SPIE SA (SPIE) Earnings Call Transcript & Summary

Hello, and welcome to the SPIE H1 Results Call. My name is Courtney and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Mr. Gauthier Louette, Chairman and CEO, to begin today's conference. Thank you.

Good morning, ladies and gentlemen. Thank you for attending this results conference. Our last results call was only 3 months ago and yet so much has happened since. We had to weather the worst and most sudden crisis experienced by the company since World War II and we have done so very decently as you will see. As you know, our services are mission-critical, and I heartily thank all the women and men at SPIE who worked so hard in such exceptional circumstances. Not one customer was let down. While dealing with the virus issue, we did not lose sight of the longer-term climate concerns as following examples will show. Moving to Slide 4. In Hanover, Germany, SPIE supported the transformation of a trade fair site into COVID-19 emergency hospital. In just a few weeks, we have been able to deploy an entire communication system, including no less than 15 kilometers of cable, 5 WiFi networks and 250 phones and DECT antenna. Slide 5. The whole world is talking now about energy efficiency, and we really see it coming at the top of our clients' priority, and it's been at the head of what we do for quite a while. In France, we continue to innovate in this field with a new energy management pack for the commercial building market. It's a customized digital solution using energy platform and sensors installed all over the building. So we are able to monitor all the fluid consumption and track abnormal usage. Again, this is the convergence of digital and technical services and working for climate change mitigation. In Belgium, we had a busy H1 on the wind energy front, with the award of 5 contracts to support major wind energy projects, including the Seagull and ICO projects in Zeebrugge. Our teams are recognized expertise in high and low-voltage technologies for wind turbines, obviously cabling, grid connection and maintenance. And we're a key partner to wind energy producers. And then e-mobility. It continues to be a fast-growing market for SPIE. In France, we were awarded a contract to install over 3,000 public charging points for the Métropole du Grand Paris. Most of the work will consist in recycling the former Autolib charging infrastructure. It was a full electric car sharing service with its own charging system, which was stopped in 2018. And most of the infrastructure has been left abandoned since. So we are going to renovate and upgrade it and to make available to the public again. Now moving to our results. So COVID-19 crisis has something -- was something which has really never been seen before. And we can say that in social context, we have shown a good resilience that confirms the strength of our fundamentals. We did suffer from lockdowns in April and May, but the recovery was quick and activity is now nearly back to normal. Adaptation and reactivity were key while ensuring strict health protection. And again, this was a lot of work with every one of our customers to ensure strict sanitary condition, both for our employees and for our customers. The cash collection has been excellent. It does reflect our long-standing rigorous cash management as well as the quality of our customer base. Now we enter the second half of the year with a good momentum, and we expect trading in H2 to be close to last year's level. This highlights the mission-critical nature of our services, and the quality and diversity of our customer portfolio. Beyond H2, we are well-positioned to benefit from upcoming stimulus plans as they will focus on energy efficiency, renewables, clean mobility and connectivity. Our business is very much exposed to these topics according to the EU taxonomy. 35% of what we do contributes substantially to fighting climate change, and we have a leading expertise in information and communication technologies. So in the first half of this year, SPIE's revenue was down 6.8%, with a 9% organic contraction. The EBITA margin demonstrated its resilience at 3.1% down only 170 basis points. The net debt was EUR 377 million lower than a year ago, with a 3.6 leverage compared to 3.9 at end of June 2019. Having a closer look at Q2, Slide 10 illustrates the impact of the COVID-19 crisis on our business and how quickly we recovered from June onwards. Looking at the monthly organic growth on the left part of the chart, following what was really a good start to the year, we were severely impacted in April and May but strict lockdowns implemented in some of the countries where we operate and primarily France, but not only, with strict lockdowns in a number of other countries as well. The organic contraction was abrupt in April at minus 24.9% and to followed by a minus 20% in May. However, the recovery that followed was quick, and June was down only minus 6.4%, with an overall activity today nearly back to normal. Looking at EBITA margin on the right, following a stable Q1, you can see the direct consequence of the COVID-19 crisis on the Q2 margin. We did implement labor cost mitigations measures rapidly, and it helped a lot. But the revenue drop we experienced during the lockdowns was such that the absorption of remaining fixed cost was very low. And again, this is due to the suddenty of the drop. Together with additional expenses stemming from health protection measures, EBITA margin decreased 350 bps in Q2. However, it is worth noting that we did remain quite profitable in what is the worst quarter ever in SPIE's history. As you know, our strategic focus over these past years has been to grow in Germany & Central Europe. And this has proved a clear benefit in the context of the COVID-19 crisis. I think Slide 11 speaks for itself in this regard. France suffered, by far, the most severe impact, with revenue down 17% organically in H1, 17%. While Germany & Central Europe was very stable at minus 1.1%. If we had the contribution from last year's bolt-on acquisition, Germany & Central Europe actually grew by 6.1%. At group level, the revenue contracted 9% on an organic basis in H1, with a plus 1.9% net contribution from M&A. So minus 7% in total, excluding FX. And I will now comment on each of the 4 segments, starting with France on Slide 12. So France did suffer a major impact from a very stringent lockdown. Q2 was down minus 30.7% organically, with a very low point at April at minus 50.2% followed by a rapid recovery, as June was down only 8.1%. The EBITA margin was impacted accordingly, down [ 220 ] basis points in the first half, as a prompt implementation of labor cost mitigation measures could not compensate for the very low absorption of fixed costs and the cost of health protection measures, which is significant. Cash collection was very good in France across all our division, and again, it is a tribute to the quality of our customer portfolio and the efficiency on our teams on the ground. Looking at Germany & Central Europe, so it did demonstrate good resilience throughout the COVID-19 crisis. In Germany, business showed remarkable stability at minus 0.3% organically. Business remained close to normal levels due to softer containment measures and rapid adaptation of working practices. This has been a clear benefit to our overall group performance. There were however differences between divisions. Transmission & Distribution Services were very strong, reflecting unabated momentum, and I think it was one of our best start of the year, while building-related services were softer and sometimes much softer due to COVID-19 constraints. EBITA margin in Germany remained robust, down only 70 basis points despite incremental costs and lower productivity generated by the health situation. And thereto, cash collection was very strong and really very good. As shown in the segment, with good resilience, also a bit of an impact from the contract phasing in Hungary. And then North-Western Europe, the performance was more contrasted with a robust performance in the Netherlands, while U.K. and Belgium were impacted by strict lockdowns. In the Netherlands, business was close to normal, and margin remained stable. No strict containment was implemented. Activity was strong in infrastructure and ICS, the latter being very active in the health care sector. Industry services suffered specifically from low demand from our petrochemical customers. In the U.K., we're impacted by a strict lockdown which started a bit later than elsewhere. It was also a time where we reshaped our organization with notably the sale of our mobile maintenance activities which were not performing well and the reorganization of all our remaining divisions. This is expected to lead to a material performance improvement and as soon as H2 this year. In Belgium, too, the lockdown was strict. Building and industry services were strongly impacted while infrastructure services showed more resilience. Overall, in this segment, we had a 6.1% organic contraction with a limited 60 basis points EBITA margin decrease, thanks mainly to a remarkable stability in the Netherlands. And Oil & Gas and Nuclear. Oil & Gas were really impacted by a harsh trading environment, combining COVID-19 issues and a very disrupted oil market. However, as you know, our focus is on recurring maintenance and operations, and we have an element of diversification into downstream. So organic contraction was limited to mid-single digit compared to minus 11% for the whole segment. And EBITA margin was stable, thanks to a swift reorganization, which we were very prompt to implement. Our Nuclear services were quite impacted by customer-specific COVID-19 measures. There was a time where our main customer asked all no -- not [ EDH ] employees to basically leave the site. But now our maintenance activities are currently back to normal. And the Grand Carénage networks, which were postponed in the first half of the year, will be largely caught up in the second half. Nuclear services is a business where our services are clearly mission-critical, and this is evidenced by the rapidity of the recovery we are experiencing since June. The COVID-19 crisis has not lowered our commitment in terms of responsible and sustainable management. Quite the opposite, this crisis does reinforce our conviction that responsible and sustainable network development is key to long-term success. We are very proud of our 2022 Vigeo Eiris ranking, where we rank #2 out of 47 companies in the industrial goods and services. This 2020 rating shows strong improvements in all categories compared to 2 years ago and particularly high scores in health and safety and environmental strategy. I will now hand over to Michel, who will comment our H1 financial performance.

Thank you, Gauthier, and good morning, everyone. I'm on Slide 18. And as Gauthier just pointed how we achieved a resilient performance in the first half, our revenue decreased by 6.8% to EUR 3 billion. Our EBITA was EUR 93.3 million, and our EBITA margin was 3.1% compared with 4.8% last year. Financial result was slightly better than last year. I will come to that later. And adjusted net income amounted to EUR 38.8 million, while reported net income was negative at minus EUR 41.7 million due to exceptional items. I will come to that later as well. All these numbers include the impact of IFRS 16. Furthermore, on the second column, H1 2019 numbers have been restated to account for the contribution of SPIE U.K.'s school facility management activity previously under a divestiture process and reintegrated to the continued perimeter in Q2 as part of our reorganization in the U.K. The impact of this restatement is, however, not significant. And you can see on the right side of this chart the numbers reported last year, excluding at that time SPIE U.K.'s school maintenance activity. As you can see on Slide 19, revenue contraction was limited to 6.8%. Excluding ForEx, our revenues declined by 7%. This includes 9% organic contraction, a positive growth from last year acquisition of 2.7% and 0.8% negative impact from the disposal of U.K. mobile maintenance activities deconsolidated since March 2020. The Slide 20 details EBITA by segment, which Gauthier has already commented. Overall, EBITA margin for the group decreased by 170 basis points with, on the one hand, France down 310 basis points as a result of a strict lockdowns; and on the other hand, Germany & Central Europe, quite resilient, down 90 basis points, and only 70 basis points in Germany; North-Western Europe, down 60 basis points, thanks to a robust performance in the Netherlands. Although our cost base is quite flexible, as you know, and has been adjusted quickly to adapt with sudden crisis, still, we had suffered from lower absorption of the remaining fixed cost basis, and we also had additional cost and lower productivity due to the new sanitary constraints. Slide 21 sets out the adjusted net income, group share, of EUR 38.8 million. Net interest was broadly stable at EUR 33.5 million. Other financial charges, although not very material, decreased from EUR 6.3 million to EUR 1.3 million as a result of lower allowances from pension provisions and more favorable FX impacts. Adjusted tax rate is 32.1%. Slide 22. Our reported net income, group share, is negative in H1 this year at EUR 41.7 million due to the weights of nonrecurring items which reflect EUR 44 million loss from the sale of our U.K. mobile maintenance activities. I remind you that we sold this nonperforming business in March. This loss is a sum of a negative [ list ] price and the net asset value of the activity, which includes a goodwill for EUR 40 million and current accounts. Restructuring costs were EUR 9.9 million and related to Oil & Gas, the U.K. and the Netherlands. So our reported net income is negative at the end of June because of what I've just mentioned, but please note that we do expect to be significantly positive over the full year. Let's move now to the cash element. Our working capital is structurally negative and follows the usual pattern linked to the seasonality of our business at midyear as you know. However, this year, working capital at the end of June was outstanding as minus 30 days of revenue compared to 7 -- to minus 7 days in June last year. This is a combination of 2 things: the possibility were offered by several governments to defer the payment of certain social charges and taxes in the context of the COVID-19 crisis. This alone has led to a 15 days working capital improvement at the end of June. If we exclude this, we still manage to improve our working capital on an underlying basis by 8 days, so 7 compared to 15. And this is the result of an excellent cash collection across the group in H1. Cash management, especially on the customer cycle, has always been one of SPIE's strengths, as you know, and we have demonstrated once again in this particular context, thanks to the mobilization of all teams. Here you clearly see the result with -- on the left side, an overall 10 days improvement, if we combine the improvement on the trade receivables but also the advances received from the customers. At the same time and considering the impact of the COVID-19 in crisis on our suppliers and subcontractors, we have been very careful to pay them promptly. You see it on the trade payables, down from 51 to 45, so it decreased by 6 days of revenue. As mentioned on the previous slide, the strong increase in net tax and social liabilities by 15 days is a result of the IFRS schemes, and this should reverse during the second half. As a result, our cash flow -- our free cash flow was still negative due to the seasonality was significantly better than in H1 last year. It was minus EUR 187 million, an improvement of nearly EUR 200 million compared with H1 2019 despite a much lower EBITA. Please note that these cash flow figures and the net debt and leverage figures that will follow exclude the impact of IFRS 16. Please note as well that interest paid you see EUR 45 million. It's higher than last year because this semester includes, for the first time, the payment, the EUR 15 million payment for the coupon for the 7-year bond issued last year in June for EUR 600 million. Below the free cash flow, acquisition and disposal accounts for EUR 28 million. This amount includes a negative impact from the disposal of U.K. mobile maintenance activities as well as cash outflow related to the former Gas & Offshore business and also some price adjustments on our 2019 acquisitions. Finally, I remind you that we did not pay the final 2019 dividend. Altogether, the net debt increased by EUR 214 million in H1 compared to an increase of EUR 493 million in H1 2019. Again, this is a seasonal increase which is reversed, in fact, more than reversed in H2 every year. As a consequence, the net debt at end of June 2020 was -- you see on the right side, so EUR 1.466 billion, which is compared to the end of June last year, a decrease of EUR 377 million, again, before IFRS 16. This represents a 3.6 leverage, improved compared to June 2019 when it was 3.9. Even if it was held by government measures, it's quite an achievement considering the context and the drop of our EBITA in H1. All this is excluding IFRS 16. If we look at the net debt including IFRS 16, you see on the right side, we are at EUR 1.8 billion compared to EUR 2.2 billion in June last year, so an identical improvement. Our financial position remained strong. We are facing no debt maturity before 2023. Our liquidity is still very high at EUR 1.1 billion, of which EUR 725 million of net cash at end of June. Please note that we have recently extended by 2 years the maturity of our revolving credit facility from 2023 to 2025. The facility amount is EUR 600 million until 2023. It will be EUR 410 million after, which is quite sufficient since this line is partially used at midyear as a buffer to cope with the usual seasonality. At the end of June, the amount drawn was EUR 200 million. You see it on the chart, this is the green bar. Today, as we speak, it is 0 because it has been fully reimbursed in July. Lastly, covenant is not an issue for us. Our only covenant is measured only at year-end and pertains to a leverage ratio less than or equal to 4. Thank you, and I will turn back to Gauthier now.

Thank you, Michel. And before moving to the outlook, I would like to highlight that we are well-positioned to benefit from upcoming economic stimulus plans. These plans are under discussion at the moment. They are very likely to focus on energy efficiency, renewable energy projects, clean mobility and connectivity. These were strengths that were already driving our markets before COVID-19, and they are going to gain momentum with such stimulus plans. As I said earlier this year, we're one of the first listed company to use the EU taxonomy. So more than 1/3 of our activities have a substantial contribution to climate change mitigation. And such activity do include energy renovation, transmission and distribution services, electrical vehicle charging infrastructure, LED re-lamping for public lighting and services to renewable energy power stations. Furthermore, 22% of revenue is derived from information and communication technology. So clearly, if Europe is looking to accelerate the energy and digital transition through stimulus investments, SPIE is part of the solution. Now to conclude, and let's talk about our outlook for the year. While we did face an unprecedented and very abrupt sanitary crisis, we have promptly reacted. And our H1 performance demonstrates the strength of SPIE's fundamentals, mission-critical services, quality customer base, top line and margin resilience and strong cash generation. Visibility has now improved, and we are today in a position to provide a new guidance. We expect trading in the second half of 2020 to be close to last year's level. This, of course, assumes no major deterioration of the COVID-19 situation. In particular, H2 revenue is expected close to H2 2019 level on an organic basis. H2 EBITA margin is expected within 50 basis points from H2 2019 level, which was at 7%. The cash flow generation will remain robust, and we expect only a limited increase in year-end leverage at a maximum 3 in 2020. And then this leverage significantly decrease in 2021. Again, I would really like to thank all SPIE employees for showing the utmost commitment to health and safety. We are working very hard to continue to serve our customers as best we could during the crisis, and this will be an ongoing effort. No one customer is let down. The mission-critical nature of SPIE services, our balanced geographical footprint and our broad customer portfolio as well as the group's strong financial position proved to be major assets in the COVID-19 crisis. And as a group focused on the energy transition and the digital transformation of our customers, we are very well-positioned to benefit from upcoming stimulus plans. Thank you very much for your attention. And Michel and I are now available to answer your questions.

[Operator Instructions] Our first question comes in from the line of Chirag Vadhia calling from HSBC.

Could you give a bit more color on the decrease in the trade payables from 51 to 45 on your slide, if there's anything that's changed around that?

No. It's simply -- I think during this COVID crisis, as I said, we have benefited from government measures, and we thought that it would be also our duty to make sure that we pay in time our suppliers and our subcontractors because we need them, and we wanted them to be on the safe side financially. So this is why you see this impact. We paid a bit earlier since we're -- I've said we were also benefiting from positive measures in terms of cash, and this is what it shows. And on the other side, our own customers also paid promptly. As you can see, we had an improvement in the DSO and also collected advances payments for new contracts. So overall, it was I think a fair balance.

And do you see potentially, if any of that could change in terms of advances and down payments in the second half of the year, perhaps if clients might want to change their spending habits?

I don't think there will be a change on this part because, as usual, we will collect. Our payment terms have not changed, and we will collect duly as we usually do. So as we used to say, our objective is always to have a cash conversion of 100%. And this is the objective we still have in mind for the full year.

Perfect. And then just finally, on -- in terms of capital allocation, how do you see, I guess, in terms of your new guidance and contextually M&A going forward, perhaps next year? Or do you see it perhaps earlier?

You mean M&A? M&A activity?

Yes.

Well obviously, our M&A activities this year are not on the usual level for obvious reasons. However, it doesn't mean that nothing will happen this year, and we are working actively towards a number of targets at the moment. So we do hope that we'll be able to show some M&A activity in the course of this year.

The next question comes in from the line of Sylvia Barker calling from JPMorgan.

Three questions from me, please. First, on July, you say in the statement that your growth is now nearly back to normal. Should we read that as down low single digits organically? Could you maybe just talk about which regions are still down and which might be growing? Secondly, on furloughs, most companies have specified, I guess, in euro or pound terms, how much benefit they seen in H1. Could you maybe talk about how much you saw in Q2 as a reduction in your employee costs help to furloughs? How quickly is that reducing also? And then finally, pricing pressure by competitors has been an issue, I guess, during the previous crisis. Is that something that you're seeing now? What's competitive behavior like?

Yes. So regarding the level of activity in July, we are -- it depends a bit from country to country, but clearly, Netherlands, Germany are very, very close to normal. In those countries which were the most affected, we're looking at something in July which is moving towards 90 -- between 90%, 95% depending on the area. So that's where we are at the moment. And we see a positive trend, so between 90% and 95% right now. And obviously, it tends to improve from one -- from the beginning of the month to the end of the month. Regarding furlough, and so what's the equivalent in Germany, Kurzarbeit, or in France or Belgium, chômage technique, chômage partiel. So we have -- we see in H1 roughly EUR 35 million savings from the furlough, and more than half of it was in France. Where we are now for the whole company, it is now much smaller. The amount of people still on furlough at group level, it's under 1,000. So we have a couple of hundred in France, in Germany, in the U.K. mainly. And still a few hundred -- I mean, less than 100 in Belgium. So it's really very much nearly back to normal in this regard. And regarding the price pressure, though it is early days yet, we do hope that our main competitors are not going to go into a panic mode. But I think that there is no reason to do that if the level of activity remains decent. And as far as SPIE is concerned, as you know, it's always margins over volume. So we will remain very disciplined in terms of pricing.

The next question comes in from the line of Charles Scotti calling from Kepler.

A couple of questions from my side. The first one, you mentioned in the press release that the activity level should be back to normal in H2. Have you been able to quantify what is the tax shift effect from project delayed from H1 and the rest, i.e., to the underlying demand from clients? Second question on the working capital. Can you quantify the impact of the deferral of taxes and social charges? And what should we expect in terms of working capital swing on a full year basis? And my third question on the 3x maximum leverage by year-end, does it include any cash outflow coming from M&A?

So regarding the catch-up and underlying demand, well clearly, there's -- it's a mix. You do have a project which had been postponed and where you are now able to resume work. It's not easy to catch up production as such because also the productivity issues linked with the sanitary measures we have to implement doesn't help. But there are also customers who really needed things to be done and like, for instance, in optic fiber, and we're very, very adamant that we progress fast. So -- and then you also have the impact of what was planned for the year. We are replanning for good growth this year. So some of what we'll do is embark from what we're planning to do for the year. And there will be also some projects which might be canceled or slightly postponed, but we have not seen a lot so far. So I don't see a huge element of catch-up as such, and this is why we do not have an H2 over 2019, but I see a good stability. And the underlying growth -- in some sectors, the growth, the underlying growth is there and is here to stay, well what we've seen in transmission and distribution, what we've seen in infrastructure maintenance in Belgium or in the Netherlands, or what we've seen in electrical vehicles. These are underlying trends which are strong and are going to stay. Regarding the -- just on the leverage, yes, there is some element of M&A included in our plan, but as I said, way less than on a usual year. And for the working capital, I think, Michel.

Yes. I think we used to communicate in a number of days. I think it's easier to understand. So the 15 days of deferrals will reverse. It's true in the second half. But it's true that when we say that we aim at 100% cash conversion, it means mechanically that the form of change in provision and working capital is close to 0. So it means that we -- as usual, we reverse the H1 impact in H2. So -- and at the end, it's almost neutral. So we can say the same for this year. And objective is to have this 100% cash conversion of EBITA. And this is what will drive our leverage to a maximum 3.

Okay. Two follow-up question, if I may. Have you increased your factoring programs in H1? And the second question on the profitability, how fast do you think you will get back to the 6% pre-crisis level? You assume a maximum of 50 basis point margin compression in H2. Is it fair to assume the same magnitude of decline for 2021 overall?