Teleperformance SE (TEP) Earnings Call Transcript & Summary

Hello, and welcome to the Teleperformance First Quarter 2022 Revenue Call. My name is Jas, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Olivier Rigaudy, Deputy CEO and Group CFO, to begin today's conference. Thank you.

Thank you so much. Good evening, good morning, everyone, and thank you for all your presence today. I'm very happy to be with you through this call to comment on Teleperformance group revenue as of end of March 2022 and outlook for the full year. I'm hosting this call from Paris with the Investor Relations team. Quy Nguyen-Ngoc [indiscernible] Investor Relations has primary comments to make before starting the presentation.

Thank you, Olivier. Hello, everyone. Financial press release related to the first quarter 2022 revenue has been published today at 5:45 p.m. Paris time. Slides of the presentation are available on Teleperformance website in the Financial Publications page of the Investor Relations section. As usual, the presentation will be followed by a Q&A session. A replay of the conference call will be available tonight. Dial-in numbers are available in the invitation to the presentation. Today's call contains forward-looking statements that address our expected future performance and that by their nature, address matters that are uncertain. These expectations are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For a detailed description of these factors and uncertainties, please refer to the Risk and Control section in our 2021 universal registration document available on Teleperformance website. Now I'll let the floor to Olivier.

Thank you, Quy. So let's start with the first slide, which is on Page 3 of the presentation. And I just wanted to start by saying that the first quarter performance was a great deal of promise for another year of growth and totally in line with our 2022 annual guidance. Consolidated revenue came at EUR 1.962 billion for Q1 2022, representing a year-on-year increase of 6.5% at constant exchange rate and scope of consolidation, and of course, 14.6% as reported. The recent acquisition of Health Advocate and Senture in the US-- United States, sorry, made a significant contribution to the group expansion during the quarter. Like-for-like growth was partially strong given the negative but expected impact of the change in revenue from COVID support contract, down EUR 83 million in Q1. Adjusted from this nonrecurring impact LFL growth -- like-for-like growth, sorry, stood at 11.1%. This is clearly a very good achievement. And clearly, and I just wanted to notice one thing, and I'll come back later on, 11% is, of course, coming after a further growth -- of previous growth of last year which was, if you exclude like-for-like growth, 20%. So we are on top of the 20% that growth of last year is [indiscernible], we are posting today an 11.1% growth. Let's move to the next slide, just to give you much more detail on the growth itself. We thought it was immediate and helpful for you to have this slide in the press release that we said have been disclosed on time. So of course, there was a currency effect, I am on Page 4, was a currency effect of EUR 54 million, mainly coming from the dollar, but to a lesser extent from -- both the sterling pound and the rupee as is euro. But as you see, we had a decrease of -- and impact of the COVID support line. Evolution is negative by EUR 83 million, while the like-for-like growth, excluding this COVID support contract is EUR 197 million, meaning 11.1% like-for-like. And on top of that, we have the change in scope, which is EUR 82 million, which are: first, Health Advocate that is continued in July last year, 1st of July last year and Senture from January 2022. So this is the way, this is how the sales have been underlined. If you move now to the following page, which is probably the most interesting one is to see how we -- to make a breakdown between the growth between the like-for-like growth and the like-for-like growth, excluding impact from COVID support. As you can see, we are here in 2022 for the first quarter, and accelerating -- we have a continued strong dynamic in 2022 despite this very, very high comparatives. In Q1, it was, of course, like-for-like 36%, which is absolutely amazing, but also 20% like-for-like, excluding impact from COVID support contracts. Again, as I told you, we are posting 11.1% growth on this 20% growth that was achieved last year. So the growth in the accelerating -- the trend of the growth is accelerating from precrisis growth. Let's move in detail now by region on Page 6 of the presentation. As you can see, Core Services grew by 5.4% like-for-like with -- I'll comeback after in detail in each region. But what are the 3 topics or 3 takeaways of this first quarter financials? Clearly accelerating market digitalization. The recovery in travel and tourism sectors and the COVID support contract which are gone in Q1, mainly in EWAP and CEMEA. This growth of 11% for the growth has been achieved despite the global environment, which is at least complex to -- has been never so complex for Teleperformance, but we have been able to swallow it. And it's true also for Specialized Services, where we have been able to post a 15.5% growth. Of course, you had the impact of TLScontact business. That was clearly a favorable basis comparison last year, but also LLS and bank collection is doing well again in this quarter. These are the figures that have been achieved. Let's move now quarter by -- I would say, region by billion to get a much more precise deep dive in it. So let's move to the English world. So the growth, like-for-like growth was 1.8% versus last year. In fact, if you take away the COVID line, the growth is double digit. Because U.K., there is a steep falloff in revenue from COVID, that was absolutely expected. But the growth in U.S. is absolutely coming back to a very good momentum, both in the domestic market and offshore business. We are back on growth in U.S. globally in the U.S. market, and we are very satisfied with the figures that have been achieved. Asia continued to deliver good growth, notably in Malaysia but also in Indonesia. So a very good quarter for the English world. If we move to the Ibero-LATAM, I would say little to say that we are just continuing the growth that we experienced for now, from quarters. We are posting 16.2% like-for-like growth for this quarter. I would say, again, strong commercial momentum with digital clients across the board. The top performer in Q1 are, Brazil, Argentina, Peru and nearshore activity, meaning Republican, Dominican, Guatemala and Nicaragua that had been opened recently. Portugal is continuing to expand steadily as in the previous quarter and previous year. So very good quarter also for Ibero-LATAM. When it comes to Europe, we have apparent decline like-for-like of 3.5%, which is mainly due from the contribution from the 22 contract that has been really decreased, notably in Netherlands, in Germany and in France, and we have a satisfactory business growth, excluding the impact of this COVID support contract. We are seeing there also growth in the hospitality and tourism segments that are continuing to pick up based in the first quarter and they dynamic business with multinational plan. Satisfactory growth also for Europe. When we move to India on Page 10, we see a 17.1% like-for-like growth. So again, after the work that has been done over the last quarter to select growth, we are now able to report again good growth, notably the offshore and add-value activities, which is e-tailing, transportation, hospitality, as we mentioned earlier and tourist segment. This is really positive, and it will help, of course, the margin. India being probably the country and the zone where the margin is higher. And we have the satisfactory growth in domestic operation. Again, also visibility control and monitor precisely to avoid to reduce margin. If we move to Specialized Services on Page 11, 15.5% growth. Of course, TLS is a major contributor to this growth. Comps were significantly easier since -- versus last year. And we have the stronger volume recovery since H2 2021. The volume trend brought in the Schengen Area and U.K., we have less visibility due to the war in Ukraine and the ever-evolving health situation, but we are reasonably confident that TLS will continue to develop again in 2022, not only in terms of growth but also in terms of margin. LanguageLine Solutions, I would say, delivered a statutory basis growth. And we know that the base of comparison are higher, but LanguageLine is there. And we have the first consolidation of Health Advocate from H2 2021, that is also acting. So if we move to the last page, before the question, I would say we confirm our objective for 2022. Not a surprise. Like-for-like growth adjusted for impact from COVID support contract above 10%, not a surprise. Exactly what we said in February. Of course, we continue to see a decrease in contribution from COVID support contract. And including this one, which would have a like-for-like revenue growth above 5%. We confirm a 30 basis point increase in EBITDA margin before nonrecurring item. And we are, of course, looking for targeted acquisitions that should create value and strengthen our add value-added business. So as a whole, you have understood that the year -- the quarter, sorry, is good. The year is starting well, despite the global environment, which is not so easy, whether it's COVID or whether it's war. But the group is clearly in good shape to post again a 2020 year -- '22 year of growth and improved profitability. So I am available with the team here to answer your question, and I would be happy to do so.

[Operator Instructions] And the first question comes from the line of Simona Sarli from Bank of America.

I have a couple of them. So first of all, you mentioned that TLS was the major contributor to growth for Specialized Solutions. Could you give us a little bit more granularity where volume stands as of today versus 2019? And secondly, so considering the strong performance in Q1 and also the better-than-expected mix with Specialized Solutions are growing ahead of expectations, what are the reasons for still guiding for margin attrition of 30 basis points? Is there any other element that we should keep in mind?

So in terms of volume, TLS has 2 major legs, if I may say. The first one is what we call U.K. UKVI and the second one is Schengen. Finally, we are -- when you look at the first quarter, we are still a little behind 2019 for 2 reasons. Of course, Chinese people are not coming to Europe still, and this is something that we are not seeing. While U.K. UKVI is now line, roughly aligned with what they were doing in 2019. So we are a little behind, but not dramatically. So what will be the future for China tomorrow? It's hard to predict. Of course, we have clearly no visibility on there. But as a whole, as you know, the group has been, I would say, working a lot in TLS, all the team have been working a lot for now 2 years to adjust the breakeven point lower than it was before. So we are reasonably confident that TLS will continue to, of course, help to increase the margin dramatically in 2022. Where does come from this margin accretion? We have, of course, TLS, we have the mix effect, we Health Advocate, as it has been that is consolidated since the beginning of the year. I'm sure you have understood that the U.S. world that was not the best world for last 2 years in terms of margin is back on track. That helps. And on top of that, you have the dollar that is also helping in terms of translation of margin. Of course, that are the main driver of the improved line. In the other part, you have less COVID business, even if it's not very different from the Core Service. It's less operational [indiscernible]. So as a whole, that are the main reason of the increase the change of the margin in 2022.

So just to clarify, you mentioned that TLS is more or less in line with pre-COVID levels in the U.K. and slightly below outside of the U.K. Is there any indication that you can give in terms of what you're factoring in your guidance in terms of how much have you...

Frankly, this is not a major -- as you have understood, clearly, TLS is going to significantly improve in 2022 versus 2021, mainly in the first quarter -- in the first half year. Of course, you have a basis comparison that is significantly helping in H1 that will be partially more complex to beat in H2. But as a whole, there is no major change versus what we have announced so far in -- when we answer the full year results, and we are satisfied with the evolution of the U.K. -- of the TLS business. That helps, of course, to improve the margin in 2022.

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

David Cerdan from Kepler. I have a couple of questions, please. First one is related to the ForEx. It was at EUR 54 million. Can you split between some currencies, U.S. dollar, notably. My second question is regarding your -- the inflation impact, at which extent your organic growth is driven by some volume effect and a price effect. And how do you expect the price effect to be over the year and for 2023 in the context of a strong inflation in wages?

So on ForEx, I cannot give you the figure, but after the EUR 54 million impact is, I would say, the vast majority of the impact, roughly 2/3, 2/3 of the impact is coming from the U.S. dollar. There has been appreciating a lot in 2022. Just to answer the question you didn't raise but that was raised before. It has also in mix, as you have understood, that LanguageLine Solutions is delivering a higher margin than the group as well and it's done in dollars. So when you transfer this dollar in euro, it's, of course, helping the rate. When it comes to inflation, what is the story? We understood clearly, early that we had to increase price. So it started notably in the English world, but also in the U.K., I would say, last October. And we have been able to push dramatically the price of our major contracts in this. So we are following that contract by contract at regional level and at global level to see whether we have been able to increase the price. One has been done by the teams across the world is that today, it's never under story, but we have been able to mitigate significantly the increase of wages that has been given to the people. So we are increasing our price, and we are in a position to increase the price. There are different ways. Either people accept increase price locally or we may move, at least for a part of it, I would say, offshore or nearshore or if people really don't want to increase, to follow the price, we have to make a decision about the future of this contract. So that's what we have done over the last months since October. And it has been done, I would say, permanent with a precise reporting. We know exactly where we are and we have been able to do so. And we are following not only the sales figure, but also the [ paid ] production to check whether our growth in real term is comparable to what we are seeing in the last term or in near term. What is more difficult to answer your question is about what is volume and price. As always, the story is that it's difficult to compare the products that are changing on a permanent way. So we have -- we are not following price and volume this way. We are just following the volume to make sure that the volume is not -- I would say, is following the same path on the price -- the sales activity, knowing that the mix is not easy to capture through this approach. But as a whole, as you have understood, we have been able to -- I wouldn't say easily, but we have been able to increase our price across the board and we've been able to do so with most of our customers. We know how to limit [indiscernible].

Maybe just to rephrase my question. At the end, have you been able to increase prices more than the wage inflation factor? And secondly, is there a lag effect between your decision to increase your prices and the fact that wages are up?

There is always a lag effect. We have understood the group has taken this issue very, very early last year. In fact, it started even in July for some contracts, but most of it has been done during the fall. And there is always a lag effect. Whether we are going -- we have been able to pass increase of price higher than the inflation of the salary. It might happen, but I'm not going to comment on too much on that. Clearly, what is important for you, I would say, we have the ability to pass on the increase of price. That's what has happened. And we took the appropriate measures, sufficient -- timely to make it happen, to make it sure.

The next question comes from the line of Oscar Val from JPMorgan.

I have 2 questions. The first one is, could you clarify what your expectations are for COVID revenues in Q2 or what the exit rate was in March, what level of COVID sales you were running? That's the first question. And then the second question is around your new sales cycle. Some of your competitors have talked about the sales cycles shortening during COVID, and they have lengthened a bit now that we've come out of COVID. Could you just comment on are you seeing more competition for bids? Is it more -- is your growth coming from new clients versus existing clients?

I must confess that on this last point that you just mentioned, we have not seen major difference. Of course, there are things that have been shorter, things have been longer. But as a whole, it doesn't change a lot or very marginal. It is not an impact. About COVID, expected COVID figures for Q2. As you have understood, they are not so big. Clearly, I'm not going to disclose figure because I'm not expecting -- I'm not disclosing the forecast in detail. But clearly, we do believe that the COVID figure are going to go down significantly in Q2 as they have done already in Q1. So this is going to continue. We know that the base of comparison for COVID is still high. But this is -- as you see -- what is the most important thing for me is the ability of the group to swallow such, I would say, peak when you look at the figure of Q1. I'm not sure what was your forecast for Q1, but probably we have been able to, in LFL, to be significantly higher than people expected. The LFL in Q2, of course, this is a question that you are going to ask me after, but we are going to be positive here.

Okay. Maybe another question. It's just going back on the contract structure and the ability to pass through wage inflation. Could you comment on, for a standard contract, how often could you go back to the customer to pass through wage inflation? Is it annually? Or is it more ad hoc?

You have what we call the QBR, quarterly business review that is done not with all the client, it's a major client. And when it comes to QBR, of course, a lot of stuff are put on the table from the client side, quality, volume. And for our side, price and forecast and all that stuff. So there are some contracts, there are some legal provisions. And of course, you can imagine that we are speaking on a regular basis, which is people. And somewhere, now people want to have volume. So they are looking for people to answer or to help them. So if we have to move quickly, we will move quickly. And we have done. We did that over the last month. So it's not a legal work or legal provision that I would say, forbid us to enter negotiation with our clients when needed.

[Operator Instructions] And the next question comes from the line of Anvesh Agrawal from Morgan Stanley.

I got 3 questions. First, I mean, your comment on LLS of satisfactory growth would imply a little bit of a sequential slowdown. Maybe if you can comment on what's driving that or how you think about rest of the year in LLS. Can you provide some color on where you are on the U.S. visa contract? I mean, has it started or when it's going to start and the possible impact? And then finally, just for maintenance purpose, can you let us know what was the COVID revenue last year in Q1 or how much of COVID revenue in absolute basis you have delivered in Q1 this year?

Okay. For LLS no, the growth is less explosive than it was last year, let's put it this way. The growth of last year was absolutely explosive. And now we are much more in radical, classical growth. In that way, you mentioned it satisfactory. About U.S. contract visa, I would say, I have little to say. Since the beginning, this contract is delaying, delaying, delaying. So there are, if I'm not mistaken, 2 or 3, I'm not sure, at least 2, maybe 3 -- some part of the world that are in tender as we speak, and we are still waiting the answer from the U.S. government. So Frankly, I cannot give you -- I cannot commit on the U.S. government timing. What I'm saying is that I would be, I would say, -- and we are not making a lot -- we took that in our forecast. We didn't take a lot so much sales in TLS from this U.S. contract in 2022. And I would suggest you to do the same. Because frankly, the path of this contract is very, very low. As far as COVID figures are concerned it was 210 million last year. And so you have the average, which is less than 83 so you have the figure for '22.

Fair enough. That's clear. And just to be clear on that LLS comment. So adjusted for the comps because the comps were super high last year, you're not clearly seeing slow down. The base business is still very solid.

Can you say again because I missed the...

No, on the LLS, it's just the comps, which is driving the slowdown?

Clearly. Clear. I come to slow down somewhere. When you deliver more than 15% growth last year, so close to 20% when it comes to something that is more classical. You say, okay, it's an increase, but coming from a high figure.

The next question comes from the line of Patrick Jousseaume from Societe Generale.

So just coming back on your comments regarding Q2 when you mentioned that you expect like-for-like growth to be positive...

It was a question for some of you.

Considering that the gap between COVID and the revenue in Q1 last year -- in Q2 last year and Q2 this year will be probably more important than between Q1 last -- does it mean that you expect like-for-like growth, excluding COVID contracts, to be still in excess of 10%?

I'm not going to comment on that. Clearly, we are waiting a good growth in Q2. And we know that, I would say, Q2 is more difficult given that. We have been able to deliver some growth, some COVID line in Q1, that was probably not expected at the beginning of the year. And probably it's going to be more difficult in Q2 on that. But as a whole, we don't see why we should not be delivering a good growth again in Q2, let's put it this way. I'm not sure if I answer precisely your question, but...

It's a good start.

Frankly, I cannot commit. So of course, you can imagine, but what is the fundamental message, meaning that despite the COVID, I would say, that is now burden that was not a burden last year. But if you take that out, if you strip that out, of course, it might churn for a quarter to another. But you see that fundamentally, Teleperformance is well placed to take advantage of this legal economy across the world, across the country, across the sectors. And of course, there are ups and downs, there are peaks and valleys. But as a whole, you'll see that the fair amount a growth of the group over the last 2 years has been solid and resilient.

Yes. And then last year, COVID revenue in Q2 was slightly higher than in Q1? That's right?

Yes.

Okay. And my last question is about M&A pipeline. Could you elaborate on that, please?

By nature, it's a more difficult stuff. There are things in the pipe now, as you know. Again, it gives me always the same -- the opportunity to give you much more detail what we are looking for and I'm going to be precise. If you look to Teleperformance, it's a Rubik's Cube. You have 3 dimensions: geographical, industry that we serve, BFSI, retail, transportation, accommodation, insurance, gaming, e-commerce, whatever. And what kind of product do you sell? That could be, of course, customer care, technical support, content moderation, debt collection, sales, BPO, all of that. So when you combine these 3 dimensions, of course, there are possibility where we can have better. So we are looking on some of them. It doesn't mean that we are going to make them, as you can imagine, as always, it's always more complex. But we are much more looking for, I would say, tactical, midsize acquisition that will, I would say, implement and deliver good results and improve the profile of the group while not taking too much risk in the size of the business. So that's what we are looking for. The pipe is there after some -- at least, you need to have a [ bank ] to make acquisition. It's not that because you have the price that you are going to succeed in acquisitions. It's always more difficult to predict. But you're right, yes. That's what I can tell you. I believe there is no more question from -- what I just want to, I would say, to pass on. I know people are very anxious about COVID, COVID, blah, blah, blah. What is important for you to get is that Teleperformance is engaged in this B2 world. And when you see the level of the digital clients that continue to grow as a percentage of the sales, that continue to improve in different direction, in different sector or in different countries. We are, I would say, convinced that Teleperformance is well placed to take advantage of this change of the global environment in terms of business in a disrupted world. That's what I can tell you today. Of course, I'm going to give a way to -- to give again the speech to give you some realistic information on the documentation and agenda for the next week and months to come. Quy?

Thank you, Olivier. Just a few key information and data to share with you. Please note that the next financial communication will be about 2022 first half results on 28 July 2022. You will receive invitation to attend the webcast organized as usual for this release. Of course, Teleperformance continue to participate to numerous digital and, at last, physical conferences organized by workers in the coming weeks, coming months, including on ESG topics. Please contact us if you need more information to attend these events. So see you very soon digitally and physically, we hope.

Thank you so much.

Bye-bye.

Bye-bye.

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