Alten SA

PAR:ATE

Earnings Call Transcript 2020-Q1

[Operator]

So welcome to the conference, Alten, about the turnover for the first quarter 2020. Now I'm going to give the floor to Mr. Bruno Benoliel, the Deputy General Manager. You have the floor, sir.

[Bruno Benoliel, Deputy CEO & COO]

Yes, good afternoon. So good afternoon to all of you. Thank you for participating in that conference call regarding the activity of the first quarter 2020. That first quarter was affected by the beginning of the health crisis in China in February, and in Europe mid-March, and in the U.S. That unprecedented crisis worse than the one in 2008 has led to suspensions of projects. Sometimes it was massive in some areas, but not so massive in other areas. The figures that I'm going to present now are an evidence of that, but they don't make it possible to draw conclusions about the trends per sectors of activity or geographies. After the lockdown that had to be managed in China with a limited impact on the group activity. The turnover was EUR 32 million in 2019 in China. The lockdown measures in Europe have led to the suspensions of several industries and then later on in the U.S. The turnover for the first quarter of 2020 is EUR 690.1 million, and it is progressing by 7% versus the first quarter in 2019. It was EUR 643.3 million at the time. In France, the activity is stable. Outside France, it's progressing by 13.2%. Acquisitions for EUR 20.2 million have contributed up to 3.3% of the group growth. The actual rate have contributed to 0.4% of the growth of the quarter. Consequently, in like-for-like activity and constant exchange rates, the growth is 4% -- at 0.4% in France because of the transfer of a related company at the end of 2019 that we have transferred and the turnover was EUR 2.7 million of turnover. The organic growth is 0.4% in France and 6.8% outside France. The -- there were 0 -- an additional 0.73 working days, 0.6 in France. And this has -- of working days, this has contributed to an improvement. There will be 123 working days for the first quarter versus -- well, an additional of 0.8 working days. And in the second semester, we are going to have 50 -- 127 working days. It will be an additional 0.7 working days during the second semester, it will be half a day additional day versus 2019.The first quarter started in line with last year in France and abroad. The activity had a growth rate that was more standardized, like we explained in the meeting in January. As early as January 2020, recruitments have made it possible to compensate for the lead, and we had 32,800 engineers at the beginning of February. That was an additional 300.March -- in March, we had a brutal interruption and we had 32,760 engineers, so we were at 37,200 at the end of 2019. There were 32,750 engineers. So we have integrated a little company in Japan with 115 people. In France, the engineers have been reduced by 131 people, and outside of France, the staff has increased by 236 people. The growth of the staff was due mostly in the U.K. and Italy and in North America. As you can imagine, the concern since -- at March is not recruiting but to keep the activity going on. Almost all Alten engineers can work from their homes if their customer base makes it possible. But that's quite different, depending on customers and geographical areas. Many customers in the industry mostly have stopped their projects. They have halted them or they are going to resize them. Some customers have decided to close the site and stop all activities during the period of time. And working from homes was -- has not been possible even for work-package work because they had -- they didn't have the staff necessary in a more pragmatic way. And in order to anticipate the future crisis with the drop of the sales, many customers have decided to freeze a significant share of their projects so that they could make an inventory and decide at the end of the lockdown what would be the priority projects that they would continue, what would be the projects that they would continue by reducing the size of the teams and what would be the projects that they would stop. At this stage, it's very difficult to know what the future will be because we don't know what their projects are, especially in industry that has been hardly hit like the automotive sector and the civil aviation. Since mid-March, in France, in Sweden, in Germany, in the U.K. and in Southern Europe, and now in the U.S., many customers are taking decisions. Looking at the bench, we are faced with this decision on a daily basis. During the first quarter, the activity rate went down by 2 points versus 91.8% last year. And in March, the activity rate was 88%, which is 12% of -- into contract. The beginning of the health crisis has hampered by 1/3 the results for Q1 for the first quarter. Now we are faced with different situations depending on the geographical areas, the sectors of activities. I'd like to talk about the situation per geographical area, knowing that the trends for the first quarter cannot be extrapolated to the second quarter. Now if I -- we can estimate some data for the first semester, but we have to be extremely cautious because the situation is changing very quickly. And we have no clear visibility for the whole quarter for a significant share of our customers.In France in Q1, the activity was stable, plus 0.4%. Suspension of projects in March has penalized the growth by 2%. So it should have been around 3%. The sectors that have grown where Aerospace, plus 4%; Defense & Security, plus 10%; energy, plus 10%; the nuclear industry, plus 16%; the rail and naval, plus 19%; and telecom, plus 4%. Overall, during the first quarter, 2/3 of Alten activity was growing. The second quarter will be very different. The health crisis with very brutal repercussions in France has led to many project interruptions, mostly in ASD automotive and in the tertiary sector in Amadeus, depending directly from air transportation, but not on the -- many customers, all industries included, have closed the sites who have not made it possible to work from our homes. The intercontract rate should, in France, be at 30% in April and then go down, depending on the resuming of the activity with our customers. We don't know yet that what will be the recovery plans because all industrial strategies are being revisited, and we believe that the decline of the activity would be in the neighborhood of 15% in France for the first semester, 18% will be due to the crisis. At the international level, the activity is also being affected by the health crisis, but in a different manner depending on countries. No Q1 data can be extrapolated on Q2. And then to give you country-per-country an overall picture of the situation at this stage and the time to try to protect ourselves in the second quarter, in North America, the activity has grown up by 25%, 16% for organic growth. The ForEx was significant, it was positive by 3.3%. All sectors in the U.S. were growing during the first quarter. The most dynamic sectors like in 2019 were the automotive sector, plus 10%; energy, plus 50%; life sciences, plus 25%; telecom, plus 11%; finance treasury activity, plus 5%. The health crisis has affected North America only during the second quarter with the progression of the intercontract rate that was very strong in the automotive and heavy weight in the first place where we had 500 people because many projects were stopped. Energy, the energy sector, mostly the gas was affected for the reasons that you know and the management and consulting offer practice, [ PNO ] and agile consulting. We have 350 people, which have been deployed mostly in the energy sector and treasury finance. The intercontract rate in the U.S. could reach 20% during the second quarter, meaning that the U.S. activity could be stable for the first semester, while we did anticipate a growth higher than 10%. In Germany, the activity has declined by 6.3%. On a like-for-like basis, Germany was already being affected by the crisis, which weighted by 3% on the decline of the activity in the automotive sector, 40% of the activity. The activity declined by 10%, 15% for equipment makers. And for the aeronautic, it's slightly growing during the first semester. But in Q2, like in France and for the same reasons, many projects have been halted. Let me recall that the automotive sector and the aeronautic interim accounts for 77% of the turnover in Germany. We could have 22% for the intercontract rate, and that's the reason why the decline that is expected would be in the neighborhood of 20% in Germany, 15% would be due to the crisis. In Scandinavia, the activity on a like-for-like basis is declining by 4% during Q1. In Finland, it's growing by 3%, which accounts for 20% of the Scandinavian turnover. But Finland is also being affected during Q2 by the crisis. And the fact should be declining by 13% for Q2, which for Finland would be an activity declining by 5%. For the first time in Sweden, 80% -- making up 80% of the Scandinavian turnover. The automotive sector and heavy weight accounting for 52% of the turnover has stopped a majority of their projects as early as mid-March, and their activity is declining by 5%, 0.2% due to the crisis. Second quarter with an intercontract rate comparable to Germany and the decline should be around 20% in Sweden as well, and 15% would be due to the crisis. In Spain, the activity is growing by 6.8% overall, but 1.5% are on a like-for-like basis. But the health crisis started earlier in February, but some strict lockdown measures have been put in place to the exception of the Security & Defense sector declining by 20% and automotive declining by 20% as well. Both sectors accounting for 20% of the Spanish turnover. Those sectors have stopped their projects like everywhere else in Europe. All the other sectors or activities have continued. They have pursued their projects working from home, and the activity has continued more or less normally. All the other sectors are growing. During Q2, the projects that were stopped because of the crisis would be -- will intensify, and this will lead to an increase of the intercontract rates. During the first semester, we believe that in Spain, the activity will be declining by 5%, so in a moderate way. In the Benelux, the activity is growing at -- growing by 5%. In Belgium, it is stable, even if the performances are different from sector, and there should be a decline by 7% during the first semester. In the Netherlands, activity has grown by 14%, 4% during the first semester to the exception of electronics and semiconductors accounting for 1/4 of the activity in the Netherlands. All sectors are growing. The impact of the crisis will be felt during the second quarter with an intercontract rate that should reach 10%. Consequently, the activity should be stable during the first semester. That's why we thought we would have a 3% growth. In Italy, in spite of the head crisis that has been brutal and started in February, the activity was done mostly from home and it has continued in spite of the lockdown. All sectors are growing, even in the automotive sector, plus 11%, even SAD, plus 20%, and the organic growth has reached 15%. However, anticipating a slowing down of their activity, customers have reduced in a significant manner the budget for the second quarter. Therefore, we believe there will be a strong slowing down during Q2. And in Italy, the growth should be 8% for the first semester as a consequence to the slowing down in Q2 and not the expected 14%. In Asia Pacific, the scope has continued to grow, plus 32% and plus 13% in organic growth. The growth of the region was driven by India because local activities have continued to grow. They make EUR 11 million of turnover during the first semester, with an 18% growth. In India, the activity is going to slow down during Q2 because of the lockdown measures. China, EUR 5 million of turnover during the first semester is declining by 13%, and that's not surprising because the activity has stopped between January and beginning of March. They haven't been back to normal and the automotive sales are still being strongly impacted in China. And finally, the U.K., the growth was very rigorous, thanks to an exceptional 2019, great -- with a very strong growth in aeronautics, plus 66%; automotive, plus 24%; nuclear, plus 100%; the rail -- but there would be a strong impact in the U.K. in Q2. We believe there will be a strong decline. We believe the decline in the automotive and aeronautics sector will be in the neighborhood of 20% during Q2. So we are still going to have a 5% growth, but the crisis will cost us around 13%. Sectors of activities. So the first quarter has confirmed the trends of the latest quarter in 2019, but the crisis has changed all prospects per sector of activities. The automotive is declining by 5%. During Q1, the decline was strengthened by the beginning of the health crisis. And it's quite heterogeneous depending on car manufacturers. Some are experiencing some growth and others are declining. But the health crisis is going to have a major impact on the activity and in a sustainable manner, and this is going to worsen in 2020 with a possible bounce back in 2021 that we hope will happen. The rail/naval is still strongly growing, plus 16% for where the crisis has slowed down the activity in Q2. But the order books are full, and hopefully, the recovery should happen at the beginning of 2021. For the aeronautics, we have 16.1% of the turnover. The growth has been 3% in homogeneous manner between the space activity, the equipment makers and aircraft makers. But health crisis has had a strong impact on airline companies. And this is going to have a sustainable impact on the aeronautics sector. Many projects have been stopped, the aircraft production will go down and the intercontract rate projects will not be renewed, make it possible to meet the new demand. So many projects will be stopped or reduced. And therefore, the visibility that we could have is very limited. Now Defense & Security, 4.5% of the turnover. They are strongly growing. Even if there is an impact during Q2, that sector should bounce back very quickly. Energy accounts for 11.5% of the Alten turnover. Oil and gas, 6% of the turnover. They have a plus 25% growth, but they will be impacted by the decrease of crude oil. Nuclear, 2% of the turnover. The growth is still quite sustained and the activity should be preserved. Life sciences, 7.5% of the turnover, they are growing by 11%. And on the short term, the activity is being impacted by the crisis, but there should be a bounce back. Telecommunications, [ 6.6% ] of the turnover. They're slightly growing 6.5%, to the exception of Ericsson in Sweden. The growth is coming from operators, the 5G migration and the networks that are being overly used because of people who are working from homes. This should continue after the crisis. Telecommunication, media activity is declining in line with what was happening in 2019, with a significant decline at Amadeus, which is going to worsen during the Q2. Amadeus, I don't know if that's something that is known. So I'm not going to give any figure, but the activity is declining in a significant manner because of the interruption of the airline activity. So Q2 electronic multimedia, we do anticipate a decline that would be higher than 10%. Finance and treasury sector, the turnover accounts for 18.4% of Alten activity, and it is growing by 3% and it's mostly driven by the banking activity. Now for external growth, we have consolidated on January 1, a company where we held a minority shareholding, at 40% in Japan. We went up to 100%. We had a call on that company. It's a company with 115 employees, and their profitability is quite low, lower than 5%. The Chinese-Japanese company that we acquired at the end of the quarter, the closing took place at the end of last year. This company is specialized on security and software development. There are 400 people. Customers are in Japan, but most of the consultants are located in China. That company made EUR 18 million of turnover in 2019, and their margin was slightly lower than 10% For 2020, I wouldn't dare to make any forecast, not for the second semester, but what we have seen -- that we've seen that the IT activities were more protected than other activities when you look at the breakdown of the turnover per sector of activity. That's the reason why countries in Southern Europe are doing better because our activity is quite focused in industry with a significant share in automotive and aerospace activity in France and in also Northern Europe. We've used several -- we've taken several measures when possible to try to keep our margins as much as possible because the intercontract rate that we have to be faced with are unprecedented, and it would be very costly if governments could not pay for a significant share of it. Now as far as the activity for the first semester is concerned, we do believe there will be a decline of 9% on a like-for-like basis. To the best of our knowledge today, that it's impossible to make any forecast for the second semester because some of our customers are -- cannot give us any forecasts for their activities. I'm going to give you the floor so you can ask any questions that you might have. In some industries, in light of the complicated situation that our customers are faced with, some negotiations are taking place about prices. And so we do have a context that is more complicated than the one we had in 2008 because it's not as much concentrated on one sector of activity, and it's much more brutal with consequences that we have to manage on a daily basis. Having said that, we will manage the situation. Alten is a healthy company. We don't have any debt. We've had to manage crisis in the past. And so we are managing the current crisis. And hopefully, as early as next summer or probably in September, there will be a rebound. Now could we open the floor for participants?

[Operator]

[Operator Instructions] So we have first question from Laurent Daure.

[Laurent Daure, Head of IT Software and Services Research]

Yes. In fact, I had 3 questions. The Airbus account, could you please tell us -- I know it's the biggest account, but could you tell us what the situation was last year? And what will be the situation for the first semester? The second point is on the way you manage your headcount. What will be the group strategy? Are you envisaging social plans or what will be -- or are you waiting after the end of the lockdown? I assume that you've taken some measures already, and you do have some potential savings. Now for the M&A policy, in view of the fact that it's difficult to make any forecast, can -- do you think we could have deals at the end of the year?

[Bruno Benoliel, Deputy CEO & COO]

Now for the Airbus account, it accounts 10% of the turnover -- of the group turnover. Bearing in mind that for that account, on Q2, we do expect to see a reduction of 40% of the activity. We've had more in April, even if the month is not over because we have real-time reporting of intercontract. So we are at 45% for April, but this is going to go down because after the lockdown activities will start again. So maybe 40% is a little bit high, but let's be cautious. We could go down to 10%, 15% for intercontract rates in June, but I believe we are going to remain higher than that because some of the projects will not start again or they will not start with the same size of the teams that they had before the crisis.

[Laurent Daure, Head of IT Software and Services Research]

So for the market share?

[Bruno Benoliel, Deputy CEO & COO]

No, it's not specific to Alten. We are probably the #1 as far as engineering is concerned with Airbus. They are making a precise inventory of all their projects that are underway. Now what I said about the first semester for the trends or the organic growth forecast, we've made an exercise, which was to try to per customer per project what the activity was going to be, and we've taken this into account. Now the turnout had started to decline at the end of March. In France, we've had hundreds of people leaving the company, but these people had resigned before. So we are going to consolidate at the end of April on the basis of what agencies are reporting what will be the resignations at the end of April. That's how we are going to be able to measure the turnover. Even if the turnover is declining, the turnover is reflecting the past at the moment. So we have to look at the behavior of engineers since the beginning of the lockdown to see how many resignations we have received at the end of April. I don't have the figure at this stage. I don't believe that we are going to go down to 0 because there are always people leaving. In 2008, just to give you an order of magnitude, the worst of the crisis, I think we had been down to 8% to 9%, which is still quite high for the account. The measures that we took regarding the staff, regarding the headcount. For recruiting, like for everybody else, what are we going to do? There were labor contracts that had been signed. So we've postpone them, but we're not recruiting anybody at the moment. Unless there are some, clearly, needs for a starting project. Let's not forget that our customers have reduced their activity in a strongly manner, and therefore, the commercial activity has also declined. So we organized our meetings over the phone or by video, but the number of commercial meetings have been reduced in a significant manner. This is going to lead to a reduction of projects. And therefore, at this time, the recruiting policies are on hold. Whether we should have a [ softer ] plan. At this stage, we're using furlough wherever we can to preserve the skills as much as possible. And we will adjust -- we've used furlough measures, and we'll see.

[Laurent Daure, Head of IT Software and Services Research]

The question is regarding the intercontracts. Well, so sometimes, you have furloughed employees because you get a benefit from the government. It's not the case everywhere in all countries. So what would be the savings on your margin?

[Bruno Benoliel, Deputy CEO & COO]

I don't have the exact figures. I'm going to have the figure, the exact figure at the end of April.

[Laurent Daure, Head of IT Software and Services Research]

For March?

[Bruno Benoliel, Deputy CEO & COO]

So it takes some time to put the request, get the approval, et cetera. So it's going to take place in April. And the principle is the same in all countries. We make a request in volumes, in hours, or we multiply the -- for example, 5 days over 3 days. It's a percentage. And then at the end of the month, on the basis of the reality of the projects, we declare that people are furloughed. It could be a partial or a full process. We've asked for furloughed measures in the U.K. and Romania, in Sweden, in Germany. We just filed for it in Belgium, in France, for the main countries, in Spain as well. Finland has also asked for the possibility to do it. Even Italy, where the intercontract rate is quite low. So it's applying to most countries where we do have a problem with the activity.The only country where there are no furloughed employees is in the U.S. Because in the U.S., when you don't need people, you lay them off. But we have decided not to do it because once you recruit people, you train them, we've decided not to dismiss them, but we'll see in a month's time, in the U.S., if we have to adjust if projects that have been stopped, like for Volvo, Ford, if they do not start again. But some of them will start again. But it's too early on to take any decisions at this stage.

[Laurent Daure, Head of IT Software and Services Research]

Now furlough, depending on countries, you will compensate fully or not? In France, for example, the government will pay up to 70% of the gross salary, which overall means that people will get 80% of their net salary.

[Bruno Benoliel, Deputy CEO & COO]

There is a Syntec convention, which is saying that we should pay up to 90% or 100% of the salary. The additional cost is not being paid by the government, obviously, in all countries in the world. Furlough will give right to paid holidays, which are not being paid by the government. So even if there's furlough, it is not going to neutralize the cost of the employee, and it's not going to do it in a unified manner in all countries. So furlough is a good thing because it makes it possible to hold and not to take hasty decisions because our know-how is our engineers. But it has consequences on the margin. Not only there is some residual cost, but the lost turnover is not going to generate any margins. And this is true for the whole industry. The margin that we're losing on our turnover is a margin on projects. So they are much higher than the 30% that we have because this gross margin that we have includes intercontract or everything that is necessary for production. Now the M&A policy. We had a number of files that were signed, but had not been closed. And so we have frozen them in lieu of the situation. But we're looking at other files because companies will be sold at a lesser price today. But the difficulty is that it's complicated to assess an asset because we don't know what the company's activity will be in 2020 and what the margin will be in 2020. There will not be so many people selling because it's an atypical year. And the question will be, if in case of any deal, we will have to agree on a down payment that is the lowest possible connected to the foreseeable activity in 2020. So I don't see any possible deals before Q3, and earnouts will probably be higher because they will be correlated to the rebounds in 2021, 2022. But it could be an opportunity to make acquisitions in favorable conditions that we couldn't have done in other circumstances. So we have not frozen our M&A policy. We are still looking and analyzing targets.

[Operator]

We do have another question from Gregory Ramirez.

[Gregory K. Ramirez, Analyst]

Bruno, I'd like to come back to cost and not to the variable share for expenses outside the head count expenses. What is the flexibility that you have implemented since the beginning of the crisis? What would be the share of variable cost in operational expenses? I assume that it's very difficult to make any budgetary forecast and that there are many possible scenarios. But what could be any lending scenario in terms of operational margin on the basis of the decline on the organic growth in 2020? For example, if you end up at 10% of organic growth, you could have 4% to 5% of operational margin, for example?

[Bruno Benoliel, Deputy CEO & COO]

Well, I cannot communicate about the year. We started to make simulations. Looking at assumptions for S2, while there are many of them, to use probabilities, it doesn't mean much. So in fact, we cannot give any guidance regarding the second semester. Bearing in mind that the uncertainty is what is going to be the level of activity in the automotive sector and the aeronautic sectors that are important sectors for us. Because as I was saying, our customers did not know what will be the projects and what will be the volume of investments that will be made for the end of the year. So this is a big uncertainty. And regarding Laurent's question, as far as the head count is concerned, that's also why we have no certainty for the variable cost at Alten. If I was a little bit provocative, I would say, we don't have any. Once somebody is in the intercontract, it becomes a fixed cost offshore ADC. They are a fixed cost because it's captive. All costs are proportionate to the activity. Engineers, obviously, because depending on the number of activities with a constant and standard rate of activity, which is 92%, 93%. These are proportional costs, but they're not variable cost. Because to the exception of a few subcontractors that we could decide to stop working with if the activity stops. And this accounts for 5% of the conductive income and some of them are linked to some projects. So we are not going to stop working with them. Because when we call upon subcontractors, it's not to have variable cost, it's because we don't have the competence in-house. So to the exception of that aspect of things, in reality, there are not that many variable costs. The variable costs are the bonuses of managers, all functions included. So we will have to adjust the structure if necessary, depending on the level of activity in 2020 -- will be what we consider to be the standard level of activity for 2020. If we consider that 2020 is like a blank year, depending on the projects that we will have, we will have to look at to size the company. Clearly speaking, the cost have been sized for EUR 2.5 billion. Clearly speaking, we're not going to make that figure, we will have an organic growth reduction. And as I was telling Laurent, the loss of the turnover is very expensive because we're losing the whole margin.Now how is it going to translate in operational margin? It will be minus 5% during the first semester. Now for the second semester, I have no idea. Well, in fact, for the first semester, it will depend on May and June. So it's really a complicated exercise. We do have different scenarios, but it's a complicated exercise. Therefore, we are not communicating on the margin. Usually, I tend to give you some different ranges. But we do have scenarios that we've built exchanging -- on the basis of the exchange between the operational managers and the customers. But the customers has no visibility whatsoever, even on how they are going to recover, how the activity is going to be resumed. The health plan has to be defined. Some of them have not defined them. We know that the -- we are going to get out of the lockdown in a progressive manner. That will be an on-a-zone case. So it might be more complicated in light of what has happened with the social partners even if everybody is very strict regarding the health measures to be put in place. So in fact, this is to tell you that I'm really sorry, but I cannot give you a very precise answer. But 5% is not absurd. It could be 6% or 4.2% or 6.5%. The sensitivity, we're talking about scores of millions of euros, and we don't have that for S2. So EUR 100 million of turnover. As far as the gross margin on a project is concerned, it will be about EUR 35 million.

[Gregory K. Ramirez, Analyst]

As far as customer's behavior is concerned, I assume that you are having discussions about payment -- hard to extend payment deadlines?

[Bruno Benoliel, Deputy CEO & COO]

We do have some of these discussions, but they're not the most important one. In fact, customer, they don't send out the orders, and that's how they manage their payment deadline. In our industry, we have a very longer payment times. Well, that could deteriorate. We haven't seen it so far. We do get money on due time. So the invoices for 2019 and 2020 are being paid. Now the discussions that we're having with them are related to other topics, prices. Clearly speaking, customers are getting back to us telling us that their financial situation is very complicated and their cash situation is very complicated. So they're asking the whole industry to make significant efforts on prices. Some are doing it on a one-off basis, but some would like to review all the referencing and all the prices. So this is going to give rise to complicated discussions. Some customers are asking us to give them the time to recover. Some are asking us to reduce our prices by 30%, others are asking us to reduce by 5% to 7% in the future. So in fact, we see everything. I think that if you were to talk to competition, they would say the same thing. Sometimes also, when people are working from their homes and the engineers are not on site, some customers are saying, we consider that productivity cannot be the same. So if it cannot be the same we consider that 10%, 15% of productivity has been lost. So we're asking for a reduction of prices by 10% to 20%. We're not saying yes. But just to tell you that it's a complicated situation.Well, it's not surprising in view of the context. Things will get back to normal, but that's the current context we are living at the moment.

[Operator]

[Operator Instructions] We have a question from Derric Marcon from Societe General. So we're going to take another question from Stefan Slowinski from Exane BNP.

[Stefan Julien Henri Slowinski, Research Analyst]

Bruno, I had 2 questions. The first one was about China. I think you said that there was no recovery in China at the moment. And we have been hearing since the end of March that things are picking up in China, so I'd like to hear what is your opinion about China? And the second question, when we're starting to think about the reopening in Germany and possibly in France. I know it's early on but maybe for next year, do you think that projects will change? How could projects change in our customers? Now will the type of projects would change and what matters for customers versus the projects we had before the crisis?

[Bruno Benoliel, Deputy CEO & COO]

As far as China is concerned, the activity has picked up in China progressively starting in March. So everybody was in a lockdown. Our engineers have worked from their homes for 1.5 months. And they've been allowed to go back to the site, either at the customers' or on our site progressively. In China, normally, our activity rate is about 95%, 96%. 3%, 4% of intercontract. Intercontract has gone up during the lockdown because some customers stop projects in the automotive sector, notably. So we went up to 30%, 35% of intercontract rates and all this has been solved, and now the rate is about 10%. The activity has started again, not completely, but for the automotive sector, we still have a high rate. Now as far as projects are concerned. Once the activity resumes in France, in Germany and Sweden everywhere, the questions will be, what is the volume of investments that customers will decide at the end of 2020, beginning of 2021 since their income in the automotive sector and the aeronautics sector will decline in a significant manner. So what they are doing at the moment, they are making inventory of their projects. So they will decide which projects will receive the priority. If they had a project that was done up to 80%, they should finish it. Otherwise, they will lose the investment. But then, they will decide either to continue -- hopefully, most of them will continue, but some of the projects will be stopped. And some projects will be resized because some of our customers are telling us that we should start thinking about reducing the team for the rest of the project, and they are asking us to reduce the specifications. Some projects could be revisited. For example, I'm thinking about engineering, manufacturing activities at Airbus. Some of them were looking at how to meet line speed, and Airbus said that they were going to reduce their production. So Airbus had a monthly rate up to 120, they're going to go down to 40. So the question is how to save because they can produce the 40 at the moment. And then some of our customers are conducting a study about what would be the interest of continuing a project or not. And we do depend on their conclusions. But if there is a reduction of income in any sector, a reduction of income will give rise to a reduction of budget, even if they are R&D budgets because they are driven by the top line.Of course, projects about standardization, et cetera, except if the European Union decides to go backward. Normally, those projects should continue because life will not stop. The ongoing revolution in the automotive sector will continue even if it will be postponed by 1 or 2 years. That's why we believe the activity will really resume in 2021, 2022. But we believe in the automotive sector, the crisis will be long lasting and the investment level will be reduced.Now what will be the proportion, we cannot speak on behalf of our customers, but it will happen.

[Operator]

Another question for Derric Marcon with Societe General.

[Derric Marcon, Equity Analyst]

The first question is about the use rate, you said it went down to 88% in March. You gave us trends for Q2 per country. Could you tell us about where you stand for the first 2 weeks of April or beginning of Q2, so we could have an idea? And my second question, I'd like to come back to Laurent's question. When you are talking about intercontract rates that are very high, I assume it's outside the furlough. Could you give us an idea of the number of people that you believe could be furloughed? I assume that you have negotiated with the Ministry of Labor already, the number of furloughed people out of these 3,000 people. Because if we look at the glass half full, to generate a 5% margin means that you should get some heads that do compensate for the loss of turnover because with 30% of intercontract means a big drop of the margin.

[Bruno Benoliel, Deputy CEO & COO]

Yes, that's quite sure. Now for Q2, we took some assumptions for intercontract rates. That includes furlough because it's not cumulative. People who are furloughed, they are accounted for as being furloughed, but we consider that they are outside projects. But it's a good thing to ask the question because it's not cumulative.So in March, we had a complicated month. For the last 2 weeks, the intercontract rate went up 12%, 13%. The intercontract level in April is at about 25% at the group level. And it is going to go down in May and June, probably at a little bit less than 20%. But this is part of our simulations because concretely speaking, we don't know what will be the pace for resuming projects and what will happen in June. So when we have people who are not working -- now furlough is to compensate for the loss of activity in view of the economic context. It doesn't work exactly the same way in all countries even though the principle is the same. In some countries, where -- when people are not working and there is furlough, there is a possible furlough like in Germany. Now if you want to apply for furlough, in Germany, it's much simpler than in France, which is not surprising. In fact, we can look at what is happening in Europe for furlough and French bureaucracy is the most efficient one, and that's not really surprising, is it?

[Derric Marcon, Equity Analyst]

No. They made some efforts to simplify things.

[Bruno Benoliel, Deputy CEO & COO]

Well, it's true for small-sized companies. Because I know a number of people and former employees from ALTEN have started their own companies. So small-sized companies which are in a difficult situation, they get an agreement for furlough very quickly. Big companies -- for big companies, it's more complicated. Now to come back to how it works. In some countries, once you meet the conditions for having the right to furlough that you can prove that there is a lot of activity with the interruptions of projects, et cetera. It's not open bucket, that if you are entitled to furlough that you will get the benefit either directly, like in Belgium, or it is the company that is going to advance the money and then it would be reimbursed by the government. So in some countries, it's 70% of the cost or 60% of the cost, it really depends on countries. In several countries, when people are furloughed, we continue to pay software charges. In some countries, it's not the case. In some cases, you have to give some additional salary. You have all situations, all possible situation. But in all countries where we apply for furlough, if you beat the criteria, you'll get a yes or a no answer. And if it's a yes, you are entitled to it. So we filed for furlough in all countries where we have a reduction of activity. Intercontracts due to the loss of activity are being compensated by furlough. In France, the government is vigilant. They want to avoid amenities. And therefore, we have filed a request for furlough because in volumes, it is in France that we have the most -- the greatest number of employees that could be furloughed employees. When we talk about 4,000 engineers, if you look at Alten and its first subsidiaries, some of them are completely unemployed and others are furloughed. We ask for the number of hours on the basis of the volumes. And in fact, we will declare at the end of the month on the basis of reality. We are being given the green light for the volume of hours, but then we have to justify that. And in France, we consider [ and this is the normal ] that the government should not pay for structural intercontract. So we're not going to apply for furlough for people who are in intercontract or standardized intercontract. We do it for people who are in intercontract because of the crisis. So clearly speaking, if the intercontract rate is 25%, and usually, we're at 6%, we are going to apply for the difference. And we should be in a position to -- we should be capable of justifying this. And then we are having discussions with the administration, either we get an explicit agreement from the administration or we have implicit agreement from the administration because they didn't have the time to deal with it, and they will validate after 24 hours, then we can come and check.We do have questions and answers. We have to answer some of their questions in order to demonstrate that we are in a situation whereby we need to apply for furlough.

[Derric Marcon, Equity Analyst]

Now what I was trying to understand, with all those discussions, have you conducted -- have you received all the approvals? Have you budgeted your intercontract risk due to the crisis during the first semester? And if you make so, what is the -- so what is the situation in France at the moment?

[Bruno Benoliel, Deputy CEO & COO]

We have filed in all European countries, and I don't believe there has been any problem. In France, we have filed for furlough in all subsidiaries. Everything has gone through an explicit or an implicit agreement for Alten as a -- I cannot give you the figures, but we're talking about half of the head count for France. And here, we are exchanging questions and answers. The administration is asking us a number of questions. Have you put in place some measures to preserve the activity? Have you organized the fact that people could work from their homes? They're asking legitimate questions, and we have to answer them. But it's not as smooth as in other environments.

[Derric Marcon, Equity Analyst]

Well, 50% are being covered. So 50% for France are being covered. But what you've done already and the remaining 50% are part of the Q&A session with the administration?

[Bruno Benoliel, Deputy CEO & COO]

Yes, that's right.

[Derric Marcon, Equity Analyst]

We're only talking about the productive staff? Have you applied for nonproductive staff?

[Bruno Benoliel, Deputy CEO & COO]

Yes, we have put a request for nonproductive staff as well, not as much, depending on functions. We have reviewed functions one by one. For example, the people in charge of recruiting, they are not overwhelmed at the moment. So we've asked for furlough for them, not total furlough but we have considered that the majority of them were furloughed. For the finance people, it's not the same thing. Some commercial managers, it's not the case. They're working nights and days. So it really depends on your function. People organizing events, they are furloughed. Even if some events need to be organized for September, but commercial seminars in May, agency meetings, for obvious reasons, they've all been canceled. So we have looked at all functions, something that the France administration is asking. They asked us to go into detail for the organizational chart. For companies of our size, it might not be the case, for smaller companies, but they ask -- they look at all positions in the organizational chart.

[Derric Marcon, Equity Analyst]

One last question, if I may. If you look at what is going to happen after the crisis, the fact that we have organized telework from your homes and from the customer, is that going to make us think about how we could deliver products to customers even after the crisis? Like engineers that are still working for Amadeus, they are not going to work for Amadeus for a long time. Do you think you could reorganize the fact that they could work from their homes on other projects in France since remote work is becoming standard? Or is it going to be still very complicated to use that workforce in a remote manner?

[Bruno Benoliel, Deputy CEO & COO]

So what we are looking at, at the moment, concretely speaking, people who were working for Amadeus, Amadeus is going to stop their projects. We're going to -- we're looking at how we could use the competencies in other sectors of activities in connection with IT. They will not necessarily be based in Sophia Antipolis. The answer is yes, we can get organized having people work remotely. When they're working on our side, they are already working remotely with customers because some steering committees are being held on a weekly or monthly basis. So we could envisage having remote work continue. And in fact, it's interesting to see that it works quite well. Now we don't know if it is going to continue to work well. Because in order to work remotely, you need to have the right conditions. Not everybody has all the conditions met because sometimes you hear that the children are in the back. But it saves transportation time. If people know how to get organized and if they can be autonomous working from their homes, we could envisage on the long run to have less premises, for example. Because today, we have a lot of square meters to put with customers' requirements because they wanted their work packages to be located next to the sides, so they could have smoother human exchanges. We could have less premises, we could have people rotate on sites, work organizations whereby people would go to a site for 3 days and then they would remain at home for 2 days. And we might have to organize these type of plans when we have people working on security. For example, we have a number of open space offices. And there, we don't have the 2 meter distance -- security distance. So I don't believe people will be able to work from their homes without ever going to the office because there's professional and social link that you need to keep. At Alten after a few weeks working from their home, people are coming back to the office, and they're very happy to go back to [indiscernible]. But this is going to force us to have a different organization. We've seen video conferences with 60 participants. That's something that we had never envisaged in the past. Even 6 months ago, we wouldn't have thought about it and it works well.

[Derric Marcon, Equity Analyst]

Well, I'm not hearing people slapping their children. I'm hearing people playing the piano. This morning, I had a conference -- video conference and I heard somebody slapping their children.

[Bruno Benoliel, Deputy CEO & COO]

Yes, the main obstacle is the fact that schools are closed.

[Derric Marcon, Equity Analyst]

Yes, it's complicated.

[Bruno Benoliel, Deputy CEO & COO]

Because you need to have the right conditions in place. We -- our engineers are quite young, they are more or less 30 years old. So they just started their work lives. They don't all have a big apartment where they can isolate themselves. We have to think about the practical conditions.

[Operator]

Thank you. So the floor is yours for the conclusion.

[Bruno Benoliel, Deputy CEO & COO]

Thank you very much. Thank you to all of you for attending that telephone meeting, which is quite exceptional. I think in 2008, we had a complicated year. But the topics are quite different from the ones that we've been talking about. Hopefully, we have given you a picture of what the market looked like. During the publication in July, I'm going to be more precise on the S1 margin because to make any forecast at this stage is very difficult. It will depend on the turnover in May and June and the turnover sensitivity is very high. In July, I'll give you a precise picture of what we could expect in terms of margin for the first semester. We'll see whether the level of activity has declined by more or less 9%. We might have a nice surprise. But to be honest with you, we believe that we've been quite objective in our forecast. And hopefully, we'll have a clear vision of what will be the activity in the second semester. And hopefully, things will clear up. So I wish you a nice weekend and see you soon. Thank you. Bye-bye.

[Operator]

The conference is over. Thank you for your attendance.[Statements in English on this transcript were spoken by an interpreter present on the live call.]