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

Welcome to the Alten web conference regarding the third quarter 2024 turnover. [Operator Instructions] We're now going to give the floor to Mr. Benoliel.

Thank you. Good evening. Thank you for taking part in this conference regarding the Alten activity at the end of September 2024. I am going to try to be brief because we have another conference for a system in 1 hour. You should have received our press release because Cecile sent it out to you at the end of the day, and I'm sure that you've already checked the figures. So there is no rebound in the activity. This third quarter made the erosion of growth worse and worse than what had been anticipated by our clients. Some of those who had already planned reporting projects before the summer decided a few days before projects that have been confirmed in September and October, canceled other projects, in particular in the automobile sector and in the aerospace sector. At the end of September 2024, our turnover is of EUR 3.1167 billion. In France, the business has gone up by 5.8% and 3.2% outside of France. On constant data, our activity is only growing by 0.3%, 5.8% in France and is going down by 1.8% outside of France. On 9 months, the business has had a 0.6% [indiscernible] more than last year, and this has had a nonsignificant impact, a trivial impact on growth. In the third quarter, overall growth has been up 2%, 5.9% in France and 0.2% outside of France. And on constant data, growth is at 0.1%, 5.9% in France and minus 2.6% outside of France. As you know, the activity rate is slow this year. There are postponements of projects and so we have a higher level of intra-contract. Our bid activity rate is at 91% this quarter. It was at -- it was higher last year. And at the end of September, it's at 91.2% against 91.8% at the end of September 2023. The rise in intra-contract is still limited in spite of the postponement, but it has an impact on our recruitment dynamics. The headcount of the group has gone down slightly because we are 58,000 collaborators when we were 58,300 in June and 57,000 at the end of 2023. Engineers have gone down by 1 are now about 51,000 collaborators, whereas we had 51,390 engineers at the end of June and 50,000 at the end of 2023. Overall, throughout the year, our engineer headcount has gone up by 1,200 people, 894 from acquisitions and 376 from organic growth with a slight slowing down on growth in France with 50 engineers and 326 engineers outside of France. To sum up, out of the 31,220 engineers, 11,750 of them are in France and 39,470 outside of France. Now if we look at business and geographical areas, the you already have the main trends. They're exactly the same as the one we commented a month ago. France has a satisfactory performance this quarter, but with 2 extra business days compared to last year. So a growth of 2.9% had it been the same number of business days. So France is still growing. but you will see that the growth rate is slowing down. Business has grown year-on-year in Automotive, Life Sciences, Defense, and Energy. Telecommunications and BFA are still slowing down, but business has gone down in the Automotive sector and Aerospace sector. In the Iberic area, growth has stabilized at 9.5%, so more than 8% of growth year-on-year. All sectors are growing, except for finance and life sciences, which are slightly declining. In Italy, growth is still slowing down, but it remains satisfactory because it's 8% in Q3. All of the significant sectors have slowed down, but remain growing, except for nonfinance, which is almost stable -- bank and finance rather. In Germany, business has gone down by 16% and year-on-year, it's more than 11%. The automobile sector, which represents about half our turnover is decreasing by 16%. OEMs, which represent 2/3 of German turnover are still growing, but there's minus 45% for equipment. Aeronautics is not progressing much during the third quarter. In the U.K., business has gone down by 12%, mostly because of the aerospace and the civil aerospace and public sectors. The public sector was impacted by the freeze of budget. And we're expecting this to resume in 2025, but we have no guarantees. The automobile and aerospace sectors have also slowed down. In Benelux, we have a stable activity, slightly decreasing in Q3 because of Life Sciences in Belgium, mostly, whereas the semiconductors in the Netherlands has started growing in the third quarter again. In Scandinavia, our business is stabilizing at 10%. The tools and machines and tertiary sectors are the most strongly impacted. In Eastern Europe, there's a decrease that is not as significant in Q3 as it was in the second quarter since it's only 4%. Poland, which represents 2/3 of our turnover in Eastern Europe is growing, whereas in Romania, our business is still decreasing by 15% in Q3 because of the automobile sector and because of the tertiary sector. In Northern America, our business had started to grow again in the second quarter. But as you can see in the third quarter, it's stable. This does not mean that our business is not resuming in the U.S. It was mostly impacted in Europe by the project postponements in Stellantis and new origin. In Canada, our business is growing. It's in the U.S. that our business has slightly gone down. And in Canada, it's growing by 7% even in the finance sector, which was decreasing in the first quarter. In Mexico, we still have strong growth, 30% for automobile and bank finance. In Asia Pacific, our business is stable, still slightly impacted by the situation in Singapore. There's a 4% increase. China represents 1/3 of the Asia Pacific region. There is an 8% growth, but it's slowed down in Q3 because of the automobile sector and the telecommunication sector. India, 30% of the area is growing by 10%, but this growth rate has slowed down in Q3 because of the automobile sector as well. Japan, which represents 20% of the area, and the growth was slowing down, but it's decelerated because it's only of 2% in Q3. As for Korea, 9% of the area. The growth is also slowing down because of the automobile sector. So in a nutshell, we can say that Southern Europe is growing still in its satisfactory. France is between Northern and Southern Europe. Same for Benelux. And Northern and Eastern Europe, including the U.K., are struggling. They are faced with significant difficulties, especially in Germany and the U.K. Now if we look at the different business sectors. The automobile sector is growing by 3.5%, with the business stabilized in Q3. Just like for the first quarter, most OEMs -- manufacturers are improving, but some have slowed down in the third quarter. As for OEMs, the slowing of business is more significant, minus 22% year-on-year, but almost minus 30% in Q3 because of German manufacturers who have seen their projects -- the number of projects decreased significantly. Rail, there's still strong growth, 6%. Aerospace, 8% growth, but this growth was slowed down in Q3 because it only reached 4%. Airbus had made announcement in January, but actually, this growth was even slower than what we expected and projects have been postponed in September and October. Defense and Security, there's a 19% increase. The growth rate has accelerated in the third quarter. Energy growing by more than 3%, thanks to nuclear energy represents about 1/3 of the sector. And the growth rate has reached 15%. The oil and gas businesses have grown by 15% year-on-year. We will see if this is because investments are resuming in this sector after several years of slow growth or if it's just functional investments because of a few important clients in this business sector. Life sciences are declining slightly. Electronic semiconductors and industrial equipment is rather stable, and there's slight growth in the third quarter. Telecommunication are slowing by 5%, but this deceleration has slowed down in the third quarter. And here again, it's slowing down. The retail services and public sectors are also declining by more than 6%, mostly because of the significant decline in budget in the public sector and in services. In the third quarter, similar to the first one because of a more significant decline in the aerospace sector than we expected. So it's not what was announced by our clients at the end of 2023 for the second semester of 2024. For M&A, no new acquisition was finalized. The closing of the new acquisition that was announced should happen before the end of the year. So what to say about 2024? It is a difficult year. Growth has eroded all throughout the year. The third quarter is more difficult than expected because some accounts in the automobile sector are still slowing down, including because of a few many factors. The number of projects started is much lower than what had been anticipated and announced, even though the announcements in July had already encouraged us to make decisions and to take this into account in our recruitment strategy because there was a decrease in projects that had been announced. Alten was faced with projects being delayed or canceled. Some of them were quite important even if they had been confirmed by several clients. And this was because of cash flow strategies or investment strategies. We have seen these -- this is quite unprecedented because these projects were canceled or delayed at the last minute. It's extremely rare. I think it had never happened since 2013 or 2012. It seems as though some clients were also surprised by their own difficulties, which explains why they have postponed even more projects compared to what had been planned at the beginning of the... These postponements of projects also came with a request to delay payments at the beginning of January 2025 for projects that were due at the end of 2024. The economic context in Europe is not favorable. The rebound in the U.S. is not clear. Asia's growth is sluggish. Even though we'd anticipated a worst-case scenario, the truth is we have to even adjust slightly our growth objective for organic growth instead of decline because we are planning on minus 0.7% and minus 0.4% organic growth for the end of the year. Operational profitability doesn't come as a surprise. It was announced. It will be negatively impacted by an inter contract that is slightly more significant than planned and higher SG&A slightly below what we had in the previous years. despite an increase in the cost reduction plan that we implemented. As a consequence for 2024, we're planning on having an operational margin around 8.7% for 2024 in a similar economic context. I'll give the floor to the participants. I'd like for you to open the conference for people to be a bit unmute.

[Operator Instructions] Mr. Laurent Daure had a question. Over to you.

Going back to the forecast for Q4, it seems like there's a major step, 3% to 4% organic growth. Is this only the difference? Is the difference only related to the Automotive sector? Or is this something else? And finally, I know that it's probably early to say for 2025, but you're already starting the year with a decline or degrade. Do you think we have the capacity to go back to growth in 2025? Or is it likely that we'll again have a performance that's declining in 2025?

Well these projects that have been postponed compared to what was planned initially, especially for projects that were supposed to start and we were informed no more than 10 days before they were supposed to start that they were postponed when the teams were actually ready to go. This is a situation I have to admit that it is very specific, very peculiar, especially given the fact that we had been informed that we're reducing our costs for Q3 and Q4. And that is why we revised and downsized our organic growth objective. But usually, I'd say that the forecast that we have, we're able to make them happen. But I don't remember ever finding ourselves in a situation where almost on Tuesday for the next Monday that our client doesn't have the budget and that the project has to be canceled. I can't remember that ever happening before. And this has happened more than once. These are situations that we've had to face across the board in the U.S., in Europe, mainly Germany, France, U.K., countries where we have a lot of aeronautics and automotive activities. And it's mainly in these 2 sectors that the situation -- that this kind of situation have occurred. But in other businesses as well, we've experienced an erosion of our growth or at least erosion of the demand and the level and the number of start-ups of projects or call for tenders end up being lower than expected. So to answer your question, globally, it's mainly relevant for the aerospace and automotive, but also you have life science, finance that are more resilient, but they're still more sluggish than what we had in our forecast. even though we had already been very reasonable in our ambition.

I'm sorry just stepping in before you have your answer. But when you give us the figures after 9 months and Q3, the verticals were not as bad for Q1 and Q2, including for the banking sector. It feels like Q4 is even going to be harder. Even though we had sectors that were starting to stabilize throughout the year, it feels like it's just going back to this decline rate?

Well, the truth is that Q3 is not as good as we would have expected. we would have expected. So that means not only are we starting Q3 -- Q4 with this degrowth with this decline because of Q3. But on top of that, we've had to downgrade the forecast for Q4. So this accumulates -- so the negative performance for Q4 also comes from the performance in Q3. What about -- in 2025, well, this is a very relevant comment. We're going to start 2025 with an onboarded degrowth that we haven't assessed yet. We need to wait for the end of the year to do that. But if 2025 is flat, and that's not the scenario that we have for now. We're discussing with our clients. And right now, they're mainly reducing costs and managing their cash flow. That's what's happening right now. But -- so there is no encouraging sign right now as of today that would allow us to think that there's going to be a rebound for 2025. And the big clients that we are lucky to work with, with large accounts, talking with the technical management, R&D departments. They tell us that they have no visibility whatsoever because they have also had constraints in their budget management and they've suffered budget costs that they did not expected because of the financial department. And that's just the news that they got and there was no notice. So we ended up in a situation where we had a team of 50 people. We had a team of 100 people in Germany, was supposed to start the project, and it didn't. So the revenue, of course, suffered from it, and that also increases the fact that sometimes we have more downtime between contracts. For 2025, if the activity stabilizes, then there will be organic growth. I don't know to what extent.

So you're hoping for an increase in Q3?

Which would be, yes, symmetric with the deterioration that we observed in Q3 for 2024. And apparently -- and I don't to speak on behalf of others, but based on the information that I get, it seems to be actually very similar in our sector and even beyond.

Just one last thing. Have you been able to try to assess your taxes?

Between EUR 3 million and EUR 5 million in Q4, the tax surplus and probably half -- this will be halved, but it needs to go through the -- in 2025, but it has to go through the Senate.

Aditya Buddhavarapu.

Okay. Great. Apologies for the issue of the audio.

Aditya, could you please speak a bit louder because you're very far.

Okay. Sure. I'll try my best and let me know if there's any difficulties in hearing me. I appreciate it. Maybe just to clarify a few things in case I missed it in the translation. So did you say that automotive OEM customers were down 30% in Q3? Is that the number you gave on the call?

No, not really. What I said is that within the auto sector, we on a year-on-year basis, achieved a growth of 8%, which is not bad. There is a big difference between the OEMs and the manufacturers because OEMs still are growing at 14%, while the manufacturers are declining 28%, so close to 30%. But just the manufacturers and the manufacturers are representing 1/3 of the whole auto business at Alten. So what I said is that as a result, we have on a year-on-year basis, the decline today of more than 20% at the manufacturers, while we still have a growth at the OEM market. And I also underline that globally, what we see is that even at OEM, which we are performing well until now, we see a deceleration of the growth at some OEM in Germany and also in France and in the U.S. So we are not worried, but the situation is less, I will say, booming that it will during the H1. And we are very concerned by the manufacturers because in Germany, it's really very, very difficult. And we are at minus 45% in Germany for the manufacturers, while we are still growing at the OEM. And I think that Q4 will be even worse in Germany and the manufacturers. But globally, it's not minus 30%. It's plus 8%.

Okay. Understood. Just to clarify another point. On 2025, you said you don't see any signs of a rebound. Did you say something about entering the year with negative growth? Or you die something about 2025 being flat growth? I didn't follow. If you could repeat that, please?

Yes, for sure. Yes, as we've been declining over '24 and especially the decline in terms of trend will probably be stronger in H2 compared to H1 because in starting September, the dynamic of auto and aero is much less positive than it used to be. We are going to start 2025 with a negative embedded growth. I still don't know how much because it will depend where we're going to end '24. But for sure, it will be a negative embedded growth. So to achieve a 0 growth in '25, it means it involves that we will have to grow again to offset the decline of '24. And you're right, I said that we have no visibility at all as our customers themselves have no visibility on their project portfolio, I mean, globally for '25 and the global budget they will have.

Okay. Got it. And then now the new guidance for 2024 implied Q4 being something between minus 3% to minus 4.5%. Can you maybe just talk about what gives you the visibility on getting to that number as well, given you're saying some of the cancellations or postponements are happening very close to the starting time. Do you have any indications at all that this number or these forecasts are maybe driven by projects which are definitely going to happen? Or could you see further very short-term cancellations as well impacting this full year forecast?

We have taken into account what we already know. And even if customers are today saying that they will not cancel further projects. They also said that in September and October, and we saw that it happened again. So to be frank, I decided to take buffer of further cancellation even on projects that have been confirmed for Q4.

Okay. Fine. So there's already some buffer for project cancellations. Okay. And then maybe just on the headcount. Can you just talk about how you're thinking about the hiring and the headcount management into the end of the year and into 2025, given the uncertainty around demand and when projects might get postponed?

Probably, we will continue to slightly decline in Q4 in terms of net hiring as we did in Q3 because we have to follow our project requirements in terms of people, if we don't want to blow bench that will be too expensive as we don't want to impact too much the gross margin were home land to let people go because the staff turnover is it has not declined to 15%. So we are monitoring the hiring in a way that we can adjust the base to roughly 9%.

We have a question from Mr. Nicolas David of Oddo.

Going back to the Automotive and Aerospace sectors, Automotive -- just to clarify, year-on-year Q3, it was 4%, and it was up 9% over the first 9 months of the year.

Q4 should grow for automotive and year-on-year for the first half of the year because the performance was really good in Q4 and first half of the year by 2023 and 2024. There was actually a rebound in price, if I remember correctly. And this is going to amplify the year-on-year dynamics. This is that we're starting the V curve, which will have a time to reverse by next September.

And what would be a realistic scenario in terms of year-on-year growth for the automotive for the first part of the year 2024 if we're cautious?

It's hard to forecast that. What we're struggling is to know when it's going to start slowing down with the OEMs. There are some OEMs for whom we have -- we're above minus 60%. And when we talk to some clients, they're panicking in Germany. OEMs are quite resilient for now. But globally, the whole sector has slowed down significantly in Q3. When I said that it slowed down a lot, it's the growth that has slowed down. Even though the activity tends to stabilize, especially with some OEMs, it stabilizes after years of growth. But the real topic I'd stick here is there are clients that have made announcements that you're aware of, Stellantis, Renault, you name it. Some German industrial OEMs as well. Volvo cars, but if it was only for them, we would probably still have a 2-digit growth next year. across the board, maybe not Stellantis. But the real question is OEMs.

Okay. But I would feel that as if the OEMs that are down 50% to 60% year-on-year, they would have hit rock bottom by now.

We don't know because this is something that we look at on a quarter-after-quarter basis. And -- but if you read the news in Germany, they're announcing that they're going to slash the headcount between 40% and 50% reduction of their headcount.

You were talking about OEMs that could grow next year, but why would OEMs, Volkswagen, Volvo, Geely, how would they grow in 2025?

The danger is also the fact that it could also deteriorate. It could erode with the OEMs as well. That's what I said. But if it was only for the OEMs because we have growth embedded, there's not a single player that has experienced negative growth. It's not because the growth rate is slowing down that we won't grow next year. So in OEMs, they have to manage their cash better, clearly. That's a revenue issue that they have. If you read the news, it's clear. On electric car sales, you need to understand that the revenues are not exactly what was expected. So of course, adjustments have to happen on the slowdown of investments and cash flow management over 3 months, a little bit more. That's what we're going through right now. But there are still projects that need to take place as part of these transition projects. Now you also have OEMs that are asking themselves questions on their investment strategy. These are questions about what kind of battery should they invest, what generation the Chinese are 5 to 10 years ahead of the Europeans. There are some OEMs that have decided to acquire the Chinese technology with a license contract basis contract in order to avoid having to make the investments. So this is probably why our clients end up pending their investments because they don't have this visibility as to how or where they should invest.

That is clear. And the Aerospace sector, do we also have a decline among OEMs?

Mostly Airbus, of course. It is being a key account, but it's the same trend as in other OEMs.

And at Airbus, they made a big adjustment in September. And now since the beginning of October, we are being very cautious for Q4? Or is this also Airbus is still in decline even for the first semester is going to continue sequentially?

I am not sure that the contacts that we have the information. When we read the communication given by Airbus regarding their process -- production process rationalization plans, they communicated regarding these plans in the press, and it doesn't seem impossible that there might be extra projects, including for manufacturing engineering in 2025. They seem to have been -- to give a lot of visibility with their plan. They gave visibility internally and on the market regarding their goals for their savings plan, but the operational detlination of the plan in the long term, I'm not in a position to answer and neither are the contacts we have. We don't know what impact it will have on the business level in 2023, but it will have an impact on the engineering projects.

And regarding prices, when we have renegotiations, will be more difficult than in previous years?

Yes, it will be more complicated for 2 reasons. First of all, because inflation has gone down again. So wages should not be raised as much. And our clients have many projects in the 5 years to come, and they don't have the revenue level that they expect. So we are expecting them to ask us to help them make productivity gains. It's already the case in the automobile sector. And our answer, I think, will be an acceleration of their offshore projects. And when we look at France only, we're way ahead compared to the rest of Europe. But growth in the automotive sector is made mostly offshore at 80% offshore since the end of COVID. This is very clear. We hired 1,000 engineers in 3 years in Morocco for the automotive sector and 3,000 or 4,000 in India.

But for margins or EBIT, where do we stand?

For the margin rates, yes, it's satisfactory even if there's -- there are higher costs because we need to steer these projects. There's a critical mass, but we also have to accelerate our adaptation of our organization. We did not think that we would finish the year with such a low turnover. So we were expecting several dozens or even hundreds thousands of euros. Our SG&A has been cut significantly, but we have structures that are still in high-cost countries, and we're trying to reorganize our delivery among other things because our turnover is not the same in Germany as it is in Morocco or India. We also have to adapt the cost structure. So our margins this year are not going to be great. But when we take into account the cost of the extra downtime, it explains a lot of the margin discrepancy. It means that we've compensated in part with our cost structure, the decrease in volume because we've had lower turnover and top line this year.

Indeed. Oaky. Thank you. It's clear. This is the best that we can get with the visibility we have. Indeed, well summarized.

I think that there are no more questions. So we're going to close this conference. Right in time for the ASystems one that is about to start. So thank you for taking part in our third quarter conference. We will see you again at the beginning of January for our conference on 2025 business. I'm not sure that we will have more visibility because it's usually in February and March that we are starting to have more visibility, but we will know the figures for year 2024. Thank you very much. Enjoy your evening. See you soon. Bye. [Statements in English on this transcript were spoken by an interpreter present on the live call].