As Jean-Louis suggested, we have reworked the strategic vision of the group. We've also been working on repositioning our ambition and our vision for the group that we have a lot of faith in. Back in March, I explained some of the workflows that we had taken up for our TMF, so our financing and leasing business. We also have been working on upgrading our professional practices. So we have drawn lessons from the situation that we were informed on in Italy in June. We already made some decisions on that back then. And we've also been working on our human capital. So appointing the new ExCom, which is all part of the same strategy.

So as I said, we believe in this group. We want to put it back on a profitable growth trajectory, and that requires one thing, that requires lowering costs. As Jean-Louis said, we decided to use a method to cut cost. And I can tell you a little bit more about it. Over the last months because this takes a long time, Galliane Touze already explained that we wanted to cut cost by EUR 20 million for 2019. And we have now decided to go even further than that, so as to guarantee that all of our cost base is completely scrubbed down. In that vein, here is our ambition, which is to reduce our cost base by EUR 96.5 million like-for-like. So based on the 2018 cost base for a full year effect coming in, in 2021. So we've given ourselves 18 months to reduce our spending by this amount.

Cost cutting at Econocom is nothing new. A couple of years ago, you may remember, we had a cost-cutting plan as well, EUR 20 million, which was fully carried out. I think that was in 2015, in fact, and that was a plan to cut general costs. The group at that time was smaller. You need to remember that Econocom over about 10 years has gone from EUR 800 million to EUR 3 billion in turnover. So our ambition to review all of our cost-cutting efforts that was done on one part of the scope in 2015 needed to be redone for the entire cost base of the group, now going above and beyond what was done in 2015 in terms of scope.

This year, we didn't just look at the general cost for the group. We looked at the entirety of the cost base without anything being left unsaid, no stone left unturned. So we had a EUR 2.7 billion working base, and the methodology that we used is something that I would like to say a few words on because I believe that this is important to understand what we did, especially with such significant amount being considered significantly up on what we've previously announced.

Over a number of months, we looked at the cost of base per country, per business line, per function. We did a real deep dive and then we looked at the internal benchmarks. So this wasn't a case of looking at our competitors and comparing the 2 and then throwing something out, no. We looked at the internal benchmarks of what was possible for the in-house company. Jean-Louis took a couple of examples there, marketing communication, telecoms, all of the spending going into our sales force and the support for the sales force, back office, admin support functions, HR, IT. This was an in-depth exercise that enabled us to achieve an analytic vision with a number of scenarios within brackets depending on how ambitious we wanted to be and what scope we wanted to consider.

We lent credibility to our exercise by asking ourselves, first of all, are we killing our business, which is, of course, a no go. To that end, we looked at how we could make sure that the cost that will be cut would not affect our ability to serve our clients. Well, and also that our cost-cutting initiative would not affect further growth potential for the group. So to make sure that we won't be too ambitious, we did a test on a P&L. We went down item-by-item and looked at what our future cost base would look like, and we developed the strong belief that this is something that's achievable. There weren't very many of us around the table at the time, this is back in May or June.

So the next step was to get all of the ExCom onboard, the financial directors and also the operating directors as well, the executive officers. We've got DSS and TMF as the 2 big organizations, and we needed to make sure that people who have been with us for 10, 15 or 20 years were behind us in realizing that this is doable. Ambitious, yes, but doable. So for 2 weeks, we all got together, and we went down item-by-item all of the spending for all of the businesses, all of the countries and all of the accounting items. We looked at all of the leverage that was available to us to reduce those costs. And together, we were able to come to this minus EUR 96.5 million figure. But that's not all. Last week, we went to the top 200 group managements and told them about our ambition and how we were going to achieve it. We are giving ourselves 1.5 years, 18 months, and the full year effect of this plan should come in, in 2021. Now I know that the questions will come on the nonrecurring items related to the plan. Given our experience and given the levers that we're going to be using, we believe that this plan will require nonrecurring funding which will be about the same amount as the savings that will be made. The motor is already running on this because, once again, the baseline that is being used in our estimate is the 2018 baseline.

In March, we already announced that we intended to achieve EUR 20 million in savings on spending in 2019. We can commit to EUR 24 million on that, and with what I'm about to explain, we firmly believe that we can go beyond that EUR 24 million that we've committed to in just 2019. So as I said, we brought together all of the top and middle managers for the group, the top 200 last week to tell them about our ambition and our intent. And we gave them a number of directives, and there are 3 parts to this. Today, tomorrow, we will be implementing a cost freeze on all nonproduction spending for the group, unless it is specifically waivered by a member of ExCom.

We are also going back to our budget for 2020. Given as Econocom has seen strong growth over the last 10 years, we've been working with budgets that have been incrementingly increasing, and we've decided to implement a paradigm shift and start with a base-0 approach. This enables us to completely rework our cost base over the coming weeks. This will provide significant impetus towards our target of EUR 96 million. To achieve EUR 96 million in savings, well, that's not something you can do just by making people buy cheaper pens. No, it requires in-depth change, that's what we're expecting. This change will come in the way we approve spending. Change will come in the way we work as well. We're going to be looking at all of our processes and thinking about whether we execute them as a make or buy, and we're also looking at our purchasing to see whether we are reaping the benefits that a EUR 3 billion international group should, so whether we're properly leveraging our bargaining power. All of this, of course, requires human resources beyond the operational stuff that will be in charge of the cost-cutting measures. We're also going to be mobilizing a transformation office made up of 3 people, so 3 full-time staffers from the finance world. These will also be people who are used to carrying out transformation plans. They'll be working under me, and they will be pushing forward on the transversal projects and also making sure that we are garnering those savings where we can. So that's the plan.

I'd like to wrap up with the 2019 outlook for you though. We can reconfirm our recurring operating profit provisions at EUR 128 million. We are continuing on our ambitious cost reduction program. All of the measures that we have implemented to better manage our working capital, our debt and our cash management will continue, and we also have our defeasance activity continuing for all of the noncore businesses within the group.

We'd now like to invite you to ask your questions.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [4]

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Thank you, Julie. Éric Bazile and Ángel, would you like to join us on stage so we can answer the questions, and feel free to ask any and all of those. We can hand the microphone around the room.

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Questions and Answers

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David Vagman, ING Groep N.V., Research Division - Research Analyst [1]

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David Vagman from ING. First question on the cost-cutting plan. It's a very ambitious one. Can you tell us about the net savings? As far as I understand, these are gross savings that you have had up on the board. So what will be the impact on profitability and margins at term?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [2]

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Now you all know Eric. Maybe he can just introduce himself briefly.

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Éric Bazile, Econocom Group SE - Group Financial Controller [3]

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Thank you. As Jean-Louis said, I joined Econocom when Econocom bought Osiatis. I was the Financial Director of that group. I'd taken that position up a couple of months before it was purchased, and I've been delighted to work with Econocom since then throughout its development, and especially with this upcoming new phase. My years in the car-making industry, of course, involved cost-cutting plans, and I think that will be useful in the coming weeks.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [4]

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Maybe you could answer that question. So gross savings, net savings, how are we squaring the circle?

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Éric Bazile, Econocom Group SE - Group Financial Controller [5]

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So EUR 96.5 million. As I'm sure you've understood, this was a figure that the ExCom came to through dialogue and through work on the 2018 cost base. Over the coming 18 months, we are going to be working on implementing a number of measures that by 2021 should lead us to that EUR 96.5 million savings. Alongside this, of course, and that's probably where your question on net savings comes from, there won't be investment that we -- we will continue to roll out on our sales force and on our products. So that will be extra cost.

As it stands, we can't say more on that. That will come once the budget has been established for 2020, and furthermore 2021. That will be when we can start talking about net savings, but our priority today is based on the cost base for 2018. Beyond any future investments that we want to make, we want to significantly reduce that cost base to allow investment in the future. And does that answer your question? In part comes that answer.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [6]

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What my question was actually driving at is, what is your net recurring operating profit target for 2021?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [7]

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Well, that would mean that if the plan is fully rolled out, then our recurring operating profit would increase by EUR 96 million.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [8]

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Should we expect a slowdown in growth?

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Julie Verlingue, Econocom Group SE - Group Deputy CEO [9]

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Well, given the items and the goals that we have set for this plan, we want to allow Econocom to refinance its growth. When you look at all of the items and the levers that we are going to be using to achieve that EUR 96 million in savings, there's no reason that by 2021, there should be any impact on our business. The only impact on our business comes from our desire to manage our debt by better managing the self-financed contracts, the lease contracts. But there's no reason why there should be any impact on the business. That being said, anyone who's carried out this kind of transformation plan knows that it will always impact the workload for any manager. So Laurent or Éric or Philippe in the coming months may have to focus on the implementation of the transformation plan. Or maybe they are just going to work longer hours. So during the first months of this plan, we are going to be hitting the ground running, but there's no reason that there should be any impact on the business after the 18 months. If we drop our communication spending by being harder with our suppliers, I know some of you are in the room, sorry about that. But if we decide to transform the way we are doing our accounting, I don't see how that could impact our core business once the plan is fully implemented.

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Angel Benguigui, Econocom Group SE - Group Finance Director [10]

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If I may add something, the overall plan is a cost-cutting plan, yes. But the cost cutting is not necessarily coming from the headcount people, investment, operational expenditure. The plan, as we have stated, involves refocusing on all of the businesses that generate profit and moving away from businesses, business lines that are in the red. So of course, by the end of this plan, profitability will be up. We will be giving you the figures on that once we get the guidance that we don't have for you today, but the profitability overall of the plan involving refocusing the business, involving cutting costs and involving refocusing on the business lines and countries that are the most profitable will make those entities even more profitable according to our reasoning.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [11]

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There may be a slowdown in growth, but there may be the opposite. I've been heading up Econocom for 45 years. These are warriors, conquerors. We don't produce products or software. We are a go-between between those 2 entities, and we finance them through banks and our own internal financing business. We don't do this to see negative growth. So the opposite may very well be true. We might actually whet the appetite of so many people who were discouraged by the unjustified spending. Now if you're into rowing like I am, it's better to have 7 people in a rowboat than 9 so long as the 7 people are working together. It's better to be efficient with a smaller team than inefficient with a larger team. And I think everyone's a little bit too rotund at the moment, naming no names. So we may be looking at refocusing some people. Does that answer your question?

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David Vagman, ING Groep N.V., Research Division - Research Analyst [12]

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So should we expect any targets for ROP, free cash flow coming in, in the coming months?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [13]

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Give us time. We will get there. We're all involved, we're all onboard day and night on this. I think that by the end of the year, we will have more for you on all of the measures that are going to be rolled out, full year effect, et cetera. And then we'll know more by the end of the year. I think that we will be able to tell you more by the end of February, beginning of March next year with the full year results. What is for sure is that no one in the group, no one from management will be proffering figures that we can't backup. Of course, beyond any unknowables, we're here to be reliable. Ángel, everyone, (inaudible), we are not here to repeat what we've seen over the last 2 years.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [14]

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A final question on leasing from me. Could we come back to the leasing results for H1? In the past, leasing has struggled, very high provisions, Italy this year. But beyond that, how is the business doing? Why is the margin so bad for leasing? Should we expect some kind of leap back to the kind of figures we've seen in the past, given the economy? Is that feasible?

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Angel Benguigui, Econocom Group SE - Group Finance Director [15]

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Well, turnover has gone down, but I explained why. We've been more selective on our deals. And we have also seen some impact from the Italy situation, which is nonrecurring. Profitability is up, as I explained. We didn't mention margins. We do not, as a rule, communicate on the profitability for each of our entities. However, we do have a plan to recenter our business, which has been announced is ongoing and was brought up during the presentation for last year. Econocom is recentering on TMF, and that involves a subset of project teams. And we have countries in which TMF has excellent performance. In France, for example, we have some excellent transactions, in Spain as well, in the Netherlands, too. So TMF's recurring operating profit is good, despite a small drop in turnover that I explained earlier. And in the future of TMF, we see it becoming the center of the group profitable. Yes, it already is, but also more important overall for the group.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [16]

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A question in the back.

If I may just say a word on leasing. Econocom got into the leasing business, usually called rental, very quickly, after just 2 or 3 years. The reason being that the leasing business used to be for cranes, boats, lorries, things that weren't very technical in nature with a very long life span. So traditional financing by banks worked quite well. Then IT came in what is now known as digital, and the life span of equipment went down a lot and needed to be managed by teams such as ours that knew the equipment well and knew its life span. So we were the intermediary there. Digital today is everywhere and in all industrial equipment, the planes, lorries and cranes that I mentioned earlier, but also hospitals on every desk. So managing the life span of equipment remained our specialty, and we are now moving to management of these solutions implemented by the clients, which change regularly because not changing your digital solution in 3 years is already quite a long time. So we're looking at a cycle of 1.5 to 2 years before any kind of update comes in. So overall, the leasing business is very good, very solid. If you look at our competitors that are just in leasing, they have good performance. We've managed to stay ahead of the pack for a number of years because we finance an assembly, but fundamentally, the market is robust.

A question in the back, I believe. Sorry, we can't really see with the stage lights here.

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Unidentified Analyst, [17]

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I have a number of questions, 3 questions for you. The first one, could you please come back to the indirect impact of Italy? The numbers are quite high, EUR 22 million. For a year, it seems a lot given the size of the entity and its recurring operating profit, EUR 22 million. This is something you didn't expect at the beginning of the year, I would imagine. You have, however, maintained your annual guidance. So further cost cutting, EUR 4 million to EUR 5 million is -- I understand. So beyond the savings, what leads you to be confident in your forecast? And also, the -- my final question on the multiyear cost saving, you talked about a cost base of EUR 2.7 billion. But there are very different costs in there, fixed cost, recurring costs, leasing-related costs. Can you tell us how much of the transformation project will impact the gross margin? And for the gross margin, what are your action levers?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [18]

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Maybe we can start with the final question because Julie can answer that.

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Julie Verlingue, Econocom Group SE - Group Deputy CEO [19]

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As I was saying, when we came to the EUR 96.5 million plan, we used that EUR 2.7 billion cost base. This was kind of a way to lift a taboo at Econocom because previously, we'd only been looking at the indirect costs. There is a big cost base which is not indirect and that was not traditionally looked at. It was handled by the P&L managers, but was not generally affected by the cost-cutting measures that we implemented because they were on a voluntary basis. Within those costs, you will find equipment purchases for our projects, equipment purchases for resale in our distribution businesses, also buying people because we're a service business, not everyone is on the payroll. And the levers that we used to come to this savings plan were based on us asking ourselves how -- now this is hard to explain, but how can we be more aggressive in purchasing so that we can streamline the number of suppliers, so that we can negotiate prices with a more hard-nosed attitude than in the past so that we can lower our supply costs for people and for products. We've also looked at our back-office margins and how we can benefit from our scale. We're a EUR 3 billion company with presence in 18 countries. So we wanted to guarantee that all of our countries and all of our businesses can benefit from a more professional purchasing strategy. So that's the direct cost. And on the indirect costs, I believe that I've already run down those.

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Unidentified Analyst, [20]

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Do you have a split of the EUR 96 million between the 2?

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Julie Verlingue, Econocom Group SE - Group Deputy CEO [21]

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I do, but I'd rather wait a little bit before I tell you about that.

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Angel Benguigui, Econocom Group SE - Group Finance Director [22]

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Just to come back to Italy for your other question. For a budget, some things are better than budget, some things are worse. That's just life. When we wrote up the 2019 budget, I would first of all like to say that expectations for Italy were lower than what we had in 2017, for example, because business was simply more sluggish than it had been in previous years. Secondly, EUR 7 million over the first quarter came from us looking at the impact, not just of the changes in the business since 2018. So lower overall profitability for the country across services TMF beyond the subsidiaries and the Italian satellites that are doing well. They are good acquisitions and are very profitable. So there was a need to refocus the teams on purging the system, on auditing the subsidiaries accounts and on putting the subsidiary back on the straight and narrow. So that, of course, leads to lower profitability in Italy. We have been very open in estimating the impact of EUR 15 million. That's our own estimate. The savings plan that Julie Verlingue just explained should show you that what we started back in the 1st of September with the cost-freezing measures beyond the EUR 24 million in savings that were estimated at only EUR 20 million, first of all, will be coming in before the end of the year. So since the 2nd of September, Monday, there has been an overall cost freeze for the entire group which will save a couple of million euros. I can't give you an exact figure, but we do have an estimate. And we do have forecasts that suggest that the EUR 15 million is achievable.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [23]

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We answered 2 of your questions, but I forgot the middle one, sorry.

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Unidentified Analyst, [24]

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I think Andre (sic) [Ángel] partly answered already. There are things that mean that you can stay on guidance for the end of the year. But part of the cost in Italy will be nonrecurring items, right?

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Angel Benguigui, Econocom Group SE - Group Finance Director [25]

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I may have not expressed this properly. These are not costs. It's an indirect impact on the business. So I'm not talking about extra costs or nonrecurring costs. What I'm talking about is a budget for a country that we -- for which we had profitability expectations that will be revised downward.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [26]

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Gentleman in the back.

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Thomas Poutrieux, Kepler Cheuvreux, Research Division - Equity Research Analyst [27]

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Tom Poutrieux, Kepler Cheuvreux. I also wanted to come back to Italy originally, but it's been extensively discussed already. But I also wanted to come back to working capital for H1. We understand that there's always seasonality between H1 and H2, but you had minus EUR 139 million, if I remember, your presentation were minus EUR 139 million in negative working cap. You said in the release yesterday that there were EUR 20 million in deferred payments from one of your big clients. So could you come back to it? I imagine that the EUR 20 million will be paid in H2 this year. And could you give us more details about the reasons why there's a -- such a high negative working capital requirement? I know it's the previous management team, but they had made a big push on the fact that working capital also improves. So could you give us more details on that?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [28]

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I'll give the floor to Éric. Well, the EUR 20 million on a subsidiary that I personally manage directly, and they were recovered immediately in July and the rest in early August. So it's all under control. For the rest, Éric?

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Éric Bazile, Econocom Group SE - Group Financial Controller [29]

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Well, for the EUR 20 million, indeed, they've been cashed in. So it's not an issue, and this subsidiary is still working on improving its WCR. So it's continuous work for this affiliate, but also for all the other affiliates. What we also were impacted by in late June connected to the difficulties that were already presented about Italy. We were impacted for the last few days of June because the difficulties were revealed on the 25th of June. We had some delays in getting a number of cash-ins for refinancing, and so that has an impact on our WCR also for roughly EUR 30 million. So of course, that was a one-off, and we don't expect it to happen again at the end of each half year. So these are -- these 2 elements EUR 30 million and EUR 20 million that had an impact on the EUR 139 million in the deterioration of our working capital requirements. And we're still working on that. As we discussed in the outlook earlier, it's part of our 4 major goals this year. We're still working flat out in all businesses, TMF or DSS, on improving our working capital and on reducing the cash needs for our entities.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [30]

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So to answer your question, is there a structural risk in -- behind this phenomenon? I don't think so for the following reason. The first EUR 20 million, that's equipment billing for operator -- telco operators that were fully solvent, but they did a bit of wind addressing at 30 June. So instead of paying before 30 June, they paid right after that. But there was no risk at all about the quality of the client or about its size. For the second part, there was a surprise -- a somewhat surprise effect from finance sales that are European when the Italian announcement was made. So they thought, well, maybe it's a (inaudible) [baby]. It's also elsewhere throughout Econocom, so won't there be any bad news elsewhere. So we immediately reviewed all of our activities. And -- well, thanks, although our IT systems are not perfect, but the way we made the checks about our supplies and maybe there were some Italian suppliers that were suspicious in the rest of the group, and fortunately, we didn't find any. So refinancers came back to a nominal attitude vis-à-vis the group. Hence, we're not expecting it to reoccur. So all that should be recovered greatly in H2.

So for the full year, could we expect a neutral impact from WCR? Or isn't that maybe a bit too aggressive, Éric?

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Éric Bazile, Econocom Group SE - Group Financial Controller [31]

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Well, we're currently working on that issue. And I think that we'll give you more information very soon about this. Anyway, all the entities are fully mobilized in order to optimize working capital as much as possible. Extensive work was already done at the end of last year. You'll probably remember it because our net debt landed at EUR 250 million roughly. And during the financial statements presentation for 2018, we highlighted the strong improvement in working capital. Well, of course, given our offering and our business, this improvement cannot be by the same amount every year. But we are fine-tuning it all, and we'll have an opportunity to give you more details later.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [32]

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And if I may add, this is Mr. Bouchard, with a more overall figure. Yesterday, when we were preparing this presentation, and at some point, I told the team in the room, well, be careful, our debt is abnormally low. Well, in fact, when you're financing hardware and when on your books you've got roughly EUR 250 million worth of hardware that we bill clients every months for, well, if you look at the company, it's no longer a traditional service business. We are already sort of a financing activity, and we should hire -- we could have a lot more hardware on our balance sheet. And the analysis would be completely different. Given the EUR 250 million at the end of last year, our debt was low. And why did I set guidance saying that one day, I'd like to have, well, in the next 18 months, probably, I'd like to have net accounting debt of 0 to avoid the Italian phenomenon because excess cash will very often conceal things. So -- and it's probably all for the better. Once the group is well under control with motivated people and good savings, then our debt should be more profitable instead of refinancing from people whose margins were 300 basis points. If we had that all on our books, we have very good control, we would save 300 basis points of EUR 3 billion worth of hardware. You can do the math. And so debt is bad because it leads to bad practices. It's not dangerous compared to the fundamentals of the business.

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Thomas Poutrieux, Kepler Cheuvreux, Research Division - Equity Research Analyst [33]

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Okay. Got that.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [34]

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And also, this is Mr. Bouchard. I'd like to add one thing. On working capital, structurally, since our business is changing, so maybe in the next couple of years, it might deteriorate because the business which is to assemble hardware and services means that the assembly and delivery period will last a couple of months, and that consumes a lot of capital. We are going to buy hardware, we'll pay for software, we'll invest in teams to put these solutions in place. For instance, that a car dealership will develop software, will buy hardware. We have developed services around that, and we'll install that in 10,000 dealerships. So the building period will last a few months and so consume capital. And we'll be able to refinance these contracts or finance themselves -- finance them ourselves just a few months later. So the nature of the business will lead to a slight deterioration in WCR, all the more reason to have these cost savings and tighten things elsewhere.

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Thomas Poutrieux, Kepler Cheuvreux, Research Division - Equity Research Analyst [35]

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Another question, a bit more general and not so financial in nature. What is the overall atmosphere in the field amongst the staff of Econocom? Because you're putting cost-aggressive cost-reduction plans in place. You'll need to close down offices in Puteaux. Maybe you've already done so. What's the mindset internally in the company?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [36]

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Well, it depends on the places. We've got a great manager for Spain, Ángel. Well, when you arrive to Spain, how many people were there?

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Angel Benguigui, Econocom Group SE - Group Finance Director [37]

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50.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [38]

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And now?

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Angel Benguigui, Econocom Group SE - Group Finance Director [39]

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Now we have 1,000 people.

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Unidentified Company Representative, [40]

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My son, (inaudible), who is 31, is working in Ángel's team in Spain. He is there with his wife and children. And -- in Spain. Every time I meet him, he's really happy, says their working atmosphere is great, we are having fun and so on. Well, things are not so -- quite so funny in Italy right now. With the cost savings in Puteaux at the head office, the atmosphere is not good. So we decided to empty out the building, 6,000 square meters, over 400 people. We decided to go back to (inaudible). The costs are EUR 180 per square meter instead of 400 in the Puteaux. So I think that in a couple of months, by experience, I know that when the plant is well underway and when you stop wasting money, the atmosphere certainly becomes very good again. So it's variable right now.

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Thomas Poutrieux, Kepler Cheuvreux, Research Division - Equity Research Analyst [41]

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And a follow-up question about that. I know that you don't -- usually don't communicate about your turnover, but you -- could you give us indications about staff turnover?

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [42]

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Who could give us an indication about that? Laurent, maybe? Laurent Roudil, as you know, who's in charge of services for the group and in France, particularly.

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Laurent Roudil, Econocom Group SE - MD of Services France & Deputy MD France [43]

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Hello, everyone. This year, we'll have turnover of less than 18%, which is right in light -- right in line with the average of digital services company in France. There's been a significant decline over last year.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [44]

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Thank you, Laurent. One of the main challenges for the group, and we are all in the same situation in service companies, right now, the issue is to recruit talent. We need talent. We need to recruit talent. And now the market is difficult, there's a lot of competition. And I hope that -- well, that will somewhat answer your question about the atmosphere. I think that what's missing in our plan right now for the atmosphere to be better is for us to announce what's going to happen 6 months after the plan. We are aware of that. We need to revise the strategic plan and explain why these savings and where we're going and where is the Econocom group going? But each thing in its own time, and we need to carry out the plan and the thing that the ExCo will receive an invitation in January in some very nice location, inexpensive, but nice location north of Aragon, for instance. And so we'll organize a seminar, but we need to have a news -- attractive strategic plan, both for inside and outside the company.

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Julie Verlingue, Econocom Group SE - Group Deputy CEO [45]

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And I also wanted to add one thing. This is Julie Verlingue. I've been with the group for 18 months, and so I'm still a new -- relative newcomer. And I wanted to share with you what I've been observing. What I've been observing is that within Econocom, there's a management core which is extremely skilled, very resilient and very loyal to the group and to Jean-Louis Bouchard. And each time I was -- I had a front-row seat in the management of the Italian situation in June, and I was struck by it. I told Jean-Louis that -- exactly that before we started the Friday night after the announcement by the Italian Justice Department of what was going on. I went to Italy in Milan, and I was sitting on my own in an office. It was 6 p.m., and I didn't know how to extricate myself from that situation. But over the weekend, I called up 15 people from the group who had never been in Italy at all because they had no reason to go there. And I asked them, could you give me a hand? Could you be here in Milan, Monday morning to help me manage the situation for HR, IT, Finance or what have you? We had someone from services also to help us, someone from Laurent Roudil's team, and they were all there on the Monday morning. And that really means something.

What we're presenting right now is no fun. It's no fun saving EUR 100 million in costs. It's no fun deciding to dispose of subsidiaries or to close down some sites, although we are not talking about closing down sites with thousands of people, just a few branches here and there that we think are not core and are not going to be scalable over the next few years. It's no fun, let's face it, but it's necessary. And what always strikes me, I'm coming from the outside and I've seen a lot of companies in 12 years in consultancy. At Econocom, there's a core team of people, top managers, middle managers or even people in functions where you would not expect them to be so loyal with such a strong desire to make the company successful. And that's really distinctive. I haven't seen that elsewhere very often. Econocom is a company with a very strong culture and very specific culture, very entrepreneurial. Some would say that they sometimes claim a lot of autonomy. And so a strong culture, you may like it or not, but it's not specific to Econocom. It's -- that's found in all the companies with very strong cultures, and I'm coming from consultancy. I have lots of examples about that. And I'm struck by the ability to be resilient and to mobilize all of our staff around challenges. And here we have a true challenge in front of us.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [46]

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Thank you. Any more questions? Otherwise, we have some refreshments available downstairs.

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Unidentified Analyst, [47]

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[Nicola Daniel]. I had 3 quick questions that were more financial for you. Could you give us the level of factoring at 30 June? And also for the scope of business that you've decided either to dispose of or stop, is that the final scope? Or are there going to be further changes in scope over the H2? And I was surprised by the level of impact of IFRS 16, which was positive for ROP in H1 when you announced a negative impact for the full year. So could you come back to it? Has that changed your view for the full year?

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Angel Benguigui, Econocom Group SE - Group Finance Director [48]

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Well, the first question -- I'll answer about the second one. The fact that -- well, the plan is set as regards closures and disposals. But a plan which has drawn up for the next 18 months, maybe we'll have to revise it. But on the principles, on -- well, basically, it's being decided in people who have -- are going to be impacted have been informed, and it's -- this plan is currently being executed. Maybe next year, it will change slightly, but we'll keep you informed.

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Éric Bazile, Econocom Group SE - Group Financial Controller [49]

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Now regarding IFRS and factoring, I'll start with IFRS 16. For IFRS 16, there are -- there's a twofold impact for Econocom, first as a lessor and then as a lessee. As a lessor, the impact is relatively limited on our profit. It's a bit more sensitive for turnover because according to IFRS 16, for a number of contracts, mostly sales and leaseback contracts that meet a number of criteria, we only booked the margin and not the turnover. And that has an impact for roughly EUR 30 million for the first half of 2018, and the impact is roughly equivalent for this year. Regarding where we are a lessee, as for any company that leases buildings or vehicles, of course, we restated the accounts as per the standard and that had a slightly positive impact on our ROP, and that also had an impact on the financial results, but nothing extraordinary there. This is in line with what every company is doing.

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Unidentified Analyst, [50]

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So do you -- could you confirm your view for the full year as announced for the annual results 2018?

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Éric Bazile, Econocom Group SE - Group Financial Controller [51]

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Well, as a lessee, there's no issue. We know what lessees we have for our buildings and the rental contracts that we have on our vehicles. So we are fully aware of the figures. As lessor, that depends on the contracts that are seen within the TMF activity are going to sign, are going to source. And so it will be on a case-by-case basis that we are going to define the IFRS treatment that I'm going to apply to these contracts. That's a bit less predictable. That was for IFRS 16. Have I answered your question?

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Unidentified Analyst, [52]

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Yes.

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Éric Bazile, Econocom Group SE - Group Financial Controller [53]

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Then regarding deconsolidating factoring, the levels have been slightly similar to the previous years, and we're talking around a EUR 200 million in factoring for the whole scope of the group. So the use of factoring has been more or less stable year-on-year.

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Jean-Louis Bouchard, Econocom Group SE - Chairman & CEO [54]

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Thank you. Any more questions? No more request for questions? Well, okay. Well, thank you, and see you downstairs for refreshments.