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

Ladies and gentlemen, and welcome to this conference call to announce Sopra Steria's Q1 2024 revenues. [Operator Instructions] And now I'll hand the floor to Etienne du Vignaux, CFO.

Thank you. Good morning, ladies and gentlemen, and welcome to this conference call to announce Sopra Steria's Q1 2024 revenues. I'll start with a few general comments on the quarterly performance, then I'll go over to the figures for our 5 reporting units. And then as usual, we'll have a Q&A session. I'm here with Olivier Psaume, who's Head of Investor Relations. So general comments. The market was buoyant for large-scale digital transformation project, but less dynamic for a discretionary project, but we demonstrated good resilience with a revenue of EUR 1,587 million or total growth of 13.8%. Organic growth was 0.3% in accordance with the indication given all the guidance at the end of February. So this was the indication was that we would have a first quarter, which was relatively stable. So the basis for comparison was quite high. In Q1 2023, organic growth was 9.1%. And then there was also an unfavorable calendar effect with 1 less working day when compared with the first quarter of 2023. Against this backdrop, public sector, financial services under fence resisted well and continued to demonstrate good outlook for growth in 2024. Integration of companies acquired in 2023 is going according to plan. We're starting to see some good opportunities that we wouldn't be able to target without the aggregation of CS and Ordina. 2024 priorities are confirmed, successfully completed the integration, execute the divestment project for banking activities before the end of the second quarter or at the latest in the third quarter, made progress on our internal transformation and improve the group's financial performance. Now I'd like to go over each reporting unit. We'll start with France. The French division generated EUR 624.6 million, so down organically by 2.6%. Most verticals saw negative growth in their revenue, including Aeronautics, which had a business downturn of around 4.5% in France. Defense and Transport remained buoyant and generating growth. Now for the U.K. Revenues amounted to EUR 240 million or organic growth of 7.4%. The public sector, which represents the lion's share of the business in the U.K. was very buoyant with organic growth of above 9%. And the SSCL platform was particularly buoyant. In the private sector, over the first quarter, this represented over 10% of the U.K.'s revenues with strong growth. Financial services started to benefit from the contracts signed in the second half of 2023, in particular, in S&I, and the ramp-up will be progressive over 2024. Now for the Europe, revenues were EUR 547.7 million. Total growth of 33.5%, organic 1.7%, and this is given the consolidation of Ordina and Tobania, which happened during 2023. So organic growth of 1.7%. If we focus on various countries now, Germany, which experienced a weaker economic backdrop than the rest of Europe for a contraction in revenue, but Scandinavia, Spain and Italy had good momentum and growth rates between 5% and 8%. The Benelux, where the integration of the 3 companies is underway, generated revenues that were similar to that of the first quarter of 2023 or EUR 173.1 million. Now for Sopra Banking Software. This unit generated EUR 103.8 million, an organic contraction of 4.1%. And this was obviously due to services, which had negative growth of 7.9%. But the subscription revenues are on track with growth of 21.1%, driven by good momentum in the digital offices of a banking platform and for the financing platform. Now for Solutions, revenues were EUR 71.2 million, so organic growth of plus 8%. So for human resources, this represented 70% of the revenues in the division in the first quarter, and organic growth here was 3.7%, the real estate solutions. So the rest of the revenue, about 30% of the revenues in this division are contracted by 5.3% in grind with the forecast established for 2024. So as a conclusion, the Q1 revenues were aligned with our forecast. The public sector, defense, financial services, demonstrated resilience. Aerospace should improve in the second quarter and progressively emerge in the economic downturn observed. Sales prices continues to increase. We're particularly attentive to our costs against this backdrop. We also confirm our priorities for the year, successfully integrate the company has acquired, execute the divestment project and then make progress on our internal transformation project and improve the group's financial performance. So we confirm our targets for 2024. So organic growth in revenue between plus 2% and 4%, operating margin on business activity between 9.5% and 10% and free cash flow of at least EUR 350 million. So thank you for listening. Now I'd like to suggest that we move on to the Q&A session.

[Operator Instructions] And our first question is from Laura Metayer.

Two questions. The first is, you've confirmed guidance for 2024. What makes you confident that you will achieve these growth rates? And then second question on aerospace. You said it was quite soft, but have you also seen some signs of improvement? And are you expecting positive growth in Q2?

So I'll just come back to the annual guidance. Obviously, this is fully aligned with what we expected. In February, we announced more or less flat revenue in Q1. We should see a slight improvement in Q2, but nothing spectacular better growth in Q1. And then we've got the mechanical effect here, which was the de-favorable and unfavorable impact in Q1, which we will have in Q2, and then in H1, which is to see a 4 basis points improvement. So we're still confident with regards to our guidance of between 2% and 4% for the year. Now for aerospace specifically, we're expecting negative growth. We had a high basis for comparison in the first semester. So for Q2, we'll have a slight negative growth. That's what we're anticipating today. And then in the second half of the year, we're expecting growth, obviously, we'll benefit from the comparison impact because activity started to contract as of the second half next year. So we should expect growth in the second half, but we won't see that in Q2.

Just a follow-up, do you think the fact that it's going to improve in H2? Are there contracts that have been signed, which confirm this?

So we've got 2 things here. We've got a mechanical impact here with the H1 and Q1, we've got the unfavorable effect of less working days. In Q2, we've got the favorable impact of working days that's averaged out across geographies, some are impacting more than others like Italy. But, yes, things do improve because we've got more working days, so that's a mechanical impact. And then we've got the basis for comparison, which will be more favorable. So we saw the deterioration in H2 last year. And then we've also got outlook for growth contracts that are ramping up. We've got the NS&I contract in the U.K. So in Q1 produced 6 million in revenue, and this contract is going to ramp up progressively throughout the year. So this should obviously have a higher weighting in H2 than in H1. So we've obviously got the basic effects, the impact of working days and then we've got the ramp-up of various contracts that all these factors will be having an impact.

Next question from Nicolas David from ODDO.

The first is for France. Could we have a more detailed vision of the public sector? Any news or the economy? Is this having an impact on Q1? Or could we talk about the sector or what are the opportunities that we see here, which enable you to be optimistic? So public sector, excluding defense? And then the second question, in Q1, we saw a net recruitment of 400 people. So how should we interpret this? Is this a sign that you're confident for the quarters to come wherein this time in 2023, it was flat? So what does this imply with regard to growth in Q1, Q2 and then your usage rates?

So first question on public sector. So excluding defense, obviously, defense is growing in Q1. So for the public sector, we've got quite negative growth in Q1 in France in 2024. That's obviously most sectors did experience negative growth. So what is the impact of public spending restructuring? Yes, it does have an impact. We've observed that in France, in Germany as well. And then the public sector, obviously, across the group is quite contrasted. We've got some countries, Scandinavia, the U.K., Italy, Spain, where we've got growth, quite marked growth. So clearly, France and Germany are countries where we haven't got public sector growth today. So this is what we've got in mind today. We're talking about slight negative growth, so single digit, mid-single digits. So in terms of negative growth of France in Q1. Now for the second question on recruitment. Yes, 440 million is a net recruitment figure. But year-on-year, if we look at last year, were flat. Q1 compared with Q1, it's flat. We're obviously highly vigilant. We know the market. We manage our recruitment and our bench very carefully on a weekly basis, depending on any business changes, head count and then the attrition rate as well, which is today at quite a relatively low level for the first quarter. So with regards to the second quarter, yes, obviously, there's the impact of the start of the year, so you should compare this with the previous quarter.

[Operator Instructions] Now we've got a question from Emmanuel Parot from Societe De Bourse.

First question on your comments on activity rates on the bench. What's the situation up until now when compared with previous years? That's my first question. And then the second question on prices. So in Q1, if we extrapolate this over the year, how do you see changes in prices? So for Q1 and then with regard to the guidance?

Yes. So with regards to the bench, we're slightly above 5% at bench. Q1 last year, we were slightly below 5%. So it's slightly up, but we're just talking about a few basis points here. So it's quite comparable. But, yes, this is something that we look at very closely against the market slowdown that I mentioned earlier, we adapt our recruitment policy to the contract. Now with regards to prices, obviously, it's difficult to have an average price for the group given the different activities. But if we take France, for example, in Q1, we've seen an increase of 4% on average. So we've got good momentum here, and this is compared of average increase of 3% in head count. So obviously, I can't talk about the full year. But at the start of the year, we have got a good momentum in this area.

Now just another point on Germany. You've been talking about the macro environment. Can we have some more information on the verticals, which are down?

So you know the situation in Germany. You know the macroeconomic situation. Obviously, we've heard Mr. Schultz's comments this week. So it is difficult for the market. We've got a negative growth in business in Q1. We're not planning on growth this year for Germany. So in Germany, we've got financial sector. We've got the public sector. Those are the 2 sectors that have got a heavy weighting for us in Germany. So I said this for the public sector in Germany. Like in France, the government has taken measures and there's some quite tough discussions at the end of the year. But obviously, this is so down various projects. Obviously, we've got the federal budget and the regional budgets that have been approved, but this has had an impact. But we've built our budget, and this is obviously included in our guidance that we've not planned for growth in Germany in 2024. So sector by sector, obviously, the public sector and the financial sector are the sectors that have got a big waiting for us.

And then, what about the second half of the year? The U.K. contracts, for example, are there any other examples that you could give us, which concerns this acceleration in the second half?

So we've mentioned aerospace earlier on. In France and in the group, we've had negative growth in Q1. This should improve in the second half of the year. So this is obviously an important sector for us. We're expecting a single-digit positive growth in the second half of the year. So this is going to depend on Airbus. We've got Airbus. Obviously, we don't have just Airbus in this sector, but they do have an important weighting in this sector. So that's one of the assumptions that we've included. We're very confident in the mid to long term with regards to Airbus. We saw the announcement this week if the order book is full. But then we manage our cash and subcontracting with Airbus on a quarterly basis. We've got the unfavorable basis for comparison, given the growth that we've experienced in previous years up until midyear. But we're quite confident. Obviously, it's difficult to time, but we do expect growth in the second part of the year. And then for the rest, we've got contract ramp-ups in the U.K. I mentioned that. And then we've got Defense & Security, which at group level, is basically flat in Q1. Even if there was growth in France, we've got one contract that came to an end in the U.K. But we've got good momentum for the rest of the year. France with CS and the Benelux as well. We're expecting between 4% and 5% growth in this sector for the full year.

No more questions on the French line but we have questions on the English line. So we'll send that to our operator on the English line, so we can address those questions.

You will now move to our next question from Aditya from Bank of America.

So 3 for me. Firstly, you spoke about aerospace, defense, scooter. Could you also maybe give some color on the trends you're seeing in financial services, maybe by market or how you think about the shape of growth in that sector during the year? Second, can you also talk about the performance you're seeing at the recently acquired assets, CS Group, Ordina, Tobania, on a like-for-like basis pro forma, if you could just comment on that? And then finally, I know you don't report the margins at the 1Q stage, maybe you can comment on how we should think about the rating of margin expansion for the year during the first half versus second half, given the top line development?

Thank you for the question. So I will answer in French for everybody. So for your first question with regards to the financial sector. So quite contrasted here. Obviously, you've seen this in the market, slight growth, single-digit growth in the financial sector group level in the first quarter. But with contrasting situations, we've got growth in the U.K. with NS&I, which has an impact, which is starting to have a big impact, growth in the Benelux, Scandinavia, Spain, Italy, net growth in Germany and France. So contrasting situation, but our growth, is linked to specific contracts, NS&I didn't exist last year in the U.K. So it's not necessarily representing the state of the financial services market. Now to your second question with regards to performance, and companies acquired last year, CS Group, Ordina and Tobania, with CS Group, obviously, at the heart of the Defense & Security vertical. We've got growth in the sector. There are opportunities which are opening up opportunities which CF or the group wouldn't be able to benefit from. We've got clearly expertise with CS, which is reinforcing our position both in terms of volume and commercial capacity. And with the addition of the aggregation of both companies, we're seeing opportunities that we wouldn't be able to address in space or homeland security. So we're expecting growth and expecting growth for the full year for CS Group. And this is linked to your third question on margins. We're expecting an expansion in margins for CS Group as of this year. Then for the other activities in the Benelux region, Ordina and Tobania I said earlier on that in the Benelux, well, I don't know whether I said it about it now in any case, it's okay, we've got a quarter that when compared with last year. So like-for-like, it's quite flat. If we integrate Tobania Ordina and then former Sopra Steria activities in this region so it's a difficult market in the Benelux. Obviously, we have to manage the bench and recruitment very carefully on a weekly basis. We're also working on new opportunities like with CS Group. So opportunities that Ordina alone wouldn't be able to access in the past, and we're going to be able to provide offshore capacities that Ordina didn't have previously. And where we're seeing conversation with financial sector stakeholders. We've got proposals, which we’re able to issue today, which Ordina wouldn't have been able to do a year before. Now for margins, we don't publish margin in the first quarter, but we're confirming our annual guidance. I said that earlier on. So between 9.5% and 10%. So we should see a slight improvement in margin, and this will be more marked in the second half of the year than in the first half. That's how we built the budget for the year.

Sorry, just maybe one follow-up from the press release, you talked about investing in programs round generative AI with Microsoft and Media. Could you just talk about maybe some of the initiatives there?

So for Artificial Intelligence, we're not alone here, but obviously, we are investing in training. So training our staff, consultants, developers for our internal needs as well. We've got various partnerships. Obviously, we mentioned the partnership with Microsoft, which is obviously a major stakeholder in the demand and then NVIDIA. AI, it's good to have partnerships. It's good to train our staff, and this is a comment that we made just 2 months ago when we got the question. we haven't yet got massive contracts. But if you're not capable of providing the expertise today at top level, then you're not going to be capable of winning these big contracts. Even if the share of AI in these major contracts is weak, you need it to win them. But obviously, we've got listing AI factories. We're rolling out 3 AI factories or 3 customers in the private sector, they're trying out artificial intelligence. So it's there, it's now. It's not in 3, 4 years' time. But once again, in terms of the percentage of revenue, it's quite small, but it's an important catalyst. If you don't have it, then you're not going to be at the table on the market today.

There are no further questions. So I will hand this back to the speaker to conclude today's conference.

Well, thank you very much for listening to this call I just want to check if there are any more questions before we wrap up. Yes, we do have a question on the French line from Thomas Cutia from Exane. Just a small question on consulting. Can you let us know what the performance was in consulting for Q1? And what is the outlook?

Yes. So for the first quarter, we were down to minus 7%, given a drop in volume, even if prices are up in consulting. So no exception to the rule. It's a difficult market for consulting. We're expecting the market to stabilize in Q2. We're obviously very attentive to this domain. We're paying a lot of attention to our bench across our geographies, but those are the figures for today.

We have no more questions. Thank you. So thank you very much for taking part in this call. And we'll be seeing you soon. Goodbye.

Ladies and gentlemen, thank you for taking part in the call today. You can now hang up. Thank you very much, and goodbye.