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

[Interpreted] Good morning, ladies and gentlemen, and welcome to this conference call on Sopra Steria's Q3 2024 revenues. The conference is recorded this morning. [Operator instructions] Today, we have Mr. Cyril Malarge, CEO; and Etienne du Vignaux, Group CFO. I'll 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 go over Sopra Steria's Q3 2024 revenues. I'm here with Etienne du Vignaux, our Group CFO, and I'll be leading the session with him. I'll start with a few general comments on our performance over the quarter, then I'll go over the figures for our 4 reporting units. Then we'll finish with a traditional Q&A session. So no big surprises here. The IT market, broadly speaking, adopted a wait-and-see attitude with weak momentum over the quarter. Against this backdrop, the Q3 revenues was resilient and was EUR 1,356.9 million, so total growth of 0.9% excluding changes in scope and currency fluctuations, revenues were stable. Based on this, we're confirming our annual target for organic growth. So revenue relatively stable for 2024. With regards to trends by vertical market, just a reminder, first, they were not exposed to the automotive sector. Next, for the aerospace sector, it contracted as expected, the assumptions made in July on changes in our revenue with Airbus in the second half were confirmed without any major additional deterioration. So Q4 should be the low point in our business with Airbus. At this level, we'll be able to stabilize around EUR 100 million per quarter. In September, we've confirmed without Airbus, all our positions as one of their best-in-class IT providers. And several large framework agreements have been renewed and extended for the next 5 years. The public sector, it was resilient with decent trends. Financial services were more or less stable. Our business is progressing significantly in certain countries like the U.K. And then finally, throughout the quarter, we renewed some significant positions in the transport, aerospace sector, and I've just mentioned that the public sector and defense. Now let's move on to France. France generated EUR 571.2 million, so down organically by 1.2%. Hybrid Cloud and Technology Services were resilient with growth of 3.3%. Consulting and systems integration contracted slightly by 0.3%. And then PLM business, which is highly exposed to the aerospace sector was down by 12.8%. In terms of vertical markets in France, defense and the public sector grew over the quarter, then financial services, energy, telco, aerospace, all contracted. It should be noted that the negative impact of aerospace on France's growth was just over 1 point. Now if we go to the U.K. U.K. generated EUR 240.2 million, so organic growth of 2.3%. The most buoyant verticals were financial services, government and transport, and then our NHS SBS platform. Business on the SSCL platform has been impacted still by the SNAP election and the new government, and this situation may persist into Q4. Now if we go to Europe, generated revenue of EUR 467.7 million, so a slight organic contraction of 0.5% the most buoyant entities were Spain, Italy, Scandinavia with growth rates between 5% and 8%. Revenue in the Benelux contracted slightly and Germany fell by about 5%. Now Solutions. The Solutions reporting unit generated in Q3 revenues of EUR 77.8 million, organic growth of plus 3.9%.So Human Resources Solutions generated growth of 7.5% and then the real estate solutions contracted by 2.7% in accordance with our forecast. So to conclude, revenue in Q3 was resilient against an overall backdrop of uncertainty and a wait-and-see attitude. The market isn't showing any signs of a recovery in the short term. And the basis for comparison with Q3 in 2023, more unfavorable in Q3. So as a reminder, the U.K. was up 13% in Q3 2023, thanks to SSCL, which itself was up 25%. And then the solutions activity also grew 8%. So against this backdrop, we're very much focused on our business. without losing sight of the group's transformation. And this is why we took the decision to dispose of the Sopra Banking Software activity. And this decision clearly repositioned Sopra Steria as a European consulting and digital services company. The transaction was finalized on the 2nd of September, and this has enabled us to reinforce our balance sheet and it's given us greater financial flexibility by collecting over EUR 410 million. The main areas of work for the short term are the shifting gear in consulting, value ramp-up for our tech offers, and then the change in our operational model. With regard to our operational model, we've just announced the appointment of a Chief Operating Officer, who alongside me will be responsible for conducting this change and this is a long-term change. So we're confirming our annual objectives for organic growth, cash generation, and then operating margin with a rate of operating margin at least 9.7%, so up when compared with 2023. So now I'd like to suggest that we move on to the Q&A session.

[Operator Instructions] [Interpreted] So we've got first question from Laura Metayer from Morgan Stanley.

[Interpreted] Two questions for me, please. The first is, given what you've seen on the market, what do you think about growth for 2025? Or is it too soon to take a stance? And then we've seen that you're up 5% compared up 5% in terms of headcount. So can we have some more information on recruitment?

So yes, growth for 2025, it's a little bit early to take a stance on this. We haven't got that much visibility. It's probable that the market will keep this wait-and-see attitude over the first quarter, and I can't see the aerospace sector recovering before the second half of 2025. And then with regards to headcount, this growth includes changes in scope, so integration of Ordina. If you look at constant scope from 1 year to another, headcount is stable and then quarter-to-quarter between the end of September and June, it's down 1%.

[Interpreted] Next question from Nicolas David from ODDO.

Thank you for the presentation in detail and the information on Airbus. So I do have a question on Airbus just to understand to stabilize at EUR 100 million per quarter, what are the assumptions based on your market share in this account and the natural evolution in the budget or the budget that the market share that you're capable of winning, so what can you tell us about the market that they can perform in this level in Q4? And then Q4, more broadly speaking, what could be the range of growth? So if we've understood flat growth for the full year, so more or less 30, 40 points on the one side. So there's a bit of room for maneuver here. So 4 plus 1, what's kind of a realistic level here with regards to the range? That could be quite interesting to have some more color here. And then what about the bench? Are there any contracts or any market segments where you've got a high level of bench? Have you had to implement specific measures to uphold your margin?

[Interpreted] So the first question on Airbus. Yes. So we've worked on this. We've had good news with the renewal. Over the last couple of weeks, we've had various framework agreements. All of our framework agreements renewed with a 5-year visibility range. So we're not going to have to generate exceptional performance. We're just going to have to deliver what has been planned with Airbus. Obviously, it depends on Airbus, but we are at this level based on what we've signed. Then for growth in Q4, so we're anticipating a slight negative growth in Q4. It's not a change in the market. Obviously, the market isn't improving, but it's not deteriorating either. So we're not exposed to the automotive sector. So it's more a basis for comparison because we've got a high basis for comparison with the U.K., 23% plus 13%, and then the solutions as well. So we're anticipating a slight contraction in Q4. And then for bench levels, it's quite stable. Bench is around 5%. It's not changing between the first half, second half. Why not? Because we manage this very closely. We manage recruitment very closely. We adapt this weekly on a detailed basis and we're compensating for the attrition rate, which is, in fact, down. So today, we haven't got an inflated headcount with regard to the situation.

[Interpreted] Next question from Antonin Baudry from HSBC.

[Interpreted] Two questions. With the current environment, are you still ramping up the value of your services? And what about the price in your strategy here? Have you got the capacity to keep on increasing your margin, bearing in mind your level of revenue for next year?

[Interpreted] So with regards to the first question, ramp-up in value or price increase, yes, we've still got this trend. So we've got the reference. I can give you the reference of France over the first 9 months of the year for consulting and integration sales prices at the end of September were up 4.5%. So that is significant. This is something that we're able to do. We obviously ramp up the value of our services. Are we going to be able to uphold this momentum in the coming months? To be confirmed, obviously, depending on the context. But the underlying work that we've been doing for several years now is paying off right now. Our capacity to increase our margin in 2025, obviously, I'll give you a reminder of the levers that we've been working on for 3 years now with regards to an improvement in margin over the past 3 years. We've got the transformation, which we've initiated, so an improvement of 0.4% so that we can be positioned at 9.7%. So obviously, sales prices increase in the value that we're producing, increase in our gross margins. So our contracts were up nearly 1% in the first half, thanks to our portfolio management methods. That's how we manage our projects. Then we've got the 2023 acquisitions, which are also delivering progression this year. That's quite interesting. So we're expecting more improvements next year on that as well. We adapt recruitment, and then we've got the disposal of banking. So there are various different levers. So with regards to 2025, it's too early to give you more details on the operational margin for 2025.

[Interpreted] Next question from Laurent Daure at Kepler Cheuvreux.

[Interpreted] I've got four quick questions now. First, if we could just look at Q4 quickly to make sure I understood? So excluding the basis of comparison for the UK, for everything else, we should expect something that's quite similar to Q3. And then next point, can we just come back to Ordina? What about the slight negative growth? Are we not expecting something stable for the Netherlands? And then a third question on HR. If we look at the performance, given the economy, what is supporting the growth over previous quarters? And then finally, could we just focus on the performance in the public sector in France? What has meant that you've been able to generate this level of performance?

[Interpreted] So Q4 versus Q3, excluding France and the UK, yes, I think we've got quite a similar context. I don't see there being any disruption between Q3 and Q4, obviously, excluding the comparison basis that I've already mentioned. Then with regards to Ordina, I think we've got slight negative growth with regards to the market, but this is quite contained. Etienne, did you want to add something?

[Interpreted] Low single digit. So in the Netherlands and Belgium with levels of growth that are quite similar. Then HR, I haven't understood the question because the growth in headcount is obviously linked to Ordina. If we look at that on an organic basis, we're stable or -- no, sorry. Sorry, we're talking about HR Solutions. So HR Solutions, well, we've taken some decisions which are taking time, but this activity, we're generating revenue with added value offers that we're pushing. So in the digital domain, we've got our HR for you offer. We've got new services that we're providing with Gen AI. So we've got things in the pipeline. And then we've got some little gems, which are helping us feed into growth.

[Interpreted] So is there no specific contract that explains the growth?

[Interpreted] No, there's no one significant contract.

[Interpreted] So it's more the portfolio?

[Interpreted] Yes, it's a portfolio. So it's quite a specific market, HR Solutions. We shouldn't extract that on an ongoing basis, we'll be at 7%. It's a market that's between 3% and 4% over previous years. And then the public sector in France, so why are we at this level? Well, we'll be modest. We've been resilient. There are two major areas in the public sector. We've got the ministerial departments, which is going down. And then we've got the social side of things where we've got major customers, the French welfare, the benefit system, different customers, France, Paris, that sort of contract where we've got big growth here. We're the #1 player here. So that means we can compensate.

[Interpreted] So in France, public sector, could you talk about the last quarter? What is the percentage of revenues in France? \

[Interpreted] So the percentage of revenues in France -- so we're about 17%.

[Interpreted] [Operator Instructions] Next question from Emmanuel Parot at Gilbert.

[Interpreted] So two questions, consulting, which is quite resilient over the quarter given the context. Can we have a little bit more explanation here? Are we worried about the upcoming quarters? Can you see any changes here? And then the next question, financial services, can you see differences between France and the UK, differences in the market between the two geographies?

[Interpreted] So with regards to consulting, so if we go back to France, I indicated that consulting and integration was down 0.3%. So within this, consulting contraction was slightly stronger, so about 5% with regards to the market where there's a gap with the market. We're aligned with our market in this regard. And then financial services, there's obviously momentum that is underway in the U.K. We started from nearly from scratch. So it's quite normal that there are higher levels of growth than in France because our starting point was quite significant in France. When we look at the financial sector in France, revenue is distributed across 6 major banking institutions and some of them enable us to keep the ship afloat, but there are disparities between the different institutions between the different organizations.