Sopra Steria Group SA (SOP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to this Sopra Steria 2019 Annual Results Presentation. As per usual, I'll be with Étienne du Vignaux, our CFO. Here in the room, we have Pierre Pasquier, so the Chairman of the group, and we have members of the Board of Directors and of the group's Excom. Welcome to those who are joining us remotely. I'd like to remind you that this presentation is webcasted live. It's translated into English simultaneously, which will enable everybody to answer their questions, which we will obviously answer at the end of the presentation. So for this presentation, we have quite a classical agenda. We'll come back to the highlights of 2019. We'll focus on each reporting unit's operational situation. Étienne will present the financial results, and then I will come back to our strategy, and our key targets for 2020. And then as I said, we'll have a Q&A session. So highlights. I think we can say that in 2019, we have hit all of our targets in terms of organic growth in revenue. We exceeded our targets for the operating margin on business activity, we hit our target, and then, for free cash flow, we have also exceeded our targets. Going beyond figures, you will remember that we set ourselves 4 qualitative targets, which are important for the group's future. They were: reinforcing the group to prepare for future growth; investing in value ramp-up; ensuring alignment with Sopra Banking Software's operational plan; and then developing responsible growth. I'd like to suggest that we take a look at this together. So figures. As I was saying, turnover is EUR 4.434 billion; 6.5% organic growth. The operating profit on business activity was EUR 354.3 million, 8% of revenue. Net profit attributable to the group, EUR 160.3 million, an increase of 28.1%. Free cash flow, EUR 229.3 million compared with EUR 173.1 million in 2018. Net financial debt was EUR 513.9 million, so 1.26% (sic) [ 1.2x ] EBITDA. And then the U.K. fund deficit net of tax was EUR 112.6 million compared with EUR 122.5 million at the end of 2018. So those are the financial figures, and then we have other figures as well, which is our nonfinancial performance. So change in workforce in 2018, plus 2,131 people. Employee attrition rate was 17.7%, was slightly less good than what we were in 2018 at 16.9%, but we've got contrasting situation. So in France, we're 0.7% down, but we've seen more attrition in the U.K. and in Germany for business regions. And this was a situation that was, in fact, [ pervade ]. We're also following the number of women in the work present. We are 32% compared with 31.6% in 2018. And obviously, we're looking at recruitment of women, 33.1% of recruitment was women compared with 32.8% in 2018. The last important information is greenhouse gas emissions per employee. Obviously, this was essential. So we are down 10.8% per employee. And if we look at this compared with 2015, which was the baseline, we have a reduction of 36.7% per employee. So those are the key figures. Obviously, with our highlights, we have growth at 6.5% organic growth. We were above the average on the market, so we're very satisfied with these results. It's above our target that we set ourselves. And this proves that we are aligned with customer expectations in terms of skills and offering, and that's very important because this is the key criteria that shows this. So behind growth, we've obviously got volume. So market share, we've gained market share. And then obviously, we've got prices as well. We were satisfied because in various different countries, we've had price increase of between 3% and 4%. Another area where we made progress is cash generation. As you know, for 2 years now, we've been making a lot of effort to improve our cash generation, and we're satisfied with our DSO, which has gone down by 6 days. So we've gone from 61 days to 55 days, an increase of 13 days. So we're down 13 days. So improving our free cash flow when compared to margin was obviously important. We've gone from 50% to 51%. Now other key qualitative information. We wanted to reinforce our group. We work in 5 different areas. This year, we set up quarterly reviews for each of our operating entities so that we can better steer their transformation and better define their long-term project for 3 to 5 years. We have also set up barometers, which are long-term barometers to ensure ongoing improvements in customer and employee perception. We've also reinforced our internal control and risk management systems. We've consolidated in-house procedures and rules. And another key point is training. This criteria is going to be key in the coming years because things are moving so quickly. This can be a key way to differentiate ourselves, and we've worked a lot in this area. So we're not going to stop working in these 5 key areas. We've made good progress, but there obviously is ground to cover. Other highlights for 2019. We have renewed our offer portfolio. We've worked on it in 2 different levels. So the tooling that we provide to our employees for our projects, so tooling. And as announced, we've made big investments in the digital enablement platform. So this enables all of our projects and employees to work in a DevOps environment. It's cloud native. And -- so we're bringing together development and brand infrastructure. And this environment means that we can work on private clouds if customers want us to, or public clouds, depending on the application. So it's big progress for us. It's something that's set up. It's state of the art. And the second area that we've also worked on on the customer side is our offering. We've better packaged our offers. They're more industrial, robust. We're more proactive. And obviously, we've worked on a key topic for our customer, which is modernizing and transforming their legacy applications. So by digitalizing processes and opening them up to the ecosystem. So we have 5 offers. And I also want to highlight our strategic partnership, which we have with Axway with the AMPLIFY platform. These offers are obviously set up and they're going to be rolled out across the group in 2019 and then 2020. Another important point, it's not new but it's important, reinforcing 2 different areas of our group and our projects: consulting and software. For consulting, we've got approximately 3,400 consultants in Europe for turnover EUR 440 million. In 2019, we launched a new brand, Sopra Steria Next. We've worked a lot on the consulting hallmarks to make sure that we have the same positioning, the same methods, same tools and same foundation across the board for all consultants. And we've worked on ramping up value vertical by vertical in all of our geographies. What you can take away or the customers' perception is that we are -- we have this end-to-end capacity with smooth running tools and we have an approach, which is highly specific to their context. On the contrary, of the Anglo-Saxon consulting firms, you have more standardized approach. So this is a strength, and we're going to carry on working on ramping up the value and ramping up consulting. With regards to software, we have growth at 13.1%, with investments, as you know, in SAB, for Sopra Banking Software, the partnership with Sparda banks. I'll come back to that. And then an acquisition in the consulting domain, so HR experts, and that's NeoSpheres. So in 2019, we have reached critical mass, critical mass that we wanted to achieve with Sopra Banking Software. We're not far of EUR 500 million, and we're nearly there, but what's important with this turnover is that we have over EUR 100 million in specialized lending, and we're clearly a leader. We have about EUR 100 million in the African market, where we're a leader, and just under EUR 300 million for retail banks in Europe, where we have a clear leading position in France. As we're talking about Sopra Banking Software, it's important. This is one of our objectives. The key message is that we are aligned with our operational plan. If we look at Cassiopae, we set ourselves some key objectives. In the first semester, we wanted to deliver version 4.7 of Cassiopae and this will be available to the market in the first quarter of 2020. And obviously, forecast -- existing customers who have been prepared to wait for this new version, we're going to kick start the project with them. We're going to carry on resolving difficulties that we had with about 10 customers on Cassiopae. And at the same time, we're working on the future version, so version 4.8, which will be a lot richer in terms of functionalities and automation. And then we'll restart sales in the second semester and at the end of 2020. So we're aligned with that one. Key objectives for banking was obviously delivery and execution in 2019. We've made a lot of progress. You know that in 2019, we wanted to ensure the platform was live for La Banque Postale. We've had 70 successful migrations to Amplitude'Up in EMEA. And what's key for the future is that we have 31 new customers for the DBEP, the Digital Banking Enablement Platform. And then platform has been successful internationally. We have an operation with 7 Sparda banks, which has come to life and has been set up since August. I'd like to suggest that we just focus on this operation. So Sopra Steria has a controlling stake in an entity with the Sparda banks. Since August, we have a Bank as a Platform. So a bank that is running 24/7. So what do we have to do over 3.5 years? We've got a major transformation at 2 levels. This joint venture, it's obviously going to be a vehicle to drive transformation for our customers. So transforming the company that we're operating. And we're also going to fully transform the information system. We're going to install banking platform at the heart of this IT system. We'll be running the full system. We have key objectives. Obviously, we want to win new customers not just in Germany, but with this model, we want to roll out in the rest of Europe. And it's very positive. We're seeing customers who are looking at how feasible this project is, and they're looking at how it's progressing. And this is something else that we want to roll out in Europe. Another key criteria is obviously that this highlights the major advantage that we have. We have a digital services company and a software vendor within one group, and this is a major strength on the market. And it means that we're fully aligned with the operating plan as announced. So obviously, what we want to do? Here is a reminder. Sopra Banking Software has 2 markets, 2 offers. For retail banks, we have Sopra Banking platform, we have a digital layer, the DBEP that I mentioned, which is the same layer regardless of the core banking system in place. So Platform, Amplitude and SAB. And we've had a lot of investment in this digital layer. And clearly, we're targeting Europe and Africa. And then with regards to specialized lending, we have global ambitions in Sopra financing platform based on our Cassiopae APAC solutions with global ambitions. A key -- last key highlight at group level for 2019 was our sustainable development policy. This isn't just something that's in vogue at the moment. We've always had these policies at Sopra and at Steria. We're working on lots of different topics. In terms of the environment, I've spoken about greenhouse gases. We're very much committed. We're also committed to limit global warming to 1.5 degrees. And we have a trajectory for this, which has been approved by the SBTi. And we've seen a significant increase. We're committing to 85% by 2040. In terms of our benchmark employee initiative, we've got a lot going on here. I'll focus on 2 initiatives that we've launched or that we're launching in the coming period. So on the 23rd and 24th of September, we're launching a forum. And then with Sciences Po, we're also launching digital governance and institutional innovation chair. So looking at sovereignty, and that's something I'll come back to. So these are the highlights. Now what I'd like to suggest is that we go around all our different divisions. Here, you can see the key figures. Total turnover, EUR 4.434 billion, an increase of 6.5% organically. And then in terms of operational results, we are at 8% operating profit on business activities, 8% compared with 7.5% last year. If we start with France, it's a solid year. I think that describes the situation quite well. Organic growth was sustained, 6.7%. And even though we've invested, we've improved our margins from 9.1% to 9.7%. So that's been our focus now for several years. We're focused on the same vertical from the 25 priority customers that we've chosen when we did the merger. And this is an illustration. We can see that growth in top 10 customers in France was above 10%, strong in defense, aerospace and then social sector as well, but we've seen growth across the board. And what is important is that we're maintaining our trajectory. We hope to be at 11% top-level margin. We're capable of doing this, and this in our trajectory. Now for the U.K. To -- just a bit of contextual information. Obviously, halfway through last year, we sold off our secretary recruitment activity. This has had an impact on margin, so approximately 0.4%, and then, obviously, the market as well, which has been quite difficult in the second semester. So against this backdrop, we feel like we've done well with growth in turnover of 7.3%. Improve in margins, obviously, linked to Sopra Steria recruitment, but other improvements as well. But this is clearly linked to our positions with our joint ventures, which have generated good growth and improved their margins, in particular, SSCL. So the rest, obviously, I can say that we're working, but this is a long-term transformation, which will be slow, and it might take several semesters. For the rest of Europe, contextual information here as well. This is where we are consolidating the joint venture that we have with the Sparda banks or the fintech. The first transformation, obviously, we've got a lot of revenue and not much margin. So this is going to be improved over time. In the second semester of 2019, we had a great deal of turnover, but not very high margin. So we're seeing an effect of minus 0.6% on top-level margin. We would have been at 7.3% if we didn't take this investment into account. So this is not as good as 8.1% that we had last year. And this is explained through Germany because by the end of the year, we saw a slight negative growth in turnover, big drop in financial services but a big ramp-up in other sectors like public sector. The bad news in terms of profitability is that we were strong in the financial sector. So obviously, we've been subject to this drop, and this has impacted the level of profitability for Germany. Now we're going to be working on ongoing improvement to boost our margins in Germany. In other areas, we're seeing growth. We're at 6.2% organic growth in other areas. So all the countries have been improved. In Belgium, for example, we were struggling for several years, but we're seeing good -- satisfactory improvement. For Sopra Banking Software, I said the big objective for this year wasn't figures, but it was to ensure that we're aligned with our operational plan. Just a few comments on the figures. APAC has been fully aligned with the business plan that we have, so great year here. Then we've also made improvements in terms of operating profit on business activity. We're at 4.9% compared with minus 13.3% in 2018. And we can also see that we are maintaining our profitability trajectory. Our objective is to gradually come back to 10% top level. Obviously, we're not forgetting 15%, which is our long-term target, and we will achieve that progressively. Then the last division that I'd like to talk about is other solutions. So good year and a sustained growth at 6%; [ current ] margin at 15.7%. Key highlight was successful implementation of payroll systems in military personnel in the French navy. We don't talk about this a lot because the ministry is waiting for us to fully make the switch with the army. There'll be heavy work in the autumn, but we've made good progress. When we launched the project, it was obviously difficult. We were struggling. But now it is live, and it has been live since spring last year, and we're extremely satisfied with this success. And this highlights or this illustrates our capacity to work with a digital services company and a software company within the same group. And then, obviously, we're investing in these product lines, we're investing in digital, and we're very active, and we're generating growth. That's what I wanted to share with you, the highlights for the year. And now I'll hand the floor to Étienne.

Thank you, Vincent. Good morning, ladies and gentlemen. As Vincent has already given you the main figures, so with that, we have EUR 440 million in revenue, plus 6% when compared to 2018 and EUR 454 million in revenue. As regards the operating profit, we had announced expenses related to share-based payments, minus 11%. In 2018, we have not renewed a stock option plan or the shares plan. The amortization of allocated intangible assets has had 2 key events, [ APTA ] and SAB mid of last year, which is a joint venture with Sparda. And the profit from recurring operations, EUR 314 million, 7.1% of the revenue. I will come back later to the other operating income and expenses. And the operating profit is now at EUR 283 million. That is 6.4% of the revenue. Before talking about the net profit, you see that the cost of net financial debt has decreased -- has increased slightly, EUR 9.9 million. The market was very favorable, and therefore, the cash products have been reduced slightly. We have -- we had stored cash in India, and we have recovered it and they generate less. So the net expenses. The figures here integrate IFRS 15, which was not the case, of course, in 2018. Of course, you have to deduct the tax expense, 87.3%, and the share of net profit from equity-accounted companies, EUR 1.8 million. That includes the good performance of the U.K. and the net profit attributable -- of which attributable to the group, EUR 160 million. Now let's have a look at the other operating income and expenses. Like last year, we have mainly had restructuring costs and reorganization, EUR 31.6 million. If you calculate the share, that's about 6% of the consolidated revenue, which is -- remains reasonable, slightly below the previous year. Now tax, EUR 87.3 million. So with an effective tax rate at 33.8%, that's slightly below 2018. You will remember that in 2018, we had taken into account a provision for tax expenses. And if we now look forward to 2020, the tax rate should decrease by 1 percentage point. Now the net financial debt, 17% below -- the previous -- below the previous year. That's 60 -- EUR 620 million, plus -- that was -- and taking into account the free cash flow of EUR 229 million with SAB and the participation of -- 51% participation in SFT in Germany. And the first -- in 2018, for the first time, we applied IFRS 15, which has a positive impact on the net debt, EUR 16.9 million, as announced last year. Now if we look at the free cash flow generation. Compare the performance in 2018 to that in 2019, taking -- in 2018, if you take into account the commercial sales in 2018, we had EUR 173 million. We had already announced the exceptional intake of EUR 20 million, giving a total free cash flow of EUR 153 million. Now there is also the change in EBITDA, which has to be taken into account. And the figure here was calculated before IFRS 16. That's plus EUR 55.7 million, plus -- so the figures here integrate nonrecurring -- recurring event in the U.K. and in Germany, mainly. But if you recalculate everything, we -- the total -- the performance is EUR 179 million, which represents a growth rate compared to the previous year, which was exactly the target that we had set. Now the financial position remains solid. As of the 31st of December 2018, equity is EUR 1,422 million. In last July, we issued a new bond loan for EUR 250 million, which we -- which you see here, it has increased the maturity of our debt. We have a syndicated loan with a maturity 2023. It has 2 tranches, one in -- with the maturity to 2023 and one '26 and -- '27. Sorry. So as you can see, the situation has improved. The net financial debt compared to the EBITDA is multiplied by 1.3 in 2018. And now back to Vincent for the strategy.

Thank you, Étienne. So obviously, just some more information on our strategy, a reminder. So our mission. We have set up a new brand platform and we've communicated on this to our employees and our ecosystem. So leveraging digital to build a positive future for all. This is a commitment. This isn't an easy assignment, but we're going to be building this initiative in the long term. Obviously, corporate responsibility is something that's very important within the group. But if we look at the previous years, we can see -- oversee was something that we were taking very seriously, but it was on the side of business. But now what we need to do is fully integrate it into all of our operations on a daily basis for our business. So I'll give you 2 examples. The first of which concerns digital sovereignty. This covers all topics. So this is something that's essential for the environment. It's essential for -- with the new technology, with the price of cloud, et cetera. This is coming back to -- this is a key central economic component. So we've got teams who are working on this topic across the board, and our customers will be benefiting from this work. The second example that I want to give you is that all of our consulting offers, we've set ourselves the target of making commitments with regards to corporate responsibility. So the -- we're thinking about the impact on our -- on the environment, our customers, their customers, the full ecosystem. So this is what we're going to be focused on in 2019. Now if I could just come back to our project, no changes here. We want to have an independent project. We're ambitious with added value, differentiation, European, and we're based on differentiation once again. So obviously, we have software. We're going to carry on working on this. We have a second differentiating factor that our customers know, and that is our entrepreneurial culture and our close relationships with them. And then the third one, which we're going to draw on heavily, is our capacity to boost sovereignty, to help our customers with digital sovereignty. We're seeing American, Chinese or other stakeholders, other market. And sovereignty is something that our customers are concerned about in Europe. So we're going to play a role in this domain. Our strategic ambitions have not changed. Our business mix remains with 15% of consulting, 20% of software. Midterm financial targets, our organic growth in revenue between 4% and 6%. Operating margin of around 10% of turnover and free cash flow between 5% and 7% of turnover. With regard to external growth, we have a targeted approach since the merger in 2015, and now we're going to accelerate. We want to be a lot more active when it comes to consolidation in the coming period. Now for our strategic levers for IT. There's nothing new here. We're carrying -- we're drawing on the same levers that we've had for this past 5 years. We have a focused strategy. When we merged, we chose 100 customers, and these 100 customers are priority. We're confirming this. We have 8 key verticals. This is confirmed. And within each vertical, obviously, we can't be strong across the board. But with our customers, we've chosen to invest in 2, 3 key business domains that they're focused on. Our offering strategy is the same, consulting our spearhead, ramping up value, upstream and end-to-end approach, getting all our business lines working together, and then a full overhaul of our core business offers on legacy applications. And then the last item, which is obviously very important and differentiating, is our production model. We're seeing more and more tooling. We use IP assets. We're working on this. We're making progress. And then our X-shore model for several years now, we've been amplifying or expanding our X-shore software. There are centers of expertise, not just centers to produce at a lower cost. Obviously, we're going to draw on these 3 different areas. We're going to draw on M&A as well. France will have an opportunistic approach. We want to reinforce our leadership in the vertical if possible. And very clearly, we're going to be drawing on Europe. We're going to be looking at what is going on in Europe a lot closely -- a lot more closely. Now for software. Now the strategic component with Sopra Banking Software. Obviously, we're going to draw on our levers that we have. So retail banking, digital bank as a platform, what we're doing with Sparda, and then specialized lending with our Sopra Financing platform offering with big ambitions, essentially in Europe and the States. Obviously global but mainly in the States. And then for HR and real estate, we're going to be offensive with a good level of performance, which will enable us to finance investments so that we can open up to digital. We're going to push our end-to-end approach across the group. The idea is to renovate, to open up ecosystems, open up to the digital world and maintain good performance and good growth. Just to finish before I move on to 2020 objectives. We have a potential acquisition, Sodifrance. Obviously, working in France here. The logic -- because behind this acquisition is that it would enable us to be a clear leader in France, if it's confirmed, if the transaction goes ahead. We'll be a leader in insurance on social security, would have roughly EUR 200 million in revenue in this sector. We're planning a rapid integration synergies of around EUR 4.6 million, which we'll see from the second year. And then to finish with strategic -- our financial targets for 2020. Organic revenue growth of between 3% and 5%; operating margin slightly improved; and free cash flow above EUR 180 million. So that's what we wanted to share with you for 2019 and the key objectives for 2020. And then as usual, we will answer your questions.

Gregory Ramirez from Bryan Garnier. I've got questions, the first of which regards improvement in profitability for Sopra Banking Software. Can we have a little bit more of a breakdown of the different items that make up margin between APAC, the core banking system and specialized lending or the Cassiopae remit? How could we anticipate Sopra Banking Software's margin this year? I will have a second question as well on free cash flow. So obviously, a lot of exceptional items. Can you detail this information you've spoken about U.K. and Germany and a reduction in 6 days in the DSO.

So with regards to banking, we don't communicate on internal information. APAC has delivered the performance that we planned when we made the acquisition, so good performance. The rest is aligned with the operational plan. So for Cassiopae, we're carrying -- we're resolving our customer situations. So on the delivery side, we're improving the situation month-for-month. Obviously, we knew that it would take 2 years. We know that we're doing a lot better than what we were 2 -- a year ago, but there is still work to be done. And this will be improved gradually, month-on-month. There's not going to be anything spectacularly -- spectacular from a moment to another. But this is how we're working. Obviously, we're transforming ourselves to be able to support all of the objectives that I had described. So R&D, the full company. We're expecting a progressive improvement in all the different areas and all areas of business within Sopra Banking Software. For free cash flow, obviously, there's 2 key items, one-off factors. The U.K., we had a litigation -- long ongoing litigation with a customer in the public sector, so EUR 20 million. And then for Germany, we've implemented a JV, SFT, so about EUR 31 million in investment. As Vincent has reminded you, margin was close to 0 in 2019. So these are things that won't be reproduced in 2020 and they'll be turned around, obviously, for collection in the future.

And then in -- so I have a question on Cassiopae. You spoke about a recovery towards the end of the year. So does this mean there won't be much growth with Cassiopae for 2020? Is that right?

Yes, that is right. We are starting to look at the sales approach because we're convinced that starting from 2021, obviously, we're going to be very active. Customers are waiting for us. We must remain active on the market. So we're going to start to recover our sales initiatives towards the end of the year. Obviously, if we have sales at the end of 2020, that's all very well and good, but we're more focused on 2021. The key topic here is that we need to install the new version of 4.7 for customers that are waiting for it. We need to make sure customer situations are in operational order, and then we'll have the new version 4.8, which will be marketed later on. So we're more focused on 2021 with regards to business acceleration.

Second question on licenses. Could we have the license information for Sopra Banking for '20? We had the figure in 2018, could we perhaps have a forecast for 2020?