SPIE SA (SPIE) Earnings Call Transcript & Summary

Hello, and welcome to the SPIE Half Year 2024 Results Call. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Gauthier Louette, Chairman and CEO; and Jérôme Vanhove, Group CFO, to begin today's call. Thank you.

Good morning, ladies and gentlemen, and thank you for attending our conference for H1 results 2024. As you know, today is a very special day in Paris with the opening ceremony of the Olympic Games. And speaking of Olympic games on Page 3, we recently installed a high-voltage substation at the Parc des Princes, for the Paris municipality. The goal is to ensure electrical supply for incoming events while minimizing diesel generator usage. Carbon emissions will be reduced by 90% for events such as football matches through direct connection to the electrical grid. And on that same note, on Page 4, SPIE has also been a key actor of the Plan Baignade in improving water quality of the Seine River in Paris. We provided a wide range of electromechanical services across 3 shafts of a 600-meter long siphon located under the Marne River, a tributary to the Seine. This work is crucial to prevent overflow during heavy rain and to stop the discharge of untreated water into the river. On Slide 5, in Austria, SPIE worked on the upgrade of the electrical systems in five tunnels along the A10 highway. Our team is leveraging his expertise on this project, modernizing these tunnels with installation of 800 kilometers of new cables for Asfinag, one of our major customers in Austria. It does reinforce SPIE's position as a leader in complex technical upgrades and our commitment to creating better and safer transport networks. Slide 6, in Hamburg we are extending our long-standing partnership with Lufthansa Technik for another 4 years. Our team will continue to provide essential technical services, ensuring the smooth running of this critical aviation facility of 500,000 square meters composed of 85 buildings. This renewal is really good for speed. It demonstrates our expertise in managing complex infrastructure and the quality of execution of our teams on the field. We have more than 150 people on these premises. And finally, on Slide 7, let me present our involvement for EDF nuclear energy program. We are part of a consortium for the supply and installation of diesel backup generator for the new 6 EPR2 nuclear reactors, which will be built across 3 sites in France. This project will span over 17 years, and it will contribute to France energy sovereignty and low carbon electricity production. We are going to bring our expertise in ventilation systems, pipe work and fire protection to ensure the safety and efficiency of these facilities. And throughout this project, we will frame our commitment to France energy future and our position as a key player in the low-carbon nuclear sector. Now moving to our financial performance for the first half of the year on Page 9. We did deliver another very strong performance. Our organic growth reached a high level of 5.8%. Our EBITA margin increased by 30 basis points to 5.6% of revenue. We did pursue intense bolt-on acquisition activity to further improve our geographical balance. This year, for the first time, Germany will be the first contributing country of the group, both in terms of revenue and EBITA. This very strong H1 2024 enables us to firm up our guidance to an EBITA margin of at least 7% of revenue in 2024. A bit more detail. Our revenue reached EUR 4.7 billion, an all-time high for our first half on the back of a revenue growth of 14.4%, of which 5.8% was organic and 8.3% from acquisitions. EBITA was up nearly 21% at EUR 2,066 million sic [ EUR 266 million ]. Our intense bolt-on M&A led us to a EUR 245 million of additional annual revenue with 2 acquisitions signed in Germany in H1 and 2 more acquisitions announced in July. Our leverage ratio was up by 0.1x compared to H1 2023, reaching 2.4x. Looking on Slide 11 to our growth per geography. We did enjoy a dynamic organic growth across all our segments, Northwestern Europe and Germany were leading the way at respectively the 8.3% and 6%. Central European countries did perform very well, while Switzerland continued to be impacted by a very challenging comparison basis. France's performance remained solid. Global Services Energy recorded an exceptional level of organic growth at 29.3%. The impact from acquisitions was particularly noticeable in Germany at 24.6%, notably with Bridging IT and ROBUR. It was also significant for Global Services Energy with 11.5% following the acquisition of Correll Group. Now moving to our EBITA margin on Slide 12. We enjoyed a significant 30 basis point increase with improvements across the board. France continued to increase by 10 basis points. Germany significantly rose by 50 basis points with the accretive impact of our recent bolt-on acquisitions, the positive mix effects from our T&D activities, and the ongoing quality of execution. Northwestern Europe materially increased by 50 basis points with a favorable mix effect in the Netherlands, while Belgium keeps improving gradually. Central Europe recorded the highest improvement as much as 60 basis points, thanks to the quality of execution, the strong pricing power in some markets like our T&D activities and the outstanding performance in Austria. Global Services Energy remained at a high level of margin at 8.4% of revenue. Giving a bit more color per segment, starting with France on Slide 13. We recorded an organic growth of 2.1% and the EBITA margin increased by 10 basis points. This organic growth was solid, considering the challenging comparison basis of last year. In Tech FM, and Building Solutions, activity continued to be driven by energy efficiency solutions, including energy performance contracts, Industry Services, driven by decarbonation and electrification projects remained resilient. City Networks was supported by smart public lighting solutions and public transport, while revenue from fiber activities decreased as expected, but it did remain well contained. Finally, growth in Nuclear Services remained constrained in H1. We will expect in due course the first contribution of the new nuclear program following the new order for diesel backup generator, I just described in my introduction. In Germany, Slide 14, the remarkable 30.6% revenue growth in H1 included a strong 6% organic growth and nearly 25% growth from bolt-on acquisition contribution. It does show the success of the strategy implemented over the last 10 years. As I said, Germany becomes this year the largest contributing country for SPIE, both in revenue and EBITA. And I don't need to remind you that this is the biggest addressable market in Europe, 1.5x the size of the French market. Talking about our acquisition, ROBUR, by setting up of industry services activity in the country, and ICG reinforcing our City Networks and Grids activities are performing well, and they materially contribute to the 50 basis point increase of EBITA margin in Germany in H1. The integration plans are progressing well as planned. The other key drivers for the EBITA margin increase are the positive mix effect from our T&D activities, and the quality of execution across the board. And last, but not least, the strong 6% organic growth was mainly driven by High Voltage, City Networks and Grids activities. Germany needs to expand the capacity of the grids, and to deploy smart monitoring system to connect many renewable energy sources spread widely across the country. Slide 15, Northwestern Europe. We recorded 8.3% organic growth and an excellent 50 basis point EBITA increase. In the Netherlands, the strong performance was driven by High Voltage activities, renovation of bridges and locks, transformation projects in decarbonation, electrification, and digitalization with blue chip customers. Belgium was supported by investment made in High Voltage, and Building Solutions with renovation contracts for existing facilities. And overall, Northwestern Europe was still at an exceptional level of organic growth in H1. In Central Europe, Slide 16, we recorded 3.2% organic growth and as much as 60 basis points EBITA increase. Switzerland's organic growth was in negative territory following the strong catch-up for the supply chain delay in '23. This challenging comparison basis should last until the end of the year. Elsewhere in Central Europe, we did see a very strong momentum, especially in Austria, where our markets were bolstered by tunnel and transportation infrastructure projects as is stated at the beginning of our presentation. And in Poland, [ where works ] for High Voltage, grids, and modernization of public lighting were very dynamic. And finally, on Slide 17, Global Services Energy recorded an exceptional 29.3% organic growth and a 30 basis points EBITA increase. We did benefit from the ramp-up of several pluriannual contracts in our traditional operations and maintenance activities, and also from the contribution of a shutdown operation offshore Sub-Saharan Africa already observed in our Q1 '24 trading update. Within the segment, we launched the Wind Power business unit following the acquisition of Correll Group. The integration process is well on track, and we foresee strong business opportunities in the offshore market going forward. With regard to our bolt-on acquisition activity, it has been intense over the beginning of the year as evidenced by our 8.3% external growth in the first half and already 2 deals recently announced for H2, OTTO in Germany and HORUS in France. We successfully completed 3 acquisitions in Germany in sectored areas of expertise, totaling EUR 320 million of full-year revenue, starting with ICG, leading player in telecommunication infrastructure, including fiber 5G networks with good growth perspective and attractive EBITA margin. MBG, a provider of EPC services for photovoltaic roll-out, mainly for rooftop installation on buildings. And finally, OTTO recently announced, which is a provider of engineering, procurement and installation for pharmaceutical and biotech production facilities. The company has a very unique know-how and a strong track record in the sector, providing with an outstanding level of profitability, the EBITA margin being above 20%. This acquisition will be integrated by different business units of our German organization, spreading evenly the management efforts. And we also announced this week the acquisition of HORUS in the robust nuclear services sector in France. He's a leader and an expert in non-destructive testing, such as X-ray testing, MPI inspection or ultrasonic testing. These acquisitions are contributing to the expansion of the group service offering and footprint density, which is at the core of our growth model. Now we'll hand over to Jérôme, who will comment on our financial performance.

Thank you, Gauthier, and good morning, everyone. I'm on Slide 20 with the highlights on our income statement. These key figures underscore the very strong financial performance of SPIE in the first semester. I would particularly point out EUR 4.7 billion of revenue with a high level of organic growth at 5.8%, EUR 266 million of EBITA, a strong 20.7% increase compared to H1 2023. It is the result of the combined effect of a top line growth of 14%, and a significant margin increase of 30 bps, as it has been said. The adjusted net income stood at EUR 158 million, up by nearly 29%. Moving to the revenue bridge. I'm on Slide 21. We've recorded a total revenue growth of 14.4% in the first semester, of which a high level of organic at 5.8%, still benefiting from an inflation effect albeit at a lower level, plus 8.3% change in perimeter effect, representing around EUR 335 million of additional revenue in H1 coming from the acquisition of last year for EUR 160 million, notably with Bridging IT. And from the new acquisitions of this year, notably ROBUR, Correll, and ICG for a cumulative amount of EUR 220 million, roundabout. Finally, a negligible net currency effect of 0.3%. On Slide 22, the bottom part of our P&L evidence is a strong increase of our adjusted net income at EUR 157.6 million, a remarkable rise of nearly 29%. This is driven by, of course, the strong EBITA performance in H1, plus 21%, as mentioned earlier. A rather stable financial cost of our -- with net interest and other financial charges being well oriented. And thanks to a large portion of our gross debt being at fixed rate, while we benefited during the first semester from a better remuneration on our gross cash. Finally, on the income tax, our normative tax rate is at 28.2%. This is 100% (sic) [ 100 ] basis points lower than in H1 2023, but this is in line with the normative tax rate retained at year-end 2023. Now on Slide 23, looking at the bridge of our net income to the adjusted net income, I would like to highlight a few points. First, the impact of recent companies being acquired, which translates into an increase of the amortization cost of allocated goodwill at EUR 58 million in the first semester compared to EUR 36 million in H1 2023 due to new consolidated acquisitions. The limited cost of integration and restructuring at EUR 0.3 million in H1. We clearly do anticipate higher integration costs in the second semester of this year in line with the ramping up of integration processes, notably in Germany. Acquisition costs in accordance with IFRS 3, for an amount of EUR 6.4 million, and EUR 5.7 million EBITA contribution from 2 recent acquisitions namely ICG and MBG, not yet consolidated at the end of June 2024. These 2 acquisitions, these 2 companies will be consolidated before year-end, and duly reflected in our full year consolidated financial statements for 2024. Given the material profit generation from ICG together with MBG during this first period of the year, it legitimates their inclusion in revenue, EBITA and adjusted net income in our presented management accounts. Regarding the other items of this bridge, we adjusted non-cash EUR 53.8 million charge related to the ORNANE that I will detail on the next slide, EUR 8.1 million of non-cash IFRS 2 charge, as usual, linked to our long-term incentive performance plan. And finally, the implied tax adjustment based on a normative tax rate at 28.2%. As said, I'm coming back on the ORNANE, and especially the accounting treatment related to such convertible bond in accordance with IFRS. So this semester, we recognized EUR 53.8 million non-cash charge, as said. In practice, this amount is split between; a, the amortization cost of the derivative instrument. This is a steady charge over the period, EUR 4.5 million in H1, and the impact of the change in fair value of the derivative instrument component of the ORNANE recorded for EUR 49.3 million in our P&L, again, a non-cash charge. This is directly related and in line with the increase of our stock price, notably at June end, the stock price being the driving factor of this fair value assessment. In the balance sheet, as of the end of June 2024, the derivative component of our ORNANE is consequently revalued up at EUR 89.3 million. As you all know, the attractiveness of this ORNANE instrument lies in its long maturity first up to 2028. It's fixed coupon only 2%, and it's low dilution potential as the conversion in cash or in share at exit, as you know, remains at SPIE, hence an option. Moving to our working capital performance. We confirm again the usual entire seasonality of our working cap as of the 30th June 2024, our working capital represents a negative EUR 457 million, which is the equivalent of negative 17 days of revenue. And it would even be negative 21 days at the end of June of revenue if we exclude especially the first consolidation impact of the recent acquisitions, and notably, ROBUR. This is an excellent performance in line with our historical seasonal pattern and reflecting our very strong permanent discipline regarding invoicing, cash collection, and all the related process across the board. Moving to Slide 26 and the free cash flow. As already mentioned, our usual working capital, seasonal pattern translates into a negative free cash flow each first semester. But it is worth mentioning that our operating cash flow has significantly improved at minus EUR 79.9 million but compared to more than negative EUR 200 million in H1 2023. And this achievement reflects the excellent performance of our EBITA and the lower seasonality of the working cap in this first semester 2024. Our tax cash-out amounts to EUR 78.8 million in H1 '24. This is up compared to last year. Two reasons for that. First, the growing group's taxable profit basis, obviously, both organically and from external growth. And secondly, I remind you that we benefited from a one-off tax deferral at the end of December 2023 that we pointed out at that time, which is now almost entirely cashed out since that date, representing nearly EUR 20 million, EUR 25 million. This good performance of EBITA and working cap cascades to our free cash flow in H1 with clearly lower cash consumption by nearly EUR 100 million in comparison to the previous year. Finally, as per our capital allocation policy, SPIE has fully self-finance its M&A activity, which translate into EUR 722 million cash out in H1. Thus, in the end, a total change in our net debt over the first semester of minus EUR 1.042 billion. This leads me to directly move on to the leverage ratio. Slide 27. Our leverage ratio, excluding IFRS 16, was up 0.1x at 2.4x at the end of June '24. This is in comparison with 2.3x at the end of June 2023. So while we self-financed our intense M&A activity in H1, as said, with more than EUR 700 million cash out, our leverage ratio finally had a quite limited increase at the end of June. This is mainly thanks to the lower working capital seasonality effect that we had over the period. Obviously, our last year-end leverage ratio, which pointed at 1.2x, would increase more significantly at the end of this year, 2024, while we hereby reiterate our commitment to clearly maintain a strict disciplined financial policy. Slide 28, to follow up on the financial structure. The group has a very solid balance sheet with a well-diversified debt structure, no upcoming maturity before June 2026 and obviously, very attractive financing conditions. In H1, 77% of our debt is at fixed rate with a stable rated cost of our gross debt standing at circa 3.4%. SPIE proactively maintained a high level of liquidity, it's above EUR 1 billion at the end of June and notably with the extension and increase of our revolving credit facility, which stood at EUR 600 million historically, now up to EUR 1 billion and with the maturity extended at -- in 2029. Finally, our long-term corporate credit rating granted by Standard & Poor's, and Fitch remaining unchanged at BB+ both with stable outlook. I now hand over back to Gauthier.

Thank you, Jérôme. Before we move to the 2024 outlook, I would like to update you on our ESG commitments and the rewards of our external ratings. And I highlight the progress with MSCI, which has upgraded SPIE's rating to A in June 2024 compared to BBB last year. On Slide 31, focus on the group's carbon footprint reduction, to achieve our 2025 targets for scopes 1 and 2, we need to electrify our fleet of vehicles, which represents nearly 90% of our direct emissions. In H1, 74% of the vehicles we ordered were BEV, up from 54% at the end of 2023. On Scope 3, the proportion of emissions related to our procurement made with suppliers who have set ambitious targets to reduce our carbon footprint has increased to 52% at end June '24 compared to 47% at the end of December '23. I do salute the work of the teams who are in continuous dialogue with our numerous suppliers to support them with their own progress. And as you can see, we are fully mobilized to deliver on our sustainability 2025 road map. Now moving to our outlook for '24. We see the very strong H1 2024 results give us confidence for the full year. In terms of organic growth, we anticipate a good dynamic in H2, albeit, as expected, at a slower pace compared to H1. We frame up our EBITA margin target to at least 7% of revenue, representing a minimum 30 basis points improvement. We're able to deliver this performance on the back of our carefully selected bolt-on acquisition, our proven pricing power, our highly selective approach with contracts, and our unabated focus on operational excellence. We will organize an Investor Day in '25 now that we are reaching 1 year in advance our 2025 financial targets. So you might allow me to congratulate our teams for this outstanding performance. And as I keep saying, it is a good time to be an electrical engineer. I thank you for your attention. And now with Jérôme, we will be pleased to take your questions.

[Operator Instructions] Our first question comes from the line of Aleksander Peterc from Bernstein.

I just have three. First two are quite related on M&A. You had close to record levels of M&A activity in the first half. Do you expect this space to continue into the second half? Or should we expect a pause on consolidation for the remainder of the year? The second one is just on the pipeline of M&A targets. If you could share the geographies where you see most opportunities or where your focus really is going forward? And what's the average size in terms of revenue or the targets you're looking at, at the moment? And then just finally, assuming no further acquisitions between now and year end, where would you expect your net leverage to land by the end of the year?

Well, thank you. So yes, we had a very good M&A activity in the first half. And we have a very interesting pipeline ahead of us in several geographies. Obviously, we are very much aware of the need to carefully integrate this acquisition. So we do also pace the acquisition with available bandwidth for the management. And clearly, this is something we have in mind and will bear on some pace for the balance of the year, not meaning that we are not preparing the more things for a bit later, obviously, because this process always takes time, and it needs a lot of time to realign with the management of the company we want to buy and which is an important step for a successful integration later on. We have targets, as I said, in all our geographies, of various sizes. And clearly Germany remaining the main focus, but it's not the only one. And our markets, especially in Germany, are still very much fragmented, and we have companies of various sizes, which are well run, well managed, well positioned and fairly attractive. But also we need, as Jérôme mentioned, we need to be very aware of the financial discipline. And especially in terms of the leverage level we want to maintain, and this is something which remains at the top of our mind in every decision we take.

Your next question comes from the line of Remi Grenu from Morgan Stanley.

A few questions on my side. So first, on Germany, specifically, I think it accelerated as you flagged it would, in Q1 publication, and you're flagging that you expect further ramp-up in Tech FM in that country. So maybe you can elaborate a little bit on what's driving that and quantify that a little bit and also maybe give us more flavor on what's the outlook for Germany over the rest of the year in your view if we can expect this acceleration to kind of continue or stable organic growth going from there? The second question is on T&D specifically in Germany. Can you make some comments on the backlog, if you have additional work ramping up or additional contracts with the short and mid-term expectation there? And also, if you could help us quantify the positive mix effect that you're referring to from T&D within this 50 bps improvement in Germany, that would be great.

So regarding Tech FM, which is a trend that we observe in Germany, but not only, we are important players in Tech FM in France, in the Netherlands, to some extent in Belgium. And the trends are similar and mainly driven by energy efficiency considerations for our customers, and also adapting to the new ways of working with a lot of -- with [ way more ] communication technology in the offices. So this is -- but really the energy efficiency decarbonation is a very strong driver, which entails a lot of modifications, upgrade, a lot of digital input as well in the buildings and it does support our growth. The backlog in Transmission and Distribution in Germany is very good, and it's increasing all the time actually. And the trend in transmission, both for overhead lines and substations remains very strong. There's a high level of investment, a high level of projects coming to the market and being launched for tenders by the customers. And so we keep building up our backlog. So this is very positive. And yes, it has a positive mix impact in terms of margin, but I would be -- I don't think I would go too much into detail in terms of quantifying this impact on the margin altogether.

Great. And just one, if I may, just to follow up on something you said at the very end of the presentation. Did I get that right that you said that you expect organic growth in the second half to be slightly slower than in the first half? Or are we talking on a year-on-year basis?

Yes. Very clearly, Remi, I think that's what had been said. The pace of the organic growth H2 in comparison to H1 would reduce, would slowdown.

Your next question comes from the line of Eric Lemarie from CIC.

I got three. The first one, regarding pricing power. Could you tell us more about its impact on pricing -- of pricing on the top line growth and on the EBIT margin? Second question regarding acquisition. Could you confirm or not that you continue to pay the same kind of multiples you used to pay around 6x the EBIT? And how do you see the multiples going on in the future? And the last question on the difference of EBIT margin in Central Europe versus the rest of Europe, in France, Germany, et cetera. Is there any reason why you should not generate the same level of margin in Central Europe compared to countries in Europe?

So regarding pricing power, it is linked with a strong demand, and we have shown -- over the past years, I think we have shown very clearly how we're able, a, to pass inflation to the customers and, b, even pass bit more price increase as only the inflation so that was a very strong trend, and we do see the inflation is abating now. But we are still able to improve the margins on the back of better prices, which are linked with selectivity, positioning in terms of contract negotiations, et cetera. So it has a positive impact on the margin, clearly, and it's one of the reasons why the margins are progressing across the board. The multiple of acquisitions, Jérôme will answer. And what was the last part of your question?