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Edited Transcript of LTEN.PA earnings conference call or presentation 20-Sep-19 8:00am GMT

Half Year 2019 Alten SA Earnings Call

Sep 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Alten SA earnings conference call or presentation Friday, September 20, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bruno Benoliel

Alten SA - Deputy CEO

* Simon Azoulay

Alten SA - Chairman & CEO

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Conference Call Participants

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* Derric Marcon

Societe Generale Cross Asset Research - Equity Analyst

* Emmanuel Parot

Societe De Bourse Gilbert Dupont, Research Division - Director & Financial Analyst

* Gregory K. Ramirez

Bryan Garnier & Co Ltd, Research Division - Analyst

* Laurent Daure

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

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Presentation

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Simon Azoulay, Alten SA - Chairman & CEO [1]

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Good morning, and thank you for being with us this morning to attend the presentation of our first half results. There will be quite some news and some clarification about the current market situation, whether there will be a downturn or not, et cetera, and I'll try and answer these questions from the standpoint of ALTEN.

For the actual first half result, our growth has been quite sharp, 17.5%, 12% organic growth, and the 5% difference means 4% of external growth and 1% of ForEx impact. It's not a homogenous growth when you compare France and the international market because there is no external growth in France. We don't need to acquire new companies in France. We might identify a few targets, but they would not have a major impact on our revenue when it's 200 or 300 people with a small impact. It will not be visible in France. We only aim for external growth in the international market to reach an international size where we want to settle down our business model. And as you see, our international growth, because of this external growth, reaches 21%, for an organic of 12% -- organic growth, 12%. Now the operating profit on activity has -- accounts for 9% of our revenue. Bruno will further detail these figures.

Now to put it in a nutshell, comparing with a 9.3% in the first half 2018, there were 2 offset effects: 1 business day -- minus 1 business day, 65% of operating profit on activity, it's rather homogenous; and an improvement of our negotiation processes and margins, 0.3%. This is not so common because this is -- we've experienced rather the opposite over the last years. So 0.3% difference. This is therefore giving you an idea of what is going to happen in the next half year and in the forthcoming year as there won't be such a business day impact. And so it gives us some signs for the second half of 2019 and the early 2020.

We have a head count of 35,500 employees. And at the end of this presentation, I will give you an update on our 3-year strategic plan. So this is the geographic breakdown and the distribution of our head count, our engineers. Now because of the offshoring, which is on the rise, the demand for which is on the rise in the U.S. and in Europe does not actually match the number of projects, as you see that we have 1,640 engineers in North America as opposed to 1,460 last year. But as to the number of projects generated, you have to add 700 engineers because we have 700 engineers in India who are working for the U.S. market, and we will also have to revise the figures for the Asian continent.

In France, we have 11,500 (sic) [11,510] engineers, but we generate work for more than 12,500 engineers because we have, for Airbus, for the automotive industry, we have engineers in Morocco and in India working for the French market as well as in Romania, but that's in Europe. And then you have 13,000 engineers for the rest of Europe with growth rates which were quite satisfactory for the 4 regions where we are present, that is the North America, France, the Rest of Europe and Asia.

Now there is one thing I'd like to say about Europe. Offshoring now accounts for 1,500 people to be compared with 24,000 engineers working in Europe. So that's only 7% to 8%. It's a trend because there is a demand, but it's not because the demand is there that it should be overexaggerated. I know that when I have face-to-face interviews with you, people are asking whether everything is going to India or other places. But this 1,500 will be 3,000 engineers 4 years from now. That will be 15%. So part of the revenue and project growth will be driven by engineers who are not based in France, and that's something I really regret and I think it is not acceptable. And we should try -- and our government should make sure that this does not happen because the savings are not that significant. It's just the purchasers' strategy to make you believe that you're making savings, but offshoring doesn't have such a significant impact on savings.

In the U.S., there are Indian companies who are 100% offshoring companies with 10,000 engineers and virtually no local base in the U.S. except for a front office. We try to strike a balance between local engineers and local activity in the U.S. And strangely enough, this is what is happening in India. We have more engineers working in India for the local market than for the offshore market. We thought that India would only be a source of offshore skills capacity, but the local market is big. And when a company sets an offshoring business in Morocco, in Romania or India, very quickly, this business is no longer an offshore but rather an R&D local company or even a local client. It's no longer considered as an offshoring company because the decision-makers are locals. So all this to comment on this world map and try and clarify our geographic positioning and the distribution of ALTEN's engineers. So sharp growth everywhere.

You have been used to watch this slide, and I will make it even more complex now. We have a kind of build of levels for the different types of offers and the added value to our client. When it's interim, freelance and what we call staffing, we don't want to work here on this market. It's an interesting market. Many companies have tens of thousands of people working this way, but ALTEN has always positioned itself with a high added value, particularly in HR, recruitment, the occupancy rates of our engineers. We pay for the downtime. We pay for the training of our consultants. We provide support in HR, and that's why we recruit engineers. We define a career development plan. We're not perfect, but it is our objective.

So level 1, the freelancers, the umbrella companies, it's 5% to 18% gross margin. That's the business model of precarious interim umbrella companies with less than 10% of SG&A. Otherwise, they would lose money. So structurally, it's not interesting from the HR standpoint. There is no long-term contract for the employees, for instance. This would be only project-based contracts or interim-based contracts, while on the international markets such as the U.S. and the U.K., there are many freelancers. And we're not -- we don't want to be present on this market, and we have reviewed a series of cases recently in countries such as the U.K. and North America, where for these reasons, we've decided not to bid for such contracts.

Level 2 is consulting, technical assistance with a very high added value with this HR component that I just explained, training our engineers, providing them with a career development plan, with a turnover of 25%. We are 27% at the moment, and we want to keep those engineers. This is where our client will understand and be aware of our added value, and this will generate 25% to 35% of gross margin. It's up to us to better control our SG&A so that it will be below 20%, and therefore, generate an operating profit which will be above 10%. In this 25% to 35%, I'm talking about potential gross margin figures, of course. You have the bench between 2 contracts, the gap between contracts, which could be 15%. And you will understand that based on SG&A and contract gaps, we may lose some money, just like we can make another 10% if we are good at managing the downtime between 2 contracts and the occupancy rate of our engineers. That's level 2.

There could be another level between 2 and 3, which would be 2-plus. That is consulting in high-level expertise services. In this level 2, you have 2 occupations, I would say: young engineers, less than 6 years experience; junior engineers who are running projects with teams of 10% to 20% that we manage or that -- a project that is managed by the customer and the expertise in consulting services that you will find with consultancy firms, companies such as Accenture and others. ALTEN is not present there because it's an HR-type of management that is completely different from us, and the average age is very different.

When it comes to technical assistance and the running of IT or technical projects, the average age, it's 30, 35 years old. At ALTEN, it's 29. 50% of our engineers recruited are junior engineers, so graduated engineers, and engineers who have 2, 3 to 4 years' experience. And other companies will hire other profiles of engineers, such as Accenture, for instance, who will be providing consulting and expertise services. This is -- these are experts whose average age is above 40 and where the business and HR models are completely different. You will easily understand that ALTEN and these consultancy firms have a different business model and a different HR management model.

Now once you have leveraged on these expertise profiles, these are not ALTEN. These are solutions that they have provided. We have 5 specialized affiliates in Agile methods, in training, which will not be under the ALTEN brand name. And these are specialty companies, and they account for less than 20% of our revenue. The core business of ALTEN, young engineers, project type of management, is 80% of our business. So Level 2, for consulting/technical assistance.

And Level 3, that's when we run the whole projects and we organize the whole logistics and the technical management. We provide a whole package, a work package as it is called. As you've have seen on the previous slide, some 60% of our engineers are managed by the technical management team of ALTEN, and 40% are providing technical assistance. So 40% technical assistance and 60% work packages. This is what you see on the right-hand column.

Level 2 at ALTEN is technical assistance by unit or multiengineers. So that's a quality project, index 1 and 2, or work packages depending on the risk level. And the specialty risk, it's IQP 3, 4, 5; 5 being the fixed-price projects with the highest risks. So we are present on 2 and 3.

And then you have engineering services going to 4, editors who are developing a product and have 10 years to send it, and they're working on IPs and CapEx. The semi-industrial engineering services, where we have in Germany EDAG, Bertrandt, have huge CapEx and have invested in huge amounts in equipment and resources. 30% to 60% of their revenue is CapEx, like Bertrandt. EUR 60 million of CapEx for a turnover revenue of EUR 1 billion. We're talking of EUR 40 million at ALTEN for a technical platforms or technical bases. We do not invest in tools, in test bench, in control benches, et cetera. We run projects and we invest in the organization and the deliverable quality.

We don't go into a Level 4. We've had a debate with Altran. When they bought companies in the U.S., they said. "We are into IP. We're going into CapEx, et cetera." And we've always said we would never go for it. I don't know whether they'll go for it or not, but it's none my business. This is explaining the 1, 2, 3 and 4.

And then you have the 3-plus level. This is what we call BPO, business process outsourcing. Huge work packages where there's a full function of the company where -- complete CRM, complete maintenance project with thousands of engineers with the working done -- the support done in France and then some outsourcing in India. That's Atos or others. ALTEN doesn't do that. We are in research and design or studies and design. Airbus is not going to de-locate the design of an aircraft. Sometimes, the prototyping in the automotive sector can be done. It's done by some German carmakers to engineer companies with CapEx, but we are not in the BPO.

So this leads me to the following slide presenting the 4 segments. It's a new type of slide. So here, you have a split between the engineering world and the world of services. So you have what we sell in blue and then what's taken on the internal budget, the firm, in yellow. Before, we used to have all that on a V-shaped cycle, but we decided this is a clear way of presenting our results.

So when -- with the services, you have the design phase, the first branch of the V cycle: budgeting, prequalification, expertise, work and the rest of it. And then you have the other part, manufacturing, process, engineering, delivery and technical support to the customer, that's the second branch of the V-shaped cycle. Historically, ALTEN has been present and operating more in engineering and services sold. So first or second degree, we're still under the pressure of the customers because the sales will condition our expenditures in R&D. And on the darker part here, outsourced engineering, what's called designing in English, so that's the bulk of ALTEN's activity.

Now in light blue, that's interesting historically. ALTEN, 5 years ago, was not at all working on that field. We were not present in the plants. We have lots of little firms, but for Factory 2.0, that's another kettle of fish. And in weaker organization, you have companies doing logistics or consulting for manufacturing organizations, such as Accenture again. And talking about BPO, they handle very big projects and they provide support to their customers for designing and manufacturing, production and the rest of it. But they never work in the world of the factory itself and the shop floor, where you have all the production facilities.

Now factories, plants are becoming Plant 4.0. Plants and factories are becoming digitalized, so we use young engineers to work on that. We do lots of robotization, IoT, and we transform the factories into big system project. You see less and less machines and you need less and less physical presence. So it's mainly the work of engineers, when in the past, there was a good balance between blue collars and white collars. We met with pretty nice successes with our clients over the last 5 years in the automotive sector, Renault and PSA; as well as the air industry, Airbus and the rest of it.

And we're beginning to be present in that second lighter blue rectangles, industrial process and manufacturing engineering. We hire more than 1,000 engineers working on that, and we got lots of projects against some competitors who had been historically present in that field. Now everybody is looking at that Plant 4.0 transformation: Capgemini coming from the yellow part, BPO, software packages and the rest. Accenture as well that operates in this field, even though they're not really in the arena proper because they are incapable of setting up engineer teams for technical projects and paid by the day. For them, EUR 1,000 a day is not expensive when, for us, it's a very good price because we tend to bill EUR 500. So they're going to have problems redeploying their population, and also they're not really capable at managing productivity.

Now those are the fundamental keys to understand today's market. So many things are happening around the world of engineering and Plant 4.0. Altran was bought by CAP because that's the activity they want to target precisely, and they want to convince their clients to entrust them with big BPOs, and they'll handle the whole logistics, industrial engineering processes. Everything is becoming digitalized and everything is becoming bigger and bigger systems. Now this doesn't affect us much, nor does it Altran because we don't work so much on that plane but more on the left part, engineering and R&D, where there are nice growth prospects. And we'll see whether we'll land on a BPO mode or design consultancy and managing project teams of 400, 500 people. So that were the challenges for the 4, 5 years to come. Of course, there are also noncommercial or nontechnical aspects, but I won't touch on that.

Now on the yellow part of the graph -- of this slide, you have 2 types of requirements: the need to develop software packages and internal information systems, that's for staff management; the pay bill and the rest of it HR mainly or financial management, billing, accounting or even customer management -- customer relation management. SIRH pay packet, that's BPO. It's all outsourced with a big part working in India for support. Very little specific development is required in that field.

Now regarding financing and accounting, they'll go for package -- I mean software packages and for companies such as ALTEN and for engineering companies because they have to design specific apps for sales and customer marketing, web marketing and the rest of it that requires lots of ad hoc specific developments because the standard products sold by vendors are not sufficient to meet their specific needs of the clients. You know at ALTEN, we have to revise our CRM every year and we have to do lots of specific developments because we cannot find a product off the shelf that will meet our needs. So we have to design very specific software packages. That's close to what we do in engineering and outsourced R&D. You have work packages, 50, 60 people working on it, and you develop ad hoc apps. So that's what you have in the dark yellow rectangles. And you find lots of engineering company, while the big IT companies are going more for BPO-type of work.

The same for networks, infrastructures. Atos, for example, would offer global solutions, but when it comes to giving support to the client for their architecture, then they turn to people with a greater technical knowledge and who are familiar with the networks. And we're good at that at ALTEN, particularly since we worked with 4G operators.

Now I told you a bit about our strategy earlier, and so where will be the main thrusts for our growth or development? And the axis of our research, of course, will continue pushing on engineering. Outsourced R&D, we're leaders, and it's very difficult to find similar companies with 2,000, 3,000 people. In the engineering and process world, it's going to be a jungle. R&D and process engineering are supposed to have merged. Well, there will be an overlap of 25%, but it's 2 different occupations altogether and you have the integrated vision of what's happening in the 2 worlds between design and manufacturing. Then you have IS software for engineering, internal networks. You have digital engineers -- I mean engineers working in digital technology because everyone goes for that. We've always worked on digital technologies, of course, and we're going to push that further and spread it to other sectors.

Now this is the breakdown of our revenue by sector, by domain. Despite the warnings we've had on the fact that the automotive sector is slowing down, still, it is thanks to the automobile industry that we did well. 25% of our business is the automotive sector. Actually, it's 21%, but we add [what's] railway tracks and the Navy. We had a big contract in Australia, and there's lots of investment in the rail track infrastructures.

Big changes happening in the automotive world. 15 years ago, ALTEN wouldn't have bet on that. And ALTEN is not positioned on everything dealing with powertrain design and mechanical design. We used to work on that but with more on test engineering and powertrain qualification, but not powertrain manufacturing. So now the designing of traditional powertrains, well, that's really going down. But we were not that much impacted neither in Germany because we were not strongly positioned on that slot. Now we are pretty well positioned for real-time embedded software. That's been our positioning since the very beginning. We used to use that with the telco operators, and we shifted all that to the automotive sector. So we're well positioned with a slight shift towards process manufacturing. I touched on that earlier. So given what we're seeing, we cannot have the same hopes of beautiful growth for the years to come. It will not be stupendous but it will be safe and sure growth.

Now the aerospace sector. You have comments further down in the presentation on each sector of activity. Regarding the aerospace sector as well as Defense & Security, lots of investment, lots of CapEx. Things are moving on that front. And there is a speeding up of requirements. Airbus needs plus 1,000 engineerings just to work on process engineering. And for Defense & Security, big budgets also are being poured into that, the drone technology, safety and security systems and the rest of it. We have pretty good visibility, and we have total peace of mind on that.

And the light blue, the rest of the industry here on the pie chart. We split that, but it all comes in the same package. You see some segments that are weighing more and that we're highlighting. Life Science, nearly 7% of our revenue. BI, data science, clinical trials, pharmaceutical certification, traceability, quality, methodology. So both in the pharmaceutical world and in the manufacturing world, they need more and more logistics and ad hoc developments, or big pharmaceutical companies like Sanofi, so Life Science within France, or with GSK in Belgium. And we'll address -- we'll turn to Bayer, or BAUSCH in Germany, Bayer in Switzerland. We already did. But there is no other major actor in that sector, but good hopes for beneficial development.

Now Energy, we have a subsidiary that's not called ALTEN for reasons I explained earlier. These are engineers or platform leaders who were based in the U.K. They're sending them out throughout the world. There is a drop in oil and gas, but there is a shift to other platforms like the Navy or railroad tracks. We've got lots of set projects. That's why our revenue in the U.K. -- well, actually, the activity in the U.K. is going up. Now so Energy, by and large, we do not see huge development prospects there because we are not massively present in renewables in particular. We work mainly on energy distribution and on the decommissioning and dismantling or designing of new nuclear power plants.

Regarding the media and telecom, we are remaining pretty much flat for the time being, but we expect much more development on 5G technology. Lots of money is being invested. We were wondering if all the installations would have to be changed with the operators or should we just upgrade the legacy from 4G. But we can plan on big investment, big CapEx. But it's been dragging a bit slow and -- but we hope to take off with the media and telco.

And then services -- retail and services, banking insurance, public sector. We have 20% of 30,000 engineers working on that domain. That means 6,000 engineers. Quite a lot. But our positioning is designing and consulting, not IT, products or BPOs or licensing. We have lots of field to conquer still in that sector, and I do believe we'll do better than the general growth rate of ALTEN Group as a whole because we have lots of possibilities when it comes to migrating towards digital technology and our customers love to use ALTEN for that.

So so far, so good for the market distribution. You will find on the following slides more details about what I've just said for each market segment with a few comment for automotive, railway, naval, defense and the other sectors, the other market segments.

Now regarding our external growth policy. As usual, since we have invested in external growth, that is 2003, the biggest company we've ever bought was 350 people. There was one in Sweden and another one in India and maybe one in Spain as well. So usually, we target companies with a range of 80 to 200 people. Our strategy is to speed up and accelerate and grow to reach a critical size in each country by including companies in a business that is able to acquire and consolidate and integrate these companies in the existing ALTEN business model. It's very important if there were to be a big company such as a big one with 5,000 to 10,000 consultants company in Germany -- well, we only have 3,000 in Germany at the moment -- it would take ages to consolidate and integrate them because we would have not to work on the other customers and the engineering activity itself. But it's the recruitment, the technical project delivery policies and strategies, which would have to be bought in by -- and taken up by the employees. And we're not the only ones organized this way, and this does also explain our good performance level.

But all ALTEN engineers do report to the head of their agencies. They do not report to the technical department management. It seems to be simple as -- like this, but it's very important so that the technical department is made of heads of projects -- technical project leaders whom we've trained but who are not involved in recruiting and providing the management of engineers. Their only concern is to manage technical teams, win contracts and to deliver the contracts on time with the right margins to our customers. And they do work for us as if they were internal customers. The business units offer these engineers to the technical divisions, and the technical division will hand back the engineers to the business unit once the project is finished or completed so that there is not an endless allocation of one engineer in a technical project. And this is why our customers are calling us.

So there is a mobility of engineers from one project to the next, and it helps to reduce the downtime between contracts for our engineers. We are at 92% occupancy rate for the engineers. So this model is never something that we've observed in the companies we've acquired. It's always the technical division that is in charge of the HR management of the engineers. That makes a big cultural difference, and the heads of agencies recruit and manage our engineers. In our work package model, it changes everything. And changing this in the company culture, in the corporate culture is a watershed. And this is companies where the power of the business unit is not in the hands of the same people, and it's difficult to find companies of a significant size with a model that can be integrated in our business model.

In the past, we've bought companies with 150 people in BI or Life Sciences. For instance, 4 years ago, those companies had the same model, and it took us 2 years to integrate 200 people. And we've lost other technical people because they were frustrated because they didn't have the HR management for all their teams of consultants. And this is what we're going through, and this is why also we are not aiming for big targets, big acquisitions because we don't want to end up with a confrontation and conflicts in corporate and HR cultures.

So we've bought 2 companies in Germany, 250 consultants. We've bought a small one in Spain. In the U.K., 170 consultants. You seldom find in the U.K. companies where the ALTEN model is comparable. You will never find a company with more than 200 people. This one is a specialized consultancy firm. It's pretty much involved in the Industry 4.0 transformation. And by the way, in the U.K., excluding oil and gas, which is an umbrella company for an international business -- excluding oil and gas, we had virtually no engineers 7 to 8 years ago in the U.K. And now we will have some 1,000 engineers within the ALTEN model without resorting to freelancers and by selling work packages. And this company comes as a complement.

We bought also a small company in Denmark, which is of interest because it provides us with references in Life Sciences because they are big decision-makers, where the business is not located in Denmark; and a company in India, which helps to reinforce our positioning in the design of microelectronics and microchips, where more than 500 people will be working for us with the price conditions that are not comparable to that of others. And for the U.S., our annual revenue is EUR 11 million, and we have 1 business which we're going to reinforce our capacities in what we call Agile methods. This will help us to reach the critical size between 1,500 and 2,000 engineers per country. Some countries already have more than 3,000 engineers like Germany, India, Spain. Other countries are close to this 300 threshold. North America is close to 2,000, but if I were to include other projects carried out by our Indian engineers, it's indeed close to 3,000. And that's organic growth with add-ons helping to boost the growth. So that was for my part of the presentation.

As for the shareholder base, it hasn't changed for several years. I have gone from 15.01% to 14.99% of the shareholding structure because since 2016, we have introduced a program of free shares based on performance levels to be achieved by the employees and the heads of agencies and heads of department in the ALTEN Group so that when this is lifted, it leads to a dilution of the shareholding base.

And now I'll give the word -- the floor, sorry, to Bruno, who's going to give you more details about the financial aspects of these half year results.

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Bruno Benoliel, Alten SA - Deputy CEO [2]

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Good morning. I'd like to use this slide as an introduction reflecting the growth of our group since its inception, mainly based on our steady organic growth, reinforced by the regular acquisitions that are made on the international markets. This does account for the increasing share of the international market increasing faster than the French growth rate and the 60% revenue goal outside France by 2021 should be reached.

And in line with our revenue, the head count has increased also with 35,500 engineers. You see that engineers still account for 88% of our total head count and that's a ratio which has remained stable for the last 10 years. 20 years ago, that was 14%, and today, the non-engineer staff is only 12%. This is reflecting our capacity to control and master the various support function, SG&A for instance, so the so-called nonproductive functions are well-controlled. This slide -- bar chart is also showing the share of the international staff. This is reflecting 2 things. First of all, that our mix has changed, that we've grown in geographic areas where the turnover revenue per person is lower, like in Asia, for instance, and that the ex-shore -- or offshoring activities of ALTEN have grown over the last years.

Now if we compare the end of 2018 and our first half year, you see that we've gone from -- by 1,600 engineers, 1,180 people in organic way, 260 in France, 920 outside France; 420 engineers have joined the group through acquisitions on the international market in this first half.

In France, the staff growth has slowed down at the end of the second quarter, as I explained for those who have attended the conference call at the end of July, because we have a higher number of people who left at the end of May and June, while the engineers had slowed down, the recruitment in the second quarter because many big projects were coming to a completion date and so there were fewer contracts. Like in 2017, the net recruitment should speed up again in September and in October.

Outside France, our head count has grown in Europe, plus 280; 120 in the U.S.; 120 in Morocco; and plus 400 in Asia.

In the ex-shore centers, today we have some 2,300 people who are dedicating their work to the internal activities of the group. Those people are mainly to be found in India, Morocco and Eastern Europe, and that's almost exclusively Romania for Eastern Europe.

This is a summary slide reflecting the half-year growth rate. So plus 12.5% organic growth, 11.7% in the international. And this organic growth has accounted for 75% of our total growth because of our business outside of the Eurozone, close to 30%. We have a ForEx impact, which has increased the revenue, EUR 7.7 million, so that's 0.7% of our revenue. In France, the growth is 13.4%. I haven't seen any specific slide for France because organic growth -- total growth is the same. There is no ForEx impact, of course. All segments have grown, the most dynamic being the Aerospace, plus 18% for this half year, thanks mainly to the Airbus group for the aircraft and helicopter and also for OEMs. It's important to note because, usually, OEMs have a slower growth rate than the actual aircraft maker. Life Sciences have also increased significantly in France with the pharma industry. The energy sector or nuclear has grown also significantly, plus 20%. Oil and gas has renewed with growth, plus 10% and our business has grown with all customers, except for Total.

Growth in France is also buoyant in naval and railway, 20% Defense & Security -- plus 20%. And the Automotive sector, where the growth has accelerated in the second quarter, is still slower than the average growth. It's only 7% growth rate, mainly driven by the carmakers, including PSA. But for OEMs, it went rather down. So all in all in France, the performance is rather good, maybe with a slowdown for the Automotive sector.

The growth rate for the international market, it's above 20%. Quite buoyant even though the organic growth is close to 12%. For the first time, it is less than the actual growth in France, and the acquisitions are still accounting for 40% of the growth outside France. And as we'll see on the following slide, it's pretty heterogeneous depending on the geographic areas.

You have here the trend of organic growth for the first and second quarters. You see that the pace is different, whether you are in France or the international markets, it has gone up with embedded growth, while in the international market, it went down slightly in the second quarter. These 2 quarters also have met a negative impact as the number of business days. We've lost 1 business day in the year -- half day. With a constant number of business days, we should have had a 13.2% growth in this first half. The occupancy rate is 91.9%. It was 92.1% last year. So a slight, very slight decrease, which did have a very slight impact on the margins.

Now per country. France, as I've said -- has already been explained. North America, organic growth is high, 17%. Just like in 2018, those market segments that have different growth are the Automotive sector, plus 30%, both for the carmakers and the OEMs; energy, with a sharp increase in engineering and consulting services, PMO or the agile consulting services; Life Sciences with the pharma sector and medical devices; and the tertiary sector.

In Germany, we'll talk about it again later. It's more complicated than elsewhere with a 4.5% growth rate. We've renewed with organic growth at the end of 2018 and in the first half 2019 with a growth which was achieved mainly in the Automotive sector, plus 5%, thanks to OEMs because it's more difficult with the carmakers, and 5% in the Aerospace. Our Tech Doc business, which struggled last year, this did have an impact on the growth rate, and the performance in Germany has stabilized in this first half, so no impact.

Scandinavia, that's Sweden and Finland. Finland accounts for 20% of the turnover -- revenue in this area with a 13% growth rate in the tool machining sector. Sweden, 5% of this market, 18% growth rate, mainly driven by the telcos and a diversification in industrial equipment, plus 40%. But the most important sector with trucks and automotive has slowed down and growth is slightly below 10% in Spain.

The growth rate has slowed down in this second half with 1 business day fewer; plus 8%, nevertheless, for this first half, mainly driven by defense. All the other sectors have also gone up, but the growth rate is only ranging between 4% to 8%.

Italy, quite satisfactory. Significant growth, both in terms of revenue and overall performance. The growth rate is 20% in spite of 1 business day fewer, mainly driven by defense, space, the banking sector, tertiary sector and the industry.

Asia Pacific, that's mainly India and China, for local markets because the revenue of offshore is included in the front office countries. So for this Asia Pacific, the significant growth in China for the automotive, electronic and aeronautics and electronics, finance in India for the local markets.

U.K., a significant growth as well with oil and gas, but it's not addressing the U.K. market specifically. Now if we were to restate, you will have a growth rate of more than 20% if we were to include oil and gas, but it's mainly in the nuclear sector because we're present on EPR project. And the Aerospace has grown significantly, more than 20%. The tertiary finance sector has gone down, has decreased by more than 10% because of Brexit. The Netherlands, 10% as well, same sectors: electronics, multimedia, tertiary finance and industry.

And Belgium, the -- it has a stabilized after a slowdown in the first quarter because there was a completion of a major project in the finance sector. This is explaining why the first half is rather stagnating. So that's for the first half condensed income statement. The operating profit has decreased because of the 1 fewer business day and an activity rate which was slightly lower.

The tariffs -- our prices have gone up with several customers in France and on the international market, this has helped to improve our gross margin by 25 bps and our SG&A has decreased by 10 bps as a proportion of the revenues. So the operating profit is rather good, the payment of shares.

Now for the new projection, which will be EUR 4.5 million next year, so it will be certainly more than EUR 4 million, depending on what would be allocated for the nonrecurring profit. It's EUR 1 million due to the acquisitions and the structuring costs and the cost of the contribution and tax controls. So we are standing at EUR 108 million, plus 8% of the revenue. The financial income is EUR 0.1 million, EUR 34.9 million for the corporate tax, now that's 31%. It was 28.6% corporate tax percentage last year. It has increased because, as you know, in France, the CICE is now taxed. So we have to give back 1/3 to the French state. So it did have an impact on our corporate tax because France is the main driver of our revenue.

Now to anticipate a future question, we have a 30% average rate -- 30% -- 30.5% average rate for the year.

Now the net income and EMCs and minority interest, we are standing at EUR 76.4 million, that's plus 1.9% of the revenue. I didn't talk about the impact -- about IFRS 16 impact. It is certainly not significant on our income statement.

Now the financial income. The EUR 0.1 million of income. Now this is a breakdown. The financial debt, EUR 0.4 million, minus EUR 0.4 million. Our debt is very low. We have to finance our working capital requirements. So the cost is very low. Interest on lease contracts. So that's the enforcement of IFRS 16. This is theoretical. So it doesn't match an actual charge or an expense, so that's minus EUR 8 million. The exchange is -- foreign exchange impact is positive. And the other financial income will be due to the discounts of I&C flows. So that is provisions for pensions and earnouts calculations and some interests in dividends in companies where we are minority shareholders.

Now per geographic -- per region. Now between France -- comparing France and international, it's 9.9% of -- in France, in spite of 1 business day minus. Thanks to the improvement of the gross margin, 30 bps in France of the brands with increase of our prices, as I explained. And in France as well, the SG&A decrease, that's 25 basis points this half year. For international markets, the margin has decreased slightly, by 40, from 8.8 to 8.4 in spite of a fewer -- 1 business day fewer. But all in all, the performance is not as good as in France. So the profitability will vary from one region to the next, as you will easily understand.

In North America, the operating margin has been impacted by the productivity demand on Automotive sector. It's down, but it's still 7%. In Germany, the situation is still difficult, even more when you have only 122 business days in Germany. The inter-contract time or the downtime between contracts is structurally higher in Germany in the first half than in other countries. There are still pressure on the prices, as you heard from our competitors as well, and we have made an effort on our business development. So the first half in Germany, it's less than 5%, but it should increase in the second half because the downtime between contracts will be lower and we only have 120 business days.

In Sweden, our operating margin is below 8%. So the Swedes have worked 118 days. And the price pressure in the Automotive sector is also high with a margin which will be higher in the second half in Sweden.

In Spain, calendar impact of minus 2 business days. It was only impacted by the number of business days, with a margin which is still above 7%. And finally, in Italy, Belgium and The Netherlands, the operating margin is still very high because it is still standing above 12%.

Now our financial structure, you're familiar with that slide. We take into account the shifting to IFRS 16. Our current assets are mainly made up of the goodwill, underpriced because of acquisitions and the right of lease utilization for EUR 135 million. Current assets are mainly made of the customer accounts.

On the liabilities side, our shareholders' equity still accounts for more than half of our total balance. Then you have the noncurrent assets or current assets, EUR 26.2 million at the end of '18. That has moved the lease debt, including IFRS 16, is accounted for in the current and noncurrent liabilities. We've identified it, EUR 137 million in total or net position is negative, but only by EUR 18 million. And the gearing is at EUR 1.7 million -- 1.7%, sorry.

Now the change in our net cash position. How did we go from the EUR 12 million in cash at the end of December to minus EUR 18 million at the end of June? Our free cash flow, EUR 4.6 million, very satisfying for the first half because the seasonality effect is strong. It was impacted by our organic growth. So I'll come back to that, but it increased by 500%, nearly, compared with last year because the WCR, working capital requirements, didn't increase that much.

We have the incidents of IFRS 16. Cash flow is up by EUR 22 million, slight impact on working capital requirements and in calculating the free cash flow. We took into account the IFRS impact, up to minus EUR 22.1 million. But the incidents ends up being neutral so that we can compare with our operational performance in 2018.

Financial investment, EUR 4.5 million. That's for warranty and lending to related companies. We also paid on our acquisitions the earnouts for EUR 42.1 million. That's the price of the companies we acquired and their equity.

Dividends, EUR 1 per share. And the other financial flows are negligible. Now let us zoom in on our free cash flow. I mentioned that the free cash flow comparison between first half of '18 and '19 and the free cash flow in our business, given the strong seasonality effect, it should be looked at on 12 sliding months, that's why you have the year '18 and 12 months on the right. And then you have the 2 semesters on the other side for comparison purposes. What I call operational cash flow, that's what measures operational performance before taking into account IFRS 16 standard. Now this operational cash flow is 9.5% of our turnover, of our revenue, markedly up compared with last year. And of course, it is proportional with the increase in our operating result profit. It would be EUR 145.9 million if we took into account the IFRS 16.

Of course, we had to pay taxes on that, change in WCR, EUR 27.9 million and flows from lease debt, EUR 22.1 million, that's a theoretical flow, though, but it corresponds to the depreciation and amortization you have in the cash flow above. So IFRS 16 is neutral here.

Working capital requirements this first half of the year, 2019, is pretty big, EUR 30 million, yet, it's markedly lower than what we used last year despite a pretty high organic growth this semester, which does require lots of cash. But as you also know, we have to look at the overall results at the end of the next -- following semester and not year-on-year. Therefore, the impact is less than last year because our sequential organic growth is slightly lower.

So I rationalized, streamlined the evolution, the change in working capital requirements so you can understand what happened. Our DSO has gone up between June and December. It used to be at 93 days at the end of December '18, now it's 97 at the end of June 2019, 97 days. That increase is a seasonal increase. Last year, at the same time, we had 98 days. So we've gained 1 day as it were, and this increase in DSO of course, contributed naturally to increase our customer count.

So schematically, the modeling of the change in WCR is as follows. The increase in DSO gave us plus EUR 32 million. Organic growth increased it by EUR 28 million in turn. Conversely, our debts and credits have gone down by EUR 10 million because of the CICE, that special scheme, that's a tax break. Social debt up by EUR 21 million. Social contributions, paid leave, suppliers' debt up by EUR 4 million. It's logical because our business went up. And the other debts increased by EUR 2 million. So in total, our working capital requirement increased only by EUR 21 million this first half.

CapEx, EUR 8 million, less than last year, 0.6% of our revenue. In our business, it tends to be around 0.8%, 0.9%, so it's slightly leveled at -- lower than the norm, but it should be higher in the second half of the year because we've hired some new facilities in Boulogne for all our sales and marketing activities, so the investment in the second half will go for the CapEx there.

Free cash flow, EUR 58.9 million. That is 4.6% of our revenue. On a constant scope, without the effect of organic growth, it would have been around 7%, which is the norm, as I told you.

You have all the details summarized on the following slide. Now let us zoom in on IFRS 16. ALTEN decided to apply the so-called transition period on 2019 alone. We didn't restate 2018. The incidents on our balance sheet, Benoit, tell me if I'm wrong, but assets, rights of use for EUR 135.2 million, the cancellation of the finance lease, which is now under IAS 17. We used to account that as a debt, whereas today, we call it a lease. Marginal impact on deferred tax. So we inflated our revenue to EUR 133.8 million on the side of liabilities, the impact on the result is negligible. Lease debt, EUR 137.7 million symmetrically. We canceled the debt on everything coming from IAS 17, so we have to cancel the equivalent like the rent deductibles by EUR 2 million. So our liabilities also increased to EUR 133.8 million. The incidents in the income statement is low, particularly on the P&L. Financial result, EUR 0.7 million. Impact on net results, EUR 0.2 million, so it's certainly negligible.

The cash flow statement, you've seen that already. We've got the inflation for the theoretical depreciation in those assets, plus EUR 22.8 million; WCR, minus EUR 0.7 million; flows from lease debts, minus EUR 22.1 million, total no impact on our free cash flow. No impact on the CFS or the group net cash position. And the lease debts, the breakdown, EUR 138 million, 48% real estate -- 85% real estate, 13% for vehicles and 2% for others.

In summary, before handing the mic back to Simon Azoulay, this half, we've seen our business grow sharply, thanks to great organic growth, satisfactory operating margin despite a negative calendar effect, hence penalizing profit, excellent control of WCR despite a negative seasonal effect. Our free cash flow is not far from 5% of the revenue and if we don't make any significant acquisition, our free cash flow should be in excess at the end of 2019. And I hand over to Simon, and I'll be glad to take your questions at the end of the presentation.

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Simon Azoulay, Alten SA - Chairman & CEO [3]

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Thanks, Bruno. So just to open up the prospects of what will happen in 2019, well what's left of it, until 2021, I'll explain how we intend to reach our targets or objectives. Our positioning is still extremely clear and both for our external growth, growth in size or organizational growth, it's all very clear. I've shown you 2 slides where I explained the V-shaped cycle and our positioning and our level of offering at Level 2 and 3 and not 1 and 4. But it goes beyond that, as I explained, it affects the corporate organizational model. Beefing up, strengthening up our leadership in design and engineering design, ALTEN will become the first major actor, player, almost equivalent to Altran. And if we include only designing and engineering, we are ahead of Altran and behind us, well, not too many people.

We know this business is still growing and as long as we stick to our positioning, teams of young engineers properly managed, we have a great potential. We're going to attack 2 segments stronger in process engineerings and the Plant 4.0 and IT services, but for the designing part and not the BPO part. So our positioning is extremely clear.

Thirdly, we choose to provide support to our customers for their globalization moves in offshoring even though it's complicated. It's quite tricky to manage. In 3 years, we'll need 1,000 to 2,000 more people between India, Morocco; why not Portugal? I think the offshoring business will go down. We dried it all out, that market. It's the case in Morocco.

So we provide support. It's a choice we make. We don't resist. I gave you the figures, 0.7%. Today, it might be 0.5%. Oh, sorry, it's 7% today. It might be 14% in 2, 3 years from now. We have to look at that and see that it's all relative. We don't know what will happen with the IQ offshoring in the U.S., it's not our strong point.

And our organic growth, it's very strong, targeted on international development. We need to find more people. We'll make announcements in the coming weeks or months. We'll calculate our quotas. We want to buy between 1,000 to 1,500 people, spread out between 10 to 12 companies. It will cost us between EUR 60 million to EUR 70 million, including the earnouts. So we stick to that size, that volume, while keeping an eye on good surprises, we expect, like the acquisition, like bigger acquisitions, we want to access the critical size in a number of countries and reach 60 -- above 60% in the international business.

Now this is a bit of our history. During 12 years since we were created until the LPO in 1999, no external acquisitions, slow organic growth. Between 2001 and 2018, for a growth of 6,000 engineers, 22,000 inorganic, 7,600 through acquisitions, it's pretty well-balanced, 2 for 1. So the growth in 2019, 8,400 inorganic and 4,000 acquired, mainly in the international world. And we have full confidence we should exceed 42,000 engineers by December 2021. That is the target.

I don't know whether you've seen what's going to happen between -- or the phasing between the first half of the year and the second half. Bruno touched on that. By and large, for the last 3 years, in the first semester, we catch up the calendar effect of New Year's Eve. We have to catch up in January, February, usually in March, we caught up what we had in December because lots of people resigned, there's lots of turnover at the end of the year, beginning of the new year. By June, we slightly exceed the head count we had in December and all the hiring is done mainly between September to December.

So the key for our HR and organizational strategy is to massively recruit between September and December, so that we have an embedded head count that's much higher than what we had in June at the end of the first half for the following month of January.

So you don't see that investment on the revenue of the second half, but it does have a great impact on the growth of the following year because we start up on the 1st of January with a much higher head count and then occupancy rate, that's much more satisfactory. So there is this lagging effect, of course, between H1 and H2. So we are subjected to that calendar effect in our sector. And that's the key of what will happen in 2020. We did the same. We massively recruited between September and December so as to prepare properly and start out in January with a higher head count that will bring higher organic growth. Now I'm always cautious, I always announce between 6% to 8% organic growth, now we're at 12%, 13%. So if we did our recruitment properly, you can imagine the benefits we'll reap next year. So I do confirm our targets for 2021.

Same thing with the ROA, return on assets. There were lots of outstanding exceptional effects that limited it to 9%. You can imagine what will happen in the second half, no calendar effect. The second half of the year traditionally has more working days, there were a few situations that we should not encounter again, so the ROA should revolve around 10% logically, if no mishap happens. It should be markedly above 10%. And the international business will account for 60% of our revenue. It's already done with the head count, and money-wise, it should follow suit.

Well, thank you so much for listening to this presentation, and Bruno and I will be happy to entertain any questions you might have.

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Questions and Answers

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Gregory K. Ramirez, Bryan Garnier & Co Ltd, Research Division - Analyst [1]

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Gregory Ramirez of Bryan Garnier. I'd like to go back to this 10% OPA, the ROA being the operating profit on activity. It could be higher given what happened in the first half. You registered greater productivity gains than planned but my feeling is that you're doing away with the trend you had at ALTEN, which was being close to the 10% for OPA or slightly above or below. But should we consider that except for any future acquisitions, not including that because it always dilutes the margin? Can't we hope to see that operating margin taking off a bit and not be bogged down at the level of 10%? And then this EUR 11 million company you acquired in the U.S., what's their operating margin? And what are they exactly positioned in?

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Simon Azoulay, Alten SA - Chairman & CEO [2]

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I might hand over to Bruno for that.

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Bruno Benoliel, Alten SA - Deputy CEO [3]

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Well, Simon was commentating on the second half of 2019. Yes, the second half should be above 10%. We can take that for granted, except if we have a very tough fourth quarter. For the whole year, the margin will be, of course, below 10%, and when it comes to the forecast, the group is sharply growing, and we have to gradually structure up all the countries in turn to make big HR investment and the rest of it. When it comes to the forecast, I think we have to remain cautious. And as indicated on this slide, the OPA should be the norm around 10%. Now it can be 9.7% or 6.2%. But that forecast seems pretty consistent for the years to come, except if the -- if there is a downturn in the economy, a major downturn. But do not bet on 11%, 11.5% for the years to come. It would not be reasonable. It doesn't match our organizational profit and our margin profit as we stand today. Simon Azoulay?

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Simon Azoulay, Alten SA - Chairman & CEO [4]

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Yes. And I would add that you always have some countries which are structurally, and lastingly, we have results below 10%, even though we do things that are okay there. In Spain, it will always be difficult to exceed that 10%. The market is highly competitive and also the labor laws encourage the clients to go for lower gross margins. You have -- for other reasons, you have the same situation in the U.S. Based on the new models bargained by the trade unions, the AUG in Germany, same thing. It will be difficult to reach and consolidate that 10% as long as we haven't shifted to a work package organization.

In Germany, we were hoping to reach 8% this year but we shall not. And we might get closer to that in the second half. We'll see what happens next year. So given all those reasons, even though for the -- in the other countries, structurally speaking, we could exceed 11% or even 12%, and you always have acquisitions, so there is an impact there, but we're pretty satisfied if we manage to get, by and large, 10% for the whole group, and we celebrate if we reach 10.5%. But above 11%, don't think about it, except if we decide to buy an Indian company with 25% EBIT. But it's not the choice we go for. It might be the right choice, we could discuss it, but it's certainly not group ALTEN's strategy.

So with the constant business in continuation with our business model, the OPA will always revolve around 12 -- 10%. But we might exceed that in the second half because we won't have the penalizing effects we had in the first half, and we might go back to that figure as well in 2020. That's for the operating profit.

Regarding acquisitions, it's what I told you earlier. In the U.S., we have 2 types of business, 50-50 split. Engineering business that we put in place very robustly in the automotive sector and aerospace sector to a lesser extent, we manage to work with work packages. With added value in good gross margins, we can get close to 9%, 10% but no more. Again, we also provide consultancy services in IT and in specialties, such as the agile methodology and the BI, Business Intelligence, in data science. The company we just bought will work for the -- around the agile methodology with also an EBIT slightly below 10%.

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

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Laurent Daure, Kepler Cheuvreux. Two questions I'd like to discuss again. The recruitment of engineers, I have understood that over the long run, the second half or the last quarter is very important, and there's momentum even in the second quarter, which was a bit sluggish. I have understood that some people have left, and those people were hired by your customers. Is there still a risk for you in this HR matter? And maybe you can make a general comment about how difficult it is to recruit young engineers, young graduates nowadays. And then another question about the EMCs. This did have an impact on the P&L. I see a significant decrease here.

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Simon Azoulay, Alten SA - Chairman & CEO [6]

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There was one company which was reporting a high revenue. I'd like to know what has happened. Now regarding the time line and scheduling of recruitment, we were not so much impacted by a huge wave of turnover in the second quarter as opposed to 2019. So we were a bit ahead. We had some reserve in June 2019. And it does explain -- account for the organic growth. These were embedded engineers for 2019. It was much higher than what we expected at the end of 2019. But in June 2019, we exceeded not by that much. We exceeded the head count of December 2018. But indeed, there were many people who've left, plus turnover, and also as Bruno said, people who are a bit lukewarm about the general market trends, what's going to happen? Will there be a financial crisis? Are we going to go through the 2008 episode again? So there was not so much fad in recruiting people, but we won other projects. So all in all, there was a bit of an offset. We have put all our efforts in the second half of 2019. So the difference between those engineers leaving and coming in won't be that big. It won't be 13 points of organic growth next year and unless we have good use, I would be very pleased. But I would be very cautious. As usual, it's not even 8 to 10 points. But I'll leave it up to you to imagine what's going to happen.

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Bruno Benoliel, Alten SA - Deputy CEO [7]

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Now for the EMCs and also talking about our recruitment of young engineers, I know that Laurent has talked quite often about this question of recruiting young graduates in France. As a complement to Simon's answers, you have to understand that in the automotive sector, for some projects, some are carried out by the so-called delivery centers in Morocco, not only in Morocco, also in India. But if you consider the number of projects, it's almost equivalent, except that there's a kind of shift of the activity, which was carried out in France in the past and now, there is an increase in the need for engineers in Morocco and others. So there's a kind of a revolution in the business model of this automotive sector, accounting for the changes in figures that are reported.

Now for the EMCs, the equity method companies, indeed, this was a steady growth up until this figure was significant. There are many -- 2 companies where we're minority shareholders out of the 40%, companies which were quite buoyant over the last years and one that was faced with difficulties at the end of 2018 with an income which went down in the first half of 2019, therefore, its contribution has dropped in the first half, the contribution to our income, and it will probably be the same trend in the second half. Not as significant, but the annual contribution of EMCs in 2019 will be lower than in 2018. It's not a big issue, but you remember that in the past, we had 10% of [Oozie] shares. We thought that maybe we would buy this company, many ALTEN managers went from ALTEN to Oozie , they've developed the company, but at the end of the day, the crisis was there.

We wanted to acquire international companies, and Oozie people wanted to be away from ALTEN and I will understand. And we sold our 10% and there was a capital gain we were happy with. It was not the initial objective. The initial objective was to invest in the potential future growth of this company. Here, again, there are 2 companies where we have some 30% of the shares. These were not start-ups, small buildups, more than 1,000 employees each with incomes which were quite interesting and promising. These are French companies or almost 100% French companies. No, it doesn't cost us that much to be shareholders. We've provided them with a bit of logistic support. They are more present in the world of network infrastructures and IT. Only the future will tell us. It's only a strategy for the time now. It's minority shares and sometimes it's a bit more, sometimes it's a bit less, depending on the years.

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Derric Marcon, Societe Generale Cross Asset Research - Equity Analyst [8]

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Derric from Societe Generale. I have a series of questions. I'd like to talk about the growth in France. Would it be possible to have the same growth in 2020 as in 2019 where it seems everything is so rosy in 2019 with all the market segments on the rise? Do you think that you'll have all these positive impacts at the same time in 2020 and maybe the growth rate will be more moderate? And then I will come up with my follow-on questions.

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Simon Azoulay, Alten SA - Chairman & CEO [9]

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Well, my answers as Simon Azoulay will seem be a bit strange. I'll be repeating a bit what I said earlier. It's the psychological feeling of our some 500 engineers in France. Now if the warning signs in May and June are encouraging to them, they will be receiving an incentive for recruitment. And in the first quarter of 2003 and the first half in 2009, we have -- they were always positioned on projects where the occupancy rates were quite satisfactory. Only these 2 moments were the ones where we suffered, the Q1 2003 after the internet bubble and 1 half year in 2008 -- in '09, sorry. Well, the 2008 year was the best year ever in terms of income for ALTEN.

Now the head count at the end of the year will be conditioning what is going to happen in 2020. So it's already done. It doesn't depend on the market because for our HR engineers, all our engineers are allocated to projects. So the supply is below demand, and for the last 30 years that I've been in this business, there were 2 occasions where I was really frightened, 2 specific moments. So what we have recorded over the last 3 months will be conditioning our growth rate, and I will have the figures in 6 weeks from now approximately and they will be the end of year impact, number of business day. The markets are there. We have no fears today as to have many engineers who will remain idle. There are so many calls for tender in the pipeline at the moment.

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Derric Marcon, Societe Generale Cross Asset Research - Equity Analyst [10]

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What about the size of contracts that you negotiate? You were talking about work packages earlier. The biggest one is at EUR 150 million. While you are competing with others with multiannual work packages, EUR 60 million to EUR 80 million work packages. Is it also something that you have observed, giving you more visibility than 5 years ago? Or is -- does that mean that you are not eligible for these projects because of their size?

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Simon Azoulay, Alten SA - Chairman & CEO [11]

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These are what we call the BPOs, business process outsourcing. These are complete functions to be covered, and these dual BPOs have a drawback when it comes to our business model because they integrate specialty and expertise services at the front end and supplying of tools, such as editing, like it could be done for suppressed area, for HR tools, for instance. And it requires offshore support, a significant offshore support. And sometimes, it also means the call centers, et cetera. And we will not bid for those.

So there will be 2 different worlds. So it's a bit strange to present our business this way, but there is the world of market of research and design and conception, where you rarely have more than 100 engineers. And the ones where we have more than work packages, where we have more than 100 engineers over 2 years. I'm not sure we have more than 10. Usually, it's 60 engineers for purchase, which would last for 1.5 years. And this is our strategy because these are truly design projects or specification for manufacturing for the industry. But the ADAS large-scale projects that -- there was one, the EUR 60 million project, I think, or EUR 80 million over 3 years, we're talking about design projects, we're talking about embedded electronic, we're not talking BPOs. But these projects also include a lot of CapEx, a lot of test benches and prototypes. Look at the CapEx line and the profile of the population of engineers. We will not go for those, and we are not geared to take in these type of projects, and we do have enough room to report an exceptional growth on our segments.

Now what is -- could be hindering us today is not the market or the fact that projects have EUR 60 million -- or clients have EUR 60 million project and calls for tender, but it's rather our managerial capacity, which has such that we cannot be present everywhere. That's all. And we're not concerned because we're not on these projects, but the Capgemini and Altran closing will meet outsourcing like in Accenture in manufacturing sector. For this type of projects, now if the client had split those in 15 projects -- and maybe we would have had some shares of it but we're not concerned, but we're really overwhelmed in preparing bids for the 2 calls for tender.

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Derric Marcon, Societe Generale Cross Asset Research - Equity Analyst [12]

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What about the so-called massification required by Safran, Toulouse or Rolls-Royce where they have high volume of their R&D projects with a smaller number of suppliers?

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Unidentified Company Representative, [13]

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It does make sense because there are big wins but there are big losses. Well, it's a good example, if we don't want to disclose our business information to the general public, well, those customers look at those who are listed. We are listed also as suppliers for those particular companies that you've mentioned, not for the others.

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Derric Marcon, Societe Generale Cross Asset Research - Equity Analyst [14]

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You've talked about an increase of your revenue in the international market. Will this mainly because of external growth or do you expect a change in your organic growth trends? Could you please tell us more about those regions which seem more promising to you? And then I had a question about the free cash flow. Any guidance as to what it could be looking like in the second half, the number of DSOs and their impact?

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Unidentified Company Representative, [15]

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Well, I'll try and go back a few slide in my slideshow. Well, it doesn't work. Well, all in all, the expectations we have by the end of 2021 for the 2,000 engineers with the equivalent revenue is planned without any external growth, except for the usual add-ons, that is 1,500 per year. So 4,000 people over 3 years to be recruited. And also it will be slightly less than 50% of the international growth. So all in all, in France, purely organic growth, maybe will we have a 200 consultant company. That could be interesting, like we did with the Life Sciences acquisition 4 years ago. But it won't have a significant impact on the French revenue for the international market. It will be 50%-50% or 60% organic growth and 40% external growth. But once again, let me insist on the fact that all this precludes the acquisition of a company with 1,000 consultants. If by coincidence and chance we find an interesting target of 1,000 people in Germany, of course, we'll go for it. It will not have a significant impact on the international growth of ALTEN, considering the ratios I've just explained. Well, the answer is yes for your question on the free cash flow. Fewer DSOs, and we'll improve the free cash flow. The positive impact on the first half will be preserved in the second half. The half year impact is truly to be understood when it comes to the free cash flow of ALTEN.

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Emmanuel Parot, Societe De Bourse Gilbert Dupont, Research Division - Director & Financial Analyst [16]

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Emmanuel Parot, Societe De Bourse. Two questions. First about Germany. What do you plan on doing to go back to the 8% EBITDA? What depends on you and what depends on the overall condition? And then about the gross margin, prices, increasing quicker than the increase in salaries, and you had a positive surprise regarding prices. Was that specific to certain sectors or running all across?

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Unidentified Company Representative, [17]

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Well, we've seen 2 phenomena in Germany. After digesting the transformation of the social model, that was pretty brutal for years ago, going from all technical assistance and the big shift to all work packages. Well, it was for internal reasons we had to train all our managers so that they would go and get new projects instead of just allocating jobs to our engineers. We had to do that in France as well, but we had to do that -- that changed very quickly in Germany. Many people were salaried employees, so we had to pay technical penalties and fines to get rid of them. We had to handle that big transformation. I thought it would take 3 years to go back to the margin -- the norm of our margin, which is around 10%. It does take longer, granted.

Well, you have to take into account the phenomenon that doesn't have anything to do with the creation of a new technical management, but the maturity level of our customers. Our customers have a hard time outsourcing department by department with big work packages because they work by state. They are pretty localized in each state. When you think about Munich, you may think it's big but actually Munich is made up of 6 towns or cities, different ones. You go from Heiligenstein to Langenstein, Audi, [Conti], BMW in Munich. You have 6 different cities there, and engineers don't move around much. So when you don't have the real, the actual critical mass, you cannot solve the problems of the occupancy rate of engineers. We suffered from that in 2018 and 2019.

So we have to focus on some specific towns and cities. So it's more the way we manage and if we have or not the critical size. It's not a problem with the gross margin. The gross margin is okay in Germany, above 30%, because we operate in work packages. So our EBIT should be above 10 points, but now we have to fine-tune our model. We don't have 60% of work packages and 40% technical assistance, which would give us some leeway. No, we have 100% of work packages. So we cannot adjust anything. We operate strictly and only in work packages. That change was pretty brutal, and it's the main reason. The reason is not due to the market. And when you look at the other big German players listed or not, you had 2 profit warnings. One was Bertrandt, one was EDAG on low margins, the one exceeds 10%, even the technical assistance champion not listed FERCHAU, 7,000 to 8,000 engineers, they haven't gone for work packages. They haven't made that shift. We no longer hear about them. They are bogged down in their problems of shifting the way they operate and all that. So all the players are trying to go back to restore a healthy balance to go back to that 10% margin.

Well, facially speaking, nominally speaking, the gross margin is pretty good and work packages, we can reach 10%, 11% EBIT, but no one manages to reach that because the market is being reshuffled and is reorganizing geographically and technically as well.

We'll take one last question at the back of the room.

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Unidentified Analyst, [18]

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Yes. I'd like to understand your logic when you say that the market early 2020 will be as good as in the beginning of 2019. Advanced recruitment indicators, it's okay if there is a turn in the market, it will be easier to recruit, but what about demand? It might not be at the same level. So there is some aspect of risk-taking, it worked well for you in the previous years, but do you have advanced indicators through your discussions with your customers about their R&D budget? Can you be sure it will be a good year 2020 and the demand will exceed the supply?

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Unidentified Company Representative, [19]

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My answer is that's why ALTEN is ALTEN. Since we'd founded the company, it's in our DNA, the way we go about business. As long as we can hire quality engineers, even if we go through crisis period. Okay, maybe all the engineers we recruited in Q4 2008, that was a burden when we had to face the 2008 and '09 crisis, but we'd never regretted to have massively recruited because we always were ahead of our competitors. We took the lead and kept it because it was always our strategy. As to 2009 and the rest, we took the lead because of our strategy.

Now granted, in the automotive sector, other businesses, we hear lots of things, but if we can recruit quality engineers, we have to take the lead. At the worst, we'll have 1 or 2 more points regarding engineers on the beach -- bench. But that's our strategy. We have to stick to it.

Now if there is a disaster scenario, S1 in 2020 equals the first semester of 2009, the big crisis, well, granted, we will have hired people for no point. We might have only an 80% occupancy rate, and with a turnover of 27%, we might stop hiring. That would be a way to manage the situation. In France, we recruit 3,500 engineers per year, so if we stop hiring altogether, very quickly we will suffer big deficits in competencies and resources to work on the projects.

What we focus on is the quality of our recruiting. That conditions everything. When we had a sharp, a high turnover and when we had difficulties recruiting, like in 2007, what did we do? We trained and hired urgently some 100 more business managers, more than our usual needs. The idea being to hire engineers with 4, 5 years of experience, who were good engineer managers and good recruiters rather than good salespeople. And if we're faced with a deficit or a shortage, we'll do the same thing with the inertia. Well, we would allocate 100 business managers. We have our own internal university with a 6 months training. Usually, there is a 3, 6 months lag, of course, but we will do everything that it takes to boost our sales efforts and marketing efforts. But ALTEN's DNA is such that we don't worry about the market. We worry so much, but we worry about the quality of our people and the engineers we recruit.

Well, thank you so much, all of you, for listening. And now, let's have a drink together. Thank you. Have a good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]