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

Good morning ladies and gentleman, and welcome to this Sopra Steria webcast to talk about the current acquisition of Ordina. I will now handover to Cyril Malarge, CEO, over to you.

Thank you. Good morning. Welcome to this webcast organized this morning following the announcement that we've just made with regards to our planned acquisition of Ordina. So I'll be leading this meeting with Etienne du Vignaux, Group CFO. And I'd like to suggest that we go over the main components of the transaction, and then we'll have a Q&A session afterwards. So first of all, a few words on the transaction context, which we're delighted to present this morning. This is obviously a strategic milestone for Sopra Steria. On the 21st of March 2023, we signed a merger protocol with Ordina in order to acquire 100% of ordinary shares, making up the company's capital. So the offer price stands at EUR 5.75 per share, which represents a total value of EUR 480 million for 100% of shares. This offer is unanimously supported by the Board at Ordina and the Dutch Legal Foundation that has a priority share. Irrevocable commitments from the part of the 2 key shareholders who represent 26% of capital has been signed, so they will tender their shares to the public offer that Sopra Steria is launching for ordinary shares. It's a transaction that is subject to the usual approvals from authorities to the European Commission and the Financial Market Authority in the Netherlands, and this should be finalized in the fourth quarter of 2023. So Ordina, if we take a look at them, so it's a historical recognized player in digital services in the Benelux, a company that was created in 1973. It employs over 2,800 people listed in the Netherlands where it generates 2/3 of its turnover and it is also present in Belgium and then Luxembourg, where generates 1/3 of its revenues. Present in the public sector, public customers represent 43% of its business, financial services, which represent 26% of its revenues. It's also present in utilities, transport and life science. So it is a well -- a good performing company. Revenue of EUR 429 million in 2022, 8.9%. Average growth since 2020 is approximately 8%, operational margin between 8% and 9% between 2020 and 2022 and net profit of 5.6% of revenues in 2022. The company is not in debt and generates solid free cash flow with the transformation rate -- conversion rate of 77%. The planned acquisition of Ordina will enable us to create a leading player, a leading player in digital services in the Benelux, very close to top 10 with revenues -- pro forma revenues of EUR 700 million and employees -- 4,000 employees distributed over the Netherlands and Belgium, helping us to reach a critical mass in Belgium. And then we've got the market, which represents significant growth potential. The growth in the IT services market is expected to be at 8% over the coming years. And we look at the size of the market, the weighting of the customers in the public sector and then public sector and financial services are also significant. So this is an important area of development for Sopra Steria. The merger will give us access to greater business -- greater and more significant business potential. One of Sopra Steria's strategic thrust is European expansion so that we can develop our market share in geographical regions where there's strong potential for growth. So this is a necessary area so that we can reinforce the strategic relationships that we have with our targeted customers and then also our capacity to recruit talent, obviously, drawing on a very strong employer brand. So the Ordina acquisition addresses this twofold target and obviously, it's got a very credible positioning in serenity and digital trust. So it will balance out the group's geographical portfolio with a pro forma basis, Benelux will then become the third largest geography for Sopra Steria. The revenue for Sopra Steria, including recent acquisitions of CS and Tobania, and this tend acquisition will be distributed as follows. So we'll have 39% in France, 15% in the U.K., 11% in the Benelux, 8% in Scandinavia, 7% in Germany, 8% in the rest of Europe and then 12% for software activities. This geographical expansion is fully aligned with the group's strategy. So focus on strategic customers, establishing long-term relationships, concentrating on strategic vertical markets, Ordina generates most of its business in the public sector and financial services and then utilities and transport. It's a positioning as a partner in our customers' digital transformation, supporting digital severenity and trust and then obviously, a focus on local proximity with customers. Etienne?

Thank you. So just a couple of words on the complementarities of this transaction. The merger of these 2 entities, Ordina and Sopra Steria will have significant complementarities from a business and operational point of view. First of all, critical mass will be reached in public sector, Defense & Security, financial services, transport will enable us to access more significant business potential. Ordina client base will benefit from Sopra Steria end-to-end capacities. So hybrid cloud, cybersecurity and Sopra Banking Software solutions and its customers will also have access to the group's delivery model support, X-shore, India, Poland, Spain and the merger of the 2 entities will strengthen hiring capability and operational efficiency. So out of a full year on a recurring basis, we're expecting EUR 10 million of synergies of complementarities, operational complementarities over 2 years. So now let's go to the Q&A section.

[Operator Instructions] So we've a first question from Nicolas David from ODDO.

So my first question is some -- could I've just details on the synergies, the complementarity we're talking about margin and not necessarily top line. So could you comment on this item perhaps their amounts are not that high. So could we've some more details beyond 2 year. Second question is what are the assumptions that you're making in terms of financing costs at this stage? And the last question, with this operation, can we consider that you're going to have a break in terms of M&A for the next year or you still looking at targets?

So with regards to the complementarities, EUR 10 million regards margin. We're not talking about revenue here in this figure. So we're confident that we'll be able to hit this 2 years after closing the transaction. With regards to the financing costs, today as indicated or the group has the capacity to finance this transaction. The group, in addition to its cash, has got credit facilities of EUR 1.1 billion. So this doesn't impact the group's debt position. Obviously, this is something that we're studying. With regards to next steps -- with regards to your last question, Nicolas, obviously, we have to digest the acquisitions that have been announced, so CS, Tobania and now Ordina, we have to secure the integration. And at the same time, we remain alert to market opportunities, focused on our M&A strategy, which supports the company's strategy. So there might be some small acquisitions, which reinforce us in terms of expertise or positioning in various sectors. So obviously, we're going to digest the acquisitions that we've made.

And then with regard to revenue synergies, do you not want to announce the amount or...

So revenue synergies, we feel that we're capable of generating business -- very good business synergies. So we're remaining cautious, but obviously, we'll be building this up in the public sector, in financial services, utilities and transport. There are clearly very advantageous synergies, which we should leverage through this transaction.

Very clear. Good luck for this transaction.

[Operator Instructions] We've a question from Laurent Daure, form Kepler Cheuvreux.

So I've got 2 questions this morning. The first one is on Ordina's profitability, between 8% and 9%, but struggling to generate a higher margin. So that's kind of the observation that we've made when we look at this company in terms of margin. Now my next question in terms of verticals and finance. Could we have a few details in term to the customer portfolio. Obviously, we're focused on the financial services vertical in the coming quarters. From this point of view, are you reassured?

So good morning, Laurent. So with regards to margin, clearly, there's 2 factors here that the synergies, which Etienne has mentioned. So that's the first part of the answer. And the second part of the answer is the Ordina's strategy, which involves being a trusted IT partner moving to a digital business partner so they've started working in Belgium, and that's going to be rolled out in the Netherlands. And this means that we're expanding -- expecting the margins to increase in the Netherlands significantly. So beyond the operation with Sopra Steria. So if we look forward 2, 3 years, we think that we can reach an operational margin above 10% in this region. With regards to financial services, we are -- well, Ordina is working with Dutch banks and Belgium banks, which are large international groups. We can talk about names like ABN AMRO, Rabobank, BNP, with these banks, they've established a long-term relationship. So obviously, this is something that we looked at given the context of this transaction. And we're not going to have an excessive amount of confidence, but what we've seen has reassured us.

And with regards to margin, is there a big difference disparity between the geographical regions.

Yes, there is a gap. There's a bit of a gap. I'm not going to say a big gap. But obviously, we see this gap where they've rolled out their strategy in one region compared to another. So there is potential for improvement to -- for the Netherlands.

ISo this means, in Belgium, they've got double-digit margin?

Yes. Yes, absolutely.

We've got the next question from Derric Marcon, Societe Generale.

I've got a few questions. The first one is on customer strategy. So Sopra Steria has got a focused customer strategy, focus on a certain number of customers. Is this the same at Ordina and how will you manage a differences if there are any? So talk about your top 10 or your customer focus. How does it work at Sopra Steria and Ordina and then business split for Ordina. Could you give us a few details. So the weighting of consulting, infrastructure management or do they just have application management, have they progressed with the cloud platform? And then my next question is more about the market. So think about your competitors in this region they're is describing the market, the Dutch market is being a little bit different to the other markets in Europe with platforms. So there's body shopping going on, on this market, a project offering, which is obviously supported by global players or Indian players. So how do you see this market and its specific features compared to the rest of your geographical regions? And the next question offshore, Nearshore delivery. Do they have any facilities here?

So with regards to customer strategy, just a few bits of information. So the strategic customers represent almost half of their revenue. They have a well-founded relationship with their customer, deeply rooted relationship. Their churn rate is very close to 0, approximately 3%. So that's significant and then they're working with a long-term approach. So we see our fundamental values reflected here as well. So I've mentioned some major global banks talking about major governmental departments as well. And we think their positioning is very close to our company's positioning and what we want to be in Belgium as well. So we feel that we're well aligned. In terms of the business mix now, Ordina is very digital. So they're moving from development -- they're developing high added value, digital solutions. So a lot of expertise in low-code/no-code. So this obviously supplements Sopra Steria's expertise in this domain. Business consulting is quite small at Ordina but this is one of the strategic areas for development, so that we can roll out squads of business and digital squads for our customers so that we can roll out solutions with a very quick go-to-market. Infrastructure management is also very small, almost 0, but I don't know all the figures, but almost 0, but we've got expertise, so niche expertise and solution expertise. So the Dutch market now, yes, we've looked at this very closely. Yes, there are Indian players, but this also applies to Germany, but there are long-standing traditional players. Well, we've got Capgemini #1 player. This is a traditional player as well. There are other major logos as well. We feel that it is a market that is one of the most mature in Europe, digital market. And so this is going to help the group to ramp up its capacities in Europe. So that's what we can say about the market. Last question with regards to X-shore. Today, Ordina is positioned as a local player, so it hasn't rolled out X-shore capacities. And this is one of the levers -- advantageous levers that we can activate in the coming months.

Can I have another question on the transformation plan. So starting with Belgium, which is being rolled out in the Netherlands? Why didn't they do it the other way around? Is it the size? Was it easier to start in one region or do they want to test in Belgium to see what would happen or was this -- this is a managerial question, perhaps they had less skills at a given time in one of the areas.

I always think they had a very pragmatic approach. So they had a mix between teams and customers. I think it was rolled out quite naturally.

[Operator Instructions] So we've a question from Emmanuel Parot from Gilbert Dupont. Over to you. Could you speak into your microphone.

Can you hear me now?

Yes.

If you can hear me, I had a question on Ordina's business with ministerial departments. Could you give us a little bit more detail in terms of the offering that they have in the public sector? Is this comparable to what you're doing in the U.K. That was my question.

So we've got a very digital positioning that's quite interesting to highlight. So with ministerial departments, we've got strong positioning with the police force, very strong to what we're doing in the U.K., but not just the U.K. and Belgium as well, it's very close, very close to what we're doing in France. So that's quite an interesting factor. So we are addressing matters which are close to what the group is addressing. So this is an interesting area to leverage, join forces so that we can replicate this approach in other geographies. So we're quite close to what Sopra Steria is doing.

And in terms of profitability, are there different levels of profitability between public and private customers?

No, no, it's quite close. Are there any more questions?

An important question, were you alone in this procedure? How was this organized? Was the company flagged by industry consultancy funds or was there a bidding process set up? Or is this a discussion that come along, you know if you're competing with other players.

So the company made an announcement last week saying that they were assessing various nonbinding offers last week. We have submitted a binding offer at the end of the week, and we came to an agreement today. So this is the result of a process which is structured so -- and followed by the Board of Directors at Ordina, but we weren't alone in this procedure.

So another question from Laurent Daure, Kepler Cheuvreux.

Just one question, a detail on what is the profile of the engineers that Ordina has or in terms of seniority? And what is the staff attrition rate?

So average age is very similar to Sopra Steria. So in terms of HR, we've also seen our fundamental values reflected in the company. So in terms of the HR pyramid, we are reassured. And then in terms of attrition market level, so no specific issues here in terms of attrition.

Ladies and gentleman, we've got no questions so I'll have the floor back to Cyril Malarge, for the conclusion.

Thank you. So just as a summary, I think Etienne will come back to the process and a few key items. So just as a summary, we're obviously very happy to announce this acquisition, and we're confident that it shall be completed even if we have to run through the usual steps of approval from the European Commission in terms of competition. You've got the detailed schedule in the presentation with settlement expected Q3, Q4 of this year. So we're confident that this transaction will be completed. Thank you, Etienne. Thank you, everybody, for connecting this morning. This obviously reflects the interest that you have in Sopra Steria, and we're very happy to initiate this planned acquisition. And I hope you have a very nice day. Thank you, and goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]