Earnings Call: Q1 2021

Apr 30, 2021

Hello, and welcome to the CP1 2021 Results Conference Call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the presentation. This can be done I will now hand you over to your host, Gotye Lhouette, Chairman and CEO to begin today's conference. Thank you. Good morning, ladies and gentlemen, and thank you for attending Spi's conference call for our Q1 results. Q1 has confirmed the good momentum of our activities with return to positive organic growth even compared to 2019 and an EBITA margin at pre COVID-nineteen level. This is a solid performance, which confirms the vitality of our market and the relevance of our positioning as an enabler of the energy transition and the digital transformation. To illustrate this positioning, I will start with a few contract examples. On Slide 3, we're talking about bespoke IT solution for COVID-nineteen vaccination centers in France, and we're happy to participate to the fight against the COVID-nineteen through the deployment of an IT solution for vaccination centers. This is an installation which can be installed within 5 days, and we provide technical IT support during the vaccination campaign and obviously dismantling at the end. We are part of a consortium awarded with a public medical procurement contract, and this solution has already been implemented at the Clermont Ferrand vaccination center. On Slide 4, as you know, we enabled the digital transformation. And in this example, it is a rollout of an optic fiber telecom network in Schwett in Germany. Optic fiber in Germany is a promising market that we have already started to address, and we recently geared up our capabilities, thanks to acquisition, as you will see later in this presentation today. In this example, our customer is a local Stadwerke, so the municipal utility of Schwed. We've been working for them for the past 25 years, initially on gas and electricity networks and today on Optic Fiber. Obviously, our good knowledge of the area was definitely a strong competitive edge to gain these contracts. On Slide 5, in the Netherlands, we enabled the energy transition with the development of the Konigs Wind onshore wind farm in order to supply 65,000 households with green electricity by the end of this year. We are connecting 19 turbines to the local grid. Our services include cabling, engineering, setup of switchgears, installation of cameras, optic fiber cables, control and security systems. As you see, it is very flat and it can get very windy. Moving to Slide 6. We often tell you about our strong local presence. This is the example of Moisac, a town in the southwest of France, where SP has been present for nearly a century. We started working on the electrification of the local train line in 1930. Today, we are active in public lighting, telecom infrastructure and rural electrification. We're obviously strongly involved in the local life. And for example, we are very active in youth professional insertion. We employ locally 70 people, some of them being the 3rd generation OSP employees. And now on Slide 8, moving on to the highlights of the quarter. Clearly, we have seen the confirmation of a good momentum with robust revenue trends. Q1 revenue was higher than in Q1 2020 and in Q1 2019 on an organic basis. We benefited from a strong rebound in France and a continued robust growth in Germany. Organic growth was atorabove4% in both these countries. Our Q1 EBITA margin stood at pre COVID level equal to that of Q1 2019. We have announced 2 bolt on acquisition, both in OPTIX Fiber Networks and both in Germany and Central Europe, which will considerably increase our capabilities on the strongly growing Optic Fiber local market. On the basis of this good start to the year, we do confirm our full year outlook. Now on Slide 9, moving to the financial highlights. Q1 organic revenue growth was +1.4% compared to robust Q1 2020, which was badly affected at the time by the COVID crisis. If we compare ourselves now to Q1 2019, which was a pretty good quarter, were up 1.1% on an organic basis and 2.9%, including changes in perimeter foreign exchange. Our Q1 EBITA margin was at 3.7%, up 10 basis points compared to Q1 2020 and equal to that of Q1 2019 with 3 COVID levels. Moving on Slide 10 and looking at our organic growth. Q1 2021 marks a return to positive organic growth and a continued sequential improvement on previous quarters. It confirms a good momentum already observed in Q3 and Q4 2020 with a firm business recovery following the strong impact of strict lockdowns in Q2. On Slide 11, organic growth in Q1 was driven by both France and Germany. France saw a strong rebound in revenue, up 4.3% organically. Germany and Central Europe continued to deliver a solid organic growth at 3.1%, of which 4% in Germany alone. North Western Europe was down minus 5.3% organically, against a strong comparison basis. We were at +3.6 percent in Q1 2020, and we do expect a catch up in Q2. Oil and Gas and Nuclear was down by a limited 1.2%. Comparing now with Q1 2019. Group revenue is higher by 1.1% on an organic basis and 3.2% including acquisition and disposals. So we are higher than pre COVID levels in Q1, which again illustrates the strength of our business. Germany and Central Europe is a key contributor to this performance, being higher by 4.2% organically and as much as 12.6% overall, thanks to bolt on acquisition made over the period. France, too, is higher by 1.6% organically. North Western Europe is only slightly lower, 1.9%, which puts in perspective the 2021 versus 2020 decrease. Finally, oil and gas and nuclear is over by 5.5% due to a tough context in oil and gas. And now on Slide 13, we are pleased to see the return of our usual bolt on M and A activity. We recently announced 2 acquisitions, both in Optic Fiber Networks, both in Germany and Central Europe, which is spot on in terms of our strategic priorities. The 11 cable in Germany, a specialist of FTTX projects with around 130 employees, a presence in over 10 locations and revenue of €25,000,000 in 2020. KA AM Montager in Austria, the Australian leader in telecommunication infrastructure services with over 170 people and annual revenue of €30,000,000 As I have mentioned before, the market potential in optic fiber networks in this country is considerable as they both need to catch up compared to the rest of Europe. So with this acquisition, we are very well positioned now to benefit from this growing market. Now moving to our activity by segment and starting with France on Slide 14. So France did enjoy a strong activity rebound with a 4.3 organic revenue growth. Compared to Q1 2019, revenue is higher by 1.6% on an organic basis. Following the good recovery momentum observed in the second half of last year, Growth was solid across all divisions, highlighting the vitality of our markets and the performance of our French organization. In particular, technical facilities management activities are increasingly benefiting from our innovative Smart FM 360 digital offering, and market dynamism remains unabated in telecom networks and smart Services. Moving to Slide 15, Germany and Central Europe. O and A growth was particularly strong in Germany at 4%, highlighting yet again the excellent trends driving the German market. On the buoyant energy infrastructure market, transmission and distribution services turned in another quarter of solid growth despite a harsher winter in Q1 this year. Activity levels remained high in Technical Facility Management despite the COVID-nineteen context. North Western Europe, we had a slow start in Q1, but we do expect a catch up in Q2. In the Netherlands, good trends in Infrastructure and Technical Facilities Management were offset by low demand for industry services, especially in petrochemical and by the impact of harsh weather conditions. Activity levels in the UK remained resilient given the strict COVID-nineteen restriction that did prevail for the better part of the quarter. In Belgium, revenue decreased to a hesitant building installation market, while transport, infrastructure and transmission and distribution services remained well oriented. And now for Oil and Gas and Nuclear on Slide 17. We did record a healthy activity in Nuclear Services, with revenue increased on a very low Q1 2020. As you will remember, EDF was very fast to shut down the external activity in the nuclear plant mid March last year. Now the Grand Carnac program as well as the recurring electrification activities continue to provide long term visibility. In Oil and Gas Services, it is in fact the opposite. Revenue was down against a high comparison basis as oil market environment continued to weigh on operation. Business levels are, however, showing signs and improvement in some geographies, primarily in West Africa. On Slide 18, a few words on how we value human capital, which is a top priority for Spain. We have set ourselves a gender diversity objective, which is to increase by 20 5. This should be achieved through internal promotion and external recruitments with the support of our group wide network called SoFP Ladies. In terms of recruitment, we want to recruit 2,200 people in France this year to support our growth. This is another sign of the vitality of our business. This year, again, we want to give students their 1st professional opportunity as we are looking for 600 new apprentices. And with regard to employee ownership, with 6.1% of the capital, employee funds are SPEED's largest shareholder, and we're among the top 10 companies within SBF 120 for employee shareholding. As we've mentioned many times, employee ownership is key as fee and we do intend to grow it further. And with this, I will hand over to Michel, who will give you more details on our financial performance. Thank you, Gauthier, and good morning, everyone. So I'm on Slide 20. As Gautier has already pointed out, we achieved a robust performance in an environment still very much affected by the COVID crisis. Group revenue was €1,671,000,000 of euros, up 0.2% versus Q1 2020. EBITA was €59,700,000 of euro, which was 3.7 percent of revenue, up 10 basis points compared to Q1 2020. As you can see on the right of the table, we are above Q1 2019 levels, both in terms of revenue and EBITA. And here, we have restated 2019 numbers just like 2020 numbers to include the contribution of a school maintenance activity in the UK, which was reintegrated into the continued parameter in June last year. So it's a small restatement, €10,000,000 on the revenue and limited adjustment on the restatement on the EBITA, but it gives you an accurate comparison basis. As you can see on Slide 21, the revenue bridge, On top of a 1.4% organic growth, Q1 revenue change includes a very small impact from acquisition, 0.1%, and a negative impact, minus 0.7% from the disposal of our UK mobile maintenance activities in March last year. And then negative ForEx impact, minus 0.6%, located primarily in the Oil and Gas division. Slide 22 on our Q1 EBITA at €59,700,000 So it was up 2.5% year on year, and EBITA margin was equal to that of Q1 2019. So this is a strong performance as we still have some negative impacts on the COVID-nineteen, but the underlying operational performance of the business is very good, which allows to offset those impacts. This concludes my part. And I'll now hand back to Gucci. Thank you, Michel. So moving to our outlook. Looking forward, we confirm our outlook for 2021, and we expect a strong rebound in revenue and EBITA margin, both expected very close to 2019 levels. The full year revenue to be acquired through bolt on acquisition in the order of EUR 200,000,000 a further reduction in the group's average and the dividend payout ratio at 40% of adjusted net income. And longer term, on Slide 25, as we have mentioned before, SPEAK is well positioned to benefit from upcoming European stimulus plan. The energy transition and the digital transformation are core to these plans, and we provide a large array of services that are well positioned to address the expected growth of demand in electricity, T and D and renewable projects, smart cities, building energy or innovation, the digitalization of businesses and public administration and Industry Services, notably now for the development of green hydrogen. Based on what has been announced so far, we estimate that the portion of the stimulus plan that would be directly admissible by SPIE would be €10,000,000,000 for Germany and €12,000,000,000 for France. Overall, these plans will bring additional growth to our activities, and they do reinforce our confidence in the promising future. Thank you very much for your attention. Michel and I are now available to answer your questions. And the first question comes from the line of Oscar Velma from JPMorgan. Please go ahead. Yes, good morning, Gauthier and Michel. I have three questions. The first one on guidance. As we think about your full year 2021 guidance that 2021 will be closed in 2019, if you're already running above this level in a quarter that arguably had some COVID-nineteen impacts, can you remind us if there are any positive one offs that the catch up in Q1 that falls away over the rest of the year? That's the first question. The second question on M and A. We've had some press reports in French newspaper suggesting that Speed could be looking at ENGIE's services assets. Can you comment on what your appetite is for larger M and A? And if you can't comment on that, maybe if you could just comment if you're seeing any changes in competition or pricing in France and your main competitors? And then a final a third question just on raw material price inflation. Can you comment on if you're able to pass through higher price inflation from things like copper? And if so, how much is it impacting your revenue in terms of pricing? Thank you. Well, thank you. The line was not very good. But regarding the first question on guidance, we do not have any one off in this quarter. This is, I mean, a perfectly run of the mill type of quarter. So no one off on this quarter. Regarding the question regarding ENGIE, obviously, this is a major event happening in our industry. And yes, we do hope that whomever the next shareholder will be, we do hope that it will have a positive impact on competitive environment and bringing more discipline on the margin expectations. And regarding the raw materials, well, it is still early, and we don't see a lot of impact. Usually and from our experience in the past, we're always able to pass on the increases, if any, to the customer. We have a number of indexation formulas in many contracts. And as you know, our projects are small and rotating quickly, so we are able to incorporate in our tendering exercises the most actual prices with again indexation formula. So in the past, similarly to wage inflation, which has been a question sometimes in the past also from the analyst, It is never an issue to pass on the price and it has no detrimental effect to the margin. Okay, great. Thank you very much. Thank you. The next question comes from the line of Charles Scottie from Kepler Cheuvreux. Please go ahead. Yes. Hello. Thanks for taking my question. The first one on the guidance, sorry to come back on this topic, but you are facing some headwinds like lockdowns, curfews, weak oil and gas business and temporary headwinds in Benadux. And despite that, you are running ahead of your pre crisis levels. So what prevents you today from raising your sales guidance? That's my first question. My second question, are there still some contracts where clients refuse to accept price increases? And does that are still dragging on your profitability? My third question on the Optic Fiber. Can you remind us the size of the business in France and Netherlands? And is this business still growing in the 2 countries? And what's in your view your sales potential in the German market? And finally, I do understand that you can't say anything on the ENGIE transaction, but can you tell us what kind of maximum leverage you could go in case of a platform acquisition? Thank you very much. So regarding the guidance, this is the Q1 is only a small quarter. It accounts for 15% of our results. So yes, it is a good start to the year, and we are very pleased and are really confident about our guidance. There are still uncertainties, as you have mentioned, and just a few things like some productivity issues, etcetera. So we are linked to the COVID. So quite a bit still of uncertainty in front of us. So we would prefer to confirm the guidance at this stage and leave it there. But you are right, the start of the year has been very encouraging. Contracts where customers do not accept price increase. As I said, there's quite a faster rotation of the portfolio. So it is as I said last time, there's a many issues for us nowadays is a case where we have to quarantine the site because of suspected cases. It is a smaller disruption to the projection, and it is hard to claim this from the customer. So this is a sort of events we have to deal with at the moment more than anything in this regard. Regarding the market of optical fiber in France, we're talking I mean, what we are doing in optic Fiber is between EUR 150,000,000 to EUR 200,000,000 in France at the moment. In the Netherlands, it is closer to EUR 50,000,000, EUR 60,000,000. It is still growing in Netherlands. It is starting growing in France. And by far, the deployment is not over at all. And it is only starting in Germany, so there's a big potential where as we have seen on the chart, the gap between France and Germany is really considerable. So we are looking now with the stock position, we will be doing roughly EUR 100,000,000 in this market on top of what we're already doing, which was in the range of 2,030. But we expect from this margin. And regarding the last question, it is related to I mean, we have no idea really about what is really for sale. So very vague understanding of the bright topic. And clearly, we have no comment at all to make regarding any kind of leverage. We're very far from such consideration. Thank you very much. Thank you. The next question comes from the line of James Winkler from Jefferies. Please go ahead. Hey, thanks guys. A lot of mine has been answered, but wondering if you could let us know what UK growth was through the quarter? And then secondly, just curious if you could talk about any I believe there's new services, new devices you talked about, one with ultraviolet light disinfection, for example. But if there's new services you're seeing a lot of pent up demand for or strong demand for end markets which are starting to reopen and return to work that you'd like to highlight? Thanks. Well, starting with the second part, we well, clearly, as our areas where we were busy in the past, which are not doing a lot at the moment, as an example, we mentioned in the past, the large contract we have with the Elbe Philharmonie in Hamburg for the next 20 years. So the base contract, which is maintaining the building, agrometry, access control and whatever, this is still fire 16. This is working so well, still paid for the base contract. But the additional revenue we derive usually from all the performances and the special features we have to frame for when the Opera is working. Well, if we don't get anything at the moment. So clearly, yes, I think there will be some pent up demand from our customers and from the public as well to restart. So this is a simple example. It is same for hospitality and we have customers among hotels, etcetera. So not obviously spending right now. And as I mentioned, we're also active in the Aeronautics and working for Lufthansa, Air France, Airbus, etcetera. This is fairly slow right now. So we can expect some catch up later, who knows, maybe second half of the year or later. But yes, there should be some catch up in this area. And regarding the UK growth, we had a single digit, mid single digit decrease in the first half, also due as you will remember it is mainly due as you will remember from the comparison with 2020, where in the Q1, we still had our mobile business. Apart from that, the organic clearly, it was more stable in Q1 compared to Q1 last year. Okay. Thank you. Thank you. The next question comes from the line of Nicolas de Bois from Stifel. Please go ahead. Good morning. Thank you very much for taking my questions. The first one would be on your Slide 25 on the infrastructure plan and spending. Do you have an update on where exactly you're expecting the tenders to start and the first impact on revenue, any idea? Then on the second one, thinking of the more Q1 exit rate in terms of cost base evolution, we've had the Q1 margin, but thinking of how you're going into Q2 and forward, are you, let's say, cautious with recruitments or are you trying to find as much qualified employees as possible because you see that pent up demand and how we should think about that? Will you wait for the investment? Or will you invest ahead of actually getting the revenue from either the green deal or other pent up demand? And then on third question would be on the M and A pipeline. Where is actually the focus for you right now for the rest of the year? I mean, we've seen your 2 acquisition in optic fiber in a very attractive market. And so where is your attention turning now for the rest of the year? Is it still more Germany? Or do you see things to do in France? And which segment, for example? Thank you very much. Well, regarding the timing of tenders, Mo, it is early to say. As we said, we have not based our plan for 2021 with a lot of impact from the stimulus plans yet. And we think that we start to see the tenders probably towards Q2 or Q3 of this year. Regarding the cost base evolution, as we have mentioned in the presentation, for instance, in France, we plan to recruit more than 2,000 people this year. And I mean, if we are looking at our plans in Germany or elsewhere, we'd have not dissimilar figures. So clearly, we were gearing up for growth, but in line with what we see in our portfolio. So in our type of business, we have some good view on what the customers plan to do and then we try to adapt not too much in advance because then it would cost money to have people lying idle, but we try to adapt with the type of growth and in the sectors which where we anticipate growth. So we're not investing ahead, but we're trying to really keep pace and have some anticipate the growth because it takes time also to recruit people. And regarding it is generally not too big an issue. We are an attractive employer. We have a so it is decentralized and so it is decentralized and with a lot of proximity to our customers, people are really able to see what's going to happen in the months too. Regarding M and A, in terms of geographies, the focus remains in Germany and Central Europe. So we have more deals cooking in this part of our business right now. We want to further develop the speed scope. So we're looking at targets in the area of HVAC. We're looking at targets in the area of infrastructure and also in the area of ICT. This area, we're also investigating in other countries like in Belgium, we're also looking at targets in optic fiber. In France, we are looking at targets in the industry. So clearly, we do not plan to grow by acquisition only in Germany, but this it does remain the main focus in terms of geography. Great. Thank you very much. Sorry. Yes. Very likely, the next deals we're going to announce will be in that part of the business. Thank you very much for answers. Thank you. The next question comes from the line of Peter Testa from 1 Investment. Please go ahead. Hi, thanks for taking my questions. I wanted to understand a little bit on some of the puts and takes in margins still being felt in Q1. For example, PPE that might not be able to be passed on in areas which were lagging, maybe some labor utilization may not have been ideal. Are there any of these factors still present in Q1? Or are they still to work through? No. Generally now all the PPEs, etcetera, won't they have been passed on to the customers or they've been included in the new bids. So it is not a major issue nowadays. So it is just as we don't mention to the customers the cost of safety issues, it's a terrible point, it is the same now, it has become part of the run of the mill business. So no significant issues there. Then what as I said, what we are facing more in terms of small disruption here and there is that sometimes the site has to be shut off and because of suspected cases, that's what the issue, but we have to deal with that. And it does happen now and again across the geographies. And anything to say on labor utilization or labor structure, the extent to which in some of the areas are lagging and maybe some people not used as well or they've been reabsorbed across the business? And if you look at your labor structure in general between the use of internal people, subcontractors and temps and so on, are there any areas which are still yet to normalize? No. We are back to normal, let's say, in terms of the split between our own workforce, the subcontractors and the temporary workers, which would vary from one country to the other due to legislation or also due the type of activity we do, but being some of it being more seasonal than others. So we are back to the usual structure, which is roughly we have from the productive workforce, we have about 15 to 25 10s and 10 to 15 subcontractors. So this is a range and we're back to that. We still have a number of people in short term employment in Kosarbeit or so much parcel or furlough, but it has reduced considerably and we're talking at group level, we're talking probably in the range of EUR 250,000,000. Right. Okay. And then the last question was just on if you look at the building segment as part of the speed and the activity level there, how it might be changing or how some of the other factors such as Green Deal related spending may be also starting to improve that segment of speed? So I'm not sure I understood the question. Just the customer exposure in the building area, that part of your business to the extent you would say that is growing in line or less than in line with the rest of the group still opportunity and maybe you're starting to see more customer activity to bring that part of the business up to group growth? Well, the facilities part, so the technical facility management, this is working very well. In all our countries, we have growth in Germany, we have growth in France, and we are doing well in Belgium or in the Netherlands. It's and now what we tend to expect is that if towards the second half of the year when there will be more people coming back to the offices, it should be benefiting to us in terms of adaptation, changes of the layouts, etcetera. So we're quite positive about our Tech FM business. Regarding installations, both the markets, as we said, is a bit tougher in Belgium right now for a number of reasons, but we see it more difficult at the moment. And elsewhere has been resisting fairly well and we had a good order intake in France or in the UK. So we're doing okay. Great. Thank you very much. Thanks for the question, Hans. Thank you. There are currently no further questions in the queue. There are no further questions submitted, so apologies. There is just one question that's submitted now, and that comes from the line of Eric Lemarie from Graham Garnier. Please go ahead. Yes. Thank you. Sorry about that. I just got one following. You mentioned the organic growth in the UK in Q1. Could you do the same for the Netherlands and Belgium? Maybe give us an idea of the ongoing growth in Q1. And second question, could you remind us the breakdown of revenues within the North Western Europe between these three countries, Netherlands, UK and Belgium, please? Thank you. Well, for Q1, the segment average is minus roughly minus 5 and minus 5.3 as we mentioned. And UK was better, as I said, and Netherlands and Belgium, they're a bit worse. But again, Netherlands in 2020, Q1 were the plus 2% growth compared to 2019. So it's not a meltdown either. And as I said, we had half winter conditions in the Netherlands for about 2 weeks. So it did have an impact, especially because we worked quite a bit with infrastructure overhead lines. And as I said, we anticipate a catch up in Q2, so no major worries there at all. Netherlands is about 60% of the segment revenue and then Belgium and UK, they are roughly the same size, yes. Thank you. Thank you very much. Thank you. The next question comes from the line of Jan de Delonge from BNP Paribas. Please go ahead. Thanks. Good morning. Can we just have an update on M and A prices? Do you see any price inflation or new data? Thanks. Well, the recent deals we've made at our usual range multiple. And so we remain very disciplined in this regard and no major change. It's again, we remain very disciplined, but we a lot of the deals we do are on a 1 on 1 basis. So not that many are done through auctions. And we'll see it helps to keep the prices very reasonable. I can also take this opportunity to highlight that with this discipline on M and A, we have no impact on the leverage of where we'll implement it. And I think also this opportunity, although, as you know, we don't publish any balance sheet on the quarter, but at least to tell you that so far this year, the working capital and the cash collections in general continue to be very good. And also, as you know, we have a usual seasonality with the timing of certain payments, variable paid, the dividend and so on. Every year, we deleverage in H1, typically in the order of one time the EBITDA, and then we deleverage in H2 by an even greater number. So for this year, we do not anticipate the H1 deleveraging to be bigger than usual. Also, as I said, we have we'll restart M and A and we pay a dividend. So it should remain within the onetime EBITDA, so from EUR 2,400,000,000 at the end of December to EUR 3,400,000,000 at the end of June max, really at max compared to 3.6 June last year. And this despite the fact that we will have paid back most of our 2020 social charges deferred, if you remember. So we took the opportunity last year to defer social charges payment at the end of the year. So this is another sign of the excellent working capital performance we are delivering at the moment. Okay, great. Thanks for the compliment. Thank you. That was our last question for today. So I'll hand the call back to our speakers to conclude today's conference. Thank you. Well, thank you very much for your attention today and for the stress you have for St. And we are looking with confidence as this year. I think we have shown the very strong resilience of the company, and we are now back to pre COVID levels. So it is a very encouraging start to the year, and it gives us a lot of confidence to deliver on our promises for this year. Thanks a lot and have a good day. Thank you. Thank you. Thank you for joining today's call. You may now disconnect.