Atos SE (ATO) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Atos First Half 2022 Results. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speakers today at the Atos management team. Thank you. Please go ahead.

Good morning, everyone, and thank you for joining us today for the presentation of Atos H1 2022 results. I'm Nourdine Bihmane, Co-CEO in charge of Tech Foundation. As you know, since July 13, we have strengthened our governance with a new management team that is here with me today. Together, we bring relevant skills and long-term experience in our industry across managed services, digital, cloud, finance, and more importantly, business turnaround and transformation to lead Atos in its transformation journey. I will let Philippe, Diane and Nathalie introduce themselves shortly. A few words on my background. I have been in this fantastic group for more than 21 years where I have served and led teams across various countries and units. Most of my time was spent in our Managed Services business, where I executed complex turnaround in U.S., Europe, but also Growing Markets. Through those experience, I developed a deep understanding of our business, global operation and our unique asset and have built strong relationship with our customers and our talent. Across those roles, I have built and applied a consistent playbook of turnaround that has been very successful in each of those missions and that I will be happy applying going forward. I look forward to working alongside with the entire team to lead Atos in its new next chapter. I will now hand over to Diane to introduce herself.

I am Diane Galbe, the Senior Executive Vice President in charge of strategic projects and support functions for the group. In my last position before joining Atos, I was Senior Executive VP of SUEZ in charge of Strategy and Transformation and also CEO of Smart & Environmental Solutions globally, in particular, IoT and software solutions as well as sustainable consultant. I also have a particular experience in M&A carve-out transactions.

Good morning, Philippe Oliva, Co-CEO in charge of Evidian. So in my last position, I was the Chief Commercial Officer of Eutelsat in the space industry and also worked 20 years at IBM in several leadership positions, both in Europe and the U.S.

Good morning, everyone. I'm Nathalie Senechault, Group CFO. I joined Atos finance team more than 7 years ago, allowing me to acquire over the years a broad perspective on the group businesses and financial fundamentals. Before Atos, I spent my legal and finance career examining key strategic initiatives for companies, such as acquisitions, spinoff, carve-out processes, which is useful expertise to have now in the Atos. As the Group's CFO, I would focus on the financing of the transition period, of course, but also and mostly on profitability, cost discipline and cash generation. And I'm really looking forward to having a transparent and constructive and trustful silo with the financial community.

Thank you, Nathalie. So going forward with this team, we'll be entirely focused on, first, improving Atos performance, operational performance; and second, delivering our strategic transformation project. I want to emphasize here that this management team believe that the strategic project we announced during our Capital Markets Day is the best path for one to deliver value for our stakeholders. The plan presented on June 14 is the best one for Atos, for our customer and for our 112,000 employees. It is also the one that we are convinced will ultimately create the most value for all our shareholders. So now it's time for action. We must execute and deliver for all our stakeholders. And this is the first commitment that Atos new management team is giving you today. With that, let's turn to the highlights of H1 2022. As you know, in June, we announced our strategic project following 6 intensive months of assessment, strategy definition, but also reorganization. Now that we've had a clear strategy in place, going forward, we will be laser-focused on our customers, employees and operations, improving continuously our performance. It is now our top priority for the organization. And the second commitment that Atos new management team is giving you today. Also, I'm really happy to share with you today after a fantastic job done by Diane, Nathalie and their teams that the financing of our transformation plan is now fully secured. This is an important milestone as we now have the means to execute our strategic project during the transition period. Now if we look at the commercial traction, it has improved a lot in Q2 with a book-to-bill going from 72% in Q1 to 101% in Q2. I would like to stress that customer response to the announcement of our strategic plan has been very positive. We signed more than 600 million order entry post announcement of which circa 75% are new services or new logo. As an indicator, as we look ahead, our current weighted pipeline for H2 is 30% higher than our weighted pipeline was at the beginning of the prior semester, suggesting significant continued momentum. In addition, our H1 financial performance is consistent with the back-end loaded plan, which we had previously announced. We have confirmed and refined our 2022 objectives based on detailed and fully operationalized plans. Lastly, Atos continue to hire at scale and in line with our objective with a total gross hiring of more than 16,000 people in H1 with significant growth in recruitment, ensure the condition of our future growth and demonstrate Atos ongoing attractiveness in a challenging talent market. Looking at the key figures for the semester. Revenue was slightly down, minus 0.6% at constant currency and minus 2.1% organically. The positive momentum continued into Q2, with organic growth improving sequentially from minus 2.4% in Q1 to minus 1.1% in Q2. The organic growth would be minus 0.8%, excluding the decline in the VAR business. And as a reminder, this is a business we are gradually exiting due to low margins. Operating margin was 1.1% of revenue, impacted, in particular, by high cost inflation, which translated mostly in salary, but also in energy and component. Free cash flow was minus EUR 555 million. On top of our usual seasonality, it reflects the lower level of operating margin recorded in H1. Nathalie will come back to that in details later during the presentation. Head count reached 112,000 at the end of June, increasing plus 2.1% organically, mostly in our offshore centers. Turning now to commercial activity. And clearly, there is some good news here that we have seen a strong sequential improvement in Q2. Order entry reached EUR 2.8 billion in Q2, strongly up compared to the EUR 2 billion we recorded in Q1. And our book-to-bill was 101% in Q2 compared to the 72% in Q1. Q2 Order entry is primarily composed of small short-term deal that will fit directly our revenue growth in H2. Looking forward, our weighted pipeline for H2 is 30% higher than our weighted pipeline for H1, which again suggests that significant continued momentum. This renewed commercial traction that we expect to continue in the coming quarter reflect the benefit of our new organization structure by business line and the subsequent refocus on our core offering. On talent, again, we have been able to recruit the right talent at scale and at a steady pace in H1 with more than 16,000 gross hiring. Our attrition rate was broadly stable in Q2 versus Q1 and remained in line with industry average at around 20%. As you noticed, we did continue to grow our head count in H1 whereas our revenue did not. This might have held back our margin in H1, but in the context of our dynamic order entering Q2 and the return to growth we anticipate in H2, it was critical for us to secure the right talent and to ensure the condition for a successful delivery in the future. By the way, 80% of our recruitment were in offshore and nearshore location. We intensified hiring at the junior level to optimize our labor pyramid structure. It is in line with our strategy and demonstrate again Atos attractiveness is intact. I will now hand over to Diane.

Thank you, Nourdine. Good morning, everyone. As mentioned by my colleagues, we are very happy to announce that we have successfully secured on debt package. As Nourdine said, this is time for action, and we are set to deliver. So this is really a key milestone in our transformation, which we are delighted to share with you today. So we have received bank commitments covering the full amount and expect to sign the final documentation in the next few days. The success of this financing is a significant leap forward in our transformation plan and also demonstrates strong support from our banking partners. As part of this process, the net debt to OMDA rate financial covenant has already been reset at 3.75x and will be tested annually. This financing will provide the group with all the funding that needs during the interim period before the potential split and will significantly reinforce its liquidity. I would like to stress that in the current macroeconomic context and debt market, you see a very strong achievement as we are ahead of schedule by a month and that the operation is likely to be largely oversubscribed demonstrating again strong support of our plan by our financing partners. On the next slide, I'm going to give you a quick update on the progress made since our CMD with regard to our strategic transformation plan. So we have now a clarified governance with a new experienced leadership team that is in front of you to ensure successful delivery of our strategic road map, both on performance and on the envisaged finance. We have just secured on debt package, as I mentioned, which is a crucial milestone and we have also earmarked the assets for sales with a total value exceeding the EUR 700 million target announced. Execution is progressing according to plan. All carve out preparation work streams have been launched and significant progress has been made on the date -- restructuring. In terms of milestones, we are ready to start the employee consultation process as soon as early September with representative bodies, which has already been provided with information. On the operations side, we are seeing -- what we are seeing is very positive. Indeed, our talent retention and change management program are deployed and effective with 90% of retention of our key people, in fact attractiveness from the talent market and significant commercial win, including after the CMD that Nourdine highlighted, demonstrates strong support of the plan by our customers. I will now pass it on to Philippe.

Thank you, Diane. Indeed, Evidian's project is to bring together the expertise and the great assets on both digital and BDS in 1 entity to accelerate our value creation's profitable growth. So each of these 2 businesses has strong leadership position that we already shared with you during the CMD. But the real advantage and uniqueness of Evidian remain the combination of both to create differentiating offerings, which will accelerate our innovation capabilities to gain market share. Combining the capabilities of digital business line in the cloud migration and application services with our leading and undisputed position in managed security services will make us the right and trusted partner for Secure Cloud. We are positioning ourselves as a unique player, providing incremental value to all the hyperscalers and help our clients to embrace digital transformation and data analytics in a regulatory, secure and compliant journey. We are accelerating our development to support enterprises and institutions to build trust in the cloud and to comply with the regulation. This is just an example of what together digital and BDS can bring as a unified company. In addition, together and as we explained at the CMD, we have all our core offerings relying on unique capabilities with proprietary IP. We are leveraging artificial intelligence, machine learning, and that's at the core of our Managed Security Services business to reach this level of efficiency. We also provide a full service from industry consulting to application development, implementation and management. And the remaining points that is quite an important one. We are also tackling massive inefficiency in IT server utilization to help our clients implementing their transformational journey and to reach their net 0 commitment. In the past, we were not delivering the best cross-selling performance between digital portfolio and BDS customers and commercially. BDS has a strong footprint in public sector and defense which will accelerate its migration to public cloud in the next years. And that creates a tremendous potential for us using digital cloud capabilities. On the other hand, customers are now looking to take advantage of high-performance computing on a broader scale and not only focusing on the institutional offers and defense. We are seeing more and more momentum in manufacturing sector and also in financial services institutions. And we are perfectly positioned to reach clients and industry new requirements. Let me remind you that our ambition for Evidian is to achieve 7% organic revenue growth on average on a 5-years point basis and 12% operating margin and circa EUR 700 million free cash flow before interest and tax in 2026. Now I'll give you some color on Evidian H1 performance. So our revenue grew 2% year-on-year at constant currency. This was a bit of a slowdown compared to 2021. So digital grew, thanks to recent acquisitions and positive organic trends in application and cloud that were mitigated by volume reduction with a large customer and also deliberate decrease, as Nourdine mentioned, on the value-added resale. So BDS suffered from HPC activity, cyclicality and supply chain tension, but it's looking at the strong recovery based on the very high order entry that we had in H1. Digital security on its side, continue to grow slowly above the market. Looking at H2, we had a very solid book-to-bill in Q2, standing at 145%, and this is a significant improvement compared to the 86% we had in Q1. There's a lot of short-term and medium-sized deals in these book-to-bill figures that will underpin revenue growth as soon as in H2. In terms of margin, we were at 3.5 operating -- 3.5%, sorry, operating margin in H1. We've been impacted by inflation as well as by low volume in HPC. However, we are expecting a market improvement in H2 with HPC recovery and performance improvement actions that the group has launched in H1. Now I would like to highlight a few high-profile contract wins in H1, reflecting the great promotional momentum that we had and the attractiveness of our services and solutions. First, we signed an artificial intelligence and machine learning deal with the major pharmaceutical players. We also partner and that's quite an important win with a major German car manufacturer to develop a connected vehicle software development factory, meaning Industry 4.0, which is a growing area that will gain more momentum in the coming quarters. And what is really important is that it's not the first win in this area. That's the third one, where we are showing our terrific capability around digital transformation and artificial intelligence development. Then we won an important contract with Asian government related to big data infrastructure for Edge and AI. And finally, as you already know, we were the sixth supercomputer out of 8 in the EuroHPC program, which is a proof to our technical and technological excellence. This award for periodic excellence -- this award for a pre-exascale system that will be hosted by Barcelona Supercomputing Center in Spain. We are really happy that our R&D and our bright brilliant colleagues of BDS are part of this exciting journey, one that will contribute to strengthen and unlock complex application in key fields such as medical, clinical trial and climate research. Moving forward, Evidian will be able to further capitalize on the unique and outstanding offering sets of digital and BDS to expand our customer base and win high-profile contracts. Equaling what Nourdine said, we are 100% committed to the strategy project and in improving the group financials and operational performance. With that, I will now turn it to Nourdine for the highlights of Tech foundation.

Thank you. Thank you, Philippe. So as presented at the Capital Market Day, Tech Foundation project is a complete turnaround by 2026 with most of the actions focused over the next 24 months. The plan follows the covenant playbook I mentioned before, across all our markets to drive strong and similar transformation that we did in the past. The key element of the playbook are: first, a refocus phase, where we are going to rationalize our fragmented portfolio and focus on the right offering. Recover phase where we will address our structural cost issues and the rebound phase where we are investing in sales capability and modernizing our portfolio to drive profitable growth. This will enable us to deliver full revenue stabilization by 2025, more than 600 basis points increase in operating margin to reach above 5% margin by 2026 and a strong recovery of our operational cash flow to reach EUR 150 million by 2026 and growing EUR 50 million per year thereafter. We wanted this plan to be prudent and realistic. But clearly, our ambition with the team is to do better and faster. So now let's look at the Tech Foundation performance in H1. Clearly, the momentum is building up quickly. The newly formed business line in March, combined with our decision to invest in this business have changed everything for our employees and our customers. They are both excited about our decision to invest in the business, which is a stark contrast to our prior strategy where part of the business were going to be disposed. And where the group focus has shifted away from our core infrastructure business. Now the focus is back and it showed up in the numbers. The revenue decline was limited to minus 2.6% in H1, which is a huge sequential improvement compared to 2021, which I remind was minus 11%, including UCC. Even further, the revenue decline would have been only minus 0.5% if we excluded UCC and the VAR business that we are executing, almost flat. Our digital workplace and professional services are seeing significant revenue momentum and are growing well. And in addition, we have contained the decrease in our infrastructure revenue and that is the direct consequence of the focus and the energy that our 48,000 people have put back into this business. Recently, Gartner for the second time, has positioned Atos as a leader in its magic quadrant for data center outsourcing and hybrid infrastructure managed services worldwide. Our book-to-bill is also improving significantly. Customer response to the announcement of our project has been good, and we continue to see significant momentum. Our H2 '22 pipeline is 50% higher than our H1 '22 pipeline 6 months back. Our focus on top account is the yielding result. Our top 30 accounts grew at 2.2%. Now we plan to extend the playbook we have deployed over those top 30 accounts to the top 100 accounts over the course of H2. In terms of margin, we were in line with the margin reported during our Capital Market Day at minus 1%. On this slide, you could see 4 examples of deals that we won in H1. As you can see across those deals, we are helping our customers on all the key CIO's priorities, ranging from modernizing infrastructure, innovating on employee experience in a hybrid world and providing business continuity for mission-critical application. We have signed a mainframe contract with a major U.S. insurer. The second one, where we provide an end-to-end IT managed services for an Asian Navigation Company. I was telling you earlier that our envisaged transformation plan has been positively received by our customers. So indeed, here, you could see 2 examples of contracts that were signed after we announced our plan. First one, we are going to provide large infrastructure and transformation contract for public central procurement agency. And second one, we signed a renewal as well as an extension to provide digital workplace services to a global quick service restaurant chain. Those contracts are profitable, cash generating and in line with our midterm objectives. So in summary, we have made up -- we have made a huge leap in Tech Foundation to stabilize the revenue and are seeing improved commercial performance and pipeline. Going forward, we are now focused on implementing the initiatives we kicked off in H1 to drive H2 financial performance and accelerating the broader transformation. I will now hand over to Nathalie to deep dive into our financial performance.

Thank you, Nourdine. Turning now to the headline figures of our H1. On this slide, you can see the main financial KPIs for the first half of 2022. I'm going to detail them starting with revenue and operating margin, the net income, free cash flow and net debt. Atos recorded revenue of EUR 5.6 billion in H1, up plus 2.6% year-on-year, including a plus 3.1% foreign exchange rate impact. Growth at constant currency was minus 0.6% with an organic decrease of minus 2.1% and a scope effect of plus 1.6%. Our organic growth kept improving sequentially at minus 1.9% in Q2 versus minus 2.4% in Q1. Philippe and Nourdine presented the performance for Tech Foundation and Evidian perimeter. I will now comment on our regional business units, starting with revenue. Americas were up plus 0.4% at constant currency driven by the contribution of the recent acquisitions, positive trends in digital, in particular, with the ramp-up of new contract with a major hospital chain were offset by a contraction in the APAC and UCC businesses as well as fluctuations in advanced computing. Northern Europe and APAC was stable compared to H1 2021, that turned positive in Q2 driven by a good momentum in digital services, particularly in public sector and defense as well as cybersecurity and advanced computing. Tech Foundation activities were slightly down, but also improved sequentially between Q1 and Q2. Central Europe was down by 1.7% at constant currency impacted by the termination of an underperforming contract with the telecom operator and low activity level in HPC and UCC. Excluding these items, revenue was stable with a marked improvement between Q1 and Q2. Southern Europe decreased by minus 27% due to fluctuations in the HPC business and to the continued wind down of value-added resale. There was a robust momentum in digital and a limited decline in infrastructure. Turning now to operating margin. It was 1.1% at group level, impacted by high cost inflation, particularly on salaries, but also on other cost lines, continued tension on supply chain. As Nourdine mentioned, the increase in our headcount, whereas our revenue did not grow, but again, that was key to secure the condition for the growth we expect in H2. And let's face it probably an element of key focus as we may have been distracted from day-to-day operation at certain time in H1. These impacts pertain to all of our avenues. I will also mention Central Europe at minus 1.7%, which on top of that suffered from challenging delivery on some contracts. Looking at H2, we are clearly expecting a strong improvement in margin, driven by energic merger in place to restore a much better level of profitability as Nourdine will explain later on. Moving on the next slide on the income statement. The main item to highlight are the following: the impairment of goodwill and other noncurrent assets, which amounted to EUR 91 million and relating to the assets held for sale. The other lines, which decreased from EUR 164 million last year to EUR 64 million this year and included EUR 32 million relating to Russian activities and EUR 25 million of exceptional costs related to our transformation plan. The net financial expenses which includes this year a loss of EUR 109 million related to the disposal of the Worldline shares in June, which I'll remind you, generated EUR 219 million of net profit, contributing to the financing of our transformation plan. Looking now at our cash flow statement. Free cash flow was minus EUR 555 million on top of usual seasonality, whereby free cash flow is always significantly lower in H1 than in H2. Our free cash flow in H1 this year reflects the low level of OMDA recorded over the period at EUR 369 million compared to EUR 633 million last year. The change in working cap was minus EUR 383 million. There is a seasonality here, too, of course, and this change was mainly driven by a minus EUR 237 million decrease in customer advance payments. Reorganization, rationalization and integration costs amounted to minus EUR 113 million that pertain mainly to cost-saving measures launched in H1, which positive impact will unfold in H2. In addition to the free cash flow of the period, acquisitions amounted to EUR 312 million. This is mainly Cloudreach and the proceeds from the sale of Worldline shares in June for EUR 219 million. Foreign exchange fluctuation and other items amounted to EUR 97 million, leading to a EUR 1.792 billion net debt at the end of June. As mentioned by my colleagues, we have successfully secured our new debt package. Atos has already received commitment from bank for the conversion of the EUR 1.5 billion out of a total of EUR 2.4 billion of existing RCF into an unsecured term loan with a maturity of 18 months with 2 6-month extensions at our option. The EUR 900 million RCF is maintained maturing in 2025. We expect to sign the final documentation in the next few days. With that, I will hand over to Nourdine for the full year objective.

Thank you, Nathalie. So as previously announced, 2022 is going to be a back-end loaded year. There's always a seasonality in our margins and cash flow but the swing is expected to be even more pronounced this year as most of the performance improvement measure we launched in H1 will be a fruit in H2. And as I said, the whole organization is now laser focused on execution in H2 now that we have a clear strategy in place. So today, with the management team, we are confirming and refining our full year objectives. Revenue. Our objective of minus 0.5% to 1.5% growth at constant currency is unchanged. Growth should turn positive in H2, and this is underpinned by the good momentum in order entry that we observed at the moment. Operating margin, we are targeting the lower end of the 3% to 5% range. And as a direct consequence, free cash flow is now expected at the lower end of minus EUR 100 million to EUR 200 million range, excluding the additional impact of the transformation plan. So now I'll give you more granularity on what it means for H2 in terms of operating margin first. So we do expect an uptick in H2, which will be largely driven by the improvement plan launched in H1 focused on 3 key levers: first, reducing our cost base. As we are unwinding the Spring program, which is our prior structure organized by industries, our structure costs are going to come down significantly as soon as H2. Since we increased our head count rapidly in H1, going forward, we will be more selective in hiring and focus only on specific areas like cybersecurity or analytics. We will reduce our use of subcontractors and increased cost discipline, which arguably we have lost a bit on nonpersonnel costs. Second, we are tackling our underperforming contract. Philippe and I and the entire team are focusing on more than 30 red accounts that we are renegotiating commercially or even exiting in some cases to improve profitability, thanks to the sanction. Third, increase in price in the context of the continued inflation will be key. We had a solid plan in place. We have already increased our price on some contracts, mostly the time and material and others are currently under negotiation. This is more a medium-term effort and you will note that we have not been overly ambitious for H2 on that particular topic. In addition to this action, the recovery, as Philippe mentioned, in HPC volume especially for the supply chain challenges will also have a direct impact on our margin with better fixed cost absorption in H2. This improvement will come on top of the usual seasonal improvement that we have every year between H1 and H2. I will now pass it to Nathalie for the free cash flow part.

Thanks, Nourdine. As a direct consequence of the uptick in operating margin, free cash flow, excluding additional costs of our transformation plan should recover in H2. And this recovery, as you can see on the chart, will be entirely driven by OMDA, while we are prudently assuming only a partial reversal of H1 working capital outflow. This includes circa EUR 150 million of ARI costs, restructuring costs, which were already embedded in our guidance. And as I said, exclude additional impact of our envisaged transformation plan. At this stage, our best estimate for such additional costs would be circa EUR 250 million in 2022, which is consistent with the indication given at the Capital Market Day of around EUR 150 million additional ARI costs. The final amount will, of course, depend on the speed of our execution. It also includes the cost of the new financing that we've just secured around EUR 50 million of exceptional external costs linked to the plan.

Thank you, Nathalie. So a few words to conclude. We now have a clear strategy and transformation plan in place. My colleagues from the management team and myself are now fully focused on our customers, our employees as well as the execution of the plan. We have seen a renewed commercial momentum in Q2 and continue to see even higher momentum on sales into H2, which will support our revenue growth in H2. We are executing at the pace on the performance improvement measure, which will drive a significant increase in OM and free cash flow in H2 and give us full confidence in our full year objective. Last but not the least, we are moving forward with our transformation plan, and we have just made a significant progress as its financing is now fully secured. So thank you for your attention, and I think we are now ready to take your question.

[Operator Instructions] Our first question will come from Amit Harchandani at Citi.

I'm Amit Harchandani from Citi. I've got a couple of questions, if I may. My first question goes towards the financing plan. You've given us a bit of a detail in terms of some of the key parameters. But could you clarify a bit more in terms of the cost of financing? The decision to convert it into an 18-month term loan and not longer? What are some of the puts and takes in terms of how you've gone about thinking about this financing, please? And can you categorically confirm this implies there is no need for any form of equity financing down the road? And then I have a second question.

Thank you. Diane?

Yes. Thank you, Nathalie. On the equity financing part, yes, we confirm that -- it means that we are not planning to do an increase of capital with this newly secured financing to remind the parameter, EUR 1.5 billion in terms of term loan and EUR 900 million in terms of FCF and also a bridge to disposal of EUR 500 million. On the cost of financing and the maturity, I will leave that to Nathalie.

So on the cost of financing, it will be in line with the market rate. The cost will be disclosed later but again, fully in line with the market. No longer term because we are financing the interim period pre spin-off, and there is no need for equity financing at all.

Okay. Okay. Second question, if I may, please. With regards to the turnaround on -- broadly at the company and the behavior of customers. We have seen you have talked about some corrections in your backlog. You also talked about customer advance payments coming down. You cited seasonality in the first half. Can you give us a sense for what is the tone of discussions with customers? Because on one hand, we do see the bookings going up. But on the other hand, as you can imagine, customers are looking at what's happening at Atos and making up their minds. So could you give us a sense for the overall tone of discussions with customers, please? And the comment on corrections and the move in advance payments?

First, so just to start with -- Philippe speaking. So to start with the backlog correction that you are mentioning, so it's business as usual. We had some bookings that were pertaining, let's say, to previous periods. We decreased our write-off, let's say, following analysis of the older part of backlog so nothing to do with the performance that we had in H1. So business as usual in our industry.

On customer reaction, I think it's important also to highlight -- I mean that especially, I would say, on the Tech Foundation side, what the customers are feeling now is we are investing in that business. We are not trying to sell it by pieces and we see that we are bringing more cohesiveness to that line of services that we have been pushing over the years. So the customer reaction has been pretty positive across the board with all the thousands of customers we formally have been speaking with, they have been positive about what we are pushing and the fact that we are investing into their business, yes. Nathalie, for the last point?

So the reduction in the customer advanced payments is purely a seasonality effect. And same seasonality decrease. This is exactly the same seasonal decrease, sorry, that we had in H1 last year that we will catch up in H2.

Our next question comes from Thomas Poutrieux from BNP Paribas.

Yes. I've got a few actually. So first of all, coming back to the cost of financing of the new debt package. I mean I understand you just said it's going in line with market trade. But given your debt rating at the moment? I mean, is it reasonable to assume something like high single-digit rate on the new debt package? That's the first question, and I've got a few bullets left to fire, if I may.

So on your first question on cost of financing, again, we will disclose them later, but they are in line with the market conditions.

Right. Understood. And then also, in 2023, specifically, we are more and more talking about potential recession at least in Europe. So I was just wondering how you reflect this potential recession in the plan that you outlined with CMD and notably for TFCo?

Yes. Thank you, Thomas. I think totally to the -- I think in the context of recession, I will say the TFCo business is a pretty a good defensive business, yes? Because as you know, it's a multiyear contract. When we start the year, we have more than 80% of our revenue already contracted, then the rest is only about the turnaround. The in-quarter revenue plus the new logo that we may sign, which will yield the revenue during the year. So I will say, entering into a recession even macro potential situation, I will say the Tech Foundation business -- book of business, give us a more broader and longer visibility versus a cyclical business.

All right. Understood, perhaps I was thinking an additional one. On HPC, I mean you announced in June that you have been awarded the MareNostrum5 supercomputer contract. I think it's been publicly disclosed, it's EUR 151 million contract in total, which I guess already contributed to the order entry that you had in Q2. But could you help us understand the timing of the revenue recognition for that contract? I mean do you expect the full EUR 151 million to basically be record in revenues in H2? Or should it be more split over time?

Yes. We had multiple wins on the BDS side. So it's not only one single contract that is materializing, let's say, the yield assumptions that we took for H2 revenue road map. This large deal is going to have, let's say, a multiple period of revenue generation depending on the milestone of the project. But our H2 road map is absolutely not only relying on this deal. We had a very strong book-to-bill and momentum on BDS and HPC in Q2 and that's multiple deals with a significant improvement of our book-to-bill ratio in Q2 that will generate the revenue. But large deals, especially on very complex HPC infrastructure are large implementation projects generally oscillating between 12 to 18 months of revenue generation.

Our next question comes from Laurent Daure from Kepler.

Yes. Ladies and gentlemen. Also, I have a couple of questions. My first one is on your the U.S. profitability, which used to be much above the roof, thanks to the Syntel business. So does this mean that in the first part of the year, for the first time, you experienced a sharp decline of your offshore business explaining the drop in profitability in that region? My second question is back on your full year guidance on the margin side. I mean you basically need to improve by a roughly 4 points the margin between H1 and H2, which is much more than what has been achieved in the last decade. So does it mean that the seasonality of margin has moved year after year because all the actions you have presented this morning makes sense, but they might not be visible instantly and also the restructuring you booked in the first part of the year are not much higher than what we've seen in the past year. And my very final question is on Evidian, if we could have more granularity because the profitability level that you have at the moment is way, way below what you expect on the long term and below peers. Does it mean that you have a big negative impact from HPC? Or is it more utilization rate issues? Or a little bit of everything?

Yes. Thank you for your question. So let me start with the operating margin. So first, it's a combination of multiple factors. We mentioned, let's say, the cyclicality of HPC, and you know that HPC is -- it's a manufacturing business. So that means that we have, let's say, a significant amount of fixed costs that have not been covered, let's say, in H1. So it's purely due to cyclicality, and we will recover in H2. The other factors that we are facing is really the impact of the inflation of our cost label base. And that's, let's say, multiple actions that we took like are impacting on our automotive business with new rate card, the inflation, and that's part of the recovery plan that we have in H2. There's no utilization rate issue at all on our Evidian business and the remaining part is really related to, let's say, the supply chain shortage that we faced, that prevented us to stick, let's say, to the initial delivery plans that we had on the BDS business side.

On your second question on seasonality. So we are starting actually from a very low H1 at minus -- sorry, at 1.1%. We are targeting 5% to 6% in H2 which is the margin we did in H1 last year and below the typical 10% we used to do in H2 in the past. So in itself, not that challenging. H2 margin is supported by actions on our cost base, which are already identified and engaged and the whole group is fully mobilized on this H2 margin.

And on the U.S. business?

On the U.S. business, so I guess your operation is related to the trend that we have, let's say, following the acquisition of Syntel, and it's still a profitable business that is running, let's say, with the right revenue growth. As I said also during the presentation, we had one effect of a contract, but that has nothing to do with the announcement. It was already, let's say, a scope reduction on the large accounts. But with the short-term signings that we had on the order entry in H1, no doubt that we will recover and grow as per the plan that we committed to during the Capital Market Day.

But have you seen some structural issues on the market or the gross margin you're making on the offshore? Because when you bought Syntel, it was a 26% -- 25%, 26% EBIT business and was about 1/3 of the size of the U.S. So it seems like you had an issue between the prices and the wages in India? Or can you give us a bit more granularity on what is happening there?

No, the only additional information that I can share is that what we explained is we knew that we had to anticipate some hirings related to the convictions that we had in the very strong, let's say, book-to-bill and order entry that we realized in Q2. But as generated, let's say, like an unbalanced business model related to incremental cost versus revenue stream that we were having. And that -- but that was required also to secure the revenue generation for H2. But there's no specific issue related to our global capability we are still winning. We are even expanding on very large contracts that we have on the U.S. side. So there's no specific information related to the business trend in North America.

And if I can complement specifically on Syntel, even though margin was impacted by cost inflation as everywhere, Syntel remains a good performer in America for digital business.

Our next question comes from Gianmarco Conti at Deutsche Bank.

So I have a few to ask. I'll ask 2, I'm going to ask in follow-ups. Out of the 16,000 hires, how many would purely offshore? There exactly is my first question. And my second question is where did you see most of the audience growth? Whether it be in digital, fiber cloud or decarbonization? Or is there also a case that you saw some momentum more so in Tech Foundations, too? I'll ask some follow-ups after.

I will take the first one and Philippe, the second one. On the hiring and the headcount initiatives, out of the 16,000, almost 80% of them have been in offshore and nearshore locations. So it have been building up capabilities in our remote location. And also, as I mentioned in the presentation, in junior -- when I say junior capability, a lower end of the pyramid, as we are transforming the overall pyramid of the company.

Sorry, before we go to the second question, sorry, what exactly -- like how much is exactly in offshore, not nearshore, offshore, purely offshore? Is it more like 50%, 60%, a bit more?

Out of the 80% to be frank, I think it's closer to 70%, 75% in offshore.

And on your first question related to the business dynamics on the offering and business line side. So as I said, we are seeing strong momentum on the cybersecurity side, still growing above the market. We are confirming also the trend that we've seen on the digital side with, let's say, alignment with the plan that we had, that is 7% revenue growth per year. And as I highlighted, and we've been impacted, let's say, in H1 on the BDS revenue, mainly related to HPC and that's part of the recovery plan to maintain, let's say, the objectives that we had for revenue generation in fiscal year '22.

Just 2 more questions. My third question is, could you perhaps elaborate more on what exactly were the tensions to the supply chain? Like maybe give us a bit more granularity about that? Are these related to specifically, I don't know also some harder than HPC products? Or are there other moving parts, maybe deteriorating demand environment, maybe because of slow supply chain production for certain customers? I mean any bit more detail here would be great. And my fourth question is how much of your operating margin targets are in to recovery in HPC? Could you perhaps quantify the impact in margin terms? I'm just trying to understand here whether a continued downturn in HPC cyclicality and supply chain tensions might impede a material size and margins and potentially putting guidance at risk.

Yes. So on the HPC side, so you know that we are talking about, let's say, large and complex infrastructure that we are manufacturing. So it's obviously more difficult to drive, let's say, supply chain management processes when you are in custom built infrastructure versus, let's say, volume in place. So that's the reason why, let's say, the anticipation is directly related to the confidence that we have on the pipeline and the win ratio that we can extract. So we anticipated, let's say, and also time because our inventory grew in H1 to ensure that we will stick to the commitment that we have in terms of delivery milestone in H2. So this is perfectly under control to commit on the yield that we mentioned and the recovery between H1 and H2. On the margin, so nothing more to say that, what I already shared at the Capital Market Day. We are planning, let's say, to operate at mid-single digit operating margin, let's say, in 2022 and with the recovery at the end of the 5 years plan with high single-digit margin.

Our next question comes from Amit Harchandani at Citi.

I've got 2 more, if I may. With regards to the free cash flow generation profile. If we assume that you do minus EUR 150 million and the EUR 250 million in exceptionals, that's closer to minus EUR 400 million for total cash outflow -- total cash free cash flow this year and we had more than EUR 400 million negative last year. Are you in a position to comment if the free cash flow profile gets better in 2023 and beyond that? How do you think some of these exceptional transformation costs might play out in 2023 and 2024? That would be my first question. My second question goes to the topic of the transformation that you're embarking upon in Tech Foundation, stuff like rationalizing contracts, talking about looking at some of the changes to structures, I mean, for those of us who have covered Atos for a long period of time, we have heard this before. So Nourdine, given that you've been with the company yourself for a long period of time, what is it that in your view is going to be different this time as you drive the transformation in the infrastructure projects versus what has happened in the past? What are your learnings versus what you have seen in the past that hasn't worked for the firm?

Okay. I will start. Thank you, Amit, really an important question. I will start with your second and then Nathalie will come back on the free cash flow. On the turnaround, Amit, I think the biggest difference that I see today versus yesterday, if I may, is that today, we are finally -- we finally have a funding to do that transformation. I will say, in the past, we were always constraint and you know us and you have seen the revenue decline in that business in the past, and we never really addressed it, yes. I think this time, the Board and the entire team acknowledged the full size of issue and have decided to address it to make sure that we could rebound, yes? And I think that the biggest difference. Then I think in terms of methodology, I would say with the vertical setup we had before, it was not at all easy to apply the playbook here because responsibility were diffuse in a complex metrics, if I may. Now that we simplified the organization, it's almost a top-down organization, pretty military. This gives us the framework to execute in a much energic way and stronger way or the usual suspect into those kind of turnaround talking about productivity, automation, offshore, obviously, but red account portfolio. But remember, in that business, the biggest impact is to stabilize the top line. So as we -- as you have seen in H1, we have been able to start seeing a huge sequential improvement from last year, minus 11% to this year minus 2.6%. And with that, I have much less transit cost to address, which are impacting directly to bottom line. So in that perspective, we feel that now with the team, we have a good, I will say, trend in terms of top line to be finally able to improve the margin of Tech Foundation, yes. So that's really my key feedback to you. Nathalie?

So Amit, on your first question on the 2023 free cash flow. So as we mentioned during the Capital Market Day, the majority of the transformation cost will come in '22 and 2023. As we already mentioned, we have already identified and launched a strong action on operating margin which will trigger benefit already in H2 2022, and also on H1 and the full year 2023 going forward.

We will give you an opportunity of your second batch of question to come back to your first one and not enter on the duration for the financing. I just continue 18 months plus through extension of 6 months.

Yes, please. Thank you for the clarification. And actually, on the financing bit then, after 18 months, are there any term around which the renewals would be carried out? Do you need to be at a certain level of leverage? Do you need to be at a certain level of profitability? Or is it a straightforward renewal after 18 months?

We have a covenant which is throughout the period of 3.75x OMDA net debt ratio. So this is a constant of the period. So no specific...

Got it. And finally, if I may, since I have your attention. You've got the EUR 700 million, I believe, that's due to come from assets held for sale. If you're not able to generate that, again, I'm not sure where you are in terms of progress on that, if you're unable to generate that, do you need to then look at debt financing -- additional debt financing to finance the overall transformation plan?

First of all, on the EUR 700 million disposal program, we already executed EUR 220 million and for the rest of the program, we are very confident because we changed our strategy in identification of these assets, which are already earmarked and exceeding far above the amount of EUR 700 million, so to make sure that we have the right, I would say, choices in terms of value creation and timing on the other end. Other points on the topic is the fact that these assets are mostly in Evidian side of the business, noncore, as we previously announced, but we already received a lot of mark of interest 2031 on the assets that we have earmarked. So very confident on earnings, disposals and announcements on the topic following the already EUR 220 million disposals that we announced.

Thank you, Amit. Thank you. I think it's now time to close. I just wanted to thank you again on behalf of the entire team and looking forward speaking with you soon. Bye.

Thank you so much. This does conclude today's conference call. Thank you all for joining. You may now disconnect.