Earnings Call: Q3 2020

Oct 27, 2020

Good afternoon, and welcome to the Alten Conference on the Turnover for the Third Quarter twenty twenty. I'm going to give the floor to Bruno Benonier, the Deputy General Manager, over to you. Yes, good afternoon. Good afternoon, everybody. Thank you for attending the conference organized by Alton for the publication of our activity at the end of the third quarter twenty twenty. Hopefully, you have received the press release that I just received by email. As we said last month, when we published our semester accounts, the recovery after lockdown in Europe is quite heterogeneous, but it's very weak. We cannot talk about any recovery, but it's very progressive. There's a lack of visibility in sectors like automotive and aeronautics sectors that are still strongly impacted. The activity at the third quarter was slightly higher than Q2, and we expected an improvement for the third quarter. At the September, the turnover at the September is 1.7646. It's declining by 8.9% compared to September. It was it is declining. In France, the activity has declined by 18.2% and outside 1.6%. Acquisitions, which have contributed up to 54,400,000.0 have made it possible to have a positive contribution to the overall contribution up to 2.5%. The exchange rate over the first nine months of the year has slightly penalized the activity by 0.15. On like for like basis, at constant scope and exchange rate, the activity is declining by 11.3%, 17.9% in France and 6.9% outside France. As I said, the end of the lockdown has not made it possible to resume normal activities far from it, whatever the sectors are considered. And there's a lack of visibility for most of our customers at the third quarter, the activity declining by 18.4% like in Q2, 27% in France, 12.4% at international. And on a like for like basis, the activity is declining by 19.4%. This year, we have forced employees to go on holidays and therefore they have done it and it is it accounts for one point of activity, meaning that otherwise our negative growth would have been undermined by more than one point, which does not change anything about the activity of the group. The activity rate has recovered, moving from 77% during Q2 at 84% during the third quarter, which is much under the 92% rate. At the September, it is 84% versus 91.8% last year at the same period of time. So the furlough has been maintained when possible in many European countries, mostly France and Germany. All geographical areas included the staff, which was 13% in furlough, has been reduced to 8% during the third quarter, mostly thanks to the fact that employees have gone on holidays. Consequently, while our staff has had continued to grow till the February, we were about 33,000 engineers. Since March, the it has been reduced progressively. At the December, we there were 32,750 engineers. At the September 2020, Alton has 34,000 employees, including 30,000 engineers. Outside acquisitions, the engineers would have been 29,600 which is 2,690 less people at the international level. The situation is very different. So we are going to start talking about France. The activity in France, the activity has been strongly penalized during the third quarter, minus 26 points is because of the automotive sector and the aeronautics sector. In the automotive sector, which is 14% of the turnover, it has declined by 33% in France and 40% during the third quarter, which is slightly better than during the second quarter, which was minus 45%. The aeronautics, 22%, declining by 30%, less 50% in Q3, which is less than Q2. We see the same thing in Germany when we talk about it. Aeronautics, civil aeronautics is the only sector which is decreasing between Q2 and Q3. Energy in France, thanks to the nuclear industry, is doing well. Same thing for the rail and naval life sciences and telecommunications. The problem is mostly focused on the automotive and the aeronautics sector in France, but everywhere in the world. At the international level, the activity is also being affected by the crisis in a different way. The activity is only declining by 6.2 in cumulated data and 14% during the third quarter. As a consequence, where the in some regions where the automotive and the aeronautics sector are very strong, the decline has been stronger. In North America, The U. S, which account for 85% of the North American sector, the automotive, 19% of the turnover, oil and gas, 15%, and even the tertiary finance where we have consulting activities, 29%, they've been strongly impacted during Q2, minus 30%, and there was no recovery during the third quarter. So we have minus 20% for the quarter. Canada is resisting better, 15 growth, thanks to the tertiary sector on more traditional activities in the banking sector, plus 20% for a sector which accounts for 45% of the turnover telecommunications, plus 30% of growth, it accounts for 20% of the turnover and life sciences, plus 90%, the sector accounts for 10% of the Canadian turnover. To the exception of the aeronautics, which accounts for 13% of the turnover, which is declining by 10%, all sectors are growing. In Germany, the activity has declined by 22%. This has increased during Q3. As you can see in the appendixes that have been sent to you, hopefully, you have received that the decline is 34% in the third quarter. The activity has not resumed in the automotive sector. It's still minus 35. The sector of activity accounts for 45% of the activity of the country. And the aeronautics has strongly declined since it was 40% during Q2, and now it's almost 60% at the third quarter, which is minus 30% in the year to date. So the automotive and the aeronautics sector account for 60% of the German turnover, but their decline rate is so high that the German performance is an issue. The other sectors, energy, life silences, tertiary finances, they are growing by 20%. In Scandinavia, the activity on a like for like basis is declining by 18%. In Finland, the activity is declining by 8%. Since the good sector has declined as well in Sweden, the activity has been reduced by 20% on a like for like basis. The automotive and the heavyweight sector is declining by more than 40%. The industry and telecommunication sectors, which account for 10% of the turnover, are declining by 14%. In Sweden, 50% of the turnover is declining. It's strong decline, and it does not compensate for the growth experienced by other sectors of activity. In Spain, the activity has only declined by 4%. All sectors are growing to the exception of the defense and security sectors. In Spain, Airbus defense and space are part of that sector. That's why it's minus 17%. It accounts for 20% of the turnover. And the automotive sector, we're not very much present. It only accounts for 3% of the turnover. And the rate is what we see everywhere else, which is minus 40%. All the other sectors are strongly growing. In The Benelux, the activity is slightly declining, minus 3%. In Belgium, it's 6.5 because of the tertiary sector in The Netherlands, the opposite. The activity is growing by 3% to the exception of electronics and semiconductors, which could seem to be surprising. They account for 25% of the turnover. All sectors are growing. In the Asia Pacific, the scope has continued to grow. The growth of the area is driven by India, where the local activity has continued to develop EUR 30,000,000 of turnover for the local Indian market. It's a 10% growth, notably in the sectors of semiconductors, electronics and the semi tertiary sector. China, 20,000,000 of turnover at the September is declining by 9% because of the automotive sector, but the activity has recovered in China during the third quarter, including in the automotive sector and in a stronger manner than anywhere else. In Italy, the activity has had slowed down 8%, but in Q3, it has recovered. To the exception of telecommunications, all sectors are growing, including the automotive sector, which is growing by 5% and accounts for 10% of the Italian turnover in The UK. A very dynamic strength to the first quarter has stopped brutally. We have declined at minus 23% and a sharp drop during the third quarter for the aeronautics and the automotive sectors. Same thing, they're strongly declining during Q2 and even more so during Q3, even though other sectors are growing. Now when we look at the activity per sector in a vertical manner, Overall, on a year for on a like for like basis, the automotive and the aeronautics sector are still the dark point, but the other sectors are declining, the exception of the rail, the naval and life sciences. So very briefly, one word on the sectors of activity that we're working in the automotive, 17.3% of the turnover is declining by 2836% on Q3, minus 40% in Q2 to the exception of here in Italy, all customers are declining plus Daimler, which is stable. The activity in the automotive sector should be resuming progressively, but we do not anticipate any real recovery before spring or summer twenty twenty one. The rail and naval still growing 4.7% of the turnover. The crisis has slowed down the activity in Q2, but has resumed in Q3. The aerospace, 12.8% of the turnover has declined by 38% with a strong decline during Q2, minus 38%, percent, and it has been amplified minus 50% in Q3 at Airbus more particularly. So this is the only sector which keeps declining between Q2 and Q3. Many projects have been canceled and we have no visibility about when the activity is going to resume, but it will probably be long time from now. No. We only have a decline for defense and security, which are declining by seven impacted during the second quarter, which was at minus 13%. The activity has slightly recovered in Q3, and it should speed up because budgets have not been reduced. Energy, 12% of the turnover, growing by 7%. In Energy, we have oil and gas, which had recovered accounts for 5.5 of turnover, but it's impacted by the crude oil price. So it is declining by 10% in Q3. The nuclear industry is growing by 16% with nice prospects. Energy equipments progressing by 7%. In Life Sciences, 8.6% of the turnover, the growth is 8%. The pharmaceutical industry is growing and also medical equipment, but not so much. We believe that the health environment is going to lead to a recovery. Other industries, they account for 5.6% of turnover, they're all declining. We thought they would resume and recover quicker. Telecommunications are slightly declining, minus 2.5, but the activity is resuming. The five gs should sustain the activity in 2021. The electronics and multimedia activity is still declining by 15% because of the fact that projects at Amadeus have been halted. We had many consultants there. Finance, tertiary account for 20% of the turnover. It's a slight decline, minus 3% because of the retail and services activity. The banking and finance insurance business is resisting quite well. Hopefully, I've given you a comprehensive overview of our activity at the September. I've tried to be very concise because I think you have another conference behind. A few words about the external growth. We have had other acquisitions at the international level with a German company specialized in engineering consultancy, working mostly in the automotive sector, but also with some references. The turnover is EUR 19,000,000, and we've taken 10%. And the option is to increase by 2023. And we have transferred two companies that were not strategic, one in China in the automotive sector because we thought that the activity was not promising. It was a EUR 6,000,000 turnover company and 160 consultants, and a French company specialized in an activity that we had developed for a few telecommunication operators. So we found a partner and we've transferred the activity to that partner. And if we need to do, we will subcontract if necessary. It was an CHF 8,000,000 turnover company with 300 technicians. So in some sectors, we do have we don't have any visibility. Hopefully, the second wave will not slow down the recovery. In June, we had anticipated a decrease rate that would be similar to the second quarter. It's been confirmed during the third quarter. And in fact, it should be the same thing for the last quarter. So we believe, as far as prospects are concerned, that the turnover should decline by 13% in 2020. Now if I may, I'm going to give the floor to participants so they can ask questions. Now, you have a question, please dial 0 and then +1 01 on your keyboard. Now we're going to wait so people can ask questions. There are no questions at this stage. If you have any questions, please dial 01. Now one question from Alexandre Plou from CCLC Market Solutions. Good afternoon. Can you hear me? Yes. Very well. Yes. Good afternoon, Bruno. I have two questions. I would like to come back to the decrease of the growth. I heard 36% of decline in the automotive sector and 28% for the aeronautics at the group level. We're talking about the negative growth. Now in terms of cumulated data, the automotive sector is minus 28% and the aeronautics is minus 28% as well at the group level. Okay. So that was the first question. Second question regarding the difficulties in Germany. You said that in the automotive sector and the aeronautics, you were not seeing any recovery before summer twenty twenty one. Do you think that's something that could be spread to other regions than France in regions less exposed to those automotive sectors? For example, like a recovery in Italy that would be slower as well. How do you see the first two the February 2021? Are you talking about the automotive sector in particular or generally speaking, for the automotive sector, okay, the possibility to see Italy being affected and in a more general way, how the German situation could spread over other regions. Well, what we think that in Germany, the sector of activity has been strongly affected because they were strongly dependent on the automotive sector and the aeronautics sector. So we should not think in terms of geographical area, but rather in terms of sectors of activity. In fact, what we see that there is a correlation of one between countries with the strongest decrease with an exception, which is Italy, where the automotive sector is not doing so bad. I have no explanations for that. I don't know why at CSE we're growing. There's still a high level of activity. We are working on the same sectors where we are working somewhere else, and the budgets have been reduced. So to the exception of FCA, which is a positive exception, all the other automotive accounts, with exception of them, are declining. But in the same order of magnitude, 30%, 40% over the past few quarters. So as long as the automotive sector is not recovering in Germany, but we have started some type of diversification, but we are on smaller sectors. Even if there will be other developments that we have not looked for yet because we had a strong demand in the automotive sector. In Germany, these are those two big sectors that are being affected. So as long as the automotive sector does not recover, we are not going to see any positive growth rates in Germany. Otherwise, we'd have to wait till the end of next year, then we will benefit from base effect. But what we're looking at, we're looking at the sequential growth from one quarter to the other in order to be able to identify the change of the curve, but we haven't seen anything like that so far in the automotive sector. And one last question about acquisitions. I did not hear. The German you said something about the German company. Are you talking about another acquisition in Germany? I wanted to talk about a German company. Well, it's a company where we only hold 70%. The turnover is EUR 19,000,000 for 2020. The EBIT is higher than five, which is very good for Germany And about 200 consultants are working for that company. So you're still the flagship of the group? Yes, absolutely. That's it. Thank you. Thank you. Have a nice evening. Next question from Gregory Ramirez. Yes, good afternoon. Bruno, I had a question regarding the cost management. Well, we have more negative growth than what was expected. So, of course, the activity rate is starting again. Furlough, you said that people were taking their holidays. Could you please tell us about what could be anticipated in terms of percentage of the payroll that is on the furlough? How can we tackle with 2021 with almost no visibility and the trend from what I understand being slower during the first semester than what was expected. Now as far as cost management is concerned, we do reduce as much as possible even if for the premises, we have some commitments on longer periods of time than the ones that we need to adjust. Furlough, we still have a furlough employment, and it will continue in 2021 in France, in Germany and in The UK. I don't know if we are going to continue in Spain because we don't have many people left. Q3, we have 8% of furlough activity and between 5% to 6% at the group level for Q4. This is the result of the resumption of activities. People are getting out of the furlough and also attrition of the staff. Since we have less employees, we have less furlough. Proportionally, our structural cost, everything that is downstream, the gross margin are higher. We have very, very low visibility during the 2021. There's no need to do the better calculations, but we've given some recommendations to reduce costs. We are revisiting and looking at transformation projects, but the lack of turnover is the reason why results are strongly penalized because we're losing in terms of margin and the inter contract rates are bearing upon So we have a reduction of the inter contract rates. It is a progressive one, but when we look at the end of the year, it's quite encouraging. We will have three hard points left, one in Germany in the North, three painful points because the Airbus activity has collapsed, of course, in Toulouse. But hopefully, we'll come back to the standard inter contract rates at the beginning of 2021. And in France, the Nice region with Amadeus and in Nantes with Airbus. So it's very much focused. And in a surprising manner, people are still resigning. So progressively, we see the headcount being reduced in those areas, which are complicated areas to manage. So at this stage, there's not much left to say about 2021 because we have almost no visibility and we haven't started any simulation yet. So the good news, if I understand, in Toulouse, the good news is to find new projects for consultants. Yes. We've managed to find new projects to the exception of the aeronautics sector, but there is a reduction of the inter contract rate, which is due to the fact that some people are resigning. Since the beginning of the year, we've lost 1,450 people in France on a like for like basis. It's huge. It's almost 10% of the headcount of the engineers since the beginning of the year. Thank you. Next question from Stefan Frohnke from Exane BNP Paribas. Yes. Good evening, Bruno. I had two questions. The first one is about the acquisition strategy. I think you've mentioned that you wanted to add 1,500 engineers by the end of the year in the acquisitions. We've seen that there was an acquisition in Germany. Do you still intend to add acquisitions for adding up to 1,500 people by the end of the year? Yes, we still have the same objective in terms of headcount. We have acquired a little company in Germany. There are other companies where we've signed LOIs and we are in the due diligence stage. It doesn't mean that they will be acquired necessarily, but I'm hoping that we'll manage to keep that objective because the companies that are in the due diligence stage, one of them has more than 1,000 employees. I cannot talk about it because we're still in the LOI. But hopefully, we will close that deal. And if we do, we'll close by the end of the year. And 1,500, 1,200, does that include the people are going to leave with the transfers or is it a net figure? It's a net figure. Okay? Second question, about the fourth quarter, you said there was no visibility for 2021 and waiting for an improvement during the fourth quarter. With the new health trends in France and the rest of the world, do you think it's going to bring a little decline, maybe not for the turnover in Q3, but as far as the forecast for Q4 are concerned? For the last two weeks, we've seen an increase of the number of bids and consulting processes, not only in France, but a little bit everywhere in all sectors to the exception of the automotive and the aeronautics sectors. So it's quite encouraging since it is confirming the fact that at the last quarter, we should start seeing the activity recover and we should see an increase of the activity. Now we don't know what will be the new health measures and we don't know whether they are going to have an impact on the activity or not. But great share of our commercial activity today is still done by a video conference. Many customers don't want to have any physical meetings. So if we don't go back to strict lockdowns, we should be able to continue our activity if customers are still there. And if they don't anticipate any reduction of their own activities. Because today, we do see customers with different budgets, and they decide to use their budget in a very partial way. When we negotiate the RFQs, people have no visibility about the budget in 2021. So we do manage on a daily basis. We're lucky enough to be in a business whereby the decision taking at the customers are quite quick. And so we can assess very quickly how the activity is going to evolve. You said that over the past two weeks, what you were seeing that in fact, you're closing deals basically. Okay. Very clear. Thank you. Thank you, Bruno. Last question from Laurent D'Orr from Kepler Cheuvreux. There's one technical point between the acquisitions and the transfers. Are we going to have some consolidations? Everything was taken from the Q3. Second point, the policy in terms of headcount. Could you please remind us the of the number of engineers that you've lost during the third quarter? And for the next six months, do you intend to see a reduction of the headcount? Or is it going to be reversed at one point? And the last point, are you starting to be able to compare with the second quarter of next year and to come back to an organic growth during the 2021? Or is it too early to decide? So answering the third question first, it will give you some answers for the fourth question. Now regarding the headcount, indeed, we've lost in fact, we've gained during the first quarter of twenty twenty one first quarter of twenty twenty one hundred and fifteen people, which is not much in light of the size of the group, but we were in a positive turn. We're talking about the number of engineers because we only talk about engineers, the only ones to work. Now Q2 second quarter, we've lost 1,500 people, six twenty in France and the rest of it at the international level, but we've lost again twelve eighty five people during the third quarter, seven twenty in France and five sixty five at the international level. We are going to lose again in the fourth quarter necessarily a net figure. So for the second quarter twenty twenty one to be higher than the 2020, in view of the negative growth, we will have to have a growth that is going to offset the negative growth during two consecutive quarters. So my feeling is that we're not going to reverse the negative organic growth during the second quarter of next year unless we have a resumption of activity as early as the 2021. And then we compensate at the end of the first quarter the for the losses that we would have experienced during the last two quarters. The problem is that since our inter contract rate is very high, we're losing mostly engineers who are not working. And it is relieving the cost base, but it is not affecting the turnover. So we need to look at the use rates and look at the equivalent of full time equivalent that is being invoiced. But I think that before the 2021. And if the curve is being reversed, I don't think that we are going to move to a positive growth. Now the question about the headcounts, will the headcount continue to decline? It might be surprising to you, but we have started to hire again. Of course, it is not being reflected in the figures because more people are leaving than coming in. But we had stopped any recruitments. But since there are new projects in sectors of activities that I have mentioned where the activity has resumed, when we don't find the skills, we need to recruit. So we have approved new recruitments specific to projects, and we do anticipate that we will continue to have a loss of the headcount till the end of the 2021, but the recruitment process is starting again. No. This is echoing my last comment. Since we do have significant pockets with high inter contract rates, now if people resign, you know, or if they agree to leave, it's better to let the headcount being reduced. Now as far as the acquisitions and the transfers are concerned, the first company that was a Japanese Chinese company because the front office is in Japan with 400 consultants. We have consolidated it starting 04/01/2020. The acquisition was done at the beginning of the year. Then we did acquire a company in Korea that was not long ago. The turnover is EUR 21,000,000. They do software development. We have not consolidated yet. Hopefully, we'll be able to consolidate it starting January 1, but their tools and their skills in terms of management are under development. The company that we have acquired the activity because it was an asset deal with the front office in The U. S. And a development base in Ukraine. That was a small company, 7,500,000 of turnover last year, and they have reduced their activity because of the crisis. We have consolidated it on October 1, which is not usual. Usually, we do it the first month of a given quarter, but it was an asset deal, so we had no choice. And the German company that we just acquired will not be consolidated before 01/01/2021. And the companies that we have transferred, the Chinese company, we did transfer it on 07/01/2020. The French company, we did transfer it on 10/01/2020. We took it out. Okay. Thank you, Bruno. You're welcome. Have a nice evening. No further questions. Any questions, please dial 01 on your keyboard. Okay. No more questions? Well, thank you very much. Thank you to all of you for attending that conference call. If you have any more questions, feel free to send me an email and I will answer it. I wish you a very nice evening, and we will meet again in January for the publication of the yearly accounts. Have a nice evening. Thank you. Bye