Teleperformance SE (TEP) Earnings Call Transcript & Summary

Hello, and welcome to Teleperformance 2024 First Half Results. My name is George, and I'll be the coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to turn the call over to your host today, Mr. Olivier Rigaudy, Deputy CEO and Group CFO. Please go ahead, sir.

Thank you, George. Hello, everyone, good morning or good evening, and welcome to our first half results event. We are going to present to you the results. I'm going first, next slide, please. I'm going first to leave the floor to Quy to make the disclaimer.

Thank you, Olivier, and hello, everyone. It is my turn to welcome you to the Teleperformance First Half Fiscal 2024 Earnings Call. Financial press release related to the results has been published today at 5:45 p.m. Paris time. Slide of the presentation will be available straight after the call on the group's website in the financial publications room of the Investor Relations section. A replay of the webcast will be available tonight. The earning numbers and link to listen to the replay are available in the invitation for the presentation. Today's presentation contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain since 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 Factors section in our 2023 universal registration document available on Teleperformance's website. Today, Olivier will first provide a summary of the key developments and the key figures of the publication and second, cover Teleperformance financial results in detail and full year business outlook. Then as usual, his presentation will be followed by a Q&A session. Now I hand the floor to Olivier.

Thank you, Quy. Next slide, please. So we are going to start with the first half highlights. What are the key development of this first half? Momentum in the business are simple. The first thing to tell, we have an acceleration in the growth in Q2. It was weighted that we are able to deliver it. The second stuff is that we are leading a smooth integration of Majorel. I'll come back to the economic side. But first of all, it's doing well on the client side. We didn't lose any client, and we are having a good, smooth integration with the people that are coming from -- of our colleague from Majorel. If we move now to the economic side, what we see is the acceleration of the execution plan in Q2 2024 with many positive impact expected in H2. We confirm the expectation to generate EUR 100 and EUR 150 million cost synergy on a run rate basis by '24 and '25, respectively. As we are working more and more with our friends at Majorel and seeing much more precisely the asset, there might have some upside to the synergy we are working, and we are assessing this potentiality, and we might come back later on that point with all the development. Third point, we continue to implement AI, GenAI solution that are accelerating client growth and internal efficiency. As we speak, more than 300 AI projects are in progress and in clients' base today. I'm sure you have seen in the meantime that we developed new partnership with digital platform, of course, Kore.ai, from which we just delivered a press release some weeks and some days ago. And we got a prize also from the Globee 2024 Golden Bridge Awards for our AI-driven solutions that streamline back office business process for client notably in India. What is interesting, beyond the high-tech part, we are all, as you know, moving on the high touch. We have 69 countries as we speak that have received Great Place certification, covering 97% of the group company. And lastly, there are some change in the governance. Mr. Moulay Hafid Elalamy has been appointed as Lead Independent Director replacing Mr. Thomas, who decided to step down after nearly 7 years on the Board of Directors. Next slide, please. So what are the results? They are solid, and they are led by accelerating growth and increased free cash flow. We do believe that this is a solid set of results in line with the annual objective. Of course, the growth as reported is 28.2% year-on-year, which is beyond EUR 5 billion. The pro forma growth in H1 is now year-on-year, 1.7% like-for-like, with a significant acceleration in Q2 plus 2.4%. We are on track to achieve our financial objective in 2024. As far as margin is concerned, our pro forma recurring EBITDA margin is up by 10 basis points versus pro forma last year, versus H1 2023 and even 20 basis points at constant exchange rate. Moreover, we have been able to deliver close to EUR 450 million cash flow, up 45% versus last year. So we are quite confident that the net debt-to-EBITDA ratio will be below 2x at the end of this year. And lastly, in terms of capital return beyond the dividend, we have been able to bought back shares for EUR 117 million in H1 2024. There are the first major points that I wanted to point out in this first half. Let's -- next side. What can we tell about the performance of -- that we have achieved in this first half, whether it's growth, profitability and cash generation? In terms of growth, Specialized Services continue to expand at a [ huge ] pace. We are going to see that, but we are speaking of double-digit, 12% growth in this area. We still continue to benefit from a resilient and diversified client portfolio, whether it's by geography, by vertical or by product. And we start to see the first line of volume recovery in tech and retail, notably in U.S. We have seen ongoing solid dynamic in financial service and in automotive, which is quite brand new for us. And we continue to see a strong demand for offshore service, especially from India to serve the U.S. market. Let's move now on to profitability and cash generation. Of course, we start to see the first effect of cost synergy from the integration of Majorel, which are limited in each one, not a surprise, but they are going to be significantly improved in the second part of the year as the months will go by. We have a positive mix effect on margin coming notably from Specialized Services, and we continue to invest in operations. We are going to see in much more detail the discipline that we followed in CapEx and working capital that helps to deliver the good cash flow figure. On the headwind side, we have been, of course, impacted by the FX movement in Latin America, notably in Mexico and Colombia, where the currency has gone up versus euro and dollar, and we continue to have transformation and development costs all along the first half. And finally, we had an impact of implementation costs on net free cash flow of EUR 25 million. I'll come back later on that. Before we move to the figure, I just wanted to show and to have a quick, I would say, to cover 2 main -- among the 300 AI project, to cover 2 specific case study that we thought that was interesting. Next slide, please. This is successful proof of concept for Teleperformance innovation. There are many of them, but we saw that these 2 are interesting. It goes from one side, and I'll come back in detail. This is driving augmented volume and client penetration, for the other sides, the increasing productivity and client stickiness. Let's come to the first case study where TP AI solution deployed for a U.K.-based digital bank has been able to grow volume and client penetration. So the idea was to support farming and business development with AI. So what we did, we did, of course, consulting to understand what was the need and the specificity of this client first to understand what was behind. And we have been able to develop AI solutions, mainly, we call it TP GenAI, which is a tool that helps to summarize the story of the -- question of the clients, the classification on the organization of the demand that also bring some reconsideration -- automatic response generation and improve quality management. This is a knowledge-based solution that we are developing as -- in a lot of our clients using TP GenAI. What are the impact, finally? We start with the first TP solution, which we have called TP Simulation in 2022, and we implement TP GenAI in 2024. And at the end of the day, for TP, for Teleperformance, we moved from 230 people in 2022 to more than 1,000 in 2024. So it means that GenAI is helping to get market share. If we move to the second case study, which is a little different, which is appealing to an American Internet domain registrar and web hosting. The idea was to increase productivity and client stickiness. All of that was just to automate all the quality auditing process with what we call TP Interact. The idea was to automate 100% of the interaction, to build scorecard for each people and to generate reports globally for this company. And at the end of the day, this was -- the idea was to build a predictive model to see what's happening in this case. So what has been the result? The result has been increase in first call resolution. We had 26 lower repetition. We had an 8-point improvement in Net Promoter Score. And for TP, at the end of the day, we have been able to grow by 50% in 2024 versus 2023. So as a whole, what we see today is that GenAI and AI is not absolutely an enemy for TP. Absolutely not. It's all absolutely the opposite. It helps to generate business, to increase stickiness, to increase productivity and increase revenue. Next slide, please. So let's move now to the first half results to get a much more precise figure. So when you look first, the results are -- the sales figure are beyond EUR 5 billion for the first time, and we have been able to grow by 28.2%, and the pro forma growth is 1.7% as I told you. Just to be very precise, this 1.7% is including 10 basis points for positive inflation this time, which is limited, but was not totally forecasted. The EBITDA is approaching the EUR 1 billion. But more interestingly, EBITA figure is EUR 703 million, growing by 10 basis points versus last year and even 20 on a pro forma basis. Just to be clear, this EUR 703 million is not including the EUR 36 million that have been spent to generate synergies that will occur much more in the second part of the year. The operating profit growing by 13%, at EUR 503 million, so net profit by 7.3%. And we just, for the first time, we thought it was interesting just to unlock and to show what is the adjusted net profit without amortization of goodwill and without the cost of synergy that has been implemented. Here, you see that the growth is 26%. Next slide, please. What happened in H1? Of course, we start with the figure of last year, EUR 3.9 billion. We had Majorel. And for this EUR 5,028 billion, there is a currency effect, which is roughly limited, EUR 35 million net. In fact, it's made of positive figure, Colombian pesos, Mexican pesos and sterling, which has been reduced by the Egyptian [ reyal ], Turkish lira and also the Norwegian krone and the Indian rupee. So at the end of the day, the currency effect is limited to EUR 35 million. And we have been able, on this base to generate EUR 83 million, the 1.7% pro forma growth that I just mentioned a minute ago. Let's move to the next slide to show how looks the year. You remember that last year, we had a decelerating growth from 11% in Q1, 6% in Q2, 4% in Q3 and 1% in Q4. We are now able to start to see the rebound and the momentum should accelerate in H2 2024. Of course, this 2% growth in Q2 needs a lot of credibility to our guidance, to 2% to 4% so that is enhanced for the full year. Of course, we have to continue to deliver the growth and it's not going to be exploding, but we are absolutely confirming the growth that we have announced for 2% to 4%, meaning a higher growth in H2. Next slide, please. What has come from this growth in the first half? Not surprisingly, it's coming from Specialized Services, mostly EUR 80 million and mostly LanguageLine Solutions. I'll come back in a minute to that. And the cost savings is roughly flat. In fact, it's made up 2 different evolution. We have the EMEA APAC growing at 2%, EUR 41 million; while the Americas, including Philippines and India, which are reducing by EUR 37 million, mostly due to the impact of the offshore. Next slide, please. What makes the difference for TP? What makes the difference for TP is this slide. As you can see, there is not a big change, but again, I wanted to stress that again, TP is by far the most diversified company in this business. This is true geographically between Americas, EMEA and Specialized Services across the world. This is true by vertical. And here the distribution of the different verticals that have been addressed, that are addressed by the group across the geography and across area. And I mean, it's also true by product. Of course, we should care that it's 54% of the business, but they are still specialized, there are trust and safety, there are back office, there are sales, there are technical support. So when you balance all these different aspects, whether geography, vertical and product, you see that TP is probably the most diversified company of the sector and is able to swallow any headwinds. Next slide, please. So let's move now to the EBITDA by activity. So just to be clear, I just wanted to precise the figure there. So again, when I'm putting the pro forma in front of 2024, it's a pro forma in terms of accounting standard, it's a pro forma in terms of, I would say, scope. And it is not a pro forma of the organization. That explains mostly the reason why the holding are moving differently, because Majorel add a different allocation of profit between region and holding, so it's limit, of course, the comparison, but this is a way you cannot avoid it. So when you look at the figures, Specialized Services for which there is no impact of Majorel is growing dramatically and coming back to a level of profit that was -- we lived in the past, more than 30%. And the Core Service has decreased a little, mainly due to the fixed in LatAm, to a lesser extent to the cost of integration, which are different from the cost of synergy. Cost of integration of Majorel is mainly the license that you are obliged to make sure that everybody is going to be on the same process while having other costs and some reinforcing of some infrastructure that was needed given the size of the group. So as a word, there is very few positive impact of the synergy. We are speaking of roughly EUR 10 million that has been incurred -- that have been realized, sorry, in the first half. Next slide, please. If we move to the operating profitability, of course, the amortization of intangible assets are growing, not a surprise following the acquisition of Majorel and the amortization of the intangible asset arising from the acquisition. On the nonrecurring items, you see that the performance share plans start to decline. It's not also a surprise. It would be probably more -- it will be more in the coming quarter and coming half year because of the decrease in the stock price and the impact on the allocation on the performance share plans that have been allocated to people. While the others are climbing by -- from EUR 9 million to EUR 42 million, of which EUR 36 million are the synergy generation costs linked to the acquisition of Majorel. So at the end of the day, the operating profit is growing by closely 13%. Let's move to the next slide, please. Financial results. So earnings performance, financial result, of course, is degrading. So it's not a surprise, which I believe, it's a good result. Because when you're seeing a minute that we have had EUR 2 billion of debt for the full year -- for the full first half, sorry, at this level, so we had some costs that have increased, but we have been able to significantly improve overall ForEx gain, for FX gain, notably on some specific currency that reduce the cost of the final -- of the interest rates that have been incurred all along the year -- along the first half, sorry. Income tax, of course, there is an increase. Two points to notice here. First of all, you have the impact of the pillar 2 impact, which is linked to the new regulations that are now going to be applied for 2024 and paid in 2026. And of course, we are incurring some costs to reorganize the legal and tax structure of Majorel to make sure that we will have the most efficient, I would say, network on [indiscernible] to repatriate dividend from elsewhere to the central company, holding company. Net profit, as I told you, 7.4% on published term and 25.9% on adjusted net profit wise. Next slide, please. Just a word about cash flow. As you see, the cash flow is growing by 29%. I just wanted to remind you that this 29% are after EUR 25 million of cost, of cash out linked to the synergy, linked to Majorel. And so without this amount, we would have had -- we would have reached EUR 600 million. The change in working capital is roughly flat while the net capital expenditure is decreasing either in volume, either in rate versus sales. It's not by chance. Again, you have 2 main in fact -- 2 main impacts, sorry. The first one being the use of -- the site of Majorel, the site optimization that we have used to -- we have tried to use as maximum as we can. And secondly, we start to harvest the decision that we took 3 years ago in increasing cloudification of the infrastructure of TP or virtual desktop. That is growing -- that has changed, I would say, CapEx to OpEx and reduced the level of CapEx. We do believe that in the long run, the level of CapEx will be around 2% for the full year. Next slide, please. So why when you look at the financial structure, the story is simple? You have roughly free cash flow after I would say, cost linked to Majorel including synergy of EUR 450 million, of which EUR 350 million has been given back to shareholders either through dividend and through share buyback. So at the end of the day, the net debt is decreased by EUR 100 million, and we are absolutely convinced that we will be below 2x net debt-to-EBITDA on a full year basis, and we will get or maintain our credit rating of BBB as we have today with no change. Next slide. I'm not going to comment very much on the balance sheet because there are a few things to tell versus the end of this -- versus the end of last time. Next slide. And I'm going to be much more precise -- next slide, please. On 2024 outlook, we confirm that we will be between 2% and 4% growth for this like-for-like growth in 2024. We see an accelerated momentum in H2 2024, of course, with easier basis of comparison and increased new business. We see, again, margin growing by 10 to 20 basis points on a pro forma basis. Why? Because you have the seasonality effects that you know as always and the acceleration of the synergy in H2 2024. We do believe that we are going to have a sustained increase in net free cash flow. We will continue to complete our 2023 share buyback program for which there are still EUR 80 million remaining and focus on returning capital while deleveraging. And we confirm our net debt-to-EBITDA ratio at the end of the year of 2x. So that is the end of my presentation, and I am ready for taking all the questions you might have.

[Operator Instructions] Our first question today is coming from Suhasini Varanasi calling from Goldman Sachs.

Two please. Can you maybe talk about the ramp-up of new contract wins that you expect will benefit the growth in second half of the year? Should we expect the benefit to accelerate evenly through 3Q and 4Q? Or is it going to be more 4Q weighted? The second question is on the synergy generation cost, I think, about EUR 35 million, EUR 36 million that you booked in 1H. Is it right that you booked it in the holding company costs -- holding company line item? And how should we think about that number for second half of this year and for 2025, please?

About the growth, it's difficult to tell. Of course, depends a lot of the volumes that people are going to give us, because it's always something that we don't know. What we see is, of course, you understood that there is a base of comparison which is easing. Of course, we are waiting for the -- specifically for -- also health care in Q4, but this is not written today in terms of -- we are seeing Q3 to be honest. Today, we are seeing growth in Q3. We still need to see what's going to happen in Q4. But this is equally between Q3 and Q4, and there are still things that we don't know. As far as synergy is concerned, we do believe that at the end of the day, you remember that we have announced last March, a cost of synergy around EUR 50 million for the full year. This is based on what we know. Clearly, this figure is going to be confirmed. And of course, there will be synergy that will be significantly beyond this figure. This is without taking account any additional thinking or view that we might make on different topics. But roughly, we do believe that the cost of synergy will be around EUR 50 million this year. And this is not always, I would say, booked in a holding company. It's at a different level. So this is not in holding only. So again, EUR 50 million roughly of cost synergy. Synergy will be above -- significantly above this amount. And we will see whether we can make additional decision in the second part of the year we are looking for.

Our next question will be coming from Remi Grenu from Morgan Stanley.

Yes. The first question is on the guidance itself. So you're guiding for 2% to 4%. You said the base is easing, you expect some ramp-up in contracts. So the first question is on whether -- why you've not decided to slightly increase the lower end of the guidance. What concerns you that you don't have the visibility to do that? That would be the first question. The second one is on the profitability of the core business. I understand the currency rationale, the currency evolution rationale, but can you maybe try to quantify its impact and elaborate whether there's -- there is any other negative factors to highlight there on why the profitability of the core business is down? And also on that, given the current FX rates, what would you expect the impact from currencies to be on the profitability of that division in the second half? And the third point is on the quite significant improvement in the profitability of Specialized Services. If you could elaborate on the drivers of that, whether it's been operating leverage, positive net pricing seems to be the case from what you're saying in the press release and positive mix effect within...

So coming to your first question of guidance. I'm going to be very clear, I'm -- we have been hit once in the last 15 years in guidance. We are very careful, but I'm convinced that we will be between 2% and 4%. So I don't want to make any -- to take any risk, to make any chance of changing. So there is no reason to change that. We'll see whether we will do that and if we do that in Q3, but this is -- there is no reason to increase the guidance. And people will understand. As far as profitability on Core Service is concerned, 2 or 3 things. First of all, there is a significant hit coming from the FX in LatAm. And we have been able to secure significantly more the second part of the year following the [ bleed ] that happened in Mexican pesos following the election of the new president last May, and that was welcome. And we hope that we will be able to be in a better situation for the second part of the year. So I'm not going to give you a precise figure, but this is helping dramatically the story. On top of that, there are some costs associated to integration. As I told you, I took this example of the license when you want that -- everybody wants to have the same systems that you have across the groups, you have to pay some license for a whole group like Majorel that was significantly more important than was expected. For Specialized Service, you remember that part of the story came from last year that the first half, notably in LanguageLine was not at levels that we were used to, even if it was significantly at a good level. So LanguageLine came back on the level that used to be delivering. And I strongly believe that in the second part of the year, we will continue to deliver roughly the same figures that what we have delivered the last year in the second part of the year. So globally, Specialized Services is going to have a good year, whether it's growth or whether it's in margin. Of course, the leverage -- the operational leverage and in fact, if you add the business on the same level of cost, it help. So upon the wall, we are seeing a reasonable increase in Specialized Services, too. That's what I can tell you today.

We now move to Laurent Gelebart, calling from BNP Exane.

Two questions on my side. Can you hear me?

Yes.

Yes, 2 questions on my side. The first one relates to your CapEx spending in H1. It was very limited at 1.7% of sales. Do you expect it to be in the same corridor in H2? That's the first question. And for the second one, in your Core Services EBIT margin, is there some [ stat ] that are nonrecurring? Because you are mentioning license, for instance, for the...

No. Today, what I'm telling that when you move from a company from -- when you have EUR 2 billion in terms of business, of course, you're obliged to reinforce some stuff, including the license, but there are other costs that are going to be recurring. So that's clear, that this is something that is clear, and I just wanted to be safe. As far as CapEx is concerned, traditionally, we have always a little more CapEx in the second part of the year. But I do believe that at the end of the day, we should be around 2% on a full year basis. But clearly, we are benefiting from what we have done over the last 3 or 4 years that are significantly improving each year, what we call the cloudification of our system. And of course, you are moving, the hardware is less important, you have less stuff, but you are paying some license on top of that, but you are avoiding to buy hardware. You are -- and in the meantime, we are less using -- we are needing less site because we have site with Majorel. And the growth in site is coming from Asia, India and to a lesser extent, Philippines. So it's where we are going to put new sites if needed or new extension of site. Of course, they are still refurbishing, but the 2% seems to be reasonable as we speak today.

The next question is coming from Carl Raynsford of Berenberg.

Olivier, can you hear me okay?

Yes. I can hear you.