Teleperformance SE (TEP) Earnings Call Transcript & Summary

Hello and welcome to Teleperformance First Quarter 2024 revenue. My name is Melissa, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]. I'll now turn the call over to Olivier Rigaudy, Deputy CEO and Group CFO. Please go ahead.

Thank you, Melissa. Good evening to all of you and happy to have you tonight to speak about -- to talk about our Q1 results. Let's enter directly in the topic in this slide. Maybe Quy you can give some information with disclaimer.

Yes, sure.

Go ahead.

Yes. Just to specify that all the looking -- forward-looking statements reflected performance management, present expectations of future events and 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. So for a detailed description of these factors and uncertainties, please refer to the Risk Factors section of our universal registration document available at www.teleperformance.com our website. Teleperformance undertakes no obligation to publicly update or revise any of these forward-looking statements. So...

Thank you, Quy. So let's enter into the topic. Next slide, please. So what has the highlight of this first quarter? I'm going to be as quick as possible but as direct as possible. It's a good start of the year, which is a little above our expectation and we confirm our full year guidance. When we get into detail, I just wanted to put out the following point. So the growth year-on-year reported growth is 26.7% for the Q1. All pro forma growth, and I'll come back in a minute to explain what is a pro forma in Q1 2024 is plus 0.9% in the high range of the expectation and on track to achieve our annual financial objective in 2024. I will talk a little more if you're interested on ongoing implementation of AI, gen AI solutions that continue to accelerate our client growth and international efficiencies. Another point which is key is the integration of Majorel, which is perfectly on track, and we confirm the expectation to generate EUR 150 million savings, cost synergy on a run rate basis by 2025. And we will have this year, which is a clear focus of the group, continued cash generation and return to shareholders, while keeping a robust balance sheet in place. Just a word about pro forma growth as we have bought I would say, Majorel in November, we have designed like-for-like growth, including Majorel from the day, the first day of 2023, even if we are -- if we have acquired the company only in November. So we will show the figure of the sales figure, including Majorel for 2023 to help the comparison. Next slide, please. So that's the financial figure. Nothing new. So we are reporting 2.4 -- EUR 2.542 billion versus EUR 2 billion last year. Of course, the reported figure is increased by the Majorel figure. I'll come back in a minute and the pro forma is 0.9%. And this is the figure. Nothing material to tell about the dollar, which is key for us, which is roughly the same from Q1 2023 to Q1 2024. And the pro forma growth is on track. I confirm again, our financial guidance for 2024. Next slide, please. If we want to understand what happened in the first quarter of 2024, we designed the evolution of the sales like that. So we remember that last year in Q1, we realized EUR 2 billion, of which we had this year EUR 541 million from Majorel to achieve the Q1 2023 pro forma figure on which we are going to compare the Q4 figures that I'm going to express in a minute. There is a limited currency effect mainly made of difficult currency like Turkish lira, Egyptian pound and also, to a lesser extent, U.S. dollar. That is negative by EUR 28 million. And we have a pro forma growth of EUR 23 million of the 0.9%. I just wanted to highlight 2 things. These figures are totally fair and clean and easy. There is no more [ COVID ] and this year, this quarter, there was no inflation impact. The level of the devaluation was absolutely linked to the CPI in the 2 countries we are speaking of Turkey and Argentina. So there is no impact of that. So these figures are totally comparable from a year standpoint or quarter standpoint, sorry. Let's move to the next slide. This is just to show what happened, in fact, the profile of the year. We have put there on a full year basis, quarter-by-quarter the evolution of the sales of last year, including Majorel and the like-for-like growth, which is estimated at 11% in Q1, 6% in Q2 last year, 4% in Q3. In 2023 to land at 100% in Q4 last year. So this is the picture of what we are fighting against this year because 2024, the 1% growth that we delivered this year has to be compared to the 11% growth that we had last year, which is a higher base of comparison that the group had in 2023. And all along the year, the balance of year, comparison will improve. This is going to help us, of course, to -- and give some credibility to our full year 2024 outlook, which is between 2% and 4%, as you remember. So growth decline beginning to drop. Next slide, please. Where does come from this growth? This growth is, of course, driven by specialized service and core activity in APAC in India. Here, you have the evolution of the growth by region. You have the Americas, the Americas, I just remind you for those who might forget it. It's made of North America, South America and what I call the South India and Philippines because these 2 countries are working mostly for the North American market. So together, this figure are declining by EUR 34 million, mainly driven by the offshorization of the business in India that continued to accelerate in this quarter versus previous year. The EMEA and APAC region is growing by 1%, meaning with good figures in the multilingual hub in Asia Pacific. And the specialized service is growing notably in the U.S., very, very, I would say, very, very sharply at close to 14%, which delivered EUR 43 million in this quarter. This is the way the growth has been distributed all along the quarter. Let's move to next slide. Just to show you now the pattern on the group on the right side of the slide, you have the core service, which is made of Americas and EMEA and APAC, which is 86% of the business. Both regions are roughly equal. While we have specialized service, which is 14%, mainly based in America, in U.S., North America should notably for LanguageLine Solutions, PSG and [indiscernible] TLS being much more [ European ]. On the left side of the graph, we'll see the evolution by vertical that shows that the group is, as usual, very, very diversified and able to swallow any difficulty, whether it's by vertical and also by region. Also to take advantage of this position. Next slide, please. By mainline -- the mix by main business line is just to show that the customer care is 54% of the business. The rest is made of wide range of value-added activity. While even in customer care, you have very much gen AI and AI business that is developing and generating a lot of value. Next slide, please. The Majorel integration plan is on track, perfectly on track. We are exactly aligned. I just wanted to make it clear that Majorel business is no longer attracting turnaround basis since January 1, 2024. So I'm not following at all Majorel on this, previous, I would say, pattern our previous presentation. This is no more -- this is now integrating all the business unit of the group, whether geographical or functional. So they are mixed with Teleperformance's previous business. We confirm the cost -- confirmation of the cost synergy plan, nothing new that was announced early March. On a run rate basis, EUR 150 million by 2025 and a run rate basis EUR 50 million in 2024. Most of it is coming from labor not surprisingly. Some premise to and other, which is mostly made of some corporate staff plus IT topic that are also under review as we speak. Finally, I'm going to finish with the last slide just to let you know 2 things. We maintain absolutely our 2024 outlook. The pro forma annual growth will be at -- between 2% and 4%. Of course, you understood that second part of the year should be easier, not only with basis of comparison but also increased new business expected. The EBITDA margin is confirmed to be up by 10 to 20 basis points based versus the annualized pro forma basis of last year. We do believe that we are going to increase our net free cash flow, and we'll continue to cash return to shareholder up to 2/3 of the net free cash flow through dividend and share buyback, but we want to keep our robust balance sheet with a leverage of less than 2x EBITDA by the end of this year. This is the figure of Q1 and I'm over with the presentation. I'm ready to take the question. To make it simple, I do believe this quarter is a good quarter. This is generating growth that was a little better than what we expect. I would say exit rate in March is significantly good. Even this March figure -- in March month was not the easiest one, given the calendar effect that we had. So we are reasonably confident for the rest of the year and to achieve our guidance. So I'm ready to take all your questions.

[Operator Instructions] Our first question is from Simona Sarli with Bank of America.

So first of all, on core services, you mentioned that they reported strong pro forma growth, but then declined by 0.9% like-for-like due to the headwind from offshoring. So can you maybe provide a little bit more detail on the headwind from offshoring for this division? And also, you mentioned that the exit rate in March was very good. And clearly, the comps are 500 basis points easier. So bring from [indiscernible] for Q2. So how should we think about Q2? And if you can please comment a little bit on the momentum on volumes.

So headwinds, it's difficult to comment. What's happening in the U.S.? In U.S., in Americas or the U.S. market because it could be -- it could have been, I would say, executed either in North America or Mexico or LatAm. A part of this business is moving to India. A significant part of this business is moving to India. So of course, you have a decrease of the published figure of the U.S. market. The U.S. core service market, I'm not speaking, of course, of specialized service, which is growing dramatically and LatAm to a lesser extent, that moved to India. So this is quite massive. How can I say that? The Indian business is growing more than 15%. That gives you some idea of the size of the switch in Q1. So it shows that a lot of business has moved from North America or North American market to India. This will probably will continue along the year. It's difficult to predict exactly what will be the outcome at the end of the day. But this is really -- about the exit rate, what was the expectation of the market? I'm sure you have noticed that March was a complex month this year because there was 2 days less than last year given Easter that felt that I would say, was happening in March versus April last year. So we were not expecting a fantastic March. But finally, March figures are reasonably good. Growing, given -- despite this 2-day calendar negative that is going to reverse, of course, in April and should help Q2 that's what I can tell you. We are quite, of course, careful on the full year. We know that H1, if you make a comparison to summarize, will be a base of comparison above 8%. So it's not so easy to beat. So I don't know exactly what will be the figure in May and June, but April should be okay. We'll see where we are going to land, but the volume are reasonably here. They are not fantastic, but they are far from being negative largely. And, again, it's the first quarter, so we have to be careful. The year is not over by far but it's a reasonable good start. That's what I can tell today.

And maybe if I can just kindly squeeze one last one, and that's about specialized solutions. Can you talk a little bit the sustainability of this growth trajectory through the rest of the year, please?

This is a permanent question since we bought LanguageLine in 2016. I remember perfectly at the time of this acquisition, people were just, I would say, questioning the ability of the sustainability of this growth. This company has doubled in size since 2016, and not only this one. TLS also is growing fast. So what we see at least for TLS, for LLS is the same kind of growth all along the year, maybe 2% or 3% -- 1% or 2% or 2% plus or minus is difficult to tell. But as a whole, we see a LanguageLine Solution delivering fantastic growth all along the year, yes.

Our next question is from Suhasini Varanasi with Goldman Sachs.

A couple from me, please. You've mentioned that you won additional new business in previous months. Can you just share some color on how the customer sentiment is today?

I've hard time to listen. What you said, you said that color on April, I have a hard time to hear your questions. Sorry. Yes.

Perfect. So I was just asking about the additional new business that you won in recent months. Can you provide some color on how the customer sentiment is today versus last year that you actually saw project cancellations or delays? And maybe also some color on which geographies and verticals are seeing the improvement? And then I'll ask the next question after this.

Okay. So there was growth last year. You remember, we were doing 11% in Q1 and close to 6% in Q2. So I'm not saying that, again, people who are growing last year. So of course, by nature, we are at a lower level versus last year. What we see is that specifically on travel and hospitality and BFS, Banking, Finance business and to a lesser extent, in media, entertainment and gaming, still growing business growth. So that's what we see. This is rough spread across geographies. There is nothing specifically different from a geography to another. But as a whole, of course, when you compare to last year, the volume is lower, but we are starting from a higher base, but the thing seems not dramatic. That's what I can tell you.

Got it. And besides there may be seeing some improvement in 4Q?

Whether I understood from your question because I have hard time to hear you whether this is going to improve over the next quarter. I hope this is [indiscernible] I would say or not to bet or guess. And that we do believe that we are going to see specifically in the second part of the year, much more than Q2. Of course, it's always difficult to predict. But the base of comparison is going to ease dramatically in the second part of the year and will help us all along the year. So that's -- so business is still there. You have to be ready. You have to be able to deliver and to offer a solution, that's it. But it's difficult to tell more as we speak. Frankly, we are in a reasonable good direction, I would say.

Got it. And the last question for me, please, is on the margin expansion potential for first half. Can we expect some improvement on a year-over-year basis? Or is that more weighted in the second half of the year?

Probably the second part. So I'm not there to speak about the margin, but we know that the H1 will be more complex than the H2, of course, given the operational leverage, given the different topic and given the synergies that should come much more on the second part of the year. But yes, you are right. But I'm not going to give any more upside on the 10 to 20 basis points that we have announced early March.

Our next question is from Antonin Baudry with HSBC.

Yes. Thank you to squeeze me and good evening, everyone. The first one is about revenue growth. Another way to ask the question on the environment. Did you experience any surprise this quarter good or bad on which sector. Is the environment becomes less volatile and more predictable in Q1 versus previous quarter? And is it possible to have more color about the trends in [ tech ] clients, which represent a big part of your business? My second question is about margin. I know it is only Q1. But if you have the strong growth of offshore, if you combine with cost synergy, would you say that the full year guidance of wrapping margins for the full year [indiscernible]?

No, the general -- frankly, I would love to tell you this is significantly improved. There are some modest sign. I don't want to [indiscernible]. So it's too early to tell that. So there are some good signs, some very, very minor signs. So don't overestimate it. We don't want to be caught by the way we have been caught last year. So we are going to stay careful. Things are reasonably okay. So we need -- Q2 is not always the most important quarter, as you know, the most important part of being in Q3 and Q4 and to a lesser extent, Q1. So it's difficult to tell, but we are not seeing collapse at all. The environment, it could be blurry some place. So it's difficult to say the market is less volatile than it was. I cannot tell that today. Even if I believe that we are well placed to take any advantages. So frankly, I'm not sure it's answering your question, but there are still uncertainties, and we want to be careful specifically on Q1. On the margin, you're right, 2 or 3 things to tell. First of all, operational leverage is much more in the second part of the year. First, synergy will be much more accounted for in the second part of the year. We know that we have some FX that is playing against us, notably in transaction in LatAm, specifically starting first half. So we are also careful. So I hope my 10 to -- hope of 10 to 20 basis points will be careful, will be, I would say, conservative we'll be in a better position in H1 to comment on that, and I don't want to commit on anything different so far. But it's true that the balance between H1 and H2 should be favorable to H2. That's what I can tell you.

Thank you, Olivier. I have the short question. It's about the return to shareholders. You reiterate that 2/3 of free cash flow...

Up to 2/3.

Up to 2/3, sorry, would be returned to shareholders, is it possible to update the share buyback program currently -- the current share buyback program and what we should expect when this program will be finished.

So as you may remember, the program was EUR 500 million that was announced 11 of August last year. Out of this EUR 500 million, EUR 430 million has been already done. We will announce after the next call, after the general meeting, the reconciliation of the repurchased share, again, just as planned. So they are still, in fact, if you make a quite small basic computation, we are buying share around EUR 60 million to EUR 80 million every month. So there are still 1 month to go. So the board will make a decision after the general meeting that should take place on the 23rd of May after this. So we align that. What we want absolutely is to keep our debt until 2x EBITDA. This is, I would say, something we want to do. So we will adjust based on , I would say, forecast on the figure, what can be done. So again, we are not saying that we are going to make 2/3 of the cash flow, but up to 2/3 of the share program. I just wanted to be clear on that.

Our next question is from Carl Raynsford with Berenberg.

Olivier. Just 3 from me, please. I'll ask them one by one, but the first one, what are the positive movements you're seeing in retail and tech just to suggest the momentum is improving? I know you mentioned it in the comments, that's number one. I'll take them one by one.

Okay. Retail and tech are not the most, I would say, [ boring ] sector, as I told you, we are much more seeing dynamism of sales in BFSS and travel and hospitality and entertainment and gaming. Retail and tech are just behind I would say, correct, not [ boring ], correct. That's what I can tell today.

Yes. Second question, just around the new contracts in financial services in -- the new contracts you were saying, new contracts signed in IT services in both segments. I'm just wondering, are those separate contracts? Or is that 1 contract which is...

No, no, there are separate contracts. There is no big fish, let's put it this way because that's the question that you may ask. There are plenty of -- there are different contracts. There have been sites that now need to ramp up that specifically in travel and hospitality, BFSS, media, entertainment and all of that, that should ramp up. So this is the name of the game today, we have to ramp up. It's a good start, but it's far from being totally down. But that's -- there is not a big fish. Let's put it this way because it's some value question that is behind.

Yes. Okay. Lastly, just around near-shoring demand decreasing, I think you said in the comments, which I find quite interesting, against a lot of rhetoric, I think, more broadly in the market. So why is that happening? I know you're getting obviously demand for offshoring versus decrease in near-shoring. Do you have any sense if that's structural or temporary? And what the reason for that is?

Because people want -- they want to associate, I would say, they are looking for savings. They are looking also for efficiencies. They are, to a certain extent, it's a...

Is that -- are those efficiencies and savings then more prevalent in India versus, I don't know, Colombia, for instance, if we're talking...

It's partially linked also to the ForEx issues. I'm sure you have noticed that either for Colombia and for Mexico, the increase in the currency made this destination, if I may say, less appealing than they were before. So a part of the story is there also people have moved business from a region to another, not all of the business, of course, but a significant part of it. And that's happening, yes, it's savings. And people are, especially in English, let's say, how much more keen to offshore, much more than nearshore, that's what we are seeing. But this is a big trend. As I told you, India is clearly growing very fast. I don't know if you remember, but in the presentation we did in March, we showed that India was growing very fast, and it is continuing. This is what we are seeing. This is -- India is now one of, not one is by far the most important I would say, delivery center, delivery country as a group and is still continuing to grow. And this is not surprising. And when you lose the competition, you see the same trend.

Thank you. Our next question is from Nicole Manion with UBS.

Maybe on Majorel, if that's okay. I know you've said that you're no longer tracking that separately, what you've commented before on the need to install a growth engine here and maybe the potential for some revenue dis-synergies, although I know you've said before, you don't expect these to be all that significant. Could you maybe give us an update on the progress here? Is disruption likely to increase through the year? And is that part of your sort of cautious guidance? Any kind of extra color on that would be great.

No, I'm not going to comment on Majorel, which is now totally mixed with our different business units. What we know for sure is that the 2023, I would say, base of comparison for Majorel was different than what we call TP or original TP. That part of the story that we are living today. But all in all, what we see, of course, integration is far from being finished, there are plenty of things to be done, but we are perfectly on line, still I would say, big stuff to be done, and there are still operation to be done in some countries. But we are running fast, and we are running fast on operation marketing and sales system and security and also some -- so the main story for us is just to make sure that the Majorel, so-called Majorel part is now totally embedded with Teleperformance and makes only 1 company. So that's where we are. So we are rushing to do that. We hope to be well advanced by the end of this year. Teleperformance, a lot of default and you are the first to make to show them, but the ability to integrate the company is that something that [indiscernible] is able to do quite well. So we are working on that. We are working as maniac as much as we can. As low as we need. Of course, we have to take care of different things, but we are well on track. I don't know if it's answer precisely to your question, but that's where I can -- what I can tell you about Majorel integration.

No, that's helpful. Maybe just a quick follow-up. I can see that you have given quite a few obviously pro forma figures from '23 in the presentation. Maybe just missing it. Have you given that geographic detail for core services for the quarters last year anywhere? Now, I can see it for Q1.

I'm not sure we have done that yet. We are rushing. There is a lot of work to be done. I hope we will be able to do that quickly. Of course, but I'm not too sure because we need to make a consolidation by -- at the end of June. So we rushing to do that. If we are able to do it by region as quick as we can, we will publish it on our website. But today, we have not been able to deliver it.

Our next question is from Markus Schmitt with ODDO BHF Corporates and Markets AG.

I've only one left for me that is on your maturity profile. I think you have a bond that matures in July '25. How do you want to address the maturity? Will you likely come to market in H2 to refinance the bond? And would a tender offer make sense for you since the bond is trading at 97% right now? Or would you issue a new bond in H2 and keep the cash on the balance sheet and to wait until the bond matures. Any thoughts maybe how you're going to address this would be helpful.

So we have time. We have more than 1 year to do that because if I'm not mistaken, the redemption is in September and October '25, if I remember. So we will see that probably in the second part of the year. Just to be clear, to all bundled, we have no issue of cash. I'm sitting -- we're sitting pre-dividend on EUR 800 million of cash at group level. And we have no issue as Standard & Poor's just confirmed a BBB rating, I would say, a month ago. So we have no liquidity nor a financing issue. The debt is totally under control. So we will see what's going to happen on the rate. I'm sure you are much more aware than me that what could happen on the euro and on the U.S. bond on the U.S. rate. If there is a window that makes sense for us, we'll take advantage of it. But frankly, it's too early to tell. But what I'm telling you that there is no issue of financing, no access to cash or no access to liquidity, whether it's bond, whether it's banking, just to remind you that we have EUR 1.5 billion credit -- banking credit line that is undrawn, and we have access to the short-term market as well. So we have no issue of financing. We will make our decision. I do believe -- I'm not sure we are going to make a decision before the fall 2024. And I don't know what we are going to make as a decision. But we have time to beat.

Maybe 1 follow-up in this context. I mean, you're producing cash, obviously every day basically. So clearly not a bottleneck that is not coming from that direction. But maybe you have some bolt-on acquisitions in front of you, something like this as a cash out. You have your buybacks, of course. So is there a minimum cash position, which you, as a CFO, don't want to undermine. I mean the minimum cash you want to have on balance sheet always or if not...

I want to make sure to pay the salary and whatever so we are careful, of course. And of course, when you are present in [ 100 ] countries. You know that the cash is not coming from day 1 so easily. But we are working on that on a regular basis. Now what we know is that we have access to cash. Frankly, our priority today is to integrate Majorel much more than to make acquisition. You never know. We said to the market that we might look to something on a bolt-on acquisition in H2. So far, we have nothing to look at. The way we are valued by the market doesn't help to make acquisition because it's going to be dilutive. So it might happen. It's not a more slightly option.

Thank you very much. As we have no further questions in the queue, I would like to turn it back over to Mr. Rigaudy for any closing remarks. Please go ahead.

No. Thank you to all. I'm happy to have been able to report a reasonable figure. The year is not finished, of course, but the good start is there. And there is 2 messages that I want you to keep in mind. First of all, a good start of the year, and we confirm our 2024 guidance. And let's see where we are going to land in the second quarter, and we are going to meet again in each -- for the H1 end of July. And of course, before, if you want to have some information from the Investor Relations team or myself. Thank you to all. Bye-bye. Have a great evening.