Spie SA

PAR:SPIE

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the SPIE Q1 2023 Results Call. Please note, this call is being recorded. [Operator Instructions]

I will now hand you over to Gauthier Louette, Chairman and CEO; joined by Jerome Vanhove, Group CFO, to begin today's conference. Please go ahead.

[Gauthier Louette, executive]

Good morning, ladies and gentlemen. Thank you for attending SPIE's conference call for 2023 Q1 revenue. We are indeed very pleased with the excellent performance we delivered in Q1, a record level of quarterly organic growth and the continuing increase of EBITA margin. In this context of sharply rising energy costs and growing awareness of the climate crisis. We do provide highly valuable services for industry decarbonation, e-mobility, building efficiency or smart cities. And as we always say, SPIE is definitely a part of this solution.

But let us start with the top priority for SPIE, our commitment to safety at work. And as it is, today happens to be the world day for safety and health at work, so today, [ mostly ] employees are taking part in workshops. This year, motto being at SPIE safety is everyone's business. In all our locations, we're organizing interaction, dialogues and training around videos presenting risks in different SPIE environment. The objective is to ensure that all our employees are fully aware that it is a responsibility every day to do everything they can to prevent accidents from happening and to return home safely [indiscernible].

Now let's discuss some good examples to highlight our expertise. On Slide 4. In Germany, SPIE has been awarded a 4-year extension contract to oversee the technical facility management of 90,000 square meters building, housing the Hamburg municipality. We provide services for almost all the property's building technology, ventilation, air conditioning, lift, sprinklers, electrical, heating and plumbing systems as well as control technology. We'll also monitor the building and its fire alarm system, 24 hours a day, 7 days a week. And in addition, we will also implement energy-efficient solutions such as LED lighting. This contract was first signed in 2019, and its recent extension evidence the high quality of services we are providing and the strength of the relationship with our customer.

On Slide 5, in the Netherlands, we signed a 4-year framework agreement for the station of TenneT's 2-gigawatt land station to connect onshore and offshore grid. TenneT will connect offshore wind farms according to new innovative standard named HVDC, high-voltage direct-current connection. SPIE will focus on the building related installations such as lighting and power installation, data cabin, heating and cooling systems as well as access control, fire alarm and evacuation systems. We collaborate with all parties in BIM, building information modeling, and this project is a good illustration of the active role this play in the energy transition of the Netherlands, as you know, TenneT is one of our major customer in the Netherlands.

Moving to Slide 6 and speaking of energy transition. SPIE France has been appointed as the lead contractor for the renovation of the lighting of the Parc des Sources in Vichy until 2028. SPIE will be responsible for implementing all the low-voltage systems, creating and renovating more than 270 light points, enhancing the facades of the historic buildings of Parc. The Parc des Sources is part of the grand renaissance project of the thermal heart and the ultimate goal of the renovation is expected to provide circa 60% energy savings, while taking into account the fauna and flora of the area.

And now on Slide 8, moving to the key highlights of this first quarter. As I said, we delivered a record level of quarterly organic growth for the second quarter in a row with an outstanding organic growth at plus 10.9%. This trend reflects the good momentum of our market, driven by the need for energy transition. It does also evidence our pricing power in an inflationary context. Our EBITA margin increased by 30 basis points.

In summary, this first quarter we seeing the strength of our model and positioning, which is characterized by our distinctive market presence, established pricing power, continuous operational excellence and obviously, the full commitment of our people. This good start to the year gives us confidence in delivering on our 2023 guidance.

Moving to the next slide, Slide 9, for our financial highlights. The total revenue reached almost EUR 2 billion, a record level for our first quarter at SPIE. Reported growth was 11.3%, and organic growth was at an all-time high of 10.9%. Our EBITA amounted to EUR 85 million, up 20.2%, and our EBITA margin was up 30 basis points compared to Q1 2022 at 4.2%. This is a good performance and showing good discipline and good pricing power as well in this inflationary context.

Looking to our growth per segment. As you can see with the dark blue bars, we achieved double-digit organic growth in almost all segments with strong dynamics. North-Western Europe 14.6%. Oil & Gas and Nuclear 14.4%, France 10.4%; and Germany and Central Europe 8.6%. At group level, the scope effect is very limited at 0.3% with deconsolidation of U.K. being compensated by the contribution from acquisitions. Overall, our growth at constant FX is 11.2%, again, a very good start to the year.

And now let's have look at the detail per segment, starting with France on Slide 11. So in France, we did enjoy a strong dynamic across all our markets, and we achieved a very solid organic growth of 10.4%. Our Tech FM activities continued to benefit from the growing appetite of our customers for our innovative technical services and solutions with obviously a strong bias to energy efficiency. In the industry, our clients continue to invest in electrification and decarbonation to reduce the carbon emissions and to mitigate climate change. Building Solutions is boosted by energy renovation as well and technological upgrades in [ a few ] buildings. And City Networks is driven by the rise of e-mobility and by smart city solutions in particular, LED public lighting, which offers direct and fast payback to the customer.

On Slide 10 -- 12, sorry, in Germany and Central Europe, our growth at constant FX is very strong at 14.4%, driven by a solid organic growth of 8.6% and a scope effect of 5.6%. On an underlying basis, organic growth in Germany is on mid-single-digit trend. The exhibited moderate 3.5% organic growth for the quarter being attributed to a high comparison basis with a very buoyant Q1 2022, which was up 8.5% organic. And we have some project phasing effects in high voltage with commencement dates on some projects have been postponed because of last-minute administrative issues.

This good momentum in Germany is supported by Tech FM with the strong demand for energy efficiency solutions and office spaces modernization, similar to what we [ identified ] in France. And by ICS with managed services and unified communication activities as well as digitalization projects in health care. And coming back to high voltage, the outlook remains very good, thanks to our dynamic order intake and the backlog, which is at an all-time high.

In Central Europe countries, we are very pleased with the progress, excellent organic growth and promising performance of the recent acquisitions. And in Switzerland, the supply chain issue, we have been mentioning last year, they do ease up a bit, and thus, we did see a good level of organic growth this quarter in Switzerland.

Looking at North-Western Europe. We recorded a buoyant 14.6% organic growth, driven by both the Netherlands and Belgium. In the Netherlands, the surge in activity was fueled by Industry Services and particularly electrification projects, such as the upgrade of high-voltage installation for power supplies of the industrial plants, the supplementation of LED lighting and the shift from gas to electricity. Building Solutions, strong performance does showcase our vastly improved market position, thanks to the Worksphere acquisition. In addition, information and communication services benefited from cross-selling opportunities with Worksphere's historical clients and a good momentum in health care projects and fire protection solutions. And in Belgium, revenue growth was mainly driven by a good dynamic in our bidding as well as ours -- in our Industry Services activities.

And finally, looking at our Oil & Gas and Nuclear Division. So the total revenue rose by 16.4% with a strong 14.4% organic growth. Oil & Gas Services continued to deliver strong organic growth, which does include the ramp-up of several contracts, and we mentioned the one we won in Denmark last year. And we do see a good upturn in brownfield investment after a period of tight spending from the oil majors. The order backlog remains at a record level. In Nuclear Services, as anticipated, revenue remained broadly stable. Some maintenance [ operations ] are still postponed by EDF, and we think it might affect the activity throughout the year.

Now I'll hand over to Jerome, who will comment further on our financial performance.

[Jérôme Vanhove, executive]

Thank you, Gauthier, and good morning, everyone. I'm on Slide 16, starting with our income statement highlights. As Gauthier just mentioned, in Q1, we had a very good start to the year being reflected in the following financial KPIs. We delivered almost EUR 2 billion of revenue. Our organic growth of 10.9% evidences the good momentum in our markets bearing in mind a rather favorable comparison basis and an obvious pricing effect. Our EBITA margin reached 4.2% of revenue, a 30 basis point improvement year-to-year. Finally, our EBITA increased by 20%, is driven by organic growth and EBITA margin improvement combined with the contribution of our acquisitions.

Moving to the revenue bridge. Above our strong organic growth of 10.9%, the perimeter effect is almost neutral at group level at plus 0.3%. It is, on one hand, a positive 3.6% effect linked to the 5 bolt-on acquisitions' contribution, 2 in Poland, 2 in Germany and 1 in France as well as the full quarter consolidation effect of Worksphere, for which we had only 2 months in the first quarter 2022. On the other hand, we have the scope effect of minus 3.2%, mainly linked to the disposal of our U.K. operations deconsolidated since the 1st of January of this year.

Slide 18. Compared to the first quarter 2021, 2 years ago, our EBITA margin increased by 50 basis points with circa EUR 85 million EBITA in Q1 2023, representing more than a 40% increase in comparison to '21. It is a step change for the group, evidencing the strength of our model, a strong discipline on margin, a unique positioning to benefit from market trends and value creative bolt-on M&A.

Finally, compared to quarter 1 2022, we delivered a 30 basis point increase of our EBITA margin. It reflects our ability to further increase our EBITA margin despite the inflationary context as well as the accretive effect of circa 10 basis points related to the U.K. disposal.

This concludes my part. I will now hand it back to Gauthier.

[Gauthier Louette, executive]

Thank you, Jerome. So as we just pointed out, Q1 is a very good start to the year indeed. We are enjoying record order backlog on the back of very strong market fundamentals. Let me highlight 2 points. First on organic growth. As we move through the year, the comparison basis will become more demanding. In 2022 organic growth was at only 4.1% in H1, but as high as 9.4% in H2.

And second, on our bolt-on M&A, no deals were was signed in Q1, but we have several M&A situations on hand, and we are looking at a rich pipeline of opportunities. So altogether, this good start to the year obviously gives us confidence in delivering on our 2023 guidance. So the mid-single-digit organic growth, further EBITA margin increase compared to the 6.3% we achieved in 2022. High focus on bolt-on M&A, which does remain at the core of our business model and we'll keep our payout ratio at circa 40% of our adjusted attributable net income.

So to conclude, we do offer innovative solutions and cutting edge technologies in energy transition and digital transformation for our customers. We are at the heart of the solution, and we are looking to the years to come with great confidence and ambition. As I always say, it is a good time to be an electrical engineer. And in this regard, I can only encourage you to look at our green book that we published recently on our website, and we've given the link here. It really gives a very good insight of all our solutions for our customers.

So I will thank you now for your attention. And with Jerome, we are quite happy to take your questions.

[Operator]

[Operator Instructions] And our first question today comes from Oscar Val of JPMorgan.

[Oscar Val Mas, analyst]

3 questions from my side. The first one, just on the outlook for the rest of the year. The full year guidance is unchanged, which implies a slowdown. Were there any one-offs in Q1 that you want to call out? Or is there anything that worries you for the rest of the year in some of the more cyclical end markets? That's the first question.

The second one is specifically on the German transmission and distribution phasing. It was, I guess, still weak in Q1. Do you have any visibility when this will recover, and could you give us a sense of how large these contracts are in terms of when they do ramp up?

And then the third question is around I guess, pricing and cost inflation, you don't have a pricing number, but could you talk about how pricing or cost inflation has changed since December?

[Gauthier Louette, executive]

Well, with regards to the outlook, this is the first quarter. And as I said, the comparables will become tougher, especially in H2. However, there are no specific slowdown we see in the market right now on the contrary. And so at the beginning of the year, we do want to get overconfident and -- but we are really looking at a very strong backlog, and we do not see any shift in the trends as we speak. Again, I remind you that Q3 last year, we achieved 8.5% growth, and it was above 10% in Q4. So a bit of cautiousness at this time of year is probably in order. But again, no -- as far as the business trends are concerned, no worries whatsoever.

Regarding transmission in Germany, we -- again, we had a very strong first quarter last year. So we had, I think, a 10% organic growth last year. We did have a couple of contracts, which were supposed to start and have been delayed more or less the last minute, but this is fixed as we speak. And by the way, the customer does compensate us for the incurred standby of the crew. So it's not that detrimental in terms of margin, but obviously, it weighs on projection. We think we will see a different trend in the second quarter and for the balance of the year. So again, some phasing effect, no worries. And in the meantime, we keep piling new orders. And so again, we have pretty good visibility midterm as well. And then we do not specifically communicate on margin for a specific subsegment, but margin in high voltage are very, very satisfying altogether.

Now to the pricing and cost impact, what we see, we see a bit of improvement on the supply chain, and we gave the example of Switzerland, meaning that delivery times are now more under control. And in some instances, there are -- cost of some suppliers are stabilized or in very few cases, gone down a bit. So we do not see the surge in prices that we had to deal with some time last year, which is a good thing because we see it has some impact on the top line, but I can tell you it's still better to maintain the margins when we have this rise in inflation. So that's the trend we see right now.

[Operator]

And now we're moving on to our next question, which comes from Rory McKenzie of UBS.

[Rory Mckenzie, analyst]

It's Rory here. I just wanted to follow up on the pricing point really to try and help us all understand the really strong growth. Could we maybe try and break this down into headcount changes and then pricing and productivity? So I guess, there's 2 questions. One, in your last annual report, I think headcount was about 4.9% year-over-year in December. And is Q1 headcount growing the same or faster than that rate?

And then secondly, compared to that 4.9% headcount growth, last year, you had constant currency revenue growth of about 16% or maybe more like 13% adjusting for the U.K. disposal. So does that mean that pricing and productivity was adding 7% to 8% to revenue growth? And has that been accelerating so far this year?

[Gauthier Louette, executive]

Well, I mean this is very hard to tell, Rory, as you know, and probably you are much more sophisticated than we are in this regard. Yes, the headcount is growing, not as fast as we would like. Obviously, there's a lot of tension on the market and not only with our competitors, but also with our customers in a number of instances, we are losing people to our customers, which is not great, but at least we have good ambassadors at our -- on the customers side. And so we have a heavy effort on recruitment, which is paying off, we did manage to recruit probably in the range of 6,000 people last year. But altogether, there is a strong emphasis on recruitment. And we did manage to grow the headcount.

On top of that, you have to take into account some change in mix and the areas where, obviously, the turnover per head is much higher as -- linked with the amount of supply also [ entails ]. And then we've been working a lot on productivity as well, obviously, to a limit, but it's something in this area -- in this time of growth, obviously, you take all the slack you have in the business.

So -- and on top of that, we have resorted also to more subcontracting and more temporary workers. Again, there is a limit to that, especially in terms of quality of the services you deliver and controlling the workforce. So we've been pulling all registers, probably the price impact has increased over the year, obviously. And when we say that we managed to pass on inflation cost to our customers, there is a strong reflection in the top line as well. But again, it will be hard put -- to quantify it properly with all the effects that have been mentioned.

[Rory Mckenzie, analyst]

That's very helpful. Can I just ask on the headcount growth or the employee base I think the resonation rate increased back up nearly 8% last year. Are you expecting or are you worried about that ending this year even higher?

[Gauthier Louette, executive]

Well, we're not worried about it. We're not pleased either. We used to -- over the past 4 years, I think this resignation rate has increased a couple of percent. We were more in the range of 5% to 6%, but we are now more in the 7% to 8% range depending on the country. So I think the general trend post-COVID in general and then specifically for our type of work, I mentioned there's a strain on resources, including at our customers. And that's what we see, we see that the market is more fluid nowadays. We keep it under control. And again, we do a lot of effort for tenant retention by many ways and means. One of them -- and an important one being all the employee shareholder plans we put in place. And also we see -- we ensure that we work a lot to be an employer of choice, which we have achieved in many countries.

[Operator]

And up next, we have Christophe Chaput of ODDO BHF.

[Christophe Chaput, analyst]

I just would like to come back on the plus 30 bps margin EBITA. You gave the figure of 10 bps regarding the U.K., the positive, here. Are you able as well to share with us the impact from the Worksphere acquisition, which is supposed to be positive related to the synergy you had extract.

[Jérôme Vanhove, executive]

I'll take the question, Christophe. We -- you have to bear in mind that Worksphere, a, did make a lot of improvement in comparison to the performance they had at the time of the acquisition, they developed very rapidly. And b, more importantly, Worksphere has much less of seasonality in the profit recognition profile over the various quarters, which is very customary for building activity which is absolutely not exposed as some infrastructure activity we have elsewhere in the group. So on this performance for the first quarter, I would assume the impact of Worksphere being very negligible in terms of accretion or dilution.

[Christophe Chaput, analyst]

Okay, which means that the level of synergy, let's say, already -- 2Q, let's say, to the average of the group in terms of profitability.

[Gauthier Louette, executive]

No, not quite yet. And the synergies have not been fully delivered. So we still have some to realize year. And Worksphere has been closing the gap with the historic Netherlands, but they're not yet at the level of Netherlands, so we still have some hope for the future. I mean not necessarily everything this year but over the next couple of years to bring them to the level of the balances in essence. More or less -- yes, go ahead.

[Christophe Chaput, analyst]

Sorry. Yes, and the last one is probably the M&A. So you say that the pipeline is quite rich in terms of opportunity for the balance of the year. Usually, you say -- you give some figure about the level of M&A. Is it bolt-on M&A that you consider for the full year, which is EUR 250 million. So basically, would you say that this level is reachable as far as your backlog, let's say, of opportunity is concerned?

[Jérôme Vanhove, executive]

The fact that in our guidance for 2023, we no longer gave any specific quantified indication. Obviously, it does not mean that M&A is no longer important and it stays really at the core of our strategy. We did that, especially because we all know that in terms of M&A and our ability to appreciate more especially what can be delivered quarter after quarter or in a given year. There is always an element of uncertainty so as to consider the sequencing of our operations. That's the only reason.

Regarding the pipeline, it stays really good. We developed a lot of effort so as to nurture that pipeline. And we currently have a satisfying number of live M&A situations, making us still comfortable regarding what we could deliver in this year.

[Operator]

[Operator Instructions] And we now move to a question from Eric Lemarie of CIC.

[Eric Lemarié, analyst]

Yes. I got 3 actually, some follow-ups mostly. The first one on the phasing high voltage in Germany. I didn't properly catch your answer actually. Does the phasing impact in Germany will disappear in Q2 or perhaps more later in the course of the year? That's my first question.

I've got a second question on M&A. Do you see in the current environment with a strong level of demand from your customers, obviously, do you see an opportunity to add a new country to your footprint, especially now that you have divested the U.K.? And last question on, I would say, the competition situation in the market. Have you already started to observe the impact on the market from the new strategy of EQUANS, to be more focused on margin and more aggressive on prices?

[Gauthier Louette, executive]

So regarding high voltage, we do see a better Q2 clearly, from -- now the projects which are ongoing, et cetera. We think we'll have a much better Q2. Regarding M&A, I think we have a lot already to do in our existing geographies. And as you have noticed also in the recent years, we have build up quite a good position in Central Europe and especially in Poland. And we are also now -- we're starting to have a very decent business in Austria. So these are now platforms where we'll be able and I'm thinking especially of Austria to build further. The main priority remaining obviously, Germany where we have seen a lot of opportunities, and we're working on them. So we do not really plan to open up in new country right now. I think we have a lot of fish to fry on the existing geographies.

And regarding EQUANS voice, it's a recent closing now by Bouygues. At least in terms of intentions, strategies, messages, we do see a much better context now with focus on margin over volume, focus on cash generation. So that's very good. And we think it's going to bear fruit definitely. so we -- as we see it right now with higher -- much less complaints about Kamikaze behavior from EQUANS as we had in the past. So more on the confident side in this regard.

[Operator]

And now we move on to David Cerdan of Kepler.

[David Cerdan, analyst]

Gauthier, most of my questions have been answered quite nicely. But I would like just to ask you the question regarding the EBITA margin improvement in Q1. Is it roughly the same in all regions? Or do you see some differences in terms of performances or progress per region? And my second reason is regarding the human factor, so in which region do you face the difficulties to recruit, to retain employees? And what are the actions to fix it?

[Gauthier Louette, executive]

So -- regarding the margin, we -- this is simply we might have a bit differences of improvement depending on the segment. As Jerome mentioned, there's a good progress in the Netherlands among others, but generally, the trends are good everywhere as is. So no -- it's quite constant across the countries.

And regarding manpower, the stress on manpower, again, is similar everywhere. It's -- we cannot see a difference. If I look at all the countries where we are active right now, this is -- the demand for our type of skills is similar. So it's employee low -- unemployment levels have tended to go down everywhere. But -- and specifically in our type of work, even with higher employment level it was easy to find the right type of resources. So it does not improve in this context.

So we do a lot to counteract this and starting with training and apprenticeship, and so we have about 5% of apprenticeship within the company. We will work a lot on a recruitment campaign, and we have developed a coaptation policy with a reward to the people who are able to bring good people to the business. It is very efficient because first people are able to reap -- our own employees are able to talk really well about what they do in the company. And we see they bring people they know. It is reassuring for these people because they have confidence in the recruiters. And also our own guys, they also want to bring good people. So obviously, they are selective in people they talk to. So it is a very efficient system, accounting in some areas for us as much as 50% of our recruitment.

And then we work on a lot of the topics regarding quality at work. And clearly, I mentioned the employees shareholding schemes, which we're going to do again this year. And I think one thing we cannot overstress is the fact that our -- the message we give about being part of the solution, doing something for the planet, et cetera, it does ring a bell, especially amongst younger people, younger engineers. And that's something that we are going to stress even further going forward.

[David Cerdan, analyst]

And just maybe to follow on this. Do you see a change in the turnover rate of your employees? And do you see some competitors with some, I would say, [indiscernible] action to recruit people?

[Gauthier Louette, executive]

So I mentioned that the turnover, it has been creeping up over the last 4 years, now up to 7%, 8% from 5% to 6%. And -- so it's not an explosion either, but it's a trend we are watching closely. With regard to competitors, you have the odd case of poaching, obviously, or some people offering inflated salaries. But it's rather the odd case than the general trend. As I mentioned, the other thing we have to deal with is how people being approached by our customers. And again, it is -- there are 2 sides to this. And so we have to make do with this behavior sometime and make the best of it in terms of maintaining the relationship going forward.

[David Cerdan, analyst]

And regarding the M&A, do you see an expansion in the acquisition multiples when you discuss with your potential targets?

[Jérôme Vanhove, executive]

Actually, not really in what we are targeting in small- to medium-sized bolt-on M&A. I don't see any major deviation in that respect. As stated already, we favor situations where we can start one-on-one situation in exclusive talks with sellers and thus favoring as much as possible reasonable, I would say, conditions. In some very specific cases where auctions are driven and leading to inflate in multiples, we look twice at it first.

[Operator]

[Operator Instructions] We have a brief follow-up from David Cerdan of Kepler.

[David Cerdan, analyst]

For sure, this is the last question on my side. Can you remind me, sorry, -- what is the earnout case for you? So do you see earnout to increase because the acquisitions have delivered certainly a better than expected performance?

[Jérôme Vanhove, executive]

Actually, we do not have so many and so much earnout situation. So unless I miss understand -- understood the question.

[Operator]

And now I would like to hand the call back over to Gauthier Louette and Jerome Vanhove for any additional or closing remarks.

[Gauthier Louette, executive]

I understand there is a further question.

[Operator]

Apologies, we just got a question from Oscar Val of JPMorgan.

[Oscar Val Mas, analyst]

Sorry, just coming back here on pricing. You've talked about supply chain conditions easing. Can you just remind us from a raw materials point of view, do you see that potentially being negative to pricing this year? And could you remind us how much exposure you have to raw materials, copper, some of those products, which might be coming down in price?

[Gauthier Louette, executive]

Well, it's not used per se because in many instances, it is the customer -- for a large project where there's a large amount of cables. It is a customer who is buying the cables for us. So it's reissued to us. And so that is the impact for us is nil, one way or the other. And so I mean, this is obviously then we do buy cables for smaller stuff, et cetera, but it's not a huge quantity altogether.

And again, we have seen the situation easing up in terms of availability. We have seen some stabilization in the price I cannot say that we have seen some decrease in the price yet. So it might end up at some stage, but it's not what we see. And really, you must understand that inflation for us is not good news. It's preferable to have stabilizing prices and getting the inflation passed across to our customer is not a piece of cake. So really we have did manage. It's been a lot of work, a lot of negotiations, the indexes, they do help, but sometimes with some lagging time as well. So the margin increase we have seen is real quality of what we are doing, discipline, et cetera. And we have not seized the opportunity of inflation. It's not the way it works on the contrary. So again, inflation is a pure battle for us.

[Operator]

As there are no further questions, I'd now like to hand back for closing remarks.

[Gauthier Louette, executive]

Thank you very much for attending this call this morning. Thank you for your interest for SPIE. And on the back of this very good first quarter, obviously, we're going to work very hard to maintain a good momentum throughout the year. And as we always do, deliver on our guidance. Thanks a lot. And do not forget it is a good time to be an electrical engineer. Thank you.

[Operator]

Thank you. That concludes today's conference. You may now disconnect.