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

[Interpreted] Welcome to the Annual General Meeting of Sopra Steria Shareholders. I will now hand the floor to Mr. Pasquier, who is Chairman of the Board of Directors. Over to you.

[Interpreted] Ladies and gentlemen, shareholders, I would like to welcome you to Sopra Steria Group's Shareholders Meeting. Unfortunately, this year is held in quite strange circumstances due to the COVID-19 epidemic. First of all, I would like to spare a thought for those shareholders, employees, customers or partners, who have been impacted by the illness, either directly or indirectly in the COVID [ circle ]. The Board of Directors have decided, given the restrictions on travel and gatherings linked to the health crisis that the general assembly will be held as a closed session with no shareholders or any other person who's authorized to take part being present. These arrangements exclude the possibility to amend resolutions or to propose new resolutions throughout the session. This is why we have asked you to vote before the shareholders' meeting, and you will see that many of you have done so. What's more this shareholders meeting is broadcasted live. So thank you for tuning in. And finally, we would like -- we wanted to enable you to send us questions on the agenda, as you normally do, quite simply, throughout the shareholders meeting, but we haven't received any questions. The office has been appointed by the Board of Directors during its meeting on the 23rd of April 2020. I will chair as Chairman of the Board of Directors. I have also been appointed as a scrutineer. Same goes for Christophe Bastelica, Secretary of the Board of Directors, who will be the secretary for this shareholders' meeting. Also, present here, we have Vincent Paris, CEO; and Étienne du Vignaux, the CFO. The external auditors for the firms Mazars and Auditors & Conseils Associés are not represented. The content of their report will be read to you by the meeting secretary. I would like to declare Sopra Steria shareholders' meeting open. The quorum, first of all, the minimum number of shares that have to be represented for this meeting is 4,106,399 shares, representing 1/5 of shares with voting rights for decisions that fall under the ordinary shareholders meeting. 5,132,999 shares, representing 1/4 of shares with voting rights, the decisions that fall under the Extraordinary General Meeting. The attendance sheet demonstrates that the shareholders present and represent totaled 15,542,851 shares or 75.7% of shares with voting rights. So the legal quorum has been met, and the assembly can deliberate. The documents filed here on the office, I would like to inform you that all documents required to hold the shareholders' meeting have been submitted, and they are here. In particular, we have the company's Articles of Association, the attendance sheet, the powers of shareholders represented by proxies as well as personal voting forms, a copy of the convening notice, a copy of the legal gazette with the convening notice, notice of the meeting and the convening notice published in the ballot, the annual accounts for 2019, 2019 consolidated accounts and other documents required by law, financial results for the past 5 years, report of the Board of Directors, report from the external auditors; and the text of the resolutions, which are submitted to the shareholders' meeting. I would also like to inform you that the annual accounts and the consolidated accounts, the report from the Board of Directors, the reports from the auditors, the list of shareholders and the prepared resolutions as well as all documents and information required by law have been made available to shareholders at the each quarters starting from the day the assembly was convened and they're available on the Internet as well. I would like to inform the meeting that the company has not received any written questions. No written questions. So Mr. Bastelica?

[Interpreted] So I will read the agenda for today, which is included in the information pack that the shareholders have received. The agenda for the meeting is as follows. So for the Ordinary General Meeting, we have approval of the parent company financial statements for the financial year ended 31st of December 2019; approvable of nondeductible expenses; approval of consolidated financial statements for 2019; appropriation of 2019 earnings; approval of disclosures as presented in the Report on corporate governance pursuant to Article L. 225-100 II of the French Commercial Code; approval of the fixed, variable and exceptional items of compensation making up total compensation and benefits of any kind allotted to Pierre Pasquier, Chairman, in respect to the year ended 31st of December 2019; approval of fixed, variable, exceptional items of compensation making up total compensation and benefits of any kind paid or allotted to Vincent Paris, CEO, in respect of the year ended 31st of December 2019; approval of the compensation policy for the Chairman, as presented in the report on corporate governance pursuant to Article L. 225-37-2 of the French Commercial Code; approval of the compensation policy for the CEO, as presented in the Report on corporate governance pursuant to the same article of the French Commercial Code; approval of the compensation policy for directors as presented in the report on corporate governance pursuant to Article L. 225-37-2 of the French Commercial Code; decision setting the total amount of compensation for the directors' activities referred to in Article L. 225-45 of the French Commercial Code at EUR 500,000; authorization granted to the Board of Directors for a period of 18 months, to allow the company to buy back its own shares pursuant to Article L. 225-209 of the French Commercial Code; authorization given to the Board of Directors for a period of 26 months, to retire any shares that the company may have acquired under the terms of share buyback programs and to reduce the share capital accordingly. This is under the Extraordinary General Meeting now. Delegation of authorities to the Board of Directors to decide, for a period of 26 months, to increase the company's share capital, with preemptive share rights for existing shareholders, by issuing ordinary shares and/or other securities giving access to the company's share capital and/or carrying entitlement to the company's debt securities subject to an upper limit of 50% of the company's share capital; delegation of authority to the Board of Directors, for a period of 26 months, to increase the company's share capital, with the disapplication of shareholders' preemptive rights for existing shareholders, by issuing ordinary shares and/or securities giving access to the company's share capital and/or carrying entitlement to the company's debt securities, through public offerings excluding Paragraph 1 of Article L. 411-2 of the French Monetary and Financial Code, subject to an upper limit of 20% of the company's share capital, or 10%; delegation of authority for the Board of Directors, for a period of 26 months, to increase the company's share capital by issuing ordinary shares and/or other securities giving access to the company's share capital, as provided for in Article L. 411-2 of the French Monetary and Financial Code to an upper limit of 10% of the company's share capital; delegation of authority to the Board of Directors, for a period of 26 months, to determine the issuance price for ordinary shares and/or other securities giving access to the company's share capital, subject to an upper limit of 10% of the company's share capital in connection with a capital increase with the disapplication of shareholders' preemptive rights; delegation of authority to increase the number of ordinary shares and/or securities giving access to the company's share capital subject to an upper limit of 15% of the size of the initial issuance; delegation of authority given to the Board of Directors, for a period of 26 months, to issue ordinary shares and/or negotiable securities giving access to the company's share capital and/or carrying entitlement to the company's debt securities, with disapplication of the shareholders' preemptive rights, in consideration for contributions in kind, subject to an upper limit of 10% of the company's share capital; delegation of authority to the Board of Directors for a period of 26 months to issue ordinary shares and/or negotiable securities giving access to the company's share capital and/or carrying entitlement to the company's debt securities, with the disapplication of shareholders' preemptive rights, in consideration for instruments tendered to a public exchange offer, subject to an upper limit of 10% of the company's share capital; delegation of authority for 26 months, to decide to increase the company's share capital, through the calculation of premium, reserves, earnings, or other items eligible for capitalization; delegation of powers to the Board of Directors for 26 months, to decide to increase the share capital without preemptive subscription rights for existing shareholders, via issues to persons employed by the company or by a company of the Group, subject to enrollment in the company's savings plan, up to a maximum of 3% of the share capital; amendment of Article 14 of the Articles of Association; and adjustments to bring Articles of Association in line with the new statutory requirements. And we have renewal of the term of office of Sylvie Rémond; renewal of the term of office of Jessica Scale as Director for 3 years; appointment of Noëlle Lenoir as new Director for a term of office of 2 years; appointment of André Einaudi as new Director for a term of office of 2 years; powers granted to carry out all legal formalities. And I will hand the floor back to Pierre Pasquier.

[Interpreted] So I'd like to suggest we won't read from the Board of Directors in full, but we will present you a few extracts, and we will comment them by going over the essential points one after another. The correlation tables, which appear starting in Page 327 of the Universal Registration Document for 2019, which are available on the company's website, will enable you to find the information that you might be interested in specifically. And now I'd like to hand over to Vincent Paris, CEO of Sopra Steria, to review the main points of the year 2019.

[Interpreted] Thank you, everybody. Hello, everybody. So this is a little bit strange. It might be -- it seems strange to talk about the figures, which appear in the report for 2019. But obviously, the context has completely changed, but nonetheless, we would do so, and we will go over the highlights and the key figures for this year. So before we speak about 2019, I think it's quite important to look at the group's identity at a glance. At the end of 2019, we had around 46,000 employees, EUR 4.4 billion in revenue, operating in 25 countries, and we can offer our customers an end-to-end approach, starting with upstream consulting right through [indiscernible] and business process services. In terms of geography, 50% in France, 19% in the U.K., 29% in Other Europe. Our revenue by business line. You can see our core business is consulting and systems integration is 62% of our business, 11% for infrastructure management, 16% for solutions and software; and finally, 11% for BPS. Finally, you've also got a presentation of our key verticals that we're concentrated on. So there are 3 key ones that I'll mention here. The 3 top ones are banking, public sector, and aerospace, defense, and homeland security. These 3 verticals represent 2/3 of our turnover. So 2019, I think, what you can take away is that it was a satisfactory year. We came out of a difficult situation at the end of 2018 with a profit warning. And I think the key takeaway is that we were focused on resolving all of the difficulties that we had, and we will focus on our areas of improvement, which has meant that at the end of 2019, we're operational, and we can get going again with a more offensive approach. That -- I think that is the key takeaway for 2019. In terms of figures, we have achieved or exceeded our objectives in terms of organic growth. We set ourselves a target of between 4% and 6% and we did better than that. In terms of operating margin on business activity, we wanted to achieve a slight improvement, which we did. And in terms of free cash flow, we had a target of above EUR 150 million, and we exceeded this target. Now I'd like to suggest that we look at these details in -- these figures in detail. Total turnover was EUR 4.434 billion, organic growth of 6.5%. The operating profit on business activity was EUR 354.3 million, so 8% of revenue. The net profit attributable to the group was EUR 160.3 million, so up 28.1% compared with 2018. Free cash flow was EUR 229.3 million compared with EUR 173.1 million in 2018. Net financial debt was EUR 513.9 million at the end of the year. And finally, the U.K. pension fund deficit was EUR 112.6 million at the end of the year. I'd like to suggest that we can share a few qualitative figures that we follow on a daily basis. So now with regards to the workforce, we had net growth of 2,131 people with an average attrition rate of 17.7%. In France, this attrition rate went down by 0.7% in France [Technical Difficulty] got more women in the workforce. And at the end of 2019, we're at 32% compared with 31.6% for the end of 2018. And we've also hired more women, so 33.1% compared with 32.8% last year. And then as part of our corporate responsibility approach, we are particularly careful when it comes to greenhouse gas emissions per employee. We've made a 10.8% reduction in 2019. So cumulative in 2015, that 36.7% reduction. In this table, you can see the different performances in terms of organic growth and profitability. So all of our major regions. So overall, we've got organic growth of 6.5%, operating profit at top level, 8.8% compared with just above 7.5% in 2018. So now if we get around our key areas. We can see in France, we had good performance. I think that we are leveraging the decisions that we took 1 year, 1.5 years ago in terms of organization, which were organized by vertical, and this is starting to pay off because we're closer to our customers, and we're generating greater added value. You can see this in organic growth, which was a 6.7%, and then operating profit on business activity was 9.7%. So we can do better, but we are heading in the right direction. This is our trajectory, and we're going to carry on investing in ramping up value, tooling, and industrialization. Now with regards to the U.K., 2 bits of contextual information. We transferred our recruitment business halfway through the year, which has an effect on our profitability of 0.4 percentage points. And then sometimes, we forget that it was a extremely difficult market in the second half of the year linked to Brexit. So it's important to bear this in mind. And against this backdrop, we had a performance compared with 2018, which was satisfactory. Organic growth of 7.3% and operating profit on business activity of 7.3% compared with 5.7% the previous year. So growth and margin are driven by our 2 public sector joint sectors -- joint venture, sorry, so SSCL and NHS. So with the Ministry of Defense, we've got a strong position here. And then the other comment that we can make is in the private sector. Obviously, we're transforming our business. This is underway. It's difficult. And this is a difficult market, so it's going to be more of a long-term approach. Now for Other Europe, just some contextual information. You remember, we acquired 51% stake in a joint venture with 7 German banks, the Sparda banks halfway through the year. And this has had a dilutive effect on our profitability. So 0.6%. So operating profit on business activity, 6.7%, but this would have been more -- not taking into account this JV compared with 2018 was 8.1%. But that's because of the joint venture. We've seen negative growth in the banking sector, which has impacted us. But with the momentum we have from the other sectors, we've maintained flat growth in this country. Obviously, in terms of profitability, there was a bit of friction here because this was the most profitable sector. And this is what explains the results in this region. Obviously, in the rest of the region, we had slightly higher average growth. So Sopra Banking Software, now we set ourselves target for 2019. We weren't thinking about short-term financials, but we're thinking more about building our products and our action plan to be able to guarantee our long-term project. So we prioritize executing our plan. So we're very satisfied with 2019. We had major go-lives for all of our product lines. So we're working in retail banks with Sopra platform and then we have Sopra financing platform. So for retail banks, we carried on evolving our products. And at the same time, we've carried on investing in digital. We have a digital layer, which is shared across all our products, whether it'd be platform, amplitude, or fab. And today, we have 31 new customers for this new digital banking enablement platform, which we're obviously going to carry on pushing in the future. For specialized lending, we hit our targets. We set ourselves the target of delivering version 4.7 for Cassiopae in the first quarter of 2020. This was done. This version is used by our traditional customers who were willing to wait for this version, and this is very positive because it means that we're quite comfortable with regards to our operational plan, and we'll be able to be more aggressive with regards to business development in 2021. And in terms of figures, this wasn't a priority, but we should note that we had an improvement in the situation compared with 2018 in terms of operating profit on business activity were EUR 4.9 million compared with minus EUR 13.3 million in the previous year. So we're maintaining our targets of 15%. And little by little progressively, we should be hitting this target with progressive improvement. And then the last division. So that's other solutions, good year, organic growth of 6%. So this is a sustained growth. Good level of margin at 15.7%. The highlight was that we had a successful go-live for the military personnel payroll system for the French navy. And this is proved that our strategy is well-founded because when an IT services company and a software vendor work together, we can see just how powerful it is. So those are the comments that we can make on all of our divisions. Now with regards to our income statement, you can see our revenue at EUR 4.434 billion, organic growth of 6.5%, top-level margin, operating profit on business activity EUR 354.3 million, 8% compared with 7.5% in the previous year. Profit from recurring operations, this including -- was EUR 314.2 million. So expenses linked to stock options down compared with 2018. And we've seen a slight improvement linked to acquisitions. We had APAC and then SFT with the Sparda Bank in 2019. Other financial, other operating income and expenses, minus EUR 31 million compared with minus EUR 34.2 million. And then the net result, which takes into account all financial expenses and tax was EUR 173.1 million. So of which attributable to the group EUR 160.3 million, so 3.6% compared with 3.1% in the previous year. Earlier on, I was saying that we exceeded our objectives when it comes to cash generation. One should take away that there was an improvement in the DSO. In 2 years, we've made up 13 days, so 6 days in 2019. I think we've had a major milestone here. And this -- when we exclude nonrecurring items, we can see transformation result into treasury has also improved as well from 50% to 51%. So all of this shows that we have a solid financial situation as of the 31st of December 2019. Equity was at EUR 1.4222 billion. Net financial debt of EUR 513.9 million with leverage of 1.26x. And then when it comes to borrowing facilities, we have maturities which are quite far off in 2023 and then 2026 and 2027, as you can see on this slide. I won't go over all the items on the balance sheet, but we've had about EUR 100 million increase in capital. So we've gone from -- we've seen an increase. And then, obviously, debt was at 47% at the end of 2018, and this has gone down in 2018. Now our outlook for 2020. Obviously, there were 2 phases to this year. Up until mid-March, we were aligned with everything that we've just presented. No surprise. Then we've had changes linked to COVID. We've obviously changed our governance, our priorities in the space of a week all changed. Our first priority is health. That's our top priorities. So for our employees, our partners, and all of our ecosystem. And then our second priority is adapting governance. So what we were managing on a monthly basis, we're now managing on a weekly basis, and we have daily meetings for various different topics. This means that we have to react quickly, understand the situation quickly, and take decisions quickly. I'd like to focus on the group's resilience. Obviously, this is very important during a time of crisis at 2 different levels. So 40% of our activities is quite resilient. When you look at all of the business that I described earlier on, 40% of this is resilient. And then about 1/3 of our business is in the public sector in the broader sense of the term. So once again, we know that the public sector is supporting the economy, and this is important. And then the fourth important item, which we have today, is the balance between short-term and long-term. Obviously, we have short-term priorities. This is what we're focused on every day. Quick decisions, optimizing costs, savings plans have been launched. We're working on this every day to try and anticipate everything as much as possible. All of this is managed. But at the same time, we're not forgetting about our long-term project. We're not forgetting that after this crisis, we had positive promising underlying trends in our market. And so obviously, we have to bear in mind our midterm project, whether it'd be with our customers, with our subcontractors or with our employees, everybody has values. Everyone was talking about corporate mission statements and now is the time to really bring this to life. So today, we're working every day with our customers, with our employees, obviously, with our subcontractors. We're optimizing everything that we can in the short-term, and we're protecting our partners in the long-term. So that's the general context in which we're operating today. I'd like to remind you the communication that we had on the first quarter, in the month of April, we had growth in the first quarter of 3.3%. So up until mid-March, we were clearly aligned with our organic growth of between 3% and 5% as announced. And then mid-March, we had a rupture, which meant we lost around EUR 10 million in turnover. We announced this at this point. And then obviously, there's a bigger impact on the second quarter. And then the other announcement that we made is that, obviously, given the lack of visibility due to the health crisis on all of our customers' economic contacts and their decisions, we didn't think it was reasonable or reliable to provide guidance. So we've just given you an indication on growth of the first semester, which will be negative growth of between 2% and 6%. That's what we can share with you for 2019 and for the start of 2020.

[Interpreted] Thank you, Vincent. Now I'd like to hand the floor to Christophe Bastelica, who will read the conclusions of the Board of Directors report.

[Interpreted] So the report on the consolidated accounts is included in Page 218 of the Universal Registration document. So in this report issued on the 9th of April, the external auditors expressed an unqualified opinion on the annual consolidated accounts. So they justified their evaluations on the key audit points. So revenue recognition on fixed-price contract, valuation and impairment of goodwill, valuation, and impairment of equity affiliates, and then post-employment commitments. And they haven't issued any specific observations. But there was a technical observation, which is included by means of application of the IFRS 16 standard as of the 1st of January 2019. The report on annual account is now on Page 251. In this report, the auditors issued an unqualified opinion on the accounts. They justify their position based on assessment of the various audit points, so revenue recognition from fixed-price contracts, valuation and impairment of financial assets, and then provisions for retirement compensation. And they report their audit missions, and there are no specific observations. Now the special report from the auditors on Page 255 of the document. They have not been informed of any specific agreement concluded during the previous year that has been submitted to the general assembly for approval. There's 3 agreements that have already been approved by the shareholders' meeting, and they [ give information ] on the implementation of these agreements. And there are any other reports issued by the auditors, there are no specific observations. So now I'll hand the floor back to Mr. Pasquier, who will address the questions.

[Interpreted] Actually, we didn't receive any written questions. So now we're going to have a presentation of the results of the votes on the proposed resolutions. So I hand the floor back to Mr. Bastelica.

[Interpreted] So just the rules on the quorum and the majority for the Ordinary General Meeting. So we require fifth of shares with voting rights in the representative shares. And then for the resolutions under the Extraordinary General Meeting, we need a quorum of 1/4 of shares with voting rights. So we had the quorum. So we have the resolution #21, which requires a quorum of the Extraordinary General Meeting. I'd like to remind you that we have the text of the resolutions, which is included in the information pack. So the majorities required -- so we had 20,971,670. For the simple majority, we needed 6,990,553. So for the Ordinary General Meeting, the quorum required was 4,106,399. For the Extraordinary General Meeting, we needed 5,132,999. So the -- we represented -- with the -- 516 shareholders represented. This represents 75.7% of share rights. And then the number of votes in attendance or represented was 20,971,670. The simple majority was reached. So yes, 6,990,553. And the reinformed majority was 13,981,107. For the first resolution, approval of the annual accounts is adopted with 99.81% of votes for. Resolution #2, approval of the consolidated financial statements is adopted with 99.81% voting in favor. Third resolution, appropriation of earnings, the resolution is adopted with 99.99% of votes. Resolution #4, so on compensation, is adopted with 98.66% of votes in favor. Resolution #5 on compensation for the Chairman under 2019, this resolution is adopted with 98.83% of votes in favor. Sixth resolution on the CEO's compensation for 2019 is adopted with 97.57% of votes in favor. Resolution #7, so compensation policy for the Chairman is adopted with 99.54% of the votes in favor. Resolution #8 covering compensation policy for the CEO is adopted with 96.88% of votes in favor. Resolution #9, compensation policy for the directors is adopted with 99.99% of votes in favor. Tenth resolution covering what we call the Directors fees is adopted with 98.41% of votes in favor. 11th resolution is adopted with 99.04% of votes in favor. Resolution #12, authorization given to the Board to retire any shares, has been adopted, with 98.68% of votes in favor. 13th resolution to increase earnings share capital is adopted with 98.95% of votes in favor. Resolution #14, increasing share capital where disapplication of shareholders preemptive rights has adopted at 95.16%. Resolution #15, increasing company's share capital with disapplication of preemptive rights for existing shareholders. This is adopted at 93.81% of votes in favor. Resolution #16, so to determine the issue price for ordinary shares is adopted with 93.84% of votes in favor. 17th resolution is adopted with 93.27% of votes in favor. Resolution #18, increase in share capital, again, is adopted at 98.44% of votes in favor. 19th resolution, on increase in share capital, again, is adopted at 98.57%. Number 20 has been adopted with 99.99% of votes in favor. Resolution 21 has been adopted with 99.64% of votes in favor. Resolution #22, Amendment of the Articles of Association, so Article Number 14, has been adopted with 99.84% of votes in favor. Resolution #23, adjustments to bring the Articles of Association in line with the new statutory requirements has been adopted with 99.84% of votes in favor. Resolution #24, the renewal of the term of office of Sylvie Rémond has been adopted with 94.77% of votes in favor. #25, renewal of the term of office for Jessica Scale for a period of 3 years, adopted with 99.59% of votes in favor. Resolution #26, appointment of Noëlle Lenoir has been adopted with 99.96% of votes in favor. Resolution #27, so appointment of André Einaudi for a term of office of 2 years has been adopted with 99.97% of the votes in favor. Resolution 28, powers to granted to carry out full legal formalities has been adopted with 99.99% of votes in favor. So I'll hand the floor back to Mr. Pasquier.

[Interpreted] I'd like to remind you that all documents required for this shareholders' meeting are available on the company's website. So we've come to the end of the agenda for today. So we can close this session. And I hope we'll be able to see you all together in one room in good health for our 2021 shareholders' meeting. Thank you, and goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]