Alten S.A. (0O1S.IL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the report of the first half results of Alten. My name is Val, and I will be the coordinator for today's meeting. [Operator Instructions] I now give the floor to Mr. Simon Azoulay, Chairman and Chief Executive Officer; and Mr. Bruno Benoliel, the Deputy Chief Executive Officer, to start their presentation. You have the floor, sir.

Ladies and gentlemen, good morning, and thank you for this unusual report of our 2020 first half results. I'm hoping that it is the first and the last time that we have to report our results in such a way, and I hope that it will be in more pleasant circumstances next time. We have unusual business results that are just measuring the impact of the COVID crisis per business sector and per country, and we're going to try and foresee what is going to happen in the forthcoming months and years and how we're going to start up again from this crisis. Alten has experienced 2 crisis since its IPO. The first one was the Internet bubble, which was in the first half of 2003, even though it had started before; and 2009 subprime crisis did have an impact only on 1/2 of 2009, but we pick up and recovered at the end of 2009. But unfortunately, the current crisis doesn't seem to offer some promises of a quick recovery. Nevertheless, the robust business model of Alten will help us to pick up as usual and, hopefully, to draw some benefits, thanks to our positioning on the market. Now to report the figures which were already published yesterday night. Our revenue for this first half is or EUR 1.240 billion, down by 4% compared with the same half of 2019, with a very patchy kind of distribution when you compare the international markets and France. Well, in France, we had a 14% decrease, while on the international market, there was a plus 3.9% increase. But when you make the math, it's minus 4%, meaning that the international presence of Alten has helped to buffer the impact of the crisis. France was mainly impacted in the Aerospace and Aeronautics and the Automotive business sectors. But the impact was sudden for the Aeronautics and Aerospace, almost minus 60% of our service provisions for Civil Aerospace, all the clients involved in the manufacturing or exporting change of air traffic were impacted. And there was nothing we could do. We could only observed that 50% of our engineers, that is roughly 2,000 -- 4,000 people in France, 2,000 of them had to stop working suddenly at the time of the lockdown in France. France is pretty much exposed as far as the Aeronautics sector much more than in any other country, and it does explain the difference. For our international market, the growth was supported -- driven by external growth because organic growth is only minus 2.9% and 3.9% in total. So it could have been 7% over total. 4% does not really surprise us, considering the crisis. And it's not natural to me to say that we almost didn't escape considering the sudden and abrupt crisis. The past crisis of 2009 and 2003 have resulted in a lower operating profit on activity for the second half of 2003 and 2009. Now we will see what's going to happen in the forthcoming half years. In terms of headcount, usually, it is reflecting the level of activity in Alten in a world where there is a chronic shortage of engineers. So when we report the number of employees, it shows how big our group is growing or shrinking. But we're not talking about a 7% idle time between contracts, which is a standard figure, or other vacant days because of training or holidays that's accumulating 7%. Well here, we're talking 13% to 14%. So it has to be restated in relation to what was actually invoiced. It's a difference of plus 7%. That is, we have 31,440 engineers, it's above what we had in June 2019. So there was no decrease as far as the number of engineers is concerned, but some 2,000 engineers, mainly in the Aeronautics and Aerospace sectors in France, are between 2 contracts, and this has a negative impact on our revenue. And we'll talk about it again later during the Q&A. We move on to Slide 5, where you can see the impact per geographic area. The United States, thanks to external growth and acquisitions and rather more agile business than in Europe, we have maintained a business performance which is slightly higher than last year. The main impact is to be observed in France and minus EUR 310 million in Europe, mainly for Germany and U.K. and Sweden, to a lesser extent, for the Automotive industry. And Asia has helped compensate because of its rules of lockdown -- or no lockdown has compensated for what has happened in France and in Europe. So on Slide 5, you see the geographic distribution. So America stable. France and Europe were compensated by Asia. Now if we move on to the following slide, Page 6. This slide is a reminder of Alten's positioning in the market. And more than ever it is to be maintained. That is, in the past years, we did discuss a lot about some acquisitions that we made in the U.S., or a mix of activity which could have put together level 1 and level 2 staffing in freelance and consulting with different gross margins. More than ever, we realized that Alten was right in maintaining a positioning in high added-value positioning with HR and consulting management and career management for our consultants, whether it was a work package mode or time and material. And we set aside all the CapEx-type of investment or investing on homemade products for which it's extremely difficult to measure the profit because it's only measured over 6 to 7 years. So we will definitely be maintaining our position on levels 2 and 3. I'd like to specify that work packages, more or less stabilized at 60% of our overall activities, has helped us to be less impacted by the crisis because we've been able to manage to have a high rate of work from home for many of our engineers. And in March, April, May and June, our clients did accept that we're working this way. And even though it's difficult to assess the productivity of work from home, our clients have accepted a very high rate of work from home for most of the services, which were supposed to be made in their premises. And just like in the Aeronautics industry, they could have said "No, we do not accept that." But in -- the Aeronautics sector went through deep crisis, was such that 60% of manufacturing and R&D investments were stopped. But in other business sectors, work from home has helped to maintain the continuity of activity, just like for our internal activities in our own premises. And this has helped to really limit and mitigate the impacts of the crisis. Following page, Page 7. This is representing the occupation positioning of Alten, and this slide is even more important today. The crisis has meant a change in the geographic distribution and positioning of the Alten Group, as we've seen on the previous slides with the world map. And you'll see the type of services that we find in the engineering occupation and IT services. Alten is an engineering and consulting company, that is the blue design that's on the left, that's 70% of our business. And in this 70%, we mainly find outsourced R&D conception and design is almost 60% and industrial process in lighter blue is 10%. So we have won this 10% in manufacturing and industrial processes, and it's probably going to rise to 15% because of digitization. This is where the plan 4.0 will be operated. And we're also going to increase, which you see on the right-hand side, that is the traditional businesses for which you have 2 parts: software; and infra, cloud and security. IS softwares and internal IS is some 25% of this business, and internal networks -- infra, network and cloud is 5%. We're talking about the same skills and competencies of our engineers. And so 90% of our engineers, whether engineering or in IS or IT services are specialized in IT and digital. 90% of the Alten's engineers are in IT and IS, very few of them are in electronics or mechanics, and this has been like historically. So it will help us to go above the 30% currently observed for IT and IS internal network. So we're going to push for manufacturing, the lighter blue box, and internal IS, software development, data and management. And we're going to push also the infra and networks business. Out of precaution and considering the current trends observed in R&D engineering, we're going to try and -- try to develop these additional businesses where Alten is already well positioned. And sometimes, in some countries, it's 50% blue and 50% yellow. Following slide, Page 8. This pie chart shows the breakdown of the sectors where Alten operates. Of course, you would have guessed that the weight of Aerospace, Defence & Security went down from 20.9% H1 2019, down to 19%. And this downward trend is certainly going to continue because the ripple effect will be felt again even though there's been a kind of stabilization, but we are in the trough. There is a remnant negative trend in the second half. But between Civil Aeronautics and everything that is Tier 1 associated and Defence & Security which were not impacted, quite the opposite, actually. Telecoms and multimedia were not really impacted because, of course, there will be more needs for telecoms and multimedia, same for IT services and finance. Because thanks to work from home, this business did not go down. And thanks to our hard work, the weight of this will be changing. The decrease in Defence & Automotive meant that IT services and finance percentage went up. And then for Automotive, Rail and Naval, Rail and Naval are doing okay, just like space and defense on the left. And Automotive, was really swept away. But that was before COVID, it's not the COVID crisis. This downward trend had been observed from September, a shrinking of and repositioning. Carmakers are going to try and decrease their R&D costs, and this is observed all over the place. Then there are request for higher productivity, shortlisting of contractors and suppliers. And we have to make sure that we maintain our positioning in France with a PSA-Renault, and also in Germany with the carmakers and their OEMS. Same thing for Volvo. We've opened successfully for Automotive sector in the U.K. and the U.S.A. But there's a huge pressure with a request for offshoring in countries such as Morocco and Romania. It's not such a huge pressure, but it does have an impact on the revenue. And today, we will go from 1,500 people to 2,000 people, maybe 3,000 people in the coming years in terms of offshoring. And this of course still have an impact on the Automotive sector. Then the other sectors -- or other businesses that we are pushing are broken down between Energy, Life Sciences and Other Industries. We're making headways in these sectors. These are not massive sectors. But altogether, they end up having a bigger weight than all the other sectors, as you can see. In the following slides, 9, 10, 11 and 12, there are more details -- further details about what we've experienced in each sector. So I give you the main line. When we move on to Slide #9, for Automotive sector, I'm not going to repeat what I said. But since the end of 2019, we've observed shrinking. But there will probably be a promising recovery at the end of this year and next year. In the Rail and Naval marine sectors, we had big very interesting projects. So despite the COVID crisis, we were able to increase our revenue in the rail and naval industry. Slide 10 Aeronautics, Aerospace industry. You know that 50% of civil aircraft, the planes were grounded. So all the airline companies, all the operators in air traffic, that was a very brutal sharp stop in the Aerospace industry. And we don't have much visibility actually. The excess number of engineers on the bench, some 2,000 people -- engineers, mainly in France and Germany, are concerned primarily with the drop in the Aeronautic sector as well as the -- in the Automotive, which should recover. So this excess of number of engineers on the bench, that is tricky. So the engineers are based mainly in Toulouse, Nantes, Sophia Antipolis, Hamburg and a few other cities, but that's where you have the main aerospace sites. So our engineers are covered by the measures taken by the French and German governments with furlough measures, shorter working time. And those engineers who used to be the kings in the market will now have to move to other places to find work. So we'll have to manage that. Defence & Security, no problem, everything is fine. Next slide, Energy. Despite some slowdown and some concerns in the oil and gas sector, the other sectors allowed us to keep growing. Same situation in the Life Science sector, there is still a capital expenditure in that domain and not only due to COVID. Slide 10, telcos, the Telecoms, very little impact due to the crisis. Of course the world of communications keeps on developing with everything that comes with it, cloud -- the cloud, security, cybersecurity. So we didn't feel much impact in that domain. And then banking, financing services and the public sector, we don't have a major footprint in that sector, but we're going to try to get better positioned, because they enjoy long cycles, that's interesting. We managed to increase the share of our revenue in this sector. And it's only the beginning, I would say. So that's it for the comments on each business sector. Now next slide, Slide 13, our growth strategy through acquisitions. So we made 3 acquisitions that you see here on the slide. It was a bit of a disappointment. It took place either at the end of 2019 or earlier in the year 2020. And at the time, people disposing of companies, well, there were huge expectations. And early 2020, it was nearly impossible to make acquisitions according to our terms. Companies would demand 6 to 8x the EBIT of the company, including the earn-out, 20%, 30% of earn-out. It was crazy. We reached multiples above 10, 12, 14, with pension funds willing to pay twice as much as what Alten was willing to pay, so it became very tricky. That's why we completed only the 3 acquisitions in Asia and Ukraine. But we've been working hard since the COVID crisis and that has allowed us to do some resetting. So I may venture to say that soon we'll be announcing more acquisitions, significant acquisitions. Well actually, not big, big targets. Do not expect targets like companies of 5,000, 10,000 people in the headcount. It might come someday that we would target big players. But for the time being, we are targeting companies with 100 to 300 people, and that's the profile of our acquisitions over the last year. Every year, we acquire 1,000 to 2,000 engineers. So we target companies with a headcount now of 300 to 1,000 people, a bit bigger. And I hope to announce companies with a headcount of between 15 -- oh, I hope to announce that will be acquired between 1,500 to 2,000 new engineers before the end of the year '20. So ideally, hopefully at the beginning of the year 2021, we would have -- we should have a number of engineers that are higher than what we had in 2019. And in terms of number of people we bill because you would deduct all the engineers on the bench, 500 and more, I hope we'll be able to absorb that without having to dismiss any people. We never dismiss people. And then we should back on our feet sometime during the year 2021. It's the objective. And in the pipeline, we're having discussions around the number of possible acquisitions, which should allow us catch up with what we lost -- the ground we lost with the COVID crisis. Now before handing over to Bruno for further financial details, I'd like to make sure you get my message here. I'll come back to it in my conclusion. But this is the macro view of what's happening, the outlook. What we've lost with the COVID, well, it leaves us with a number of engineers that's pretty much equivalent to what we had last year, actually. But you have 2,000 more engineers on the bench and we have to absorb that. It's mainly in 4 cities in the Aerospace industry. So this is an outstanding exceptional cost. It's covered -- well, 50% of that cost is covered by the government, the French and German government measures. The impact on our EBIT, on our operating profit is kind of heavy, and we had to recalculate on the basis of the number of engineers billed and not the number of engineers employed. So we should get back to the same number of engineers billed and we should absorb the engineers on the bench and be back to similar levels as what we had in 2019. So this is what -- so what happened during that first half year 2020. Next slide, Page 14. Well, no change here. There's been no move, no major move, except for various programs, the free shares that we've been granting since 2016 to all the Alten Group managers up to thousand shares a year, more or less. That's what it accounts for -- to increase the share of shareholding employees. But the rest didn't change. I'll come back to you. But now I hand over to Bruno for further financial details.

Thank you, Simon. Good morning. We are on Slide 16. I hope you were able to download the presentation that we put online this morning. So in a nutshell, as Simon said, since 2019, for the very first time, Alten saw its growth interrupted due to major economic crisis. Our organic growth had been continuous and steady since the first half year 2009. And hopefully, pretty quickly in this graph, you will see a beautiful recovery. International business, more than 60% of our revenue, embedded growth was indeed higher than at the end of last year. There was relatively lesser impact of the crisis on the business, and that's also thanks to the acquisitions we made. Slide 17, obviously, 2020 shows a major stop in the continuous increase of our headcount. We used to be the 37,200. At the end of December 2019, including 33,200 engineers. And our headcount had continued increasing a 32,550, of which 37,200 engineers. And then there was this sharp, brutal stop. And except for a few exceptions, we stopped recruiting. Now we're back down to 31,440 engineers out of the total headcount of 36,100. Those figures include the recent acquisitions we made and that we consolidated early January that we made late 2019. And one more acquisition that Simon mentioned, the Chinese and Japanese company, we consolidated their revenue and their headcount as of the first of April this year. Now excluding acquisitions our engineer headcount would have been 15,085 more engineers on a like-for-like basis, of which 844 outside of France and the rest in France. Slide 17, the makeup of our turnover on a like-for-like basis with the same scope, down 7.3% for the business by and large. Acquisitions, mainly in the international business, making up for the loss of organic business, 3.1%. No foreign exchange impact this half year. But the rate of business was 92%. Last year, it went down to 84%. So 92% versus 84%, leading the revenue to go down by 4% in total. So our organic growth that had been steady and regular has been brutally stopped by the COVID health crisis. Slide 19, information about plants, more specifically, now focused on France. Earlier in the year, we disposed of a small site unit, EUR 2.5 million in revenue last year first quarter, bringing our revenue 2019 to EUR 568.7 million versus EUR 491.1 million. That means a decline by -- a drop by 13.7%. France was much more badly impacted by the crisis, particularly in the second quarter, due mainly to the Automotive and Aerospace sectors. Organic negative growth of 28%, accounting for that minus 14% for the half year. In France, the Automotive to accounting for 14% of the turnover declined by 28%, minus 45% in Q2. Aerospace, 24% of the French revenue went down by 38% during Q2. Energy, thanks to the nuclear industry, 15% of the French revenue. Rail and Naval, 6%. Life Science, 9%. All that -- those sectors slowed down in Q2, but they're still growing by 3% to 5%, all the other business sectors account for a marginal balance or slightly declining still in France. Slide 20, international business on a like-for-like basis. The crisis impact was less than France. We will make a focus on the international business country by country. It's quite contrasted, the situation. So organic negative growth by 2.2%, but that's amply compensated for by our acquisitions. Slide 21, as usual here, you have the sequential growth dynamics. Well, unfortunately here, it's negative growth, but that helps you to get really an operational vision of the business rather than a comparison quarter-by-quarter. A peek at our slides. So here, you see the negative growth -- marked negative growth in Q2. So the health crisis made us lose minus 18% in growth, 18.2%. Slide 22 and 23, on those 2 slides, published data and organic data showing the evolution of our business by geographical regions. Slide 22, end of June data, and on Slide 23 as well. Between Q1 and Q2, you have the published revenue and the revenue on a like-for-like basis, and same ForEx. So the situation, so very contrasted depending on what region you're talking about. North America, plus 7.5%, but stable organically despite the decline of [ 0.2% ] in Q2. ForEx positive by 2.2% this quarter. The U.S. accounts for 85% of the North America zone. The business went down by 3%. A sharp drop in the Automotive sector, 18% of our revenue in the U.S. in Q2. We were growing by 25% in Q1 and minus 30% -- so plus 25% in Q1, minus 30% in Q2. Same thing in the tertiary services. Sharp growth in the first -- in Q1, sharp drop in the -- in Q2, and that's a picture of our footprint in the U.S. But all the other sectors are growing in the U.S., including the Aerospace. In Canada, 15% of our revenue in North America. The business is still growing by 20%, borne by the tertiary sector, telcos and aerospace industries. In Germany, our third biggest geographical area today, business went down by 12% in organic growth -- oh sorry, 12% in total, 16% -- minus 16% organically. Germany is quite exposed to the Automotive sector, that's 30%. And the Aerospace sector is between 30% to 35% of our revenue. Germany went down by 26% organic growth because it [ extends ] to the Aerospace and Automotive sectors in Q2. So minus 15% for Scandinavia with differences between Sweden and Finland. In Finland, that's 20% of Scandinavia revenue, it's minus 3% mainly in the industrial equipment, which is a big sector in Finland. 75% of our revenue in Sweden, automotive and heavy trucks are 35% of our Swedish revenue. R&D projects were stopped at mid-March, therefore, the sector has decreased by 40% in this half year. The other business sectors went down. Sweden was greatly impacted. Spain, in spite of the health crisis, which started earlier than in France and stricter lockdown measures, paradoxically, it was only a 3% drop, mainly due to the Defence & Security sectors because of the closing of the defense and space Airbus sites. Same thing for the Automotive sector, while all the other sectors are on the rise. In Benelux, that is Belgium, the Netherlands and Luxembourg, a slight decrease, minus 1.6%, with for Belgium minus 6.5% because of the tertiary sectors. Reversely, it's plus 3% in the Netherlands for all sectors, except for electronics and semiconductors that have slightly decreased. Finally, to end this world tour, Asia Pacific, the scope has increased. The growth is mainly driven by India. The local business went up close to EUR 22 million revenue, plus 11% for the revenue. China has decreased by 13% because of the Q1 lockdown and because of different positioning. In Italy, in spite of the health crisis, which was also extremely violent and started earlier since the lockdown started in February, a lot of our work was done from home. It was slowed down in Q2, but the number of projects went up again. And for the whole half year, it's plus 11% in Italy. All the sectors are on the rise, including Telecom and other sectors. U.K., quite a buoyant growth of 30%, suddenly stopped minus 4%, while the first half was at 15%. Aeronautics, 23% of revenue and tertiary went down sharply in this second quarter. Now the condensed income statement at Page 24. With no surprise here, unfortunately, our operating profit on activity has been heavily impacted by the health crisis. In the second half, the activity rate was 77%. It's unprecedented in Alten history, so it did have an impact on Q2. In order to mitigate the impact, immediate measures and steps were made in Europe: furloughed workers was possible in Europe, so 13% of the headcount; stopping of recruitment; SG&A reduction, which were embedded, which were to meet a EUR 2.9 billion revenue, would easily understand that we had to take drastic measures to reduce the SG&A down to acceptable levels, and this is still underway. And in the U.K., in the U.S. and in Sweden, we've had to make some people redundant. We've also had to bear additional costs due to COVID, EUR 2 million for this first half. And the tax credit from research is also decreasing compared with 2019. So minus 200 basis points. In spite of the furlough paid for by some states, we still have some expenses in some countries. SG&A have increased by 60 base points because of the decrease of the revenue. So 15 base points because of COVID directly -- direct costs and another minus 30 bps. So in June 2019, it's 6.1% -- in 2020. Now have in -- several million euros of free shares, so it's an additional charge for the second half. And the cost of the new plan that we're going to implement in Q4 shouldn't have a significant impact on the second half. The nonrecurring profit, as you know, some costs will go directly to the gross margin that is cash. The restructuring costs due to the acquisitions, fees because of the acquisitions, so restructuring, EUR 2.5 million, EUR 1.7 million of fees. Redundancy plans, which we've implemented abroad, so these are nonrecurring, that's U.K. and Sweden, some EUR 2 million. And reversely, we've had a nonrecurring profit, a positive [ realization ] of earn-out, EUR 4 million, which had been provisioned, and an earn-out which had not been fully paid out since not all the business objectives were met. So EUR 68.7 million for the operating profit, that's 5.5% of the revenue. The financial income has been positive, 11.5%. The details will be explained in the next slide. The income tax accounted for EUR 21 million. As to the EMCs and minority interests, they account for EUR 1.5 million. So the net income stands at 60.6% -- EUR 60.6 million, sorry, so minus 20.6%. So it's not as high as the operating profit on activity because of the financial income. For those who model our business, I know that every time you ask us our actual income tax, it's 25.5% for this half, but it's not a standard one because there are some taxes on the disposal of some shares and deferred active taxes, that is deferred taxes due to losses of some affiliates. And so we've decided not to activate this because the time to recover was too far from us for the second half. It's 28% tax rate for Alten. Page 25 has been on the financial income. The financial debt does take into account the financial expenses and charges. And the earn-out provisions, it's still very low, 0.3 -- minus 0.3. So minus 0.9% of the interest on leasing contracts. So EUR 1.2 million for the cost of financial debt and lease. ForEx is breaking even. And the other financial income, there is a gain from the disposal of some shares where we were minority shareholders and we sold our shares earlier this year. This has made a EUR 14 million gain, which was impacted by provisions on the depreciation of other companies. Per geographic area now, Slide 26, we see France and international markets for 2019 and 2020. Starting with France, as you can read, the profitability was more heavily impacted than the international markets. In Q2 in France, it was 72% as opposed to 92% last year. Furlough was a mitigator, but what we still need to pay is a high amount. The loss of revenue was significant since it's minus 14% in France, which meant loss of margin. And the -- it went down by 350 basis points compared with 2019. SG&A cost reduction measures have helped to reduce the SG&A in absolute terms. We have succeeded in reducing our SG&A below the 2019 levels for France. But in relative terms, because of the decrease of the revenue, the SG&A rate as a percentage of the revenue went up by 140 basis points in this half in France. The tax credit on research is lower than 2019 for the first half. This has a weight on France only. That's an additional charge of 70 basis points. So we go down from 9.9% goes down to 4.3% of revenue. On international market, it's patchy. Some countries were heavily impacted like Germany, and other countries not so much, like Italy. So for all countries together, it was 85% versus 93.5% last year, so 13% better than France on average. Furlough was implemented everywhere it was possible, that is U.K., Sweden, Germany, Spain and Italy. But if we go through all the countries where Alten is present, in Germany, the first half, there were 122 working days, just like in 2019. So structurally, EBIT is low in the first half, but better in the second half. But because of the crisis, the operating profit of Germany has been decreasing for the first time since 2009 in the financial crisis. And in spite of furlough, operating profit and activity is negative. In Sweden, it was divided by 2 at 4.5%, while Finland -- was heavily impacted, while Finland has had an operating profit above 8%. In the U.K. and the 3 countries of Benelux, operating profit was maintained above 10%. In Southern Europe, Spain has reported a decrease in its operating profit and activity. While Italy, heavily impacted by lockdown, has maintained its profitability at 2 digits. In North America, operating profit has gone down, but it's above 5%. So all in all, excluding France, the profit went down mainly because of Germany. So all in all, it's standing at 7.2%. Briefly for Page 27 now. You have the balance sheet representing and reflecting our financial position. It was paradoxically reinforced during the crisis on assets. Noncurrent assets still account for 40% of our balance sheet, with goodwill is EUR 551 million, including the right of use, EUR 161 million. The current assets in terms of cash flow, that's 46% of the balance sheet, and that's mainly customer receivable and related assets, that's 80% of the total. In the liabilities, the shareholders' equity still accounts for a 60% of the total of the balance sheet. And the cash is EUR 224 million, as we will see on the following slide, Slide 28. For the first half, Alten generated a free cash flow of EUR 98.5 million as opposed to EUR 140 million as of June 30, 2019. Now if we restate this free cash flow with IFRS 16, that is the operating margin, was at EUR 71.1 million at 5.5% of the revenue. It was EUR 123.1 million, that is 9.5% of our revenue as of June 30, 2019. So this free cash is logically proportional to the operating profit on activity, and its decrease is correlated to that are the operating profit on activity. The tax is EUR 26.2 million. There were down payments made this year. As to the change in working capital requirements, it has decreased by 95.1% because of the accounts receivable, because of the consequence of the organic growth of the second half. And this, in spite of DSO, which went from 94 to down to 92 days. CapEx, minus EUR 7.4 million, 0.6% of our revenue for the last 3 years. This CapEx has been below what we call the standard level, which is 0.8%. Flows from lease debts restated in free cash flow so as to mitigate IFRS 16. So a total free cash flow at plus 134.9%, 6.9% over revenue, and it is the consequence of the second half -- the second quarter decrease. Our financial investments, that is change in scope, additional pricing, account for EUR 17.9 million. And I'd like to draw your attention on the fact that it's a positive figure. It's because we've cashed in because of the disposal of shares we had. In some companies that I described earlier, we've cashed in an amount which has helped us to pay out some earn-outs this year and some acquisitions, and generated a gain of EUR 18 million. No dividends were cashed out in 2020. And the other financial -- financing flows are ForEx cash position. So the net cash stands at EUR 224 million at the end of June. Slide 29, trying to present here free cash flow analysis over 6 months, so first half 2019 and first half 2020. But this comparison doesn't stand because the working capital requirement changes does not help to draw final conclusions, except that it is confirmed that WCR picks up. And when there is such a drop, the cash return is rather high. You see the analysis also over a period of 12 sliding months, as we call them, and H1 12-month half 1 2019 plus half 1 2020. Now the summary of what I've explained for the free cash flow on Slide 30. I'd like to mention that the DSO changes were not so important between June 2019 and 2020, only 2 days. Usually, more days than this time. Between the end of December and the end of June, it's only plus 2 days. I don't know whether it's because of lockdown, but our clients paid rather on time. But we do anticipate delayed payments which will be directly related to the health crisis. Slide 31, here you have the summary of the IFRS 16 impact on our balance sheet and income statement. The impact is negligible in the P&L and on our cash flow position. And on the TFT or lease that account for EUR 660 million, and up to 90% of that being real estate rental. In summary, Slide 32, so the synthesis for this first half year. The organic growth that we have been enjoying for the last 12 years steadily was brutally stopped in H1, mainly due to the drop in the Aerospace and Automotive. The operating margin and activity was also strongly affect by high increase of the number of engineers on the bench as well as exceptional expenses. The free cash flow is growing sharply, growing to a decrease in our business in Q2 despite a decrease in operating profit and a slight increase in DSO. And I'll be happy to answer any questions. Back to Simon Azoulay.

Thank you, Bruno. So in conclusion, Slide 34. To summarize in a nutshell, the current problem which is the fact that the Aerospace, Civil Aeronautics sector is badly hit by the COVID crisis. I want to remain optimistic though. Because there are many projects in the pipeline today, lots of discussions, government subsidies and the rest of it, all that is a good omen. We should see a beautiful -- a nice recovery of this sector before the end of the year or next year. And we should be able to absorb the number of additional engineers on the bench, 7% in 3 cities in France and 1 in Germany. That's where our problems are concentrated. In the Automotive sector, there should be a beautiful recovery, and we're getting prepared for it. If we manage to absorb the impact in the Aerospace/Aeronautics sector and if we see a beautiful recovery in the Automotive sector, we can make up for that harmful impact. If we can recover and restart in other sectors, then by the end of 2020, we should go back to pretty normal -- normative situation. We should -- sorry, in 2021, we should go back to where we should have been in 2020, which would be great news, of course. And we'll still have to manage the number of additional engineers on the bench. We can use them for mobility purposes. For the last month, we've been deploying an action plan that will cover the next 3 years to speed up on international growth, HR investment and investment in external acquisitions. That should allow us to diversify the sectors where we work, Life Science, Energy and IT services, in particular. Those sectors are targeted in particular. And as I announced to you earlier, except if we're really unlucky, normally, we should complete the number of projects we lost due to the COVID crisis. And that before the end of the year, we should be able to compensate through acquisitions, so that in '21 we can be back to what should have been the norm in 2020. Next slide, 35, so my message is that more than ever, we are sure and proud of having been rigorous as to our strategy in IT engineering, levels 2 and 3 of our business offers that's slightly positioned. We were well positioned internationally and in the right sector, so we will continue to speed up. A particular trait about Alten, and sometimes I'm blamed for that, it's our way of management. People blame me for not being bold enough on acquisitions. But mind you, Alten Group has the most healthy financial situation in the business. So we can -- we have lots of possibilities available to us. We have a great balance sheet. It's really unique. We have cash, but that's not why we should buy just anything. No, we'll stick rigorously to our strategy. IT engineering, our business offers positioned at levels 2 and 3, mainly, the slide I showed you. And also, we'll stick to the ratios that have been good to us with our IT-oriented technological offers, the way we used to. And we shall invest to catch up on the COVID impact. It should be erased in 2021, that harmful impact should be canceled out. So in 1 year from now, we should be back on our feet to the previous situation with an operating profit close to 10% as usual once we solve the problem of too many engineers on the bench. And the international business should account for 2/3 of our revenue, at least 65%. Thank you so much for you attention, and I will be glad, Bruno and I, to entertain any question.

[Operator Instructions] First question, Mr. Laurent Daure.

I have 3 questions. First, back to how you manage the drop in the headcount at the beginning of H1. Well, I guess some people had resigned prior to the COVID crisis. You end up at a very low level. Also decline in outsourcing, subcontracting and then some people left on their own, minus 1,500 people. It cannot be only in the Aerospace/Aeronautics sector. Second question, the amount the subsidies in H1 and what you contemplate for H2 and the visibility as to the prolongation of the subsidies in 2021. I don't know where we stand in that negotiation. And third question, the capital gain is quite high. Usually, you buy minority shares and then you plan on integrating a company. So what led you to sell and outsource capital gain?

Thank you, Laurent. Okay. First, the headcount, about the headcount. Oddly enough, it's not the main concern, as I explained to you earlier. Today, we can manage our headcount the way we please. The problem now is the number of work packages and the number of engineers on the bench, which has an impact on our margin, which is exceptionally 13% versus 7% usually, and how we will absorb that. When it comes to the headcount, the headcount continued to grow slightly. We're stable, we're pretty stable, I would say. It's only marginal. The changes were pretty stable versus the situation shown on Slide 4, 31,000 engineers. The turnover went down as well as the recruitment that went down sharply as well. For the last 3 months, our headcount is stabilized around 31,000 engineers that we can bill for. But 2,000 -- we have 2,000 engineers on the bench. The acquisitions we've been preparing, that should materialize before the end of the year. That should bring to us between 1,500 to 1,600 engineers as well as more projects coming our way. And that should solve the problem of our engineers on the bench. And turnover in recruitment, we are now below 20%. It continues, there is some momentum. We are targeting our recruitment and we'll start recruiting more, but in a very targeted fashion and not in an aggressive way like what we did in 2019. I hope we don't regret that. But the recovery will not be sharp and very fast, slow slope. Okay. About state subsidies, government subsidies, I'll hand over to Bruno to that. And as to the capital gains and our disposals, we disposed of some minority shares in companies where we became aware we were heading towards big difficulties. We had brought support to start-up companies and taken minority shares, 30% to 35% in those start-up companies. But then we finally concluded, we cannot integrate them in the Alten Group. We also disposed or were contemplating disposing of some not-at-all strategic businesses, like small companies including 150 technicians. We're going to dispose of that, sell it to an entity doing only that as their core business. And then I'll hand over to Bruno for the government subsidy.

Now when it comes to furlough and the support from the government to businesses, considering the rate of activity that we've disclosed regarding France and Germany, you will imagine easily, the amount it implies. We've maintained the furlough program for the second half. In Germany, it will be maintained in 2021. And paradoxically in Germany as furlough is extended over a time, engineers and employees are better paid paradoxically, and the residual cost for the company is approximately 20%. In France, the union has just signed an agreement on furlough program. But we need to look into the details of this agreement with the government because we don't know whether we will be in a position to implement it. If not, we will be relying on the state-financed furlough. That is, 70% of the group salary is paid. But under our collective bargaining agreement, we have to recover 75% -- or 20% to 25% or even 30% for us will have to be paid for us, since we have to provision paid leaves, et cetera. And if we cannot apply this long-term furlough, we will have to consider ways to adapt our headcount. Because the problem is that some announcements and statements and measures announced that are not specifically related to business sectors, and month after month, for instance, it was said that maybe furlough will not be subsidized so much in September, but then they've postponed it to October then November. And then they've said it would be per sector in 2021. So we try and factor in all the information disclosed by the government and we adjust our strategy accordingly. Now in a nutshell, it only is true for 2 countries, France and Germany. It's 2/3 of the payroll that is subsidized in Germany. And in France, it's for 1,500 people. It was 60%, which was covered, excluding sick leave -- or paid vacation, sorry. And it will be some 50% in some time from now. So the negotiation is not really positive for us. But we still -- for the time being, we need to look into the various modalities and the measures that are announced by the government. These don't account for your conservative guidance on H2, yes. But we will have to consider these 1,500 people in France to be reintegrated. We decided not to make them redundant. We don't want to lay them off. They will be once again precious and valuable resources because there's still this chronic shortage of engineers in France. So we have this 1 year. We are in a period where we have many engineers in places where there is no alternative job, and there is little mobility. So we'll have to manage this for a year with governmental support, which will be divided by 2 for these 1,500 engineers in France.

So if my understanding is right, is that once this 1,500 people will recover work, you will recover with a normative cash flow or gross margin in 2022 or at the end of 2021?

Yes. Hopefully, in 2021, there will be an impact on our margin. But there will be acquisitions, which will be compensating for what I explained earlier. So we will be back to the 2019. But the impact is that of the idle time with engineers on the bench not working. And it is a significant cost, but it doesn't prevent us from sleeping at night. But in these uncertain times, we're not really concerned about the cost on Alten and the charges that it will mean for us, maybe 1, 2 to 3 points of operating profit. There will be a shortage of engineers in 2022. We're more worried about the psychological condition of these engineers who will be staying at home for 6 months or maybe 1 year, and this was not really taken into account in the negotiation process. We should find ways to keep them busy and that's quite difficult.

[Operator Instructions] Gregory Ramirez from Bryan Garnier.

I have a question on your long-term margins. Since there is a change in your revenue mix, you were talking about more manufacturing and engineering, more IT services. Now is your 10% objective likely in the coming years? And then about your 10% margin, I do understand that you have this engineers on the bench and it's going to be difficult to recover in 2021. But considering the gap between 2020 and 2022, I'd like to understand how you mean to achieve 10% in 2022, excluding acquisitions. And even though you have targets.

No. If we consider the 2 -- next 2 to 3 years and geographic distribution and the business distribution of -- Alten has gone for, that is more IT services or more manufacturing engineering, that is the Industry 4.0, there's no reason why the margin should be lower. There is a balance between our customers and Alten so that the whole subcontractors, engineering services and IT services will be between 0 and 12%. 0 is -- tends to be managed and 12% when it's a smooth management, where we are the best in class in the U.S., U.K. and Europe. Alten is always generating 10%, 10.2%, 9.8%. So once you keep this in mind you may recalculate based on the acquisitions that will have an impact of minus 0.3 or 0.4. So ultimately, we're really good. And it would be true for all business sectors. Some will be 0% to 5%, other will be between 5% and 7%. And the good ones will be standing with a margin 10%. And that's true for all sectors. IT services. It's true also for R&D. It's true for infrastructures and networks, et cetera. So I'm talking about large companies, of course. I'm not talking about companies with 200 and 300 people who can make 15% EBIT because they have a very specific cutting-edge expertise. But when you're talking about thousands and dozens of thousands of people, it's quite a feat. Now an additional piece of information, that's offshoring. In IT services, when companies have large subsidiaries, in India for instance, where the EBIT will be between 25% and 30%, 20% for the last in class and 30% for the best in class, and it does have a significant impact on their business in the U.S. in general, which will extend in France or not. There was a mechanical effect on the EBIT by 2 -- up to 4 points for this structure that has heavily invested in an Indian company, and you know who I'm talking about. But that's also true for all the big ones. So if, for any strategic reasons in the future -- and we will not do that for the face value of the company and it's listed on the stock exchange. If this company is EUR 2 billion, we buy it. If 20% EBIT, mechanically, it will mean that it adds a business to us, which is American, which is mainly IT offshoring and which would be pulling the EBIT at a cruising speed, 9% to 10%, which is what we usually hope for. In IT services, it can help us to rise up to 14%. But that's not our strategy today. We want to support the new shore and offshore needs of our clients when they're going through an optimization and transformation process. And through this, we would like to accelerate our presence in the United States. But it's not something that we want to be massive or so big that our debt will go up again. So maybe they can ask more questions if it's not clear. But our strategy at Alten is very clear. We will resume the 10% EBIT with acquisitions which will slightly reduce our EBIT. But sometimes, we can have a 15% to 20% EBIT acquisitions and that will help us maintain our EBIT.

There are no more questions online. [Operator Instructions] Derric Marcon from Societe Generale.

I have 5 questions, if I may. The first one is about the Automotive sector. Your confidence in the recovery of this market is quite surprising. Some carmakers had been better than others during the crisis. But what is it that leads you to think that it may recover before the end of the year or at the end of the year? That's my first question. The second question is about your -- the current business and the number of [ OSP ] you received. Do you feel any dynamics in early September? Third question about Q3, rather flat, I understand. What about Q4? And since you will recruit, don't you think that Q4 might be the same as Q3, that is stable or flat? Fourth question is about the tertiary sector in the U.S. What does explain that it went okay in the U.S. versus other countries in Q2? What are the lessons you're drawing from this Q2 performance? And then this intention to change your mix in business sectors and more IT. Since you're going to put more effort in developing this market, don't you think that you will be faced with more recruitment difficulties because in spite of all the engineers' profile who may switch from engineering to IT services and consultancy, would they have more idle time or less? Don't you think it will be more difficult to recruit such profiles who will be in IT networks, software development rather than in engineering?

Okay. I'll try to answer all 5 questions. Now about the Automotive sector, we are not super confident. No, I didn't say that. But there are technological breakthroughs requiring major R&D investment in the car-making sector, and that's what we hear from our clients as well. We see signs of the great needs, not so much in the structural needs of the Automotive sector, more about a major shift change in the Automotive culture sector. Subcontractors tend to be more and more concentrated. There is constant pressure on margins with dumping on a survival mode. We know 2 of them in France, you have some in Germany as well. Companies with the headcount of 10,000, 15,000, almost only working in the car-making sector, and they could harm us in a world where competition should be healthy and not promote dumping. We're more concerned by that than we are by the volume of business. Of course, we've seen short reductions in the U.S. sales, Sweden, Germany, France, but not related to the COVID. It started back in September '19 and the recovery was then announced for the end of 2021. Okay. We need very specific skills and competencies in ADAS, for example. So we look closely at how our competitors behave. It might get a bit hot, but we should keep our business level at the level that we see. We'll just have to look at our margins because of the dumpers. Okay. About the overall dynamic for Alten Group. I would say we see the beginning of a slight recovery. Things are getting better. We hit the lowest point end of March, early April. That didn't impact Q1 but it did impact Q2 very strongly. We have caught up on half of that drop. Half the drop was due to everything being stopped due to the COVID, and now we're catching up on the other half, that minus 7%. That's pretty stable. It is pretty stable and it does remain positive. But nothing great at all. Granted, it's not like a sharp recovery with 10%, 12% of organic growth. No, not at all. But we are stabilizing and slightly improving the situation as it is today in September. In terms of engineers, we have pretty much the same number that we did last year, but with 2,000 and more idle engineers. But acquisitions will be made so we can catch up with our revenue. But we'll have an excess number of engineers -- redundant engineers. And business is not really picking up very energetically. We don't see major signs of recovery. We have the economic solution, we know how to restart better than before. But for the time being, we don't see any clue of a sharp organic recovery of the business. Hopefully, it will change. We may have a nice surprise around the end of the year or '21 or early 2022. That's why we're cautious with our recruitment, very targeted and pretty low. That's just slightly higher than what we started out with. So that's the answer to your first 3 questions. About your question #4 now, about the tertiary sector, service sector in the U.S. Our business has been quite impacted. We do consultancy with the agile method and digital transformation, so that should go on definitely, it shouldn't go down. It's only a matter of commercial performance with the local managers. We're not worried, but it's highly specialized. We've addressed the U.S. market with specific skills, digital transformation, digitalization and agile method. So that should restart pretty quickly and pretty well. As to your question #5, what about our place in the IT world? Now let me specify something that I love repeating to Alten managers, IT is ubiquitous. It's everywhere, absolutely everywhere, in R&D, engineering, in manufacturing, in the world of internal IT services, enterprise services, Internet world, the cloud and data processing. So IT is merely a technique, it's not a business sector in such. But since we were founded, 90% of our business is IT, the rest being electronics and mechanics, purely speaking. So we do have the skills and competencies. However, when we use those skills in the service world, banking, financing, public sector, that's the tertiary sector, we're working with them. Well, we are speaking with the IT managers, senior managers. Their role is not to sell equipment in a competitive environment, their concern is to keep up and running the IT system of the company. So the cost is not so much a priority. Their focus is on getting the right response to the needs and requirements, so that all the companies and employees can work properly. So they require more experts, and the rates are -- the fees are better, higher. So with those clients, given that we've got the same competencies, there is a gap of 10% to 15% in the rates and salaries. The gross margins remaining the same, but it is a venture indeed. Not the same in all the countries. Like in India, there is no gap, no difference. In the U.S., France, England and Sweden, you have a gap, a big difference. In Southern Europe, no, you don't have any difference. Engineers in internal IT services are treated just like engineers working in the industrial world purely. So we'll have to get positioned in France, in Germany, in the U.K. and in Nordic countries. We'll have to target highly technical, highly skilled added value. It does work already, particularly on infra and in the networks where it's highly technical. In the U.S., we have to tap the market through freelancing or Indian offshore -- or Indian offshoring. You don't have much in between freelancing and Indian offshoring, so we'll targeting offshoring. 30% of our revenue is already there. If we reached 35%, it will be beautiful. We never reached 50%. Though Alten will, in priority, address the world of engineering and industry. But we should reach 35% in there. And our acquisitions will be around 10 points of our EBIT, just like with engineering.

Charles Lepetitpas from ODDO BHF.

I have 3 questions. The first one is about Renault, the French carmaker. We've read in the press recently that the new Head of Engineering would have a short-leasing process with privilege to suppliers. You've talked about dumpers earlier, could you please tell us a bit more about this specific client and the negotiating process? Is it final? And do you think that other clients would be doing some delisting other suppliers? Then regarding your engineers who are not working, who are on the work bench, do you share the burden of the cost with the government, I'm thinking about those engineers based in Toulouse? Or do you have to bear 100% of this cost? Now the fact that these engineers are not staffed means that there will be a price decrease in some contracts or even in other sectors than Aeronautics. And then back to the Automotive industry, for my third question, in Autonomous cars. Several OEMs have postponed their projects, are you well positioned on these projects? And do you think that you will benefit from that?

Now regarding Renault, I would like to name a client. These discussions are always confidential. And clients do not like it when we talk about them without their approval. The only thing I can say is -- and remind is that in 2009, there was a Dutch auction and very harsh negotiations, which meant that 4 companies were ranked as number as #1, ranked 1. And 2 other companies were coming as a backup to the 4, which were shortlisted, Alten, Altran and others. And we managed to come up with different skills and competencies than the 4 shortlisted one. True and also what we can with in terms of methods and organization and IT and other skills. We felt that we were not listed to Renault, but they took us nevertheless. It is the only carmaker with which we were faced with the situation. We are shortlisted by all other carmakers in Europe and in the United States. And Renault, since then, has respecified this 2009 listing which was reconvened in 2012. It's not a new situation. It's just a reminder. 4 shortlisted one and 2 others as a backup for complementary services, and it's quite significant. It's not trivial. But I cannot tell you more about it. For the time being, we discuss with them on various subjects and we are hopeful that we will be in the Tier 1, because we think that we should be and as Alten. We think that we should be on that list, but there's nothing that I can say at this stage, it's confidential. So that's for the current situation. In the worst-case scenario, we didn't change. And in the best-case scenario, we would be shortlisted in Tier 1. Now regarding our engineers in Toulouse. So the big branch is in Toulouse. For France, it's 50%, 60% in Toulouse, 20% in Rennes and the remaining ones in the South East of France for the Civil Aeronautics. No, there was no pressure by the clients to introduce what I would call the double penalty on us. We have been considered as trustworthy partners because we bear the brunt of the impact of the crisis. So really the problem is the occupancy rate or the engineers on the bench. My feeling is that the client doesn't want to take advantage of the situation and introduce a kind of a dumping policy. So far, everything went fine. So it's not going to have an impact on the fees or the rates. Salaries will not go down. Everybody is aware and our engineers in France are not that well paid, 5% less than in Germany or in the U.S., for instance. But we have to pay much more social contributions on their salaries. And we cannot decrease it further. All our clients are engineering -- are in the engineering sector, they do not want to see a too big gap between the salaries of their employees and that of their subcontractors. So there is no risk, no such risk as the one you mentioned in your question. Now for autonomous cars, as I said earlier, and I repeat myself. Yes, we have good hope to join the band, particularly with those OEMs where there are some promising news about recovery. But you can count your chicken before the hatch, but it means probably that there would be a recovery in the Automotive sector at the end of the year.

Another question from Derric Marcon, Societe Generale.

I'm sorry, back. I forgot a question which is rather important. The fact that the deferral will last over time, isn't there a risk that it will unsettle the organization and the position of your business managers? Because even though we're all aware that this situation is not a standard situation, but it doesn't have a direct consequence of their margin and their salary. So as long as governmental measures are there, we may carry on like this. And this may be a protracted situation, postponing some decisions. Isn't there such a risk that it might be lingering?

I know it's an important question, indeed. And I might be cynical but it's only in 3 towns in France. So we'll be considering that those engineers working in the Civil Aeronautics are isolated in 3 different locations in France. And this does have -- does not have an impact on the overall business. And let's not forget Hamburg in Germany, heavily impacted as well. So 3 towns in France and 1 in Germany. Excluding these 4 cities where the Aeronautics industry is big, in the western part of France, some engineers may be switched to other tasks. And those who are idle will remain on the bench in towns where there are little local alternatives available. So the likelihood that they would be working in other sectors is very low. Mobility is possible. We never forced, nevertheless, our engineers to move away from their towns where they might have built their house, where there is spouse or partner may be working. It takes almost a year before you can actually move to another region. So for the time being, the impact is only on the managers working in these towns. So the managerial approach is being substituted by kind of HR policy. We are encouraging these managers to search for other clients or to move to another region whenever possible. No, it did not have an impact on the working methods or, so far, on the morale. So they are like an isolated group, if you wish, in the Southwest and Southeast of France and Hamburg and in Britain even.

There are no more questions. I'll give the floor back to our host for the closing of this session.

Thank you for having attended. There were quite many of you listening to us, quite normal considering the current circumstances. I hope that Bruno and myself have been able to answer most of your questions. But don't forget to get back to us if you have more questions. I hope this has provided you some visibility as to the next half and our hope for a recovery in 2021. Thank you very much, and have a nice day and stay safe. Goodbye.

Thank you for having attended today's conference. You may now switch off the -- you may disconnect. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]