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

[indiscernible] to conclude with our print for the second half of the year and get -- we'll finish with a Q&A.

Start with the highlights of the first half. at I'd like to own business that we have recorded in Q2 with underlying organic growth of 5.3%, while in the first quarter, the group was already at 4.4%. And the same time [indiscernible] business activity was at [indiscernible] and stood at 9.6%. This good operational [indiscernible] that's what makes us confident delivered I also wanted to highlight the disperformance on our consulting business. In the second quarter, we exceed the third quarter of consecutive growth at 20% higher, which was a difficult year growth every quarter is driven by Germany, earn annually momentum and with business success -- the European [indiscernible] won a 3-month agreement covering project management activities as base engineering -- and data for all European advertise the agency. This highlights the complementarity between secretaries same expertise and the remote footprint contribution to Sarian, and this enables us to support the full European ecosystem for the -- in [ epay ], we want to contract with the FDA [indiscernible] service information systems, both on [indiscernible] data. In France, we were selected by the Ministry of the Armed Forces [indiscernible] program. So that's rolling out the future in service support and the IT system. So the public disposition is well when it comes to the definition and critical [indiscernible]. We also won a major contract with [indiscernible] national maritime surveillance platform and is covered development operation and make critical -- so following our -- pricing and legal citing purposing our recast on repo operations on the original cost and the is in critical systems ongoing available on resilience and of higher security standards. We have made artificial intelligence development -- I think while convince potential cost impact benefit drive ending for growth and position. We refer to as we've concentrated our assets on 3 different areas that is developing a tentative consent for customer reinventing business process services with the launch of [ Lumina ] and then renovation of our production methods from the [indiscernible] an internal AI backbone. So now if we look at each of these models best [indiscernible] the idea is to roll out solutions that can be applied to a specific business on an adjusted specific, but also to video in critical and regulated sectors where it's bile exposed to the [indiscernible] and financial serves. And this comes from a high level of initialization like the rate with use cases at large scale. So to do [indiscernible] our internal excellent, our IP and the tools that were already developed such as the [indiscernible] AI platform as well as of technological partners like [indiscernible]. Second area focuses on new generation businesses asserted with the launch of [indiscernible] and Lumina. And this new offer in both [indiscernible] unique platform fully integrated combining asset pools and constitute solutions with operational expertise that we have now seen a long time in an how can the model and roll out in highly regulated sectors like financial centers, public sector are different or a -- now the third area concerns reaction of industrial sales. So this is the AI backbone. This is the foundation of the way we'll produce services in the future, and it can be progressively production gains, combined open architecture is agnostic. It's for a production platform, which is being designed natively. And this enables us to roll out AI quickly across all of our cities. And our teams will be retained and we're aiming to have half of our teams trained on it by the end of the year. So together, all of these initiatives show how AI is being taken in to account across our business kind of into a [indiscernible] and adding to our customers. So from design a sovereign installation sector, the transforming business operations right through the industrial rollout and keeping this under control at large scale. One of the [indiscernible] unique specific positioning that it has in critical sectors that are regulated as a part of European priorities. So [indiscernible] businesses focusing on 4 strategic verticals, have [indiscernible] defense-associated financial series and air space.And they're promising in the midterm that part of European arena challenges and there's a benefit significant investment in the coming years. So this area is a leading player in Europe in these critical factors, and it's particularly [indiscernible] when it comes to European severances, [indiscernible] in critical systems regulated environment, and it's taken on our results-based commitment, which is the case of the [indiscernible] its business. So during the first half, we hired on investing in order to reinforce the positioning. We acquired Starion and Nexova to establish a European -- a leading European [indiscernible] in an interest-based sector at a critical size of like EUR 200 million with [indiscernible]. We also accretive negotiations with 2 companies to reinfuse our footprint in aerospace. So the company's digital product simulation to remain both our PLM business and the manufacturing engineering from at industrial services that will reinforce our expertise in state engineering. Finally, we have acquired in [indiscernible] Asia -- with vaccines of species and invasion [indiscernible] and coordination of rent, so resident industrial [indiscernible] management infrastructure and then obviously public security. So before we conclude the highlights, I wanted to talk about the environment, response [indiscernible] an impact on it. So we have acquired the Level 2 [indiscernible] and awarded by [indiscernible]. And this recognition of come -- it recognizes the commitment that we've had for several years now. Over 10,000 employees have been made aware or we do plan on eco design with also [indiscernible] our commitment to test digital technology with open, so protecting young people and will be [indiscernible] them awareness of good practice then our ESG commitments are still recognized by the key rating agencies, the key financial [indiscernible] EcoVadis with platinum in company assessed, and our grow is 98 out of 100. And we have the ongoing ISO14001 rollout for the group's major sites in France, and this obviously highlights our willingness to keep improving our performance in the environment in the long term. And with that, I'll hand the floor to Etienne du Vignaux who will talk about the situation by reporting as well as the consolidated accounts for the first half.

Good morning, ladies and gentlemen. So before we go over the situation in private reporting, [indiscernible] some information for you on the segment information. So in light of changes to our operating model. We've reviewed how we allocate cost satisfying on verticals in real term group investment, group level investment in service lines like consulting, DPS and fiber. And then in the verticals, aeronautics, defense, financial services, that was previously assigned to the France reporting unit and allocated across all reporting units. This adjustment has no impact on the group's operating profit on business activity and the various reporting units have been restated with the 2026 methodology to ensure comparability. So let's come back to the results by reporting units, starting with France. Revenue stood at EUR 1,315.6 million. Q2 got up to a good start with organic growth of 7.1%, supported by the public sector transport, aerospace, defense, security and space as well as financial services. Operating margin on business activity was 9.5%. And contraction when compared with 2025, and this reflects use of higher of contractors -- [indiscernible] contractors to ramp up major programs throughout the first half. In the U.K. revenue stood at EUR 464.1 million. Organic growth in revenue of 2.5%. This was driven by development of next-generation BPS, financial services, the patents and then services related to new technologies. Operating margin on business activity stood at 9.5%. So up 0.8 points when compared with H1 2025 Europe. Revenue stood at EUR 1.8 billion, excluding SST, the division had organic revenue growth of 3%. So Switzerland, Italy and Spain had good momentum, just like Scandinavia, which experienced an acceleration in Germany and Belgium improved in the second part of the semester, and then the Netherlands experienced a moderate contraction with an outlook for improvement. Return to growth in these 3 countries in the second half, that's expected. So SFT revenue stood at EUR 37 million, aligned with the program -- with the fund stop at the program [Technical Difficulty].

[indiscernible] 98.9 million net revenue, organic growth of 3% in the first half of 2021. And then we had an increase of 8.5% of the operating profit on business activity. This shows a 9.2 or 9.6% margin rate versus 9.2% during the first [indiscernible]. I'll tell more about the details of this in a minute. All in all, the operating profit reached EUR 223.5 million, therefore, up 3.8% versus the first half of 2025. Then the cost of the net management debt that improvement at EUR 8.2 million versus EUR 10.4 million in the year before. And we benefited from a decrease of the average in the first half and a slight decrease in the average cost of debt. Then there's a EUR 3.9 million increase for the other commercial income expenses and the main reason is an increase in interest rates leases at IFRS 16 and also on the pension liabilities in noncash. And then the tax expense that I will talk you through later on, reached EUR 55.5 million, which means a net profit of associates that includes the net profit of the [indiscernible] versus a loss the previous year. The net profit attributable to the group after factoring in the noncontrolling interest reached EUR 2 million and we reached EUR 146.3 million, therefore, up 3% versus specific as we had last year. Now then other operating income and expenses, as you can see during the first represented a net expense of EUR 40.4 million to be compared with 18.6% first half of '25. This change is explained, thanks to an increase in restructuring costs and reorganize costs, which reached a bit more than EUR 20 million to be compared with almost EUR 19 million last year. This year, as we said, we include the costs connected to the end of the SFT program, which reached almost EUR 20 million to the first half. Then the tax expense is EUR 55.5 million, as I said before, which shows an effective rate of -- tax rate to be compared with 23.7% during the first half of '25. The normative rate, excluding the nonrecurring higher tax rates in France to be tested at more or less -- for the purpose we count on an effective rate, which will be similar to the 1 that we saw during the first half. Now then we'll talk about free cash flow and cash generation as usual, during the first half, we saw strong seasonality in terms of cash generation at the [ SPS ] for the first half was negative. That is a negative EUR 143.6 million a bit better than what we had which was a negative EUR 145.9 million. This performance is satisfactory as much as the first half of this year included several nonrecurring divestments for a total of EUR 29 million, restructuring cost connect -- at the end of the SFT program, as we said, the end of the higher tax rate in France and modification of the scheduled for payment to contributions in Norway. EBIT acted a little the difference with the increase of EUR 23 million for the operating profit on this is acting to be an with 2 elements, a decrease in project risk. This is because we have normalized provisions now versus the provision levels we had during first half of 25 and also more investments of provisions during the first half of '26. These reversals have been used mainly that is offset by the booking of operating expenses during the half year. improved, and this is a positive contribution, reaching EUR 41 million for the cash for the half year. And then the receivables and related accounts represent 49.4% of the revenue on the 30th of June, a level that's 2.5 points lower than the average ratio that we've seen over the past 10 years, which is exactly at 51.9%. Let me recall that the group had a 0 transfer of deconsolidating receivables neither in '25 or in '26. And then the change in disbursements connected to [indiscernible] restructuration and reorganization represented EUR 36.2 million and more than EUR 13 million connected to the [indiscernible] program. To conclude the cash generation for the first half is totally in line with the annual objective, which was set at the end of February 2026. And with the same seasonality, the net financial debt reached EUR 618.7 million on the June '26 6 versus EUR 246.7 million at the end of December '25 [indiscernible] include, as usual, the payment of dividends during the first half for a total of EUR 102.7 million, share buybacks for EUR 42.7 million [indiscernible] connected to the change in scope and the financial investments reaching EUR 87.2 million. This gives us a solid balance on the 30th of June '26 as you can see the equity represented 61% of the assets and [WCR], whereas the gearing ratio improved at 29% to be compared with 34% of the year before. Now as the leverage ratio is compared at the end of June, it is 1.1x EBITDA. That's pro forma numbers on rolling 12 months before IFRS 16, though the ratio we had last at 1.2% and well below the banking covenant and onco, which is a maximum 3x. And then the group has a comfortable financing with almost EUR 2 billion lines spend has not been drawn at the end of June '26, and the maturities go from July '26 to '29. We recently reinforced our liquidity profile [indiscernible] we assigned a [indiscernible] financing for a total line of EUR 300 million. This includes 2 maturities, EUR 270 million in 5 years with [indiscernible] rate and 83 million in 7 years with variable rates. This refinancing will cover the 2 countries of Euro PP, the outs on the table to EUR 150 million total. And the first 1 maturity in July this year and the second trance will have its maturity in July '27. Apart from the utility extension, the -- will give the group more divest balancing sources for an average weighted cost below 4% when we sign the contract and to optimize financing also in terms of cost the flexibility the group has an EU NTM program totaling EUR 300 million plus the EU CP program totaling EUR 700 million on the 30th of June '26 an for the NTM program, we have EUR 55 million and for any UCP, EUR 160 million. We can use these and that's covered with a multicurrency credit facility, reaching EUR 1.1 billion, which would be used as a source of financing versus any UCP and MTM if we meet them at the end of the financial statement. Now Rajesh it was yours for the outlook for 2026.

Thank you, Etienne, So before we come back to the priorities for the second half, just want to take a few moments to speak about a few ideas that I've had after my side first month as CEO of Sopra Steria. So the first 5 months have been focused on meeting teams -- and understanding our offering and what makes us specific or unique. So there are 3 areas of strengths that have absolutely convinced me that the group is unique. Firstly, we've got teams with great business and technology expertise. Next, we've got long-term test-based relationships with our customers to base on long-term commitment. And then our positioning is unique. We exposed the significant exposure to promising like defense, aerospace, public sees. And this puts us in a good position when it comes to quick evolution that we're seeing on the market and then the emergence of serenity challenges. We're also clear cited when it comes to our environment. The macroeconomic and geopolitical backdrop remains uncertain. Furthermore, the basis for comparison in the second half of 2026 won't be as favorable as in the first half. And then finally, as I previously stated, we have taken into account the dilutive impact on growth of the wind down of the SFT program and this impact will be more significant in the second half compared to the first half. Further, we are going into the second half with confidence we are benefiting from favorable trends in our strategic markets, so in particular in aerospace, defense, security and space and in the public sector. What more we're expecting ongoing improvement in the situation in Germany, Belgium and the Netherlands. And this means that we can expect a return to growth in these 3 countries during the second half. Based on this, we are capable of raising our organic growth target for 2026. We are now targeting organic growth between plus 2% and plus 2.5% for the full year compared with plus 1% and plus 2% announced previously. The target still includes a negative nonrecurring impact of it linked to the SFT program. So excluding this impact, the organic growth target which has been revised would be between plus 4% and plus 4.5%. So for the rest, we're confirming our margin targets and our free cash flow target as communicated at the beginning of the year. So operating margin on business activity of at least 9.5% and free cash flow of around 5% of revenues. So I'd like to suggest that we move on to the Q&A session now.

[Operator Instructions] The first question comes from Nicolas David from ODDO BHF.

Congratulations on the good results. My first question regards Q2. And what were the positive surprises when compared with what was initially planned in terms of geographies and sectors. And then my second question regards Q2, we've seen the acquisitions and then -- but we've got a negative net recruitment, so on an organic basis is negative. Can you just help us understand the trend here 1,000 people Q2. Can you just give us a bit more detail on these figures and explain why the momentum is what it is?

Thank you, Nicolas, for your question. So for the first one, we've not been particularly surprised by Q2, even if we've confirmed the positive momentum, especially in France, so with growth rates of basically equivalent between Q1 and Q2, 7.1 million compared with 7.2 million. All geographies just to keep it simple. There wasn't 1 geography that set out, old geographies [indiscernible] has made a positive commission. So we're just slightly above what we're expecting. So this is what enables us to raise the guidance for the year with the comments that Rajesh made. Obviously, we'll have a less favorable basis for comparison moving into the second half when compared with the first half. And obviously, this will be even more -- it will be less favorable with regards to SFT, but this has already been flat. Now per headcount, excluding acquisitions, we are up excluding acquisition, we're up 200, 300 full-time equivalents Q2 compared with Q1. So there is an organic growth in head count in Q2 versus Q1.

So the contribution of Starion and Nexova in terms of headcount?

It's about 600. [indiscernible] that we've got internal head count, but then there's also subcontracting, especially to space, that's more significant than in other sectors.

And just a follow-up question in terms of margin EBITDA. So that's stable year-on-year. Can we have an explanation of what the momentum is here -- is that why you're not raising the margin guidance for the full year?

So obviously, I explained this previously when I talked about cash. EBITDA is flat in HI [indiscernible] fewer provisions. So obviously, that's good news. It means the level of risk the group has had is going down. And conversely, we've eliminated certain risk that was previously provisioned. So [indiscernible] EUR 20 million, if you look at the details, net -- so that's a favorable impact on H1 and we didn't see this in H2 or at least not at this level. So that's the [indiscernible] of the non-production in H1. But now we give guidance on operating profit on business activity. Obviously, these impacts that are mentioned are now behind us, these reversals of provisions that's behind us, and we won't see this going forward.

Next question from Thomas Poutrieux at BNP Paribas.

One question linked to Defense and [indiscernible]. Could we have a little bit more strategy or more information on the matter for the second half? And then could we have perhaps some examples of new initiatives or new skills that are being developed, things that you're pushing to be able to new opportunities in the coming years. And then next point on the U.K., could you just limo the momentum that you have in the pipeline for the business. So various contracts. There's obviously been a change in CEO, I think that the [indiscernible] July. And then in the public sector could you give us some more information with regards to your expectations for growth in the coming quarters.

So for defense, as you've seen, we've had good commercial success, which I described during the presentation, that we are reinforcing the group in various sectors, we're expecting strong growth. So in particular, space. And this is why we've made the investment in Starion, obviously enabled us to win interesting contract with the European Space Agency. So all digital transformation solutions based on AI, open AI and then based on solutions like [indiscernible] against drone, anti-drone solutions. All of this is very promising, and we're expecting growth in the upcoming -- in the future. So in the U.K., obviously, a change in CEO that was [indiscernible] because currently [indiscernible] Nielsen is retiring -- happen. So a new CEO has been appointed not that long ago. And obviously he's already been with the group for over 10 years. So this is aligned with what we've been doing previously, and it's not external recruitment. Now for business momentum in the U.K., last year, you remember that the business wasn't linear. It was [indiscernible]. There were some quarters where there was growth, and there was others where there was a contraction. So it's transactional volume that can obviously have an impact from 1 quarter to another and take a step back and not necessarily look at the biggest quarter-on-quarter. First quarter organic growth 12.2%, that was the first quarter. Q2, we had slight growth, so 2.5% over the first half and Q3 we're expecting more growth. Obviously, the third quarter was slightly weaker last year, in particular for NHS -- the 2 joint ventures that we have [indiscernible]. And then conversely, Q4, which experienced strong growth last year should have less growth this year. So you have to bear that in mind when we talk about growth in the U.K. But broadly speaking, we're expecting slight growth in the U.K. over the year. So public sector business as [indiscernible], but not just that, that's now 100% owned by Sopra Steria [indiscernible] SSCL and then of the business outside of the JVs. We had growth in Q1, growth in Q2, and we're expecting growth in Q3.

And just a question on aerospace, which wasn't that strong in the second half, but 12% at group level. I think Q1 was 15%. What are you expecting in Q2.

So the basis of comparison is going to be less favorable because we -- we started to take off, excuse the pun last year. That was obviously driven by Airbus, as you know. So that materialized in July, August of last year. So the basis, the comparison not as favorable, but it is a buoyant sector.