SPIE SA (SPIE) Earnings Call Transcript & Summary

Hello, and welcome to the SPIE half year 2023 Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Gauthier Louette, Chairman and CEO; and Mr. Jerome Vanhove, Group CFO, to begin today's conference. Thank you.

Yes. Good morning, ladies and gentlemen, and thank you for attending SPIE's H1 results conference call. So we have delivered outstanding performance for the first half of '23, and it evidences our good positioning for industry decarbonation, mobility, building efficiency and energy transition. It further demonstrates the strength of our model with our distinctive market presence, our established pricing power, the continuous focus on operational excellence and the uneven commitment of our employees. Let me start with some examples to highlight what we have been doing in the first half. So in Germany, on Slide 4, we installed 2 sections of extra high voltage override for lines, representing about 25 kilometers in total. We do deal with changing conditions for the Moser Isil valleys. This is an ecologically sensitive environment. The project is technically complex. We are carrying out the new installation, disassembly and renovation works for 3 line simultaneously. It is necessary to set up extensive temporary sect routing equipment to ensure that the supply is always secure. This new line will increase the transmission capacity and ensure the security of supply and the grid stability in this region, it is key for the German energy transition, bringing more and more wind or solar electricity to the grid. And this is a project done with a client Amprion, which is a leading electricity transmission system operator in Europe, and we enjoy collaboration and trust with this client since many years. On Slide 5, in France, we are supporting Life, which is a pioneering company in green and renewable hydrogen. So this project pertains to assembly and installation of 2 electrical shelters, one in Brittany, close to L'Oréal and one in Oxitani close to Telus to decarbonize freight and passenger transport. ISA will be able to produce up to 2 tons of green renewable hydrogen per day with an installed capacity of 5 megawatts. Steel industry is now one of the key players in France for green hydrogen. This is an energy of the future essential for the carbonation. Now on Slide 6, in plain France, we're looking at a 6-year energy performance contract with the Cabinet de Gomer San deposit local authority. We are providing a full range of services such as energy management, centralized technical management, connected object, operational system and building. The work will include the renovation of fitting adventition system, improvement to equipment room in station of renewable energy production, such as Geothermal Energy. The aim is to reduce energy consumption by more than 20% by 2028 and looking at carbon neutrality by 2040. On Slide 7 in Belgium, speed was set to improve energy efficiency at Les hospitals through the renovation of the entire HVAC and hot water system and also with the inflation of a new central combined heat and power plant in a new building. The ambition is to save up to 16% energy and to reduce emissions at 265 tonnes a year. And finally, in Germany, thanks to artificial intelligence, we're able to reduce the number of hours of helicopters spent online inspection. artificial intelligence combines multiple data source, laser-scans [indiscernible] to identify components and better detect and localize any damages on the line in a much faster way. So we have an efficiency increase of 30%, and we are saving roughly 300 kilogram per hour of helicopter of CO2. And now let's move to the key highlights for the first half. So we delivered an outstanding financial performance in H1 with an exceptional level of organic growth, boosted by both volumes and prices and a significant EBITDA margin increase even in this inflationary context. We did see a strong leverage in with a structurally negative and solid working capital level. Bolt-on acquisition remains at the core of our strategy, and we did achieve 2 and we have a very active pipeline. We saw a gross debt reduction of EUR 20 million in optimization of the group financing conditions through the new finances of our debt. So on the back of this strong H1, we revised a pros outlook for 2023, both in terms of organic growth and EBITDA margin. Looking at the key figures on Slide 10. Total revenue was above EUR 4 billion. We had an exceptional organic growth of 9.8% and a reported growth of 9.6% due to the disposal of our UK activities. EBITDA was at EUR 220 million, up 16%, almost drive the growth in revenues and adjusted net income up 15%. EBITA margin was up 30 basis points, a very good performance, thanks to our activity in taking on contracts and our proven pricing power. Leverage ratio is at a low 2.3% for the first half, down 0.5% compared to June 2022. It does demonstrate our efficient free cash flow model generation. And now on M&A days, 2 bolt-on acquisitions, representing EUR 45 million of full year revenue with a selective pipeline and more to come. So it is definitely a good first half, and it does support well our guidance upgrade for the full year. On Slide 11, looking at the growth per segment, we did enjoy a buoyant organic growth in all segments, leading to a 9.8% at group level. There is a compounded effect of volume and price with the impact of inflation kicking up in fully compared to H1 2022. You see this a nonrecurring pattern. In North Western Europe, we did have the best organic growth with 13.2% and it fully compensate the exit of the UK. Oil & Gas and Nuclear were at 12%, fueled by a very strong [indiscernible] segment. France, Germany and Central Europe above the 8% mark. And then we have a very limited scope effect of minus 4.4% at group level. The total growth at constant FX is at 9.4%. So we do have the negative scope effect linked to the disposal of our UK operation. We have a positive scope effect mainly to acquisition in Germany and Central Europe and also to one acquisition in nuclear in France. Looking at the margins on Slide 12. For group level, the EBITDA margin increased by 30 basis points to 5.3%, with improvements in all segments. So by far, the most impressive improvement is in Northwestern Europe up 130 bps. It is fueled by the Netherlands with good improvement of margins at Workshare. The synergies of this acquisition now nearly fully achieved and the performance initiative in the historical -- this parameter delivering the expected results. We are now well deployed across the whole economic spectrum in the Netherlands, and it helps to deploy all the levers of our business model. In the server segment, EBITDA margin improved by 10 bps on the back of good market momentum and operational excellence. So we are satisfied with our margin improvement over the first half, and we are now absolutely confident to keep the same improvement over the full year. On Slide 13, in the context of higher inflation, we wanted to remind you of the key drivers of our EBITDA margin improvement, where pricing power and operational excellence, allow for gradual and continuous increase, thanks to the discipline and commitment of our teams on the field. Main operational levels are our mission-critical positioning and the high demand from customers, our excellent execution and the fact that we're able to price nearly real time with a short cycle of our activities. Slide 14 regarding bolt-on M&A, which, as you know, is a key pillar of our value creation strategy. During the first half of 2023 and at the beginning of July, we did acquire EUR 44 million of full year revenue in Germany with ECS, the technical services provider in information and communication technology with around 130 employees. In France with AVM up in the strongly growing market of complementary cloud services and added value solutions with around 50 highly skilled employees. And indeed, we have a very active pipeline of opportunities and today, more than 10 projects in progress. We're absolutely confident we will announce more deals in the second half. And now moving to our business per segment, Slide 15 in France. As I said, the good momentum across all activities and the continued margin increase, a strong organic growth of 8.9% and 10 basis point EBITDA improvement to 58%. France is perfectly delivering on the STI model based on pricing power, quality of execution and added value innovative solutions. Building Solutions and Technical Facility Management activity remains boosted by growing needs for energy efficiency solutions. This is definitely a very strong and lasting trend. In particular, works for building renovation and energy performance contracts which contracts supports our clients in their drive for energy efficiency and decarbonation with a fast payback. City net was supported by a high demand for e-mobility, notably with inflation of charging stations, more than 100,000 charging points have now been installed in France, and SPIE installed nearly 15% of them. We had a good momentum for smart public lighting solution with lots of LED projects and many innovative monitoring solutions. In Industry services, where we address a wide range of customers and sector, the activity was supported by decarbonation requirements, but also automation and debitization of processes. Moving to Germany and Central Europe on Slide 16. We have a safe performance in Germany and a strong dynamic in Central Europe. Organic growth at 8.4% for the segment with a 10 basis point EBITDA improvement. In Germany, as planned high-voltage activities intensified in Q2, thanks to the ramp-up of transmission line project, such as the one presented in this introduction. Technical fasting services were supported by dynamic energy retail market, similar trends that we see in France or in the Netherlands. Information & Communication Services were boosted notably by a large-scale investment from the government to upgrade the health care infrastructure across Germany, and this is a very slid customer base for us. In Central Europe, the momentum was very strong across all our activities. Our position in Poland and industrial has been strengthened, thanks to the recent acquisitions, which are performing well. And regarding Switzerland, organic growth was supported by the supply chain delays, which has now been entirely clear. So we are really catching up compared to where we were same time last year. In Northwestern Europe, slide 17, as I said, I'm really pleased with the outstanding performance of this segment and especially with the margin development in the Netherlands. Organic growth was at 13.2% with a buoyant 130 basis point EBITDA improvement to 5.4%. Transelec, we observed a strong growth in all segments. Industry Services, fueled by investment in electrification and digitalization, and we're also making our first inroads in the hydrogen installations. Technical Facility Management and Building Solutions activity driven by the strong dynamic of work here, information and communication services propelled by fire protection, data center and health care projects. So the EBITDA margin, a strong increase was driven by workshare integration, through synergies now delivered and the performance initiative in the historical parameter. So together, a very good progress in the Netherland. In Belgium, organic growth was supported by industry services and Building Services as well. Regarding oil and gas and nuclear on slide 18. So very good momentum in Oil & Gas, but more constrained in Nuclear Services, organic growth at 12% and 10 basis EBITDA improvement to 8.3%. Panga Services, we see a strong dynamic in our market. We have a good midterm visibility with multiyear contracts with a high EBITDA margin. Nuclear Services, the welding repair issues have caused disruption in the planning of maintenance activities. It is easing up, but not back to normal yet. Midterm, obviously, the French government decision regarding nuclear program give us a good long-term visibility, and we are starting to build on elements of this new program. Now I will hand over to Jerome, who will comment on our financial performance in more detail.

Thank you, Louette, and good morning, everyone. I'm on slide 20, starting with the highlights of our income statements, and I'm pleased to come back on H1 key figures: EUR 4.1 billion of revenue with an exceptional level of organic growth at 9.8%. EUR 220 million of EBITDA, up 16.1% and a significant margin increase, up plus 30 bps, EUR 122 million of net adjusted income, up 15.1%. Moving to the revenue bridge, the exceptional 9.8% of organic growth benefited from the strong momentum of our market and our pricing power. The scope effect is negligible at minus 0.4%, reflecting a positive 2.7% from acquisitions, notably with 1 additional month of contribution from workshare and the first consolidation of general property in Poland and the negative 3.2% being mainly driven by the deconsolidation of our UK operation since December 31, 2022. Current effect is primarily related to the USD euro parity, benefiting to our Oil & Gas Services business for a negligible 0.2%. Overall, our revenue was up plus 9.6% during the first semester. Looking now at the P&L below EBITDA, which is up by 16.1%. Net interest, reflecting the cost of our debt. They are up 11.9% to EUR 34.8 million, which is a very limited increase in the context of higher interest rates. This evidences our optimized debt structure, which now includes the online convertible bond with a [indiscernible] at 2%. Other financial charges of EUR 11.6 million are mainly impacted by the interest cost of pension, now using higher interest rates for actualization as well as lower ForEx gain compared to H1 2022. Finally, our retained normative tax rate is down by 2.5 points to 29.2%. This is assuming a reduction of the French [indiscernible] or the contribution on added value. As a consequence, our adjusted net income is up 15.1%. Slide 23, looking now at the net income, I would like to highlight 3 points in particular. First, an increase of the other items, including the cost of our long-term incentive performance plans under IFRS 2 treatment; second, applying the IFRS split accounting method. We recognized a charge of EUR 18.4 million related to the change in fair value and amortization costs of the online derivative component. We will further come back on that. Considering it's noncash nature, it is obviously restated in the adjusted net income, while the 2% coupon attached to our Oman remains obviously included in the interest cost. Finally, I would mention the implied tax adjustment reflecting the difference between effective and normative taxation level. Slide 24 shows the entire seasonality of our working capital, which remains structurally negative all along the year. As anticipated, we are in the context of a high activity level. We see at the end of June 2023, a drift similar number of days of revenue than in December 2022. And excluding the UK, we see for H1 2023 an increase by 5 days, while we already had plus 4 days in December 2022. I would add that the seasonality level of the working cap in H1 remain indeed exactly the same meaning an increase by 22 days if we compare December to June, in '22 and in '23. To provide you with some color on this performance, we observed at the end of June 2023, an increase by 4 days related to trade receivables and accrued income mechanically increased due to the high level of activity at exceptional level in this quarter and minus 1 day of advances from customers due to some phasing effects attached to some projects. This being said, we remain highly confident in our ability to maintain the quality of our working cap, again, to fuel our [indiscernible] cash generative model. Slide 25, as usual, our free cash flow is negating during the first half of the year. This is reflecting the seasonality of our working cap once more, specific points worth to be highlighted. The reduced cash out for taxes in H1, which resulted mainly from some payments being postponed either to the second semester 2023 to come or even beyond 2023. This is essentially in Germany. Net interest paid in H1 2023 still included the yearly coupon for the bond 2024, which is now redeemed entirely. Other items in the free cash flow increased mainly as a result of the increased cash out for pension and notably in Germany. The acquisitions and disposals represented EUR 19.5 million. This is mainly related to the acquisition of General Property and some earn-out payments. Overall, we maintained a strong cash management, resulting in a free cash outflow, which is similar to the one observed in H1 2022. Slide 26. Our leverage ratio reached an all-time low at half year. It was down by 0.5x at 2.3x compared to 2.8x at the end of June 2022. Compared to the end of '22, our leverage ratio increased by only 0.7%. This is the usual deleverage at half year, which is a good performance compared to previous years, where the leverage was rather up in the range from plus 0.9% to 0.1x in the previous half. Overall, the continuing decrease of our leverage ratio over the years evidences our cash generative model. During the first half, we have optimized our debt profile with, as you know, the issuance of the sustainability linked Orlan due 2028 for a principal amount of EUR 400 million and an attached 2% yearly coupon. [indiscernible] allowed for the reimbursement of our 2024 bond for an amount of EUR 600 million. Thus, which as I mentioned, reducing our gross debt by EUR 200 million in the period. The renewal of our securitization facility for an amount of EUR 300 million unchanged and the 4-year period until mid-2027. Today, the group benefits from a very sound financial structure with no upcoming maturity before 2026, a very attractive weighted cost of our gross debt of [indiscernible] 3.1% and 80% of our loan debt being at fixed rate. We have a very strong liquidity, EUR 1.2 billion, half being cash, half with undrawn revolving credit facility. This sound financial structure is well recognized by S&P and [indiscernible] as evidenced by our BB+ rating upgrade in January and May respectively. On Slide 28, I wanted to draw your attention on the accounting treatment of the Oman and IFRS. As already explained, the financial considerations for the Oman are a principal amount of EUR 400 million with a 5-year maturity, 2028 and a cash yearly coupon at 2%. This representing an EUR 8 million coupon being paid semiannually. In terms of IFRS accounting this time, we retained the split accounting method, implying in the balance sheet, the split of the Oman, the EUR 400 million between a debt component, EUR 352 million and the derivative instrument of Circa EUR 48 million recorded at the issuance at the end of January, both totaling the EUR 400 million. In the income statement, the derivative component will be subject to a fair value assessment at every closing and the linear amortization cost both with a noncash effect, which amounted for this first semester to EUR 40 million and EUR 4 million, respectively, as of June 30, 2023. As a result, the true cost of the [indiscernible] as the issuer of the Oman is limited to its 2% coupon, while the derivative component reflects the future potential dilution for the shareholders, which in case of Oman remains very limited. This concludes my presentation, and now I hand it over to Gauthier.

Thank you, Jerome. So moving to ESG on Slide 30, we want to make a focus on the group carbon footprint reduction progress towards our 2025 targets. For scope 1 and 2, we target to reduce emissions by 25% by 2025. To do so, we need to electrify our fleet of vehicles. They represent 90% of speed direct emissions. In H1 2023, the share of electric vehicles ordered rose by 81% to reach 67% compared to 37% in 2022 and 6% back in 2021. For Scope 3, we aim to reach by 2025 that 67% of the emissions related to our procurement are related to suppliers having set ambitious targets to reduce our carbon footprint. In H1 2023, we reached 42% compared to 29% at the end of December 22 on the back of a proactive approach with suppliers through engagement letters, innovation forum and performance business reviews. These figures illustrate the good progress made in order to reach our 2025 targets. And regarding ratings, our commitment to ESG is very well recognized and speed is ranked among the best performers in its industry by a very highly recognized rating agencies. The latest new rating obtained by SPIE is our A minus rating with CDP. This was for the first year of rating with them. And we also want to mention the recent upgrade by Moody's SG Solutions in May 2023, enabling speed to improve its score to 58. And now moving to the outlook for 2023. So as I said, with this outstanding first half results, we feel very comfortable to revise upwards our guidance 2023. We now target an organic growth of at least 6% possibly to 7. In line with our SRL increase, we now anticipate an EBITDA margin up circa 30 basis points. We'll have a continued high focus on bolt-on M&A. As mentioned, 10 active deals in the pipe are being considered right now, and we do hope to announce several deals in H2. The interim cash dividend of 0.20 per share will be paid on September 22, and we obviously maintain the dividend policy with a payout of circa 40% of adjusted net income. I thank you for your attention. And now with Jerome, we will be pleased to answer your questions.

[Operator Instructions] The first question comes from the line of Rory McKenzie calling from UBS.

It is Rory here, just to firstly on operations and a follow-up on the finance charges. So firstly, can you just talk about the average pricing contribution you estimate within the organic revenue growth in Q2? And then secondly, in terms of your backlog, have you seen any areas where customers are delaying projects or having to rethink projects due to their own cost and budget pressures. Obviously I'm sure you're aware, but some other companies in the industry, maybe in different drapes to you have been calling out some delays coming through. Just wondering if you see any change in behavior.

So regarding pricing contribution, as you know, Rory, it's always difficult to asset in. But clearly, as we said, compared to H1 last year, the inflation has now fully kicked in. So it is fully in our price. And the fact that we are able to even improve our margin is really a credit to the team because they did manage to pass on all this inflation to customer. As a proportion between the volume and price, as you know, it is a standard answer, it's very difficult for us to assess. Regarding the backlog and thanks for asking this question because it's an opportunity for us to underline that our backlog is extremely strong and even growing. And we said it was at record level, and we are beating the record every month, really. So it is really a very strong trend and basically all sectors of the activity. And today, I would be happy to give examples of customer dealing decisions. I'm not saying it's not going to happen. But at the moment, we have not seen at all. And clearly, all the projects linked with the renewable, with energy efficiencies as they are really on the move right now. So again, I'm not saying that it's not going to happen, but we see no evidence of that. And on the contrary, our backlog has increased even further in volume but also in margin quality. And so it is also to be mentioned.

That's great. And then just on the finance charge. So the EUR 18.4 million noncash charge in H1, I guess depending on the share price movement, we should expect another noncash charge in each interim period ahead. And then I just wasn't clear on how it actually impacts the lines in your P&L. So did you say you include it in your other financial charges line, but then you strip out of your adjusted net income. I wasn't clear on that last slide when you said it kind of impacts the net financial result and then you adjust for it.

You're absolutely correct. On the lion's share of the EUR 18.4 million is directly derived from the evolution of the share price. That's clearly the share value, the fair value assessment of the derivative component. A smaller part of it is related to the linear amortization of the entry booking value for the derivative. This one would be stable over time. Where do we treat that? Clearly on a specific line item as it is purely noncash, rather depending on external element like the evolution of the share price. And therefore, as you rightly pointed out, it is clearly restated from our adjusted net income, therefore, having no impact or consequence on the dividend distribution policy, for instance.

Got it. And then just a follow-up on Slide 22, what's the EUR 11.6 million other financial charges then?

We are here in the adjusted and the bridge from operating adjusted net income and EBITDA, you have in there the interest cost for the pension, basically as well as the cost for guarantees and securities being given to clients the bonds.

The next question comes from the line of David Cerdan from Kepler Cheuvreux.

I have a few questions for you. First one is to come back on your operating performance in H1. So you have made some significant progress in West Europe. Do you see some upside on this margin for the future? And regarding the other region where you were up plus 10 basis points, do you think that you are now at a certain plateau in terms of profitability for the other regions? And my last question is regarding your guidance for the organic growth of at least 6%. This implies something like around 2%, 3% in H2. Is it very cautious? Or can you explain why you only expect at least 6%.

So regarding margin progress, our ambition is to continue, we are never satisfied with the level of margin. Specifically for the Netherlands, we have made a lot of progress with the reasons I've mentioned in the call. But we see that there is more to come. And generally, at [indiscernible] as I mentioned, the backlog is high on volume, but also better on margin. So we see no reason why our margins should not continue to progress in the future. And when I'm saying in the future, it is obviously year-on-year. And regarding the guidance, well, as you know, it is not easy to forecast very accurately organic growth. There's a lot of components and project phasing, et cetera, do play a part. So we tend to [indiscernible] on the cautious side as a tradition at SP as well. So that's what we are seeing right now. As I said, it is at least 6 and possibly towards the 7%. That's the best we can say at the moment.

Next question comes from the line of Oscar Val calling from JPMorgan.

I have 2 questions. The first one on Germany. You've talked about high voltage ramping up in Q2, but organic is still at around 4%. Is there a case that Germany and specifically transmission can improve in the second half? Are there still ramp up of further contracts? That's the first question. And then the second question is on working capital levels. So at H1, it was kind of 5 days lower. What's the current thinking on the full year? Should we expect a similar amount of working capital days less in the full year?

Well, with regard to Germany, yes, high voltage is ramping up, and we're looking at high level of activity for the second half. But not only, we have also other activities like city networks, which are kind of accelerating. So we do expect a stronger organic growth in the second half of the year.