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

[Interpreted] Good morning, ladies and gentlemen, and welcome to Sopra Steria conference call for the presentation of Q1 revenues. I will now hand the floor to Cyril Malarge. Over to you.

[Interpreted] Thank you. Good morning. Good morning, ladies and gentlemen. Welcome to this conference call to comment on Q1 revenues. I will start with a few general comments on the performance of the quarter, then I will detail the figures for our 5 reporting units, then we will have a Q&A session, which I will lead with Etienne du Vignaux, the group's CFO. So what can we take away from this quarter. We had a good first quarter with revenues totaling EUR 1,395.4 million, total growth of 10.1%. So growth generated in a market that is driven by our customers' digital transformation, excluding changes in currency and scope. Organic growth was 9.1%, which as planned is above our forecast for the full year. Obviously, we had a favorable comparison basis in the first quarter and an additional working day when compared with 2022. Momentum remained sustained, both in terms of volume and sales prices. All of our reporting units contributed to the group's growth. The defense and security aeronautics sectors have contributed to our growth with average increase of around 20% and consulting activity increased by 15%. Then with regards to external growth, the integration processes for CS Group and Tobania were launched and organizations are set up. And then with regard to the proposed tie-up with Ordina is progressing according to plan, and we plan to file a proposed public tender offer in the second half of May 2023. So now if we go over our 5 reporting units, we'll start with France. The revenue in the first quarter was EUR 589.9 million, organic growth of 9.6%. So it was a good quarter for France. All service lines grew and the greatest momentum was achieved in consulting [indiscernible] buoyant sectors were defense and security and aeronautics, as previously indicated, but also transport and public sector with double-digit growth for all of them. CS Group has been consolidated since the 1st of March and contributed EUR 29.6 million to the Q1 revenues. As I said, the organization is now set up and collaboration has been initiated so that we can start generating commercial and cost synergies. Now a second reporting unit, the U.K. Revenues for Q1 were EUR 216.7 million, organic growth of 4.3%. So it was a good performance for the U.K. Performance that should be considered against the backdrop of strong growth posted since 2021. So over 17% accumulated over 2 years. The aeronautics, defense and security sectors grew at a pace above 10%. Private sector posted growth of 6%. Our 2 joint ventures, specialized in business processes in the public sector, so SSCL and NHS SBS posted average growth of 3% and the rest of the public sector was stable over the first quarter. Now let's turn to Other Europe. The revenue for the first quarter was EUR 410.4 million, organic growth of 13.1%. The strong growth in this unit was driven by Scandinavia, the Benelux, Spain, who grew at a pace above or equal to 13%. Germany and Italy generated growth of around 10%. Tobania has been consolidated since the 1st of March and contributed EUR 8.6 million to Q1 revenues. And then finally, revenue for SFT were [ EUR 37.1 million ] in this first quarter. Two takeaways here. Firstly, in keeping with our previous announcements, we're satisfied an agreement has been reached with the seven Sparda Bank to wrap up the transformation program, which means we can reduce and manage the operational risk associated with this operation. And then the second takeaway is that the Sparda Bank run and the IT will continue to be operated up until the end of 2025. Now for Sopra Banking Software, revenues totaled EUR 107.7 million in Q1, organic growth of 5.2%. So return to growth. Return to growth for SBS after 3 years of negative growth, which is explained by good momentum in subscription for digital offers and especially specialized financing and regulatory reporting. This business -- the subscription business increased by 12.2% in Q1. License sales were stable when compared with the first quarter of 2022. In total, software revenues grew by 2.8%, and service revenues grew by 6.1%. Now for Other Solutions, revenue in the first quarter was EUR 70.6 million, organic growth of 5%. HR solutions, which represent 2/3 of this reporting unit revenue increased by 3.4% in Q1, and the revenue from solutions dedicated to real estate increased by 8.5%. So in conclusion, it's a good start to the year. As foreseen, we're aligned with our forecast. Obviously, the environment isn't certain in the second half of the year. But the momentum that we've seen in defense and security, aeronautics and the public sector, which represents nearly at 22% of revenues do provide us with a certain level of visibility for the coming quarters. And I also want to highlight that we're not particularly exposed to tech sector, digital marketing and to a lesser extent, retail and industry aside from Aeronautics. So we're focused on our strategy, value ramp-up, with our digital activity, consulting [ of our ] transformation. And we are launching the integration of our acquisitions that we've made. So against this backdrop, we do confirm our targets for 2023. So organic growth in revenue between 3% and 5%, the lower limit of this range represents the worst-case scenario. And most likely is that we'll be at the top of this guidance range. Operating margin slightly above 9%. And finally, free cash flow of at least EUR 300 million. So now I'd like to suggest that we open the Q&A session.

[Interpreted] [Operator Instructions] First question from Emmanuel Parot, Gilbert Dupont.

[Interpreted] Could we have some more information on organic growth at group level? Could we have some more comments on Q2? Are we seeing a comparable momentum, bear in mind the impact of working days might be a little bit more difficult. Could we just have a feeling or some more color on customer demand. And then third point, recruitment in Q1, and then the turnover rate is -- recruitment pace, something that can be extrapolated over coming quarters? Or will there be more caution in the future?

[Interpreted] Thank you. So I'll go over your questions in order. Sales prices. All of our business is not necessarily impacted by sales prices of BPS or software. But -- so this just gives you an indication. If we speak about France, services in France, that can give you an indication. Sales price in France increased by 5% to 6% over Q1 in France. So that can give you just an indication of organic growth in France in Q1. Now with regard to the second quarter, we have highlighted that in certain countries, especially France, there are 2 less working days. So obviously, this will impact organic growth. So it won't be at the same level as the first quarter. We are anticipating a decent level of growth in this quarter, and this will obviously be impacted by the impact of working days. Now with regards to recruitment momentum, I'll start by sharing some information. You saw it in the press release. Attrition rate was approximately 16%, which was slightly decreasing. So this is showing that the market is starting to slow down. This is a key indicator, which does demonstrate slowdown. So obviously, we've given out the directive to adjust recruitment according to attrition rates and growth rates. And that's something that we assess every month, we almost look at it every week. We have a goal for the year of 11,000 employees, and we've recruited slightly over 3,000 in the first quarter. So just this mean that you're recruiting slightly more over the first quarter given that your attrition is slightly lower. No, actually, we've recruited what we planned. we anticipated the fact that we would have a good start to the year. So we've recruited over the first quarter to be able to support growth.

[Interpreted] Now we shall move to Laurent Daure from Kepler Cheuvreux.

[Interpreted] I have 3 questions. Could you just come back to consulting performance. We've seen a lot of investment last year. I know this is a cyclic business, business cycle. So we have some more information for the future. Are there any signs of a slowdown in this side of the business? Second question, CS. So first, integration, in terms of [ separate ] revenue, up and until today, with regards to the work that's still to be done on margin, so the complexity of projects to be delivered. What's your vision? And what are the potential risks now that you've been able to take a step back with regards to this business? And then for Nordics, for years now, we've seen that it has been working very well. Is this the public sector in Norway? Or are you diversifying your activity in terms of vertical?

[Interpreted] Thank you, Laurent. With regards to consulting, good performance. When we look at it, it's slightly down with regards to the growth that we observed in 2022 because we're at 18% growth. So 15% is slightly down. So it's a good performance, but slightly down. We're planning growth -- double-digit growth in the first half of the year. That's our momentum, driven by value ramp-up of our operations and our customers' digital transformation. So at this stage, we've got good momentum. However, the activity -- the business is quite volatile so we don't have that much visibility with regard to the second half of the year that we are cautious, but we have good momentum. This applies to France, but also all countries. The second question, yes, CS. So we finalized the transaction, Etienne could talk about that, Where this is our first integration. So no surprises for us. Because basically, this is a company that we know very well. We've been following for 10 years now. We've had a partnership with them, shareholders. So last July, we said we would expect EUR 13 million of synergies over 3 years. So we've got 3 years to work on this performance in France. So we confirm this momentum, and it's interesting because the integration is going well. The teams want to work together, and that's the first good indicator. And then in terms of business synergies, obviously, we've got teams who want to make sure that 1 plus 1 equals 3. So then for cost synergies, we will leave ourselves the time that we set for ourselves, and we are aligned with our plans.

[Interpreted] So is this business going to grow organically this year.

[Interpreted] So it's activity that should be close to 10% with regards to organic growth. Then just -- you asked a question about risks. We're talking about multi-annual contracts. We were cautious when we talked about recovering margin levels over 3 years. We're confident that it should return to normative levels progressively. With regards to the Nordics now, yes, year after year, they've been posting impressive growth rates. That's for sure. So public sector, but [ power ] public, close to the public sector, we also work in transports. We work in energy, in telcos, which are very close to nationalized or national companies. So all very close to the public sector. But yes, we've got strong momentum, and I don't see this stopping in the coming years.

[Interpreted] So last point with regards to this region. Perhaps not in the short-term because you've got a lot of integration work, but are there any targets identified in these countries.

[Interpreted] In terms of M&A strategy, we've already announced our M&A strategy. So reinforcing the group's positioning outside of France. We want to build a European group. So we've got the Benelux. And then obviously, Scandinavia, Germany, these are targets for us. But initially, we're going to make sure that our 3 acquisitions we have made go successful in terms of the integration. So in the very short-term, we're not looking for additional targets this year. In any case, we want to make sure that these integrations are a success.

[Interpreted] Next question from CIC.

[Interpreted] And congratulations for your results. So what was the organic growth rate for Tobania? And the second question is slightly more complicated. Given the acceleration in the private sector, could you give us a little bit more information about Q2 and profitability because there seems to be a bit of a gap between the levels in this domain.

[Interpreted] So organic growth for Tobania, revenue of EUR 8.6 million in Q1 is stable with regards to previous quarters. So that's for the first question. Now for the U.K. We've planned to have a Q2 with JVs. So stronger growth than what we delivered in the first quarter. So that's the visibility that we have at this stage. Yes, we don't have the same performance levels in the JVs and the private sector -- in the joint ventures and the private sector. But we had a difficult situation 2 years ago. There's a bit of a gap still today, but it has been closed when compared with the past.

[Interpreted] We now have a question from HSBC.

[Interpreted] Two questions. So 1 for SBS. How do you see the performance in the coming quarters given the situation, which is a slightly tense, situation with regards to banks? Second question, how do you see the competitive landscape given the current environment. Are you challenging your strategy, particularly in terms of price in France?

[Interpreted] So with regards to SBS, what I was -- what I had announced in February, we finished last year with a strong business pipeline, especially for the digital offers that we've developed. And so I had said in February. So after 2 years of implementing our cost reduction plan, we would, if necessary, make decisions in terms of operational performance and growth. So the growth that generated this quarter is good. We should expect growth or organic growth in the first semester. So I'm not expecting operating profit on business activity above 2022. But what we're doing is implementing the plans we previously announced and making decisions in terms of market share, and we will assess the situation after the first semester. With regards to competitive landscape, so prior sales prices, good signs. We look at our own positioning across the board. We've got levers. There is potential. We've got the momentum that's been initiated with our offer transformation. So even if the competitive landscape is slightly tougher, we do have strong proactive momentum to increase sales prices, perhaps it will be more difficult to get customers to accept this when compared with the past, but we've not seen any issues up until now, and we are committed to this because it's important for the group's strategy, ramping up the value of our operations and also for our overall performance.

[Interpreted] So we have a question from Bryan Garnier, it's Gregory Ramirez.

[Interpreted] So I've got 2 questions on Germany. The first on banking, perhaps you're quite exposed here. And then with SFT, what's the momentum that you have now, what can we anticipate at this stage. And then for the second part, a question on SFT. Is there anything new to highlight with regards to what you said a couple of months ago at the annual presentation. So with regards to wrapping up this contract. And if I've understood well, the end of the run will be in 2025. Are there any implications -- any additional implications? Anything you can say in terms of figures or scope or the ramp down, and then some -- just some indications in terms of Sopra Banking Software.

[Interpreted] So first question, on the banking market. Just 1 detail. We're not exposed to U.S. banks. So we're more focused on Europe and major banks. So perhaps that gives a different perspective with regards to the situation in our competition. So we should be flat plus a little bit. So stable, maybe slight increase. So -- and then with regards to SBS' business, when we offer high added value offers, there's always a market, there's always demand. So stable. In Germany, banking represents 35% to 40% of the country's revenue, so stable or a slight increase. We still got business, but we might see that it's slightly slowed down when compared to the past. But we are aligned with our forecast and there are no alerts here. Now for SFT, I can give you more detail, obviously, but we're aligned with what we announced. In February, we said we were just talking to the banks because we considered that the digital transformation, the [indiscernible] conditions were no longer there. It was difficult to align all the stakeholders. So there was a change in the end management and a change in direction, so the conditions were not met to be successful. We've worked on this over the past couple of months. We've reached an agreement, we've come to an agreement, which enables the banks to find an alternative. And in the meantime, we will be operating the IT up until the end of 2025. We're not forecasting a significant impact on our results, but I'll let Etienne comment that.

[Interpreted] So in terms of figures, we should be around EUR 70 million this year, similar to that of last year for this scope. So operating profit on business activity, stable. So as Cyril has said, progressively, obviously, there won't be a big bang, no instant impact. So it will be -- they'll be moving to a third party towards the end of 2025. So the revenue will progressively decrease over this term. And then given the future, we'll look at the situation with the 7 banks. Obviously, 1 of the difficulties of this project was the misalignment of the 7 stakeholder banks. So will we look at the situation in due time. We've got time to do so until 2025. And then the second part of this question, the impact on SBS, it's quite limited, to be clear with you because it was localization of the banking platform. So there's no direct link with the banking platform that SBS has, the impact on SBS' offer is close to 0. And then for Germany for SBS, that is about EUR 20 million in revenues. So obviously, we've got a vehicle to generate more than EUR 20 million, but at this stage, we're not going to be saying it anymore. The impact is very limited when it comes to SBS. This will enable us to free up resources to accelerate R&D development [indiscernible].

[Interpreted] But just I want to come back to the ramp down in terms of figures. Is this going to be progressive. So this means 2026, you'll be at 0 for SFT. Can we consider the revenue?

[Interpreted] So was it going to be a third, a reduction in revenues over the 3 years. So it's too early to give you details because the migration plan is going to be built with the banks. We know that it's going to be progressive. So obviously, at the end of the term, it will be 0. It's mechanical, but I can't give you the details of the ramp down year-by-year, but it will be progressive. That's the detail I can give you. Thank you.

[Interpreted] Now we're going to move on to Derric Marcon from Societe Generale.

[Interpreted] I have 3. The first is on pipeline. Some of your competition have seen decision cycles being extended since the start of the year, but orders are coming in, but coming in at the end of the quarter. So what's in the environment given economic uncertainty, difficulty in taking decisions. This is something that you've observed in Q1 when it comes to decision-making. Have you had deals coming in at the end of the quarter? Or are you still considering that you're in a buoyant market. And then pipeline for software today, how are you positioned? Are there some big deals? [indiscernible] has got a lot of hope when it comes to Europe. This is also your playing field. Do you see any major deals that you can highlight for this year. Obviously, despite the context that we're all aware about. And then next question on U.K., the JVs in particular. So is there any potential with new platforms? Is there anything positioned in your pipeline for 2023? So obviously, you highlighted in 2022, you've got a major platform.

[Interpreted] So questions basically on pipeline order book. I'll take the first question. I haven't observed the cycle that you described with decisions slowing down and accelerating towards the end of March. I haven't observed that. We've got major operations, which have a long decision cycle. So is it taking slightly longer than usual, perhaps in some places, but to a lesser extent in others. But I can't see any notable changes. No significant changes here. Perhaps at the start of the year, consulting was slightly slower than what it usually is, but obviously caught up by the end of March. Then for the software pipeline, to a comparison with [indiscernible] banking, are there any major deals? Not more than usual, where we have a more digital pipeline for this type of project. That's what the pipeline looks like at the moment. So this applies to software, HR and real estate. Good pipeline at the start of the year. Now for the U.K. With the U.K., we've got a pipeline which is well qualified, interesting, but long-term -- longer-term momentum. So we're talking about operations, which could generate revenues at the end of the year or 2024. But yes, there is a significant amount of deals in the pipeline.

[Interpreted] We don't have any more questions on the French line, but now we'll switch to the English line. We'll now take our question from Aditya from Bank of America.

About 3.5% for the next 9 months of the year. So can you talk about, firstly, what are the underlying assumptions you're making in terms of what could cause that slowdown? And second, how should we think about the phasing of growth through the rest of the year as you go through Q2, Q3, Q4. Then on the margins, again, you have that target of above 9%. You had a very strong start to year on the top line. So can you talk about the phasing of margin as well between the first half and second half? And the progress on the cost savings you talked about earlier around real estate and so on.

So we didn't get the [indiscernible] of your questions on, I guess growth. Could you say it again?

Yes. I think that given the strong start to our 9.1% organic and you're saying you'll now go to the top end of the full year range, that still only implies around 3.6% growth for the next 9 months of the year. So can you talk about what do you think is going to lead to such a slowdown over the rest of the year compared to where you were in Q1.

[Interpreted] Okay. So I'll be answering in French because there is a translation for those listening to us. So with regards to growth, yes, we're starting with Q1, which is decent. But as planned, we're not surprised by this quarter. We're expecting Q2 to be not as strong, obviously, given the impact of working days. So there's a difference here when compared with 2022. And at this stage, it's -- you seem to have visibility over the second semester. So guidance was between 3% and 5% at the lower end of the range is basically our worst-case scenario. So we're expecting a strong Q1, which will then decline over the other quarters. So this is not -- the worst-case scenario isn't very likely. And then the other scenarios, strong Q1 and then more nominal rates in the rest of the quarters. But we will assess the situation when we published the first semester results at the end of July. And now with the operational performance, Etienne?

[Interpreted] Seasonality of profitability. So the guidance is confirmed, slightly above 9% annually. In the first half of last year, we published margin at 8%. So we're expecting a significant increase as of the first semester. But in terms of seasonality, is always under second for the full group. And then for real estate -- real estate savings, we're confirming this. We've initiated this plan with the impacts that have been forecasted, but it's a long-term plan. So no highly significant impact in 2023.

All right. Can I just ask 1 more follow-up? So just on M&A. So you've done a few deals over the last few months of CS Tobania and then Ordina is in the process. Can you just talk about the M&A pipeline for the rest of the year? What you're focusing on in terms of areas, capabilities and potential size of deals?

[Interpreted] So as previously indicated, priority is not filling the M&A pipeline, but it is to consolidate and make sure the 3 operations are success with regards to integration to CS, Tobania and then Ordina. They're not aligned in terms of their cycle. So we're very much focused on that. Obviously, we're listening to the market. We're attentive to the market, but we're not focused. We're not concentrated [Technical Difficulty].

[Interpreted] Another question from Laurent from Kepler Cheuvreux.

[Interpreted] Just 1 last follow-up question on England or the U.K. Because there's a lot of moving parts here. So if I remember, there's a [ SF ] contract that should increase. Is there a ramp-up here? And then if I remember correctly, volume for the passport and visa services here was very strong following COVID. So when all of this comes together, where can this take us in terms -- where can it take us in this region over the full year?

[Interpreted] So with regards to the U.K., 4% growth in Q1, we think this is aligned with the growth that we can have over the full year. And then we've got -- we've got management. This platform, which has kind of pushed -- pushback in terms of revenue. So that will be more 2024. It will take longer on the customer side to finalize that. And then on the flip side, we've got volume, which is at the level it should be. So the Visa services and then we've got SSCL and then NHS. So that's kind of the reality. So growth should be quite consistent over the quarters. So the new platform debt collection. So that should be about EUR 40 million, if my memory is correct. So when we'll be seeing that figure. So we weren't talking about EUR 40 million this year, a lot less because this is the first year. So this revenue should come in 2024. But at the same time, in the private sector, we announced 6% growth in the first semester. So we've got a good start with regard to the coming quarters. But yes, the debt collection is pushed back slightly. So this is just 1 contract out of many others. So not necessarily for 2023. There are other deals underway. As Cyril mentioned, the pipeline is very full. So it's a possibility that will be transformed or not, but there are other opportunities alongside this. But the [indiscernible] concerned, there's a framework agreement. But obviously, we have to sign agreements with specific customers. So that's what can take time, and we're not expecting much revenue for 2023. Just in addition, we were very cautious in terms of the U.K. budget for this part of the business.

[Interpreted] We don't have any more questions. So I'm going to hand the floor back to Mr. Malarge.

[Interpreted] Thank you very much. Thank you very much for taking part in this conference call, and I hope you have an excellent day. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]