U.S. Markets closed

Edited Transcript of LOCAL.PA earnings conference call or presentation 29-Jul-19 8:00am GMT

Half Year 2019 Solocal Group SA Earnings Call

Sevres Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Solocal Group SA earnings conference call or presentation Monday, July 29, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eric Boustouller

Solocal Group S.A. - CEO, GM & Director

* Olivier Regnard

Solocal Group S.A. - CFO

================================================================================

Conference Call Participants

================================================================================

* Babichanth Kulasingham

Midcap Partners, Research Division - Financial Analyst

* Conor O'Shea

Kepler Cheuvreux, Research Division - Head of Media Sector

* Eric Blain;Finance Connect;President

* Julien Raffelsbauer

Millenium Management, LLC - Investment Analyst

* Saurabh Bhalla

Oak Hill Advisors - Principal

* Vincent Baron

Trusteam Finance - Hedge Fund Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello and welcome to the SoLocal H1 2019 Revenues Call. Please note, the call is being recorded. (Operator Instructions).

This document contains forward-looking statements. Any forward-looking statement does not constitute forecasts as defined in European Regulation (EC) 809/2004.

Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

The forward-looking statements are based on the company's current beliefs, assumptions and expectations of its future performance, taking into account all information currently available.

Forward-looking information and statements are not guarantees of future performance and are subject to various risks and uncertainties, many of which are difficult to predict and generally beyond the control of the company. These risks and uncertainties include those discussed or identified under section 2 Risk Factors of the SoLocal Group's reference document, which is filed with the French financial markets authority, the AMF, on the 21st of March 2019.

Important factors that could cause results to differ materially from the results anticipated in the forward-looking statements include, amongst other things, the effects of competition, usage levels, the success of investments by the group in France and abroad, the effects of the economic situation. Solocal Group, its affiliates, directors, advisers, employees and representatives expressly disclaim any liability whatsoever for such forward-looking statements.

The Board of Directors approved the consolidated financial statements of the Group as at the 30th of June 2019. The limited review of H1 2019 accounts was completed and the limited review report is currently being issued. The quarterly financial statements were not audited.

Financial statements restated before IFRS 16 are unaudited figures. Due to rounding, numbers presented throughout this and other documents may not add up precisely to the total provided. All financial data and indicators are published in details within the report of consolidated financial information as of the 30th of June 2019, which is available on the corporate website, www.solocal.com, finance section. I would now like to hand over to your host, Eric Boustouller, to begin today's call. Thank you.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [2]

--------------------------------------------------------------------------------

Thank you. And good morning, ladies and gentlemen, and welcome to the second quarter 2019 and first half 2019 results webcast. I'll share with you today our Q2 and H1 results and some insight on our business as well as the progress we've made in the execution of our strategic plan SoLocal 2020.

As you know, this is a massive transformation, and we feel it's important that we provide regular updates on the implementation of our plan and share what has been achieved so far and what the next steps are. As to our strategic Solocal 2020 plan, we are undergoing a deep transformation, very fast pace to build strong foundation for the new SoLocal. We want it more solid, more efficient and more productive.

We are very intentional in building solid foundation for the long term. Although it can be challenging in the short term, we do not compromise on the long term.

Since the announcement of our credit plan back in Feb 2018, we achieved significant milestones, and we continue to do so every day. We focus on execution, execution and execution.

Let me highlight the key messages of today's presentation. One, as I said, SoLocal 2020 plan is in full motion.

These past quarters, we kept executing our plan deeply transforming and optimizing our organization, thereby increasing our sales productivity. Indeed, weekly digital order intake by sales rep increased by 31% in H1 2019 versus H1 2018.

I said 31%. This is massive. While we continue to manage sales capacity and skill of the organization and despite, if you remember, the artificial and special performance of last year's second quarter, Q2 2018, the mentioned productivity increase enabled us to deliver digital order intake of minus 5.8% in Q2 2019 versus Q2 2018.

Although this is slightly below our expectation, this trend is in line with the year-on-year trend observed in Q1 2019, which was at minus 5%.

As to our strategy, our business KPIs showed positive signs in the first half of the year. The churn rate decreased by 2 points and auto-renewal subscription order intake, which is at now 36% of digital order intake, an increase of no less than 15 points year-on-year.

These figures represent significant steps to our strategic path to transforming in a real SaaS business, meaning a recurring revenue business. Moreover, the rollout of the presence and priority ranking ranges across sales channels in the coming months, as well as promising dynamics of our large account segments, will drive our business metrics further up, as per the very encouraging first customer feedback and performance we got in recent weeks.

In the first half 2019, we also increased profitability significantly, gaining 4 points of EBITDA. The story is quite clear. We do more with less.

Indeed, we keep working through cost reduction further to reach more than EUR 100 million by the end of 2019 versus the 2017 cost base. This strategic cost management is obviously controlled and monitored and has driven plus 5% increase in recurring EBITDA in H1 2019.

This is, if you allow me, a strong achievement. After 9 consecutive years of EBITDA decline, we achieved the stabilization of recurring EBITDA in 2018 and now we deliver EBITDA growth in H1 2019.

Additionally, on the financing front, let me tell you that our liquidity is reinforced, with increase of up to EUR 40 million with more partners of the revolving credit facility signed back in Feb 2019, and this is up from EUR 15 million.

Olivier -- Olivier Regnard, in fact our new CFO, who I welcome today, welcome, Olivier, will go into more details later on.

Considering the Q2 2019 order intake performance, we confirmed a return to digital order intake growth in H2 2019, enabling us to deliver stable digital order intake in 2019.

We delivered on profitability this H1, which confers us in confirming moderate growth of recurring EBITDA in the year.

Now let's focus on the second quarter 2019 performance. Moving to Page 6. Digital order intake amounted to EUR 132 million in Q2 2019. Digital order intake trend is in line with Q1 2019 year-on-year trend at minus 5.8% versus Q2 2018.

We fell slightly below our expectation for 3 main reasons. One, we deepened our sales reorganization driving capacity gaps across channels. This is fixed for H2 onwards. Second, we set up CIS legacy system outage, and this is now under control with most of our infrastructure and applications moving to the cloud in July time frame. And three, we managed quality of sales versus short-term low-value accelerated deals. This is super clear. We will not compromise the long term for poor short-term gains.

The digital order backlog, which corresponds to accumulated digital order intake not yet recognizing revenues amounted, to EUR 349 million at the end of June 2019, a 1.4%, slight decrease compared to the beginning of the period. This is due to the order intake performance of Q2 2019.

Digital revenues stood at EUR 135 million, a minus 7.7% decrease in Q2 2019 versus Q2 2018, impacted by H2 2018 order intake conversion into revenues.

In the quarter, we made strong milestones of our strategic turnaround into Digital SaaS business.

First, the percentage of automatic renewal subscription-based sales ramped up by 15 points from 21% to 36% of digital sales at the end of June 2019 compared to the end of 20 -- June 2018.

This is a huge leap forward into a recurring revenue business, and building up long-term customer relationship to maximize their lifetime value.

The 15-point increase in the subscription base sales was driven by Presence Products and Website range.

When you come to PagesJaunes, the audience was up 19% versus last year in Q2. We have more than 510 million visits in Q2 2019, fueled by our prosperous targeted partnerships.

Moving to Page 7. I am pleased with the progress we are making in terms of sales productivity. Indeed, we do work super hard, super hard on upgrading our sales organization towards long-term productivity and sustainable efficiency.

Our new multi-channel organization, our new client segmentation, our new allocation of customer portfolios and our new sales force compensation scheme all contributed to tremendously increase the productivity of sales organization across sales channels in H1 2019.

Look, weekly digital order intake by sales rep increased by 31% versus last year and by 39% versus H1 2017.

Calling time by telesales rep increased by 76% versus same period last year to more than 2 hours and 20 minutes per day, which is 1 full hour more.

In terms of ARPA, new customers ARPA was 64% higher than churned customers ARPA in H1 2019. Although we see room for improvement, we definitely stepped up in productivity in a very short period of time.

On Page 8, let's take a look at the operational KPIs by customer segment. The number of customers are almost 400,000 at group level and 355,000 for our (inaudible).

This is down from 7 -- sorry, 375,000 last year. The decline in the customer base is driven by 2 main factors. One, we suffered slow hiring and onboarding of new telesales reps. We have identified the hiring and training programs so as to secure optimized sales capacity throughout H2 to catch up on customer acquisitions through our telesales engine going forward.

Second, our brand-new e-commerce channel ramped up slower than expected in Q2. Yet we are confident that, with the availability of new advertising priority ranking services and the online credit card payment option, which we identified are the 2 required game changers, online sales will accelerate in H2 onwards with very positive impact on new customer acquisition as a consequence.

Besides the (inaudible) of presence products and our new priority ranking range sold in subscription mode, in which we see very encouraging feedback, will positively drive customer base dynamics in H2 2019.

Then we are pleased with the churn downward trend. Indeed, the focus on existing customer retention led to a significant decrease in the churn rate, down 2 points to 14% in H1 2019.

Let me now dig further into some customer segments. First, lower ARPA segments, our core business registered a visible decrease in the number of customers as telesales capacity, which I mentioned before, is yet to be optimized. However, as to our strategy while driving ARPA up, ARPA of micro enterprises was up nearly 50% and (inaudible) VSEs, very small enterprises, was up 5% as of 30th of June 2019 thanks to our new product range, especially presence, our entry-level survey that provides real added value to customers.

On large accounts and network side, this segment includes both headquarters and network franchisees of large account customers.

If you look at the large accounts with an ARPA over EUR 25,000, the churn is very low. In the 2% to 6% range.

Indeed, our [offer] for large accounts is unique and enjoyed a very good momentum in this segment this past quarter.

Moving on to Page 9. Let me give you some colors or more colors on the large account business. I'm pleased to share with you some recent successes highlighted by a raise in the number of signed framework agreements. Eleven, in fact, in Q2 versus 4 in Q1 2019. We've built a strong pipeline on new framework agreements over various industries in the first half that we can convert into sales in coming months.

Moving forward, our immediate goal is to increase the penetration rate of these network franchisees month after month through our unique bridge platform.

Indeed, the SoLocal bridge platform enables large accounts to manage local campaigns at a national level in a consistent and agile way and within a controlled budget.

Simply put, network heads can determine the framework for campaigns, make sure all their franchisees and point of sales apply the guidelines in a very consistent and budget-friendly way. We can deliver this value proposition through our purposely designed state-of-the-art tech platform, our local engagements and very well oil-structured processes.

So moving to Page 10. Let me take the example of Intermarché, Les Mousquetaires that you may know, a new contract that was -- that we signed a few days ago.

This is a strategic 3-year contract announced in July 2019 with Intermarché, Bricorama, Bricomarché, Brico Cash, Roady et Netto brands benefiting from local presence products.

Solocal enables Les Mousquetaires to drive visibility and branding for approximately 3,000 point of sales and communicate reliable and consistent information full web.

Each point-of-sale can manage and control its online contents, information and reviews. And the end goal is quite clear. It's to drive customer acquisition and loyalty. That's an example. But as I said, we built a strong pipeline and there is much, much more to come in this domain.

Moving on, looking at our presence and priority ranking product range. I'm really delighted to announce that we launched as planned these new products in recent weeks.

This is a core pillar of our product strategy. It's the core pillar of our SoLocal 2020 plan. And it's moving ahead. So what it is all about? This new offer comprises new full web digital services designed to add real value to customer, sold in subscription mode with automatic renewal in omni-channel and with digital coaching to support our customers.

The priority ranking service as it stands today is a far, far upgrade from the historic PagesJaunes ranking product. That represented, if you remember, a declining business as not adding sufficient value to customers.

The new priority ranking is, in short, a completely revamped version of our historic business on steroids.

So why that? Priority ranking combined our new presence product launch in Q4 2018. We stopped ranking and therefore, stopped visibility on keywords that are relevant to our customers on 3-I traffic media.

Pagesjaunes.fr, we struck more than 1.7 billion visits per year and reach audience has increased this quarter by 19% year-on-year.

Mappy, highly intentional and geo-localized media with EUR 300 million plus yearly audience and Yahoo.

For these products, our customers have the full web visibility on 21 high-traffic media and are highly ranked on 3 others, leveraging the traffic to ultimately gain quality leads. Priority ranking is a unique engine providing multiple leads to our customers in a simple, consistent and budget-friendly way.

As you can see on Slide 11, we have 3 priority ranking packages running from -- ranging from EUR 59 to almost EUR 400 per month on automatic renewal subscription mode, which is an up-sell from the circuit Presence packages and aimed at increasing ARPA of small-size customers.

Moving on to Page 12. The new priority ranking of (inaudible) very well received by the sales force, but I would say primarily by customers. Our first customers experienced an increase in leads and request for quotes, generating good ROI performance for them.

On our side, we saw immediately an increase in customers ARPA. The presence and priority ranking ranges are being deployed as we speak.

Week after week, month after month, thereafter they're across all sales channels, telesales, field sales as well as on our e-commerce solocal.com website.

These rollout of our new product range to existing new customers is absolutely strategic to us and will be the growth drivers of the second quarter and second half -- sorry, second half of the year. Moving to Page 13 and sharing with you some CapEx colors. Here, you can see our SoLocal 2020 plan in full motion. Indeed, we keep making this (inaudible) and building the foundation to fuel long-term growth, productivity and profitability.

But to achieve that, we need to keep on investing. We spent EUR 21 million of CapEx in H1, speaking strategic investments in media platforms, CRM, digital services, data, IT, cloud and so on.

If you look at the breakdown, it is relatively similar to 2018, with investment in our media to increase traffic and upgrade user experience in order to increase monetization.

We continue to develop and improve our digital services with the new priority ranking range to continuously optimize our customer experience. And we invested in IT and cloud with the migration of most of our apps and infrastructure to the cloud recently. This enabled us to be more efficient and hence, more productive by scaling our apps and tools and platforms in a very optimized way. So the agenda is quite clear. It's all about back to growth now. We feel we are turning the corner. This is a time -- this is a time to return to growth.

I'm confident that the strategic investments we've been making, the new digital services that we are fully rolling out in omni-channel, together with the relentless upgrade to our sales organization will be critical drivers of our growth journey starting in H2.

We are continuously working on the intensification of sales channels to increase new customer acquisition and boost up-sell.

With this time around, very specific focus on websites and the Booster line of advertising services. This is supported by brand-new sales tools and IT cloud platforms to scale flawlessly.

We'll continue to drive ARPA up and churn down while improving customer retention, building on 2 pillars: one, the full deployment of our presence and priority ranking ranges; and two, the deep transformation of our organization from EMEA sales force to value-added channels, coaching and accompanying customers throughout their life cycle.

On large accounts, we are working on converting our strong framework agreement pipeline into new customers. From (inaudible) to many, many more of them.

In parallel, we are committed to revamp the PagesJaunes media platform with new experiences, more personalized to full audience up wild and to bring to life new transactional business models to monetize further this [cool] SoLocal asset.

For sure, we have still work to do. We'll keep on executing with passion our strategic plan and leverage on what has already been accomplished to accelerate our transformation and become even more productive and agile.

I can see the strategy is already delivering. But I can tell you there is much, much more to come. Let me pass on to Olivier, now our new CFO, for more colors on our financial results. Olivier, the floor is yours.

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [3]

--------------------------------------------------------------------------------

Thanks, Eric. Good morning, ladies and gentlemen. I'm very happy to share with you this morning our financial performance over H1 2019. H1 2019 revenues reached EUR 304 million. It comprises 88% of digital revenues and less than 12% of revenues deriving from the Print business. I remind you that Print revenues continue to decline, with an acceleration over 2019, as we will stop to publish printed directories at the end of 2020 as already announced.

We now focus on digital. As you're familiar, our digital products can be classified in 3 large categories: presence, websites and advertising.

Presence revenues come from our existing search products and from our new offer that Eric described before. Revenues are in line with H1 2018.

On the websites part, we are the first website factory in France with EUR 107 million of revenues generated in 2018 and EUR 55 million revenue in H1 2019.

I'll remind you that we launched our new website range 9 months ago in September 2018. This activity is performing well. On the Digital Advertising segment, say the decrease in revenues this semester. I point out that the revenue recognition is faster in that product compared to Presence and Website segments. The steep slowdown of order intake in H2 2018 mentioned by Eric earlier is the main driver of this decrease.

On the specific topic of conversion rates, could you move overleaf, where I would like to update you on where we stand in terms of conversion offsets into revenues.

As you know, order intakes are recognized in revenues over the period of time when services are rendered. Considering our products and business model, this explains why order intake impacts revenues with a delayed effect.

At the end of 2018, we presented the average conversion pattern of order intake into revenues over a 2-years period.

For consistency purposes, we have updated these items to show you the underlying trend of this conversion pattern. This is highlighted in the graph. And as you see, in H1 2018, 64% of order intakes were recognized in revenues within the next 12 months.

It is now 68%, so 4 points up in H1 2019. Why is this? Because we hardly worked on clearing our backlog and we focused on the quality of order intake.

As in illustration, we aim to first avoid renewals too long ahead of the end of the subscription period, and then we will focus on developing up-sell on existing customers and developing new customers. This ratio is really key for us. It is a way to monitor that salespeople increase the quality of their backlog without draining their long-term pipeline.

It is also a pillar of our SoLocal 2020 plan, which is to reach a SaaS model and to recognize revenue generated month by month via service on a subscription mode.

As Eric mentioned earlier, 36% of our digital order intake is now under a SaaS model.

We can now move forward to focus on our profitability, which is illustrated on the next page. To better understand, I recommend to focus on the 2 left-hand side columns, which present the P&L before the impact of the implementation of IFRS 16.

The main message is that we fully offset the 13% decrease in revenue with a major cost reduction plan implemented in 2018. This cost reduction plan was mainly focused on personnel expenses. They have already been reduced by EUR 60 million last year over H2 2018, almost EUR 45 million of savings have been added up to this amount this semester.

On the external expenses side, they decreased by 5%. This decrease was mainly driven first by the decreasing cost of goods sold, directly related to the Print business; but also by the decreasing media spend due to the improvement of the sourcing of contacts.

Clearly, in addition to this, we reduced significantly our SG&A cost basis. These decreases have been offset by proactive investments, such as the move to cloud project that will enable scalability of our business or marketing expenses, which accounted to EUR 3 million over the first half of the year.

All-in, cost reductions on a full year basis amounted over the last 12 months to almost EUR 110 million, which is higher than the EUR 100 million target that we initially announced for 2019. As a consequence, recurring EBITDA reached EUR 80 million for the semester plus 5% compared to last year before IFRS 16.

If you look at consolidated EBITDA, it was of course negative last year, since it was including restructuring provisions.

Let's turn to Slide #19 to analyze the breakdown of this EBITDA. The bar chart first highlights the impact of IFRS 16 on our EBITDA.

A full explanation of this impact -- of the impact of this new accounting standard is available in appendix. The full year impact on 2019 EBITDA will amount to EUR 16 million, but what is much more important from a business standpoint is a fact that first the EBITDA contribution of the Print business is decreasing while the EBITDA deriving from digital is increasing by almost 9%.

The digital recurring EBITDA margin stands at 24% compared to 20% in H1 2018.

Let's focus on the breakdown between variable and fixed costs. With no surprise, you can see on Slide 20 that we have significantly reduced our fixed cost basis with a EUR 57 million decrease compared to last year while maintaining our variable cost, which highlights the fact that we want to [variable-ize] our cost basis.

We are now going to focus on cash flow generation, which is presented on Slide 21. I'll remind you that IFRS 16 has no cash impact, except somewhat classification linked to booking entries in the P&L and balance sheet.

Particularly, we have generated EUR 47 million of recurring operating cash flows this semester. We stated from IFRS 16 impact we actually generated EUR 39 million compared to EUR 30 million last year, including an improvement in our working capital position.

Of course, this positive cash generation has been offset by the exceptional cash out related to our 2018 social plan.

Indeed, the EUR 46 million of nonrecurring cash outs comprised EUR 38 million for the restructuring plan, EUR 4 million of nonrecurring change in working capital directly related to this plan and then to EUR 4 million paid for individual legal disputes.

As announced, we paid no corporate taxes this semester. All in, we had a negative cash flow for the period of EUR 23 million, including the EUR 38 million paid for our social plan. We stated from this cash out, our business generated EUR 15 million net of financial expense and CapEx.

I remind you that we generate much more cash in H2 than H1 historically. We thought the second semester was almost EUR 60 million of cash on our balance sheet.

Slide 22 aims to focus on cash outs related to the restructure -- to the 2018 restructuring plan. As you are aware of, we booked the full amount of the provision in P&L in 2018, but cash outs are to be done mainly in the course of 2019 and especially over Q3.

The chart highlights the past and expected cash out of the plan. These charts only focus on cash impacts directly related to employees which have left the company last year.

As you know, the exceptional provision booked in 2018 also included a provision for rents of unused office spaces. The provision has been maintained within our financial statements, what went [open] normally.

If you look at Slide 23, net debt reached EUR 349 million at the end of June. This leads to a net leverage ratio of 1.94, which gives us plenty of headroom compared to our covenants, which stands at 3.5.

The increase in net debt results from the cash out performed to pay the EUR 38 million of indemnities over H1 2019 that we already discussed.

I remind you that according to the bond documentation, we do not apply IFRS 16 to our covenant testing.

Regarding ISCR, we delivered a ratio of 5.6x, well above the threshold of 3x we have in the bond documentation.

The last point, from a financial point of view, is a focus on our liquidity and our -- and on our financing toolbox. As we announced over the past months, we have worked on increasing our headroom. As you remember, we announced as of Feb 2019, our first EUR 15 million commitment within our revolving credit facility basket. It has now been increased by EUR 25 million to reach EUR 40 million.

Maturity is unchanged at March 2022. These facilities were undrawn at the end of June 2019.

Our working line is performing very well with our partner. We have used it up to EUR 2 million at the end of June, and we will continue to use it up to the EUR 10 million allowed by the bond documentation. Therefore, these financing lines bring us almost EUR 50 million of additional headroom. We will continue our work on that front to extend it.

As we said, we need to rebuild financial partnerships with diversified financial sponsors. We will continue to optimize the basket we have in the bond documentation and for example, on bilateral lines or asset financing.

I now leave the floor to Eric to conclude this H1 2019 presentation.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [4]

--------------------------------------------------------------------------------

Thank you, Olivier. Let me wrap up quick. So yes, I think you could feel that SoLocal 2020 is in full motion. You can see that. I can say that the team is truly energized. And you can certainly read that we strongly execute the plan as we enjoy many positive indicators our transformation plan and all that on the way.

Positivity is up big time. Churn is down. New range of services coming to life, huge cost reductions really lending. And yes, we will do always much more with less. In H2, we'll be back to growth when it comes to digital order intake while stabilizing for the year.

We'll deliver our EBITDA promise. After 9 years of declining EBITDA, last year, you remember we stabilized the recurring EBITDA. And today, we delivered an EBITDA growth for H1 2019 and recommit to landing a moderate EBITDA growth for the year while strengthening our liquidity situation. We still have a lot to do, but we are proud of what we are building to deliver new digital services and added-value products to our customers.

SoLocal 2020 has a real traction, strong traction. And I can tell, we can't wait to be back to growth in H2 2019.

With that, let me open up for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We do have a question that has come through. Our first question comes from Conor O'Shea from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [2]

--------------------------------------------------------------------------------

Three questions for me, please. First question, on your Slide 8, where you give the updated detail on the various revenue lines, which is very helpful, just wondering in the -- you're seeing upper increases in most of those lines, except for the SMEs at -- up to EUR 3,000 where that has declined by about 10%. So if you could just explain what's happening there?

Also in terms of the large accounts, we've seen a significant drop in the number of accounts from 35,000 to 30,000. I think, Eric, you mentioned that the very large accounts above 25,000 were doing very well. So if you could just explain what's happening with the other ones because I had thought that was a focus for growth for you.

And then maybe last question, maybe for Olivier. On the free cash flow for the second half of the year, if you -- assuming you make your EBITDA target of slight growth, what would that imply? What kind of range of free cash flow inflow would that imply for the second half of the year?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [3]

--------------------------------------------------------------------------------

Well. On -- can you remind the second question, Conor, quick?

--------------------------------------------------------------------------------

Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [4]

--------------------------------------------------------------------------------

Yes. Second question just on the -- yes, sorry, the number of large clients I think decreased from 35,000 to 30,000. You mentioned that the large accounts -- why the drop, yes?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [5]

--------------------------------------------------------------------------------

I get it. Okay. So I mean, when you take this because -- this is an easy one, even though this is not self-explanatory from what you can read.

Large accounts and networks include not only the large accounts or the heads of the large accounts, but also the franchisees and the point of sales, right?

Okay. So basically we lost some, let's say ground in this field. But the focus for us is definitely to go after the head of these large accounts and then to penetrate their networks. So that's the goal.

So I mean, we are confident that one, with -- you see the framework agreements that we've been signing up in Q1 and Q2. We are now going to deploy these contracts across the networks. And then we will be back, let's say to positive, I would say ground as we move forward.

So -- and we really focused -- we've been focusing primarily on the head of the networks to go after these framework agreements so as to have -- I mean I would say the multiplication effect on our resource.

So that's what you can read here.

First question was about the SMEs, right? And the ARPA down?

--------------------------------------------------------------------------------

Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [6]

--------------------------------------------------------------------------------

Yes. Because it's obviously up in most of the other lines. But that one, slightly down year-on-year. So just wondering what's going on there.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [7]

--------------------------------------------------------------------------------

So we provided this visibility. Honestly, this is not historic something that you can draw a lot of conclusion, so this is the first half. What you need to have in mind is basically what we are driving. One, we continue to revamp the sales organization dramatically with a big, big, big focus on renewal and go after ARPA. But there is also one thing that we need to do is to go after acquisition.

And what we are missing here, certainly is the acquisition so as to drive the right ARPA level.

But again, I mean, I would not draw too many conclusion from this side. Again, this is more, I'd say an in-between. We'll add more conclusion as we move forward. That's basically what we will provide in the February time frame.

--------------------------------------------------------------------------------

Conor O'Shea, Kepler Cheuvreux, Research Division - Head of Media Sector [8]

--------------------------------------------------------------------------------

Okay. Fair enough. And on the free cash flow?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [9]

--------------------------------------------------------------------------------

Yes. Yes. On the free cash flow. As mentioned by Eric, I think -- well, we confirm that we will convert 60% of our recurring EBITDA in operating cash. So if you want to have the net free cash, clearly you have to take this amount and then the debt, the cash out related to the social plan and financial expenses.

So that we need, but we confirm our strong cash conversion from EBITDA to operating cash.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from the line of Babi Kulasingham from Midcap.

--------------------------------------------------------------------------------

Babichanth Kulasingham, Midcap Partners, Research Division - Financial Analyst [11]

--------------------------------------------------------------------------------

Earlier in 2019, you forecast moderate growth in the recurring EBITDA. To reach this target, you need to deliver around EUR 100 million EBITDA next semester. Due to the current backlog, I assume your turnover will be down in the next semester. So should we consider further cost reduction in EPS, would it be about workforce?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [12]

--------------------------------------------------------------------------------

So first of all -- thank you, Babi, for the question. First of all, historically the -- I would say, the picture for H1-H2 is quite different. So for seasonality reasons, we have much more EBITDA that is, I would say landing in H2 versus H1. So consider that this is no more, I would say the -- again, the picture for the year. The second thing is yes, we will continue to drive cost reductions not only in H2 but also in 2020.

So -- and this construction will come from, I would say external charges. So to reduce also the fixed costs of the company. Then there are a number of businesses that we will basically exit. Print business is an example. So there are areas like this where cost predictions are quite evident, and we're going to drive that. This will have an impact in H2 and this will have an impact also in 2020.

So we are committed to drive EBITDA growth not only from the top line but also from the cost base.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from the line of Julien Raffelsbauer from Millennium.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [14]

--------------------------------------------------------------------------------

Regarding your digital order intake. So you were targeting before growth, now you're targeting more stabilization in digital order. Is it possible to quantify the magnitude of the change in guidance? And do you have a number for July as well you could share with us? And then I've got another question of the rollout of Print after this.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [15]

--------------------------------------------------------------------------------

Okay. So good catch. One, basically we took the lessons of Q2. We are slightly behind. And therefore we have adjusted our guidance when it comes to digital order intake from growth to stabilization. Yet we are committed to return to growth in H2. This one is not a change. So that -- we are confident that we can drive that. We cannot comment on July, but again, H2 is all about growth.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [16]

--------------------------------------------------------------------------------

And it will be more driven by less churn? Or more by higher customer acquisition?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [17]

--------------------------------------------------------------------------------

It will be deriving from a number of factors. Yes, correct. Churn will be -- or something, we should be on the right direction. We are driving ARPA up, and this a consequence of deployment of our new product ranges. One, presence; and two, due to the priority ranking. We have a number of, let's say evidence, which shows that, as we drive and as we deploy these new products, ARPA is up. Then when it comes to acquisition, I think we were very transparent to tell that for a number of reasons we've not been, let's say on target from our perspective when it comes to acquisition because we did have the, let's say the sales force capacity that we needed. Two, e-commerce was not delivering as much as we would have liked. But all these things are now behind us, and we feel confident that the sales capacity will be back on track and therefore dedicated to not only renewing the customer base but acquiring new customers. In the same time, the solocal.com engine will be up and running when it comes to one, selling the new products whether the, let's say shortfall we had was that we were selling only presence. And presence is not the only product that people want to purchase. So adding priority ranking is something which is going to add value and create more abundance of our product range on the solocal.com.

And the second thing, which is very compelling and expected by customers, is to buy with the online credit card option. This was not available. This has been, I would say released last week. So we are already taking some orders and people can buy through the online credit card. So for all these reasons, we will be back to acquisition. We want to domain the customer base you near to be, let's say restrengthened in H2, renewing our customers with higher ARPA, managing the churn and then going after acquisition.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [18]

--------------------------------------------------------------------------------

Okay. And for the Print business. So in 2020, do you expect cash revenue? I thought it will be only P&L revenue. I don't -- I think there will -- it will be only P&L and -- but if you could confirm that. And what will happen to the cost of the Print business? Looking at your H1, I think you got around EUR 60 million of cash cost in the Print business. I'm just doing a revenue less EBITDA and I'm annualizing this. What will happen to these cost? The direct cost will disappear for sure, but what will happen to the indirect costs? And how much are they -- is possible?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [19]

--------------------------------------------------------------------------------

Okay. So first point, it's P&L cost to answer very directly to your question.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [20]

--------------------------------------------------------------------------------

The revenue, you mean?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [21]

--------------------------------------------------------------------------------

What -- excuse me?

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [22]

--------------------------------------------------------------------------------

P&L -- sorry, P&L revenues or P&L cost?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [23]

--------------------------------------------------------------------------------

No, no. P&L cost. P&L price. Okay? And secondly, on the Print fallout, clearly we are absorbing day by day, we are decreasing the cost basis. So we will do it, let's say smoothly until the end of the rollout.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [24]

--------------------------------------------------------------------------------

Okay. So just to (inaudible), in 2020, the Print business, will there be cash revenues or not?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [25]

--------------------------------------------------------------------------------

A little bit, yes.

--------------------------------------------------------------------------------

Julien Raffelsbauer, Millenium Management, LLC - Investment Analyst [26]

--------------------------------------------------------------------------------

A little bit. And will the EBITDA be negative because of cost or not?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [27]

--------------------------------------------------------------------------------

No, no, no. No, it will not be negative because we anticipated this rollout. So we are decreasing smoothly just to maintain our EBITDA -- let's say our EBITDA margin on this specific segment, and we do not expect negative EBITDA on this segment. While adapting on a day-to-day basis, our cost base is to decrease, as mentioned by Eric earlier.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from the line of Vincent Baron from Trusteam.

--------------------------------------------------------------------------------

Vincent Baron, Trusteam Finance - Hedge Fund Manager [29]

--------------------------------------------------------------------------------

Just a quick question to understand. So in order to have order intake positive for the full year, so you are expecting at least a double-digit order intake growth for digital sales in -- for digitals in H2?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [30]

--------------------------------------------------------------------------------

We are not commenting on that. But I'll let you make the math.

--------------------------------------------------------------------------------

Vincent Baron, Trusteam Finance - Hedge Fund Manager [31]

--------------------------------------------------------------------------------

Okay. So you expect digital order intake growth for full year...

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [32]

--------------------------------------------------------------------------------

To be positive. To be positive in H2.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question is from Eric Blain from Finance Connect.

--------------------------------------------------------------------------------

Eric Blain;Finance Connect;President, [34]

--------------------------------------------------------------------------------

Do you hear me? Okay. Just one question about your small deception about second quarter in term of order intake. Can you give us a little more granularity about why it's one shop? Or if it's more recurring to competition, which partially totaled as a sales down?

And my second question is about sales on 2020. Can you give -- confirm what you think about 2020?

And I have 2 questions by Internet. Your guidance is clearly (inaudible) IFRS says in terms of EBITDA? Can you confirm that?

And about the level of ARPA of new contracts. You explained on Page 7. Can you give us perhaps an idea of this develop?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [35]

--------------------------------------------------------------------------------

Okay. Thank you, Eric, for the questions. So I -- let me, I would say get back to you to the different drivers of the slight, I would say gap between our expectations and what we really landed in Q2.

First of all, I would say the EUR 3 million to EUR 4 million gap, so we're not talking about big amounts.

One -- there is one thing that we don't want to do anymore in this company. It's to drive, I mean sales for the short term, low-value deals. Basically, you accelerate deals and then you close them in a quarter instead of the next quarter or the quarter after.

So this is something we don't do. Okay? So the second thing is we are driving a real turnaround of the company. In particular the sales organization. So we are managing sales and the sales organization and the salespeople with a high expectation when it comes to performance. So we are turning over low performance, therefore we need to hire, onboard, train. And this is not necessarily something that you do -- that we could do at the right pace. So we have adjusted that. We have ramped that up, and we feel good that in Q3 and Q4, we'll be back on track from that perspective.

But we did have what I call the sales capacity which was, I would say at the level of what we wanted to deliver. The third thing is e-commerce.

E-commerce, we decided -- and you could see that we didn't make any advertising campaign in Q2. I don't know whether we quote that. Why? Because we didn't want to drive traffic on, let's say our e-commerce site. Why? Because we knew that this additional spend and the traffic would not have been sufficient or with the right ROI, sorry -- with the right ROI.

And therefore we decided to delay that. Why? One, the feedback that we got on e-commerce is -- under our online SoLocal.com is you need to have a number of projects to sell. We did add only one. And the second one is -- will be available now in the course of the third quarter.

Second thing, lots of customers want to buy with a credit card online. And we didn't have that facility, which is available for a week. So -- and by the way, we have already registered purchases through online credit card. So for all these reasons, we feel good that we are going to catch back when it comes to acquisition, and therefore everything that we suffered in Q2, unless there is something new coming up, is behind, and we feel good going forward in Q3 and Q4. And that will fuel our growth in the second -- in the second half.

We are confident and we are building everything. So basically, the muscles will be up and running for 2020. So 2020, we are comfortable to say that it will be back to growth. When it comes to digital order, when it comes to revenue, when it comes to EBITDA. So when I said we are turning the corner, it's what we think. In H2, we are turning the corner. And that's, I would say on track with the plan that we have announced a couple of months ago.

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [36]

--------------------------------------------------------------------------------

And on your question relating to our EBITDA guidance. Yes, clearly it's before IFRS 16. Well, I mean that our increase in EBITDA is comparable, is that -- with the same accounting standards. So this is very clear. On the objective of cash conversion, as mentioned earlier this year, this is after taking into account the change in IFRS 16. So the 60% of EBITDA conversion into operating cash flows is after IFRS 16, as mentioned during the financial statement announcement.

--------------------------------------------------------------------------------

Eric Blain;Finance Connect;President, [37]

--------------------------------------------------------------------------------

And just to go on the sort of level of ARPA of new customer, you mentioned a huge increase on Page 7. Do you have -- can you give us some idea of this level?

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [38]

--------------------------------------------------------------------------------

Yes. I mean on Page 7, what you see, and in particular you referred the launch of our Presence product, which is EUR 29 per month, so roughly a little bit above EUR 300. And that's for the essential. But for the premium, then we are in the EUR 49. So that's around EUR 600. So if you take a bit, a mix of all that, we will be driving ARPA up on these segments going forward because at the segments for which the Presence offer is really targeted. And so we feel confident again you that ARPA will go up. Then ARPA will go up across the board with the launch of our priority ranking. Again, priority ranking. The older one on PagesJaunes was something which was keywords, some visibility on PagesJaunes. What we are now delivering to the market is a completely revamped version of priority ranking. It is not only on PagesJaunes that you get visibility. It is on PagesJaunes, on Mappy and Yahoo! Then you have visibility across the big website on the web, Google, Twitter and so on so forth. And all that for -- starting at EUR 59. The feedback that we are getting from the market because all our telesales people, all telesales beating for prospects or for customers are now up and running. So they are all setting the priority ranking. And the first, I would say return from the market are very positive. One, on how easy this is. Two, how, let's say well targeted this is versus their expectation.

And then when it comes to ARPA, as I said, this is in line with what we expect. We have, I would say tests going on, on, let's say on field sales segment, and we are getting similar feedback and returns on the market. So that's quite positive. I cannot give you more granularity on that and more, I would say numbers, but I'm committed to do that as much -- as soon as we can do that. On let's say -- something which is statistically relevant.

--------------------------------------------------------------------------------

Eric Blain;Finance Connect;President, [39]

--------------------------------------------------------------------------------

Just one thing. Can you -- can we make a relationship between this huge increase of the ARPA and the disappointing sales you have on the Q2? I mean, in first step, you prefer to have -- to EBITDA before sales.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [40]

--------------------------------------------------------------------------------

So again, the disappointing sales on this slide, let's say miss versus expectation is what I told you, Eric. There is nothing else. I didn't comment on the technical issue. We had technical issues. Why did we have technical issues? And this is really short-term issue. It's just because we are moving all our legacy platforms. This company was relying on very old platforms, which are all, I would say suboptimal. We are changing all that, moving to the cloud in a super, super accelerated pace. Come on. We started in September last year. And most of our application infrastructure in the cloud. I can bet you, there are not so many companies in the world that can be -- that has been able to achieve that. So we are committed to that. We drive that. But on the way, we have some breaches. All our data, PagesJaunes, everything moved to the cloud in the June time frame. Everything moved to the cloud in the June time frame. It's in the cloud now. So basically, the time to get access to data, the time to -- I mean the flexibility that we have on PagesJaunes now is just -- you mean, there is no comparison. What we had in June. And -- but we had to make that call. We had to make that very courageous, risky call to make it in June at the expense of some EUR 1 million or EUR 2 million missed in the sales. So now we are on the right path with the right systems to go forward and not, let's say suffer from technical problems.

So again, Q2 is one, some capacity gaps from a system point. This is fixed. Two, technical platform, moved to the cloud now. This is fixed. And the third thing is e-commerce. We are in the right product range and the online credit card facility up and running. For all these reasons, we feel confident that we are back on track from all these, let's say elements going forward.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

We do have a further question. The next question comes from Saurabh Bhalla from Oak Hill Advisors.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [42]

--------------------------------------------------------------------------------

Just following up from one of the previous callers, what is your gross margin in the Print business?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [43]

--------------------------------------------------------------------------------

Our gross margin on the Print business, while we do not monitor it exactly like this because our gross margin, while there is a lot of fixed costs as you can imagine, so our direct gross margin is probably higher than 80%. But it didn't really mean much. So you have to take really the contribution of the Print business to our EBITDA.

I think it would be much more, let's say -- well, it would be much more present within the contribution of the Print business rather than the gross margin.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [44]

--------------------------------------------------------------------------------

Understood. So again, we're trying to understand when you wind down this business, what would be the cost associated to wind down the business? Can you give us any guidance on that when it happens in late 2020 or early 2021? The cash cost to wind down the business?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [45]

--------------------------------------------------------------------------------

Well, specifically, we won't have specific cost to wind down this business. Why is that? Because we just anticipated that we will roll out this business out. So we are decreasing it smally, smally -- well, on a day-to-day basis.

So we do not expect a significant cost for the -- at the end of the Print business.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [46]

--------------------------------------------------------------------------------

You see, we -- to add on what Olivier just said, we've been managing that from, let's say almost day 1 of our plan. We anticipated that and we keep anticipating -- anticipate the exit of the Print business at the end of 2020.

So just to bear in mind, there won't be an increase effect. So it is not going to be brutal because we've taken decision and executed on those decisions. And that's why we are already seeing costs along the way to make sure that there is a smooth transition from the old Print business to a pure 100% digital company starting 2021. By that time, all our products will be digital. In a subscription mode, omni-channel and so on so forth.

So there is no -- I would say we've taken all these measures to absorb that.

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [47]

--------------------------------------------------------------------------------

And let me go -- and just on one point. In terms of revenue, just to highlight this, that in terms of revenue, we decreased our revenue by almost EUR 20 million on the Print business and the impact of the EBITDA contribution just decreased by EUR 2 million. So it means that we achieved the cost reduction as we are rolling out the business. So I think it's probably the most important.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [48]

--------------------------------------------------------------------------------

Understood. And just on these numbers. So a reduction in revenue by EUR 20 million and EBITDA revision by EUR 2 million. Is that for FY '19 full year or FY '20?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [49]

--------------------------------------------------------------------------------

No, it's for the half of the year.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [50]

--------------------------------------------------------------------------------

I'm sorry. For the first half, you mean?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [51]

--------------------------------------------------------------------------------

No. Yes, well, the revenue decreased by EUR 20 million in H1 2019 compared to H1 2018, as mentioned in Page 16 of the presentation. And the EBITDA contribution decreased by EUR 11 million to EUR 9.4 million.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [52]

--------------------------------------------------------------------------------

Got it. Understood. My last question is on the cost saving. Can you confirm that you're able to achieve the full year cost-saving target of EUR 100 million for '19? And can you also remind us what was that for 2020, the cost-saving target?

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [53]

--------------------------------------------------------------------------------

Okay. So just -- as I was saying during the speech, we are currently -- over the last 12 months, we are -- we had a reduction of EUR 110 million in terms of cost reduction, so we are very confident that we will reach the target of EUR 100 million at the end of 2019.

And it's clearly not the objective to increase costs in H2 2019, as mentioned by Eric. And on the second part, we had an objective of decreasing costs for 2020 by EUR 120 million and we confirm this objective.

--------------------------------------------------------------------------------

Saurabh Bhalla, Oak Hill Advisors - Principal [54]

--------------------------------------------------------------------------------

So to be clear, EUR 100 million for the full year '19 this year. And then additional EUR 20 million on top for next year, right? That's how you get to 20 -- EUR 120 million. Okay. Got it.

--------------------------------------------------------------------------------

Olivier Regnard, Solocal Group S.A. - CFO [55]

--------------------------------------------------------------------------------

Yes. Yes.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Thank you very much. We have no more questions in the queue. So I'd like to hand the call back to Eric.

--------------------------------------------------------------------------------

Eric Boustouller, Solocal Group S.A. - CEO, GM & Director [57]

--------------------------------------------------------------------------------

Just want to say a big thank you. And for the ones that are not yet in vacation, so I wish you, I would say a very nice vacation. I look forward to seeing you beginning of October somewhere -- no, beginning of November for our Q3 results.

So thanks again and have a nice day.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Thank you very much for joining today's conference call.

You may now disconnect your lines.