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Alten SA
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Welcome to the Alten conference about the turnover of the first quarter 2019. I'm going to give the floor to Bruno Benoliel, Deputy Chief Executive Officer. You've got the floor.
Good evening. Thank you all for attending this telephone conference relating to the activity of Alten in the first quarter of 2019. You must have all received the press release that we have published about an hour ago. As you may have noted, the beginning of 2019 was dynamic and continuity of last year in France and abroad. We have experienced a satisfactory quarter regarding recruitment, the turnover stayed stable around 25%. The activity rate is a bit less than last years, 91.9% for Q1, we were at 90.3% in 2018. We recruited a number of engineers, and we had a number of recruitments in Germany and Belgium. There were also some delays in the start of some projects and turnover in the first quarter 2019 is EUR 643 million increasing by 17.5% in comparison with 2018, it was EUR 547.4 million. In France, business is increasing by 12.5%, outside of France 21.9%. The exchange rate effect contributed as -- up to 7.9% especially in the U.S. because the dollar rose in comparison with euro. The Swedish krone decreased by 4.5% that contributed negatively to the total growth. In like -- on like-for-like basis, growth is 10.5% that is 12.5% in France and 12.6% internationally. The quarter included 0.7% business days fewer. It penalized the activity by 1% about -- on like-for-like basis, organic growth would have been 13.9%. The first quarter of 2019, there were 123 days, we had 124 last year. The second quarter is going to include 127 days, we had 126.5 days last year. There is, in total, 0.5 business day less in 2019 than in 2018 on an annual basis. As a consequence, you have understood because you are familiar with issues as calendar is going to induce the seasonality on the margin we are going to lose 1 day, but to a lesser extent a positive seasonality for the second quarter margin. Alten has got 35,000 employees. We were 33,000 in 2018. Our total headcount grew by 1,400 employees and 1,300 for the engineers organic and 343 by external growth. In France, the engineer headcount include more than 300 people, outside of France 640 -- 650 people. The headcount outside of France increased in Italy, India, North America and Morocco. In total today between India, Morocco and Romania, Alten has 2,000 people working on European projects and American projects. By geographical area, in France, the activity continues to grow, especially in the Aerospace sector, Defence & Security. In Life Sciences, it stayed sustained, especially in the nuclear sector 19% in France. Energy has grown by 10%. Naval and rail has grown also rather strongly. Finance and banking continued to grow. Growth rate of 8%, especially in banking and insurance. The Automotive industry in France is strong, thanks Renault and Volvo trucks. In France, in all sectors, business is satisfactory, very satisfactory and well oriented in the beginning of this year.Internationally, the growth is ramping up in several geographical areas. In North America, organic growth by 7% with -- just like in 2018. The strongest sectors are the Automotive industry and insurance and banking. In Germany, the activity grows by 5.5%, in the automotive industry 6% with all accounts are growing, especially equipment manufacturers 10% growth in other sector. In -- the issues that we encountered in 2018, don't know whether you remember, in Tech Doc activities have not been solved, but the activity is stabilizing. Scandinavia, the total growth is 23%, 13% inorganic. In Finland, that represents 20% of Scandinavia, growth is 12%. It confirms the recovery in the activity that we experienced in 2018. In Sweden, growth is still good, almost 14%. Thanks to the Automotive industry and heavy trucks, Telecoms also. And also thanks to the development of equipment services. In Spain, 12.8% on like-for-like basis. All sectors are going especially defense plus 17%, tertiary plus 13%. In Italy, growth -- organic growth stayed really high at more than 20%. The business was fed by the tertiary, Automotive, defense plus 30% and electronics. In Asia Pacific, the scope is growing organically, also growth is more than 50%. Even though the area is still small. Growth is strong in China with an organic growth of 36% especially in the Automotive industry and electronics. In India, 40% of growth, EUR 7.5 million of turnover with revenue especially in tertiary and telecom sectors. In Asia Pacific, the revenue is local, and it does not include the revenue achieved in India offshore with the U.S. or Europe. In the U.K., the negative growth is by 6% especially because of the oil and gas sector. The Automotive sector has stabilized with -- after the strong growth of last year. It's aerospace that is growing significantly this year. In the Netherlands, despite 1 less business day that impacted growth by 1.5 points, will still have an organic growth in Life Sciences. In Belgium, the first quarter is dropping because of the business day that we had less. The banking sector didn't see the replacements required. And there were also delays in the start of project. As consequence, the banking and insurance sector is impacted negatively and Life Sciences also. But rail is doing well, 40% of progress in Belgium, and Energy also good progress by 50%. At the end of the first quarter, according to the first estimates, the business should grow again. So at the group level on like-for-like basis, all sectors are growing. The Automotive industry is growing by 10%. There is a heterogeneous situation. So manufactures are growing strongly, Volvo, Renault, Volkswagen, Porsche, PSA, Audi also. The decrease is mainly to be seen in BMW and Ford. For equipment manufacturers, the growth is more than 11% with various tendencies.The naval sector and railway sector is growing by 34 -- 35% in rail. The growth is mainly thanks to the usual accounts Alstom SNCF. In Naval, the business is growing with the accounts that we mentioned earlier, Toulouse, for example. Aerospace stays a dynamic sector of activity with a growth by 17% this quarter. Growth achieved with most manufacturers and some equipment manufacturers growing by 11%. Defense & Security continued to grow in sustained way also. Energy that represents 10% of the revenue is growing. Oil and gas that represents 5% of the revenue is growing also, plus 6% that confirms the tendency of the first quarter of last year. And the share of renewable energies is growing significantly while the share of project in oil is decreasing. Nuclear growth is more than 20%, thanks to the EDF business. Life Sciences, that's growing also thanks to pharmaceuticals. The other industries, 5% of the revenue grew by 5%, thanks to industrial equipment manufacturers. Telecoms are growing slightly but just like last year, the equipment manufacturers are dropping. But the situation is quite heterogeneous according to the country. Electronics and media is growing also. And tertiary, finance and banking sector is growing especially banking and insurance. Regarding external growth, we have made this quarter 3 acquisitions, including one that we commented on, on the occasion of the conference of January last. Company acquired in early January in Germany, 80 people that represent a turnover of EUR 6 million specialized in automotive engineering. In February, we acquired another company in Germany, 175 people specialized in onboard software and algorithms. And in Spain, a company specialized in digital with EUR 6 million turnover and 95 people. We have other companies that we are looking at. It is likely that we will make other acquisitions in the second quarter. That this quarter and even this year Alten will have a satisfactory organic growth, the economic situation is favorable even though it's too early to say things precisely. But the first semester -- the first half year should allow to reach a 2 digit organic growth. So I'm going to ask you to -- participants that they can ask questions now.
[Operator Instructions] We have no questions for the time being. [Operator Instructions]
Anna Patrice. So growth is even stronger than last year. What is your visibility what is the growth rate you expect for the year? So what's your visibility, the first question. And for M&A what is the additional revenue that you think you're going to have? What is the main market for you? What are you looking for? What kind of segments? What is your ideal target for M&A?
Well, for the time being, I can't give any guidelines for the complete. We never do that. We've got sufficient visibility for the first semester. We are on markets where signals are rather shorter. The first -- the second half year will depend on our capacity to recruit and also on projects on the customer sides that we know about 2 or 3 months in advance. So considering the first half year -- the first quarter and the second one that is associated with good outlook, we'll have 2 digit organic growth in first half year. Then we hope that business is going to continue on this way in the second half year, but I can't make any commitments in April. What was your second question? Area?
Merger and acquisitions. Because you said that you have acquisitions in the pipeline. I'd like to know in which countries there are more opportunities? and which are the segments that you are looking at? Because it is the mix that is important. So what are you missing, really?
Well. We are looking at acquisitions abroad, outside of France. Today -- well, there's one company in China, there's another one that is in Germany, another one in Portugal. We're also looking at companies in Northern Europe. We've got several companies geographically allocated that are being analyzed. And an acquisition that should be announced -- an acquisition of the same size as the one we've just made. It should be announced in Q2. It is an operation in India. In terms of geographical sectors, we've covered everything, almost. Now business sectors. It depends in Germany, it's more the Automotive industry. In India, it's more conductors, semiconductors. Northern Europe, we are looking at industry Life Sciences. It is a strategy of diversification and strengthening of our geographical positions and sectorial positions. Now to say what is the revenue, the additional revenue we are expecting for the year, I couldn't tell you. We usually have got rate of achievement that is not that high because as a general rule when we negotiate with sellers, where we do that rather quickly after the execution of a letter of intent. But sometimes or rather often what we discover during the due diligence period -- what we discover does not necessarily meet our expectations.
And just one question regarding the number of days in the second quarter. Will there be a negative impact?
What do you mean in the second quarter?
In Q2, will there be a negative impact for Northern Europe?
Well, in France, for example, we've got the same number of days as in 2018. But abroad, according to the geographical area, we've got to calculate awaiting. We've got 0.7 business days fewer in the second quarter of 2019 in comparison with second quarter of 2018.
Next question by Gregory Ramirez.
For Belgium, you talked about projects that have been delayed. Could you specify is it a slight delay? Is it a problem of organization and other geographical areas where there are delayed projects more than usual?
Well, there are geographical areas where it is inherent to the business that is Germany, very often in the first quarter, there are delays in the start of project because it's the way German customers work. It takes them a while to launch a processing -- purchasing process. So for Germany, it's common as a general rule in Germany, while we've got seasonality. Belgium is not a big country for Alten. It's true that it's the only country where we've got negative growth. But it's purely situational. It's related to projects that were supposed to start. They were rather big projects. So obviously the impact is strong. We have decided to continue recruiting nevertheless because there is no particular warning in Belgium. So we've continued staffing Belgium. There were some delays, especially in pharmacy for reasons of validations of purchases also and as there are projects where you need to have staff part of the team. We may have 20 to 25 people recruited and the project is delayed by 3 weeks. So -- but now projects have started that's why we should have a positive growth rate at the end of June in Belgium.
At the end of June that is for Q2?
Yes. Q2.
Next question by Mr. Laurent Daure.
Well, you said about Germany that they will take the issues that have not been solved. Do you believe it could have an impact on the margin?
Yes. When I said, it's not been totally solved is, well, we don't have the same level of business as 2 years ago. Part of the business was relocated in India and in Romania. We've gone through the hardest times. Even though it's loss making in Germany but it's not going to be worse than last year. So the weight will not be any heavier than last year. It's a matter of different organizations. Obviously, it requires logistics means especially in the Airbus scope. At least, now the situation is stabilized. So the margin in Germany should progress in 2019. Over the whole year, yes. Not necessarily for the first half year, but over the whole year, yes. Especially because in Germany we've got strong seasonality effect. The big difference between the first half year and the second half year and number of business days. In Germany, while I may find the figures, but seasonality is strong. 122 days in first half year. 123.5 last year. So it's not neutral, 1.5 days fewer. You see it's in margin. And in the second part of the year, 127 whereas we were at 125 last year. So globally we'll have one more business day. But first half year that will be penalized and the second half year that will be more favorable.
Okay. I've got a question also about the good situation in the Aerospace sector. What is your visibility in that segment in the coming quarters?
To be honest, we all surprised ourselves with a rate of more than 15%. We have the same growth rate as last year. There's nothing new. Now new reference listing could have -- as it was the case 3 or 4 years ago.
No, but it is growing. And you've got visibility over the coming quarters? You've got long projects?
We've got projects that last about 1.5 years. They are not as long as design projects. But yes, it's 10 to 18 months.
Also have a question about recruitments. So it was quite dynamic in the first quarter. Why is the market like today? Salaries are still controlled and your -- can we extrapolate your pace of recruitment in the first quarter?
Well, Q2 should be also good quarter in terms of recruitment. Last year, we recruited 1,000 people in Q1 and 800 in Q2. Don't know whether we're going to reiterate that this year in Q2, but we don't have any recruitment issues. Salaries are increasing on average. The assumption is an increase of 1.5% for the full year -- 1.5% to 2%. There were price increases in some places. I'd say 2019 is the continuation of 2018 from that point of view.
So you may have -- you have an average price that is correlated to the salary increase?
Yes. About. Then there's geographical mix effect that has got to be taken into account. Strong growth is in Spain, Scandinavia, U.S. These are all countries where margin rates are lower, but there's no geographical area that we should be ashamed of.
Last question to have the timing of the consolidation of the quarters because you announced 3 acquisitions in Q1. Could you sum them up?
Well, we consolidated this year. So companies that have been included into the scope in January, which are the acquisitions made in last quarter of last year that is company that we acquired in India, very small one, EUR 1.3 million of revenue but that was growing strongly. That made EUR 0.6 million in the half year -- in the first quarter, sorry. We also acquired a company in Sweden, 90 people, EUR 12 million of revenue. In the previous year, we have consolidated it in the first quarter for EUR 4,100,000. We bought in Finland in October a company that was in this -- in the IT sector, 65 people, with a revenue of EUR 6 million. We consolidated EUR 1.5 million. We also bought a company in the Netherlands in electronics and semiconductors. And the release of the funds was done in January 12, I think, and that will be consolidated at the later stage. We bought a company, the one I was telling you about earlier. In Germany, 80 people in the Automotive industry. The company that we acquired in early January 2019, I announced it on the occasion of previous call, EUR 6 million of revenue. We consolidated it right away for EUR 1.9 million. And the 2 others that I talked about earlier, the Spanish company and the other German company, these 2 companies have got revenue of EUR 22 million. They will be consolidated as from July 2019. Because we need to be able to recruit a team to produce the counts because they normally close with -- one year later, they will be consolidated in July.
Next question.
I've got a question about level of demand. Strong growth is fed also by the order taking in 2018. What is the order taking like in early 2019? Has there been a change in comparison with 2018, especially in some sectors or not at all?
Well, not at all. If we look -- if you look at -- well there's part of the growth that comes from last year, it's true, an important year. Because we have no reason on a year-on-year basis. So we have the benefit of the last 3 quarters of last year. But in terms of pace, we have got 2 indicators to measure the business. There is the net recruitments that depends on the business activity because there's general rule we manage inter contracts by 7% to 8% and not beyond. That is when business activity does not allow for having such rates, we slow down recruitment. It's not the case. So business is dynamic still, and we have recruited on a net basis as many engineers as last year. But if we made the announces we've recruited about 650 people internationally, about half in offshore areas, people whose added value in euros is less than the one we can achieve in the U.S. or Western Europe. And it's the reflection of the evolution of the business in the sense that gradually for some businesses, especially in the Aerospace and Automotive industries. We relocate more projects for the [ dev ] part in India and Morocco. So there is a bit more in the contracts than last year. But we've got confidence over the year.
And what is the second indicator then?
Well, the first one that's recruitment and the second is the rate of inter contract.
Next question.
Maybe a question to confirm the message about the margins. So your objective is to maintain the margin in 2019 despite the slight drop in the field. Could you tell us about HR investments that you made last year? Have they been fruitful? And are you going to continue making such investments in 2019?
Well, investments we made last year, are we going to continue? We're going to amplify them because it's a matter of career management processes for engineers. It's about improving relationships with engineers and to limit turnover. We offer engineers the possibility of changing sectors, for example, and we open up possibilities of changing jobs or changing sectors. So that's quite fruitful for the turnover, and it will be fruitful for the evolution of salaries. As for the annual margin, I've always said that -- well, last year it was 8% or 9%. I've always said that the range of margin for Alten was 9.7%, 9.9%. Where exactly are we going to land? I don't know, but we'll have a first semester that will be less than last year's because of that business day less and the second quarter should be stronger. But there are mix effects also that have got to be taken into account. And -- well, growth rates will have an important impact on the margin rate for 2019 but not a significant impact. There's a strong correlation between managerial costs and the business. But we made a number of investments last year that we're going to continue this year that we will be better able to amortize if growth continues on 2-digit rate.
Another question about the Automotive industry. We can see that the first quarter -- in the first quarter you got back to a growth rate of 5% in France, I understand that PSA is growing again. Does that mean that's the end of that wave of relocations that we saw in the last years? What do you expect in the future -- for the future?
I don't believe. There is the end of that wave of relocations. German manufacturers have started looking at opportunities they may have with PSA. It continues. It's logical because there are more projects, and we got some percentages as market share, but our business profile's not changed. Proportionally, with PSA, we've got the same number of projects that are subcontracted as they're -- that are made in France. It's just that the business has developed in comparison with last year. And then 2017, there was a big change with number of engineers who worked on PSA projects with high number of engineers, and switched our engineers -- transferred those engineers to Morocco, but things have stabilized. Anyway there is time when it's got to stabilize, not everything can be done offshore countries because of specifications, et cetera. They've got to be done here. Then what we have made abroad it's the dev sites, where we've got the skills to do that.
Right, it's clear. Is there another sector -- business sector that could follow the same direction in 2019, 2020?
Well, in industry, potentially maybe no industrial sectors, but as there's onboard software in all sectors today we could -- imagine it could impact all the sectors. But it's mainly, today Aerospace and the Automotive industry because to be able to put in place the site per organization, you must have important projects, big projects, big in size. A project of 15 people, it's not going to be transferred to Morocco, but if it's a project with 50 people maybe. We could also imagine the same thing in rail and naval. Bertrandt is not very much developed, but it should be also the case. We could see partial rare occasions.
Okay. We have no further questions. [Operator Instructions]
Could you tell us about the levels of profitability of the 2 new companies that will be consolidated, the German and the Spanish companies? Could you tell us about their business? What about the portfolio of the German company car manufacturers?
Well, the one in Germany is purely automotive. It's got some customers in IT, but it's largely automotive. In terms of profitability, the Spanish company has got the profitability of 10 points of EBIT, and the German company 6 on basis of what we may understand. In the German company, they are organized in work packages or not only -- there are few companies in Germany that only do work packages.
They are at the same stage as you?
Yes, same stage.
Second question, maybe you won't have the figure in mind, but could you calculate growth of Germany? I'd like to understand what is the contribution of Germany? Well, what is the contribution of the Automotive industry?
Well, I couldn't tell. You all may calculate it, but it couldn't have a strong impact. Well, if the question is, to know whether are we going to go from 6% to 8% of growth margin -- growth rate? No, I don't think. I can give you the information at a later stage.
Last question. In France, weren't you surprised by the high level in Q1? Were you terribly surprised? In fact, you did more than last year in France?
Thanks to the momentum in 3 sectors. ASD: Aerospace, Security and Defense. Strong progress there and in [indiscernible]. So Aerospace, Security and Defense, yes.
Last question in relation to PSA. I understand the comment about off-shore. But today could you say for onshore at [ Peugeot ] you are growing?
There's a problem. If there is a transfer as part of the engineering works between onshore and off-shore, you have more of a workload in off-shore and less in onshore. Well since the beginning of the year, we are growing with PSA because we won projects, and a significant part which is done here. So onshore you mean? Yes. It doesn't mean that we've stopped relocating part of the projects because of the growth of the headcount, but with PSA proportionally we've started no projects in France than abroad. So it's just like in Aerospace, there are projects in data science analytics. No, well, we've got projects in engines and onboard software. It's rather traditional projects, engineering and traditional projects, yes.
Yes, I'd like to understand why in France -- couldn't understand. Last year you increased the margin so this year what could be negative or positive for margins in France?
Well. France is the country where negotiations are the most complicated with clients, apart from the Automotive industry in Germany. Most reference listings are very structured in France. So today, we are working on projects of bigger and bigger sizes and clients ask for productivity gains over several years as a compensation for the reference listing. So we've got to achieve those productivity gains, but it's difficult in engineering. When you buy increasing gross margins because even when you relocate a project in India or Morocco, productivity is captured by the clients as opposed to what may happen in IT, where service companies could increase their margins by 7. In engineering activities, clients snowball the configuration of projects. And even if projects are transferred it's because the economic equation is impossible to solve, everything is done in France or in Europe, anyway. This is one reason. The second is that contrary to others business sectors where margins have recovered and there were even price increases that IT banking and insurance that is growing, but at a lesser rate. It represents in the outer mix in France a share of business that is well not much known, but lower than for some of our competitors because we are positioned in our mostly R&D and engineering. If we had a share of activity, the highest share in banking and insurance where we experienced a slurry in price increases that were consistent, we could have restored margins in France than what we could do today. There's another explanation why can't we significantly increase margins in France? It's -- but I'm no way even talking about CIC, but if that France is the country that is the flagship for the group where general solutions, methodologies, tools are designed that are then licensed to the rest of the group. All of the HR tools, for example, there I was talking out in the beginning of this conference, everything that revolves around skill management, career management. Everything that we've got to implement today to support volume and improved loyalty of our engineers. Those investments are supported by France or made in France. So it's France that has got that burden. And we had to take some additional local people in France that are re-invoiced to clients but with no margin. There are many elements that are such that, even if growth is strong you can't expect a significant improvement of the margins in France because we've got cuts that we tried to engage in a consistent way with growth.
And internationally, you improve the margins in Germany, but you're buying companies with lower margins. So internationally margins will stay about stable?
Yes, that stable. You're listing them always very conservative, but I've always said that considering the size and the structuring that's ready to support growth, we have to have organizational structures, German resources, investments. Let's take an example, IT security. It's a true subject today, even more than in the past. As you know our competitor was attacked. Clients demand from us to be an ISO certified and request drastic security measures. Means we've got to recruit people and we have strengthened us, the IT security departments. It's part of the requirements we have got to have. Cybersecurity is a strong issue and for clients it is essential. We are audited by our clients in that regard. It represents hundreds of thousands of euros of additional investments. It is also the adaptation of the job and a size effect that are such that we've got to meet customers' requirements and all of the companies with 200 people that we buy do not have such measures in place. So it's true in France but abroad also.
Was the tax rate this year about 30%? Could it be less next year?
Well, you've got to ask the President, Emmanuel Macron. Well, we've got most of the way abroad. Don't believe it is going to go -- internationally, we've got a taxation rate of 26%, whereas in France it's still 34%.
[Foreign Language] I forgot about one, we hear about telecom equipment manufacturers, especially in relation to 5G. Is it something that your teams already see and potentially could it represent a big business in 2019?
Honestly, I haven't heard much about it. I don't have the feeling, really. But I could ask countries where we acquired presence in telecoms. I guess, Ericsson in Sweden could be the case, but everywhere else when you see the evolution of the telecom revenue, it's not very strong. I'm not sure. Yes, we hear things about 5G here and there, but I don't believe it represents the huge revenue. Maybe it's a weak signal, but it's particularly with 1 telecom equipment manufacturer that launched calls for tenders. Maybe this would be interesting to investigate. It's not one of your bigger clients.
Which is it?
The biggest.
European or French?
Well, the biggest.
Thank you. No more questions. You've got the floor for the conclusion.
Well, we don't have any more questions, so I wish you a very good evening. Our next telephone conference will be held on 24th -- 25th of July. I think it's 25th. It will relate to the business in the first half year 2019. Good evening, see you soon.
Conference is over. Thank you for your participation. You can disconnect.[Statements in English on this transcript were spoken by an interpreter present on the live call.]