Teleperformance SE (TEP) Earnings Call Transcript & Summary

Hello, and welcome to the Teleperformance acquired Senture call. My name is Judy, and I'll be the coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I would now like to hand you over to your host, Olivier Rigaudy, Deputy CEO and Group CFO, to begin today's conference. Thank you.

Thank you, Judy. Good evening, good afternoon and good morning for those who are based in the U.S. today. The first thing I just wanted to tell you -- just to tell you, Happy New Year, we are starting 2022 as a rush and we are here together to comment on recent acquisitions that have just been announced end of December. Next slide, please. So I'm skipping directly to disclaimer and just explaining what we have done. As you have read in the press release that we issued just before the end of the year, we acquired a company called Senture and here you have the presentation of this company, which is a major BPO operator for government service, mainly federal, state and local in the United States. It is providing fundamental support that is paramount for a citizen-first experience in different sectors. I'll come back in a minute to that and focused on government services in the U.S.A. As you can see, there are many -- there are also commercial health care, but more than 80% of the business is government service and is spread across federal government and state and local. We have listed here all the different activities in which Senture is active, it could be defense health, civilian health, education, transportation, tourism. But it could be also unemployment assistance, consular affaires, national interest, COVID vaccine and 311 services across the different town or country. This is a very, very large business, speaking to 11 federal states, at least, with federal government and across the U.S. This is the most important part of the business of Senture. And this company is also active in commercial health care in different business that we know well. So Senture is a -- let's move to the next slide just to show you what is Senture. Senture has been established in 2003. It's based in London, Kentucky in U.S. and not in U.K. They are running a business of 4,500 full-time employees, of which most of them are working from home. They have roughly 50 clients they are going to deliver for this year. They will deliver for this year roughly EUR 192 million sales, just below EUR 200 million. The margin -- the EBITDA margin is around 19%, close to 20% and the adjusted EBITDA margin is at 16% above the group standard. What is interesting and here you have the figures that have been displayed, the revenue breakdown by end market and also by vertical. As you can see, the commercial is only 23% -- pure commercial is only 23% of the business, where roughly 80% of the business, 77% to be precise, is citizen line of service in the different states that I just mentioned earlier on in the different sector. And they are working on as you understood, health care which is 52% business, but also transport, education, social assistance or the different sector. Here, the 52% are, of course, including the 23% commercial that are mostly in the health care business. This is a company that is well managed, not big size, but well managed, as you can see, if we go to the next slide. This company has grown dramatically over the last 3 years. Of course, a part of it is coming from the COVID line, but only roughly 20% of the business is COVID there. The growth has been very, very important over the last 2 or 3 years in different sectors, adding new service in new states, adding new country, new town and new business. So the growth has been tremendous and very quick. In fact, it seems that the digitalization of the world is now touching the commercials public sector, not only in the U.S., and this is really a change versus the previous year. When you look to the results, the growth of the EBITDA is above, of course, the growth of the sales. And more interestingly, they are delivering very, very good cash. Most of the EBITDA is conforming in cash. You see 82% of the EBITDA is conforming in cash. So all these figures, of course, are totally consistent with our financial criteria, whether its growth, whether its margin, whether its cash conversion. And that is why this company has been appealing to us and at least for financial, I'll come back in a minute the reason for which we have decided to buy that. What are rationale? In fact, rationales are very simple. And for those who know us for some time, we are just pursuing -- I'm going to the next slide, sorry, expressing our vertical specialization strategy by strengthening our citizen line of service, which is already active in the U.S., but not so much, much more in U.K., in Europe, in Middle East, in Asia and Africa. But clearly, we were growing in U.S., and this is opening new opportunity for growth in the U.S. in these sectors and improving. We have seen that not only for COVID, but also for other services. And we were probably behind the -- we were lagging behind in this part of the world on this vertical. Of course, a second point, Senture benefit from some financial with strong top line growth and EBITDA margin above that of Teleperformance. So figures are okay and more than okay. So strategically, it makes sense. Financially, it makes sense. Not only it makes sense, also management teams are going to stay with us as we are able to do that for years now. And the operation is very accretive to Teleperformance earnings per share by around 5%. When you look, and I'll come back later on that, we are buying this company at a price which is around 10x EBITDA and financing is below 1% in terms of cost of debt. So that makes sense, and that helps dramatically first to fit whole strategic, I would say, pattern; secondly, to continue to grow in this sector and on some financial figures. If we move now to the next side, Page 7. Here is the pattern of the growth is rational. You have on this slide, the industry verticals that we are operating in and all the line of service. And of course, there are 2 axes of the group that we are trying to fix in each intersection to get market. But these 2 axes are, of course, complemented, let's say, with other stuff, meaning interaction channel, what kind of product we are selling, is it support service, is it technical support in sales, in BPO, Geo strategy, of course, in what countries are we operating, [indiscernible] pattern. And lastly, we are trying to digitalize to use all these AI technique credit program and all that stuff that helps to deliver a better strategy. So all that -- all these 4 actions and maybe with -- with the digitalization is now explaining what we are doing there. And when you look Senture acquisition, this is totally consistent with our vertical specialization strategy. The line of service is clearing cost and is leased. The industry vertical is clearly citizen service and geography is clearly in U.S. where we were probably not at the level that we should have. So this is helping to accelerate and to give better growth there. And we do believe that, if you move to the next slide, that this is absolutely a huge market to be tapped. The citizen service is around EUR 7 billion, out of the BPO is EUR 35 billion, and the ITO of 300 billion. But we do believe that the U.S. government service represent an untapped opportunity for Teleperformance. And in U.S. government service market, BPO market, it's 5x bigger than this service market. So there are possibility here to grow, to grow profitably and to grow with a very good rationale. This is what -- the reason why we did this acquisition. And we strongly believe that when you put commercial force of Teleperformance when we're going to put commercial force on this company that is already active in 11 states in the U.S., we are going to accelerate dramatically this line of sales. If we move now to the next slide, what are the financial impact for Teleperformance? So what are the key transaction data. As I told you, the enterprise value is EUR 400 million. Everything is financed through debt. The transaction has been closed on the 28th of December and the consolidation will start from January 1 this year. Of course, the level of the debt is not going to be -- net debt to EBITDA is not going to be impacted very much by this acquisition. We are going to receive likely bigger and this is an accretive impact to earnings per share if you take out amortization of intangibles by around 5%. In a nutshell, if we want to, I would say, least the reason of this acquisition. So strategically, it's a good acquisition. It fits the whole -- in the pattern and helps to accelerate this booming environment, it's going to be easy to integrate for Teleperformance. The price is quite cheap, I would say, 10x EBITDA and significantly below what we are seeing around the market as we speak. Easy to finance, it's going to be accretive and help us to continue to have, I would say, the entry for further acquisitions in the future because it's not so much a big deal. So that is the reason of this acquisition. And of course, I'm ready to answer your question, and this is open for questions. Thank you.

[Operator Instructions] The first question in the queue is from Sylvia Barker from JPMorgan.

Firstly, could I please ask on the -- what obviously, Happy New Year actually to everyone on the call. This is the first call of 2022. Could I just ask on the COVID work? So you mentioned 20% of revenue is COVID related. Could you confirm how much of that -- how much of the EBITDA in 2021 will be COVID related and the longevity of the profit going forward?

EBITDA is not different from the other, currently. Longevity of the COVID business, this is a permanent story. I know that everybody was -- supposed that this COVID business will disappear in Q4. I don't -- I doubt that is going to happen in Q4, but I'm sure, and probably not in Q1, too. So what -- maybe the way we have seen the stuff just to see what will be the growth for 2022, I don't know if we were not having some COVID business or if we are losing the COVID business or significant part of it, we do believe that Senture is going to deliver double-digit growth in 2022 even with a sharp decline of COVID lines that we got last year.

Okay. And then maybe could you just talk about the -- I guess, the details of the deal, how -- what was the process like? Was there anyone else bidding? Why are the private equity companies exiting at this point?

Private equity, always trying to exit, that's a good point to make. So there is no chance of that. No difference. So that's clear. We were the only 1 on this deal. We will be able to do it.

Okay. So you were the only ones bidding. I mean, I guess, it does seem like it's a good multiple for that business. So I was just wondering if -- and why was no one else bidding? How did you -- I guess, how did you end up being the only one interest in this asset or?

Maybe Teleperformance is also known to be easy to work with, sure to work with. That means that when we enter a deal, we are going to make it -- if we decide to make it, we are going to make it. We are not there to come and disappear just before the deal and the management was keen also to continue. So when you put that together, the agility to make the deal before in very short time as it has been done in a very, very short time, all that will explain why Teleperformance has been chosen by the seller.

And final question, if I may. Just when we look at the EPS accretion, could you just -- just a technical question. Could you just talk about the tax rate they're using kind of any synergy or?

Tax rate, which is around 22%, 23%, which is roughly the same that we have in the U.S. So this is not the main impact. We are not so aggressive in terms of tax. So -- but finally, the main question is simple, strategically we treat. We don't pay too much. We do believe that we are going -- in terms of synergy, we do believe this company is well managed. There are some things that could be, of course, big -- and of course, that could be reduced. But the main story is to develop the business quicker and wider than what they are doing. And hopefully, all the commercial team from Teleperformance, whether it's from or around is going to accelerate this trend.

The next question is coming from the line of Nicolas Tabor from Stifel.

First of all, Happy New Year, of course. I wanted to know more and understand more about the historical growth of the company. Of course, there was the COVID contrast. But apart from that, what was driver for such a fast organic growth? And how did they deliver also in terms of ramping up the number of employees, of course? And can we have an idea of the breakdown in terms of clients? What I mean by client, of course, is different state institutions that are, let's say, different contractors, we say, and the concentration we can think of, is large contracts or more?

Imagine, I would say, big names, if I may. Big states in the East side of the country, big popular state, it could -- of course, you might have been to Illinois or this country or the states that are a big one, and we are working -- and Senture is working with them. Why is that growing? First of all, there are a reasonable that is clear -- that if I may say, all this what we are seeing in the commercial on private sector is, of course, arriving in the big sector. It started in Europe. I'm sure you remember that Teleperformance is already very active in the U.K. as has been very active over the COVID line, but not only on the COVID line in France, Netherlands, Germany, and Italy, and other country like that. So we are -- so the citizen is the client like [indiscernible]. And this is exactly what has happened and people as a citizen cannot accept not to have the same series that they are asking for their phone, their computers or whatever. So it's exactly what's happening in the world. I do believe that this company started to work very, very early with the main states in the U.S. and has been able to succeed very suddenly, in 5, 6, 7 states very quickly because they have been able to deliver properly on site in the states sometimes that is also something that rings the bells for the government and they have been credible. And what is important is to be credible with this. So the growth has been over the year 45%. But not all of that is, of course, coming from the COVID. They are coming from different sectors, different situation and this is growing dramatically.

And these employees, they're U.S.-based employees?

All of them are U.S. based. All of them are U.S. based.

Okay. So it's more higher value type of services, it's not nearshore or offshore service?

There is no nearshore, no offshore, which is not surprising...

And so for this line of business, those operators, they're working on -- I mean, excluding the COVID situation right now, but let's say, before COVID were these people working on site or -- and so now it's shifting to remote?

Yes. So far, we are facing the same situation in the commercial one, meaning that 85% of the people are working from home. The attrition is very significantly lower than in the rest of the commercial business. And this is a very well-managed company, with even good margin, good EBITDA. It's well managed, well under control. And now the question is just to grow.

And are there kind of foot-in-the-door as well, I mean, for the Visa contracts...

Not exactly. It's not exactly the same business because it's -- they are much more on the federal state than on the federal government. They are working for the federal government. But most of the them are working for federal states, different states, the 11 states that I just mentioned earlier on. So Visa is not -- there might have some consumer issue, but most of the business in Visa is much more on the federal state.

[Operator Instructions] The next question is coming from the line of Anvesh Agrawal from Morgan Stanley.

Happy New Year. Can I ask 2 questions please?

Yes. I'm not able to hear you, I'm sorry, maybe you can be closer to the microphone, please.

Can you hear me now?

Yes, significantly better.

If I can ask 2 questions, please? 23% of the business is commercial and lot of that is health care. Are there any synergies with your health advocate business that we can think about in terms of the...

No, no it's business. In fact it's that Teleperformance is not exactly the same in exactly the same contracts, but the data on is already doing such kind of business. But is -- it's interesting, but most interesting part of the Teleperformance is, of course, the seeking line.

Yes. And there is sort of no synergies or are there synergies within the health business that is sitting within the...

Yes, of course. Absolutely, of course. But what I just want to convey as a real message, of course, this is important and we have also a practice for health care. But what we are doing is to add practice on practice, you have a practice for retail, you have a practice for health care, you have practice for automotive, now you have practice for citizen. Hold the job is just to add practice to practice like a bank. I'm sure there are some bank [indiscernible], you have the guy in charge of ECMs and cash management, all that. It's exactly what we are trying to do, I would say, as a [indiscernible] into our business.

Okay. That's interesting. And then just you said most of the or all of the employees are actually -- there is no offshore in this business. Is there an opportunity to do that in future? Just sort of thinking from a margin perspective can...

I would be surprised because this is mostly a domestic business for our citizens. I would be surprised as federal country, federal states will be keen to move to India or Philippines?

And the next question is coming from the line of Patrick Jousseaume from Societe Generale.

Olivier, can you hear me?

Yes.

Okay. So I have 2 questions on my side. First question, where you candidate for the acquisition of this company 1 year ago when it was acquired by the private equity company?

No, no.

And why?

Because we didn't even know this company.

Okay. And my second question was about the acquisition calculation. Well, because we understand that the EBIT is around EUR 27 million, EUR 28 million, and you have the tax rate. I guess that's the reason financial cost for the acquisition. So we go to something maybe between around EUR 20 million plus of contribution on the -- in 2021 pro forma basis, so is it to reconcile this with 5% accretion?

Let's -- we said around 5% and without intangible, the cost of debt is very, very low. I don't know what you have taken. Maybe it's a little more, but keep in mind that the cost of debt is low.

Well, what was -- last time you shared with us the -- because I think that the denominator that you take is the net profit after goodwill?

Without goodwill. Without goodwill, yes.

You mean, after goodwill?

Yes. We make the computation. We have no idea what will be the amortization of intangible on Senture. We have a rough idea, we don't have a precise idea. So I took it out and make a computation based on that, and this is around 5%. I must confess, it's not mechanic. But what is interesting for me this is -- it's not a big deal. You have understood that it's not changing the pattern of growth. But what is interesting is that, first of all, it's positive, you understood that we are paying at low price which is acceptable. And on top of that, this is also opening new doors. I'm not sure it's not so easy to open, specifically wherever the country are, to open the doors of the government is always complex.

And the next question in the queue is coming from the line of Andrew Grobler from Crédit Suisse.

Happy New Year from me as well. Just in terms of contracts, you mentioned you had around, I guess, 50 clients. What is the -- in terms of your largest one, 2 or 3 clients, what percentage of revenues would that make up? And could you talk through how that clients approximately is growing...

I'm not going to enter in detail, but what I can tell you is that, first, we contracted longer than commercial one. They are much more of 5 years. Of course, big states, Texas is not exactly Kentucky or you understand that or Illinois is not exactly Utah or whatever. So this is clearly -- when you are working with such organization, all the job is just to add more. Of course, you understood you have -- I'll give you an example which is very interesting because we are using it in -- we have on a contract like that in Middle East where we are in a single point, a single entry point for all citizens, meaning that all the agents are gathered there and all the jobs that we are going to try to do is just to make sure that when you call for your driving license or your unemployment stuff or your health care stuff, you are going to be supported by the federal state or the state in each dimension. That is something that is probably going to be the future of such contract. But the quality of the contract is classical. It's very, very classical contract, even longer than more commercial one.

And I mean in other -- historically in BPO contracts in the U.S., I know there's lots of variation about what BPO means those contracts. The margins have been lower than the 19-odd percent that you're looking at here. Why do you think those are sustainable? And why have they gone up so much over the past 2 years?

Well, first of all, for some people, I'm not sure you know very well Teleperformance. But clearly, Teleperformance is not going to make commodity for low price. So we are not going to enter BPO just to make volume like they did notably in the U.K. And even in U.K., we have a lot of business that we are doing in the U.K. with very good margin. So that is a reason. The second reason is that probably, of course, you have a size effect, the improvement -- not probably, there is a size effect in the margin improvement and also the ability to price better some services. So what are the reasons. And one of the more 2 of 3 performance is clearly to fight on price. And when people want low price with the same quality, it's not possible. So people start to understand that, and I do believe that we are going to do the same for Senture.

And -- so sorry, I mean, that's in the future, this is all in the past in terms of that margin improvement. Is that...

What I tell you -- what I told you is to see this first they are growing the operation of the gearing effect of the size of the business. And secondly, the growth management that they have put in place were improving over the year, yes.

[Operator Instructions] The next question is coming from the line of Christophe Chaput from ODDO.

Wishing you a Happy New Year. Just 1 or 2 questions from me. Coming back to the business of Senture, do they got some specific accreditation with obviously the government that could help you to leverage the business in terms of top line which means that the states...

This is exactly what we want to do at federal state, at federal level, but also at different local state. When you get -- when you are working with a big federal state, you can compete, you know how to, I would say, to navigate to be aware of story before it goes to public and you are able to go to new business, of course, this is what we are going to do, yes.

Okay. And that's the first and the main value added of venture versus Teleperformance, let's say.

Exactly.

So you would say that they've got higher market share when there is tender offer than Teleperformance?

And of course, they are aware of the story before the tender share -- before the tender.

Okay. Okay. And just to understand.

It's a different world. It's a world that Teleperformance was not very good at or could be better. Let's put it this way. It is a different world where we are going to invade this new world now.

Okay. And just to be sure, the gap in terms of profitability versus you is linked with pricing?

Pricing, operational gearing also -- so it's a big, it's a huge 16% margin that I don't know where you are in your model for 2022. But this is also management's ability to price, to execute properly, reducing attrition, all that stuff, that helps to deliver better. But if I may, we can be dig into this detailed acquisition in detail whether it's 0.2%, 0.3% or 1% margin, it is interesting, but the main story there is the ability to accelerate dramatically on this market that is going to be the same than the private one which is huge demand, a huge possibility of growth, delivering good margin, that is a rate -- the main, I would say, a story of this acquisition much more than to discuss about 50 basis points there although given the size of the business compared to Teleperformance. What makes the story for us is the ability to accelerate on this underpenetrated business which is growing fast at the same way than the commercial one.

What was your growth in U.S. related with the government, the pace of growth of your top line at Teleperformance?

I don't know. I cannot answer like that. What I can tell you is that in the U.S., we were not at the level that we should be in terms of size, given the size of the group. Let's put it this way.

You said in line with the average of the group, sorry.

No, no, in line of the growth of the group. I don't know what do you mean by your question. What I'm saying is that Teleperformance was not at level where it should be in terms of -- on this market in U.S. That's what I can tell you. Could you ask a last question?

The last question will be coming from the line of David Cerdan from Kepler.

All the best for 2022. Okay. I have a very simple question. It's regarding the top management of this company. What are the objectives now that they are part of Teleperformance family?

That they are going to be part of the Teleperformance family, probably and they are going to accelerate to help to be -- to enlarge dramatically the size of this business. I don't know whether we are able to double or triple it, but there is no reason why we should not grow very fast. And this is exciting for them. That's the reason why and we have much more ability to do so being part of the Teleperformance family and being owned by a private equity.

And do you think risk related to the recruitment of staff to limit the potential of expansion of the company?

This is a question that is much more U.S. one, not specifically, not for this company. The question that everybody has is what will be the market labor market in U.S. But the question is simple. When you pay, you find people and when you find people, when you do it, you have to be paid for that. So that is the moto of Teleperformance. And so far, we have been able to succeed to do it.

And how much do you think that wages in the U.S. have increased in 2021?

I don't know. Clearly, the rate we are approaching the level of -- depends on the state, of course, it's not exactly the same, but it has increased significantly, more than 10%. Thank you to all. I'm very happy to have been with you tonight. Again, you have to understand this operation as part of a strategic approach, meaning that we are filling a gap and we are working on that, and we will continue to do so in the future and doing that proper way, good growth, price acceptable, relative operative impact, accretion impact, these are the strategies that Teleperformance wants to develop over the next years to come. So with that, I wish you again a Happy New Year, and I hope to be able to see you [indiscernible]. Thank you. Bye-bye.

Thank you, everyone, for joining us on today's call. You may now disconnect your handsets. Hosts, please stay connected.