Earnings Call: H1 2021

Jul 28, 2021

Good evening, everyone, and good morning for those who are based in the U. S. Thank you for your participation to the webcast. I am Olivier Rigaudy, Deputy CEO and CFO of Teleperformance, and we are here together tonight to comment on the group results at the end of June 2021, that just released. You may have received the press release at the closing of the stock market. As a result, the presentation will be followed by a Q and A session. The replay of the webcast will be available online on the corporate website after the meeting. I won't read the usual regulatory disclaimer About contracts contains forward looking statements. You can find them in the press release and at the beginning of the H1 slideshow. I know that the period is busy and that many companies publish their half year results on the same day, but I believe that we stand out because we have broken a new record of growth and profitability in this first half. Now let's go through the slide, sorry. I will pass on the group overview, but you go directly to the key facts and the key figure related to the first half. But I just wanted to show you how much how wide we are, and I believe you know that. So let's go to the first half highlight. We are happy today to announce that we posted another growth record in 2021 in H1. Our organic growth was 36.8%, and that means that we have even a better Q2 than Q1 that we did in first half because it was 35.7%. Our current EBITDA increased to a level of 14%, which is above pre COVID level, of course, above last year but also above pre COVID last year, achieving 14% figure. The net profit group shared quadrupled to €255,000,000 and the net free cash flow is up by 30 more than 70% to €333,000,000 This excellent first half performance confirms a very positive trend in place since the second half of twenty twenty and far exceed and separate return Freedom Pre pandemic Growth. There are 3 main drivers supporting the H1 strong performance, and I which will explain the next in the next 6 12 months growth outlook. We continue to benefit from the accelerating market digitalization, which is a solid positive macro trend supporting our long time top line growth. This is today illustrated by sustained growth pace of business development for the group notably in Continental Europe, Continental Europe and Ibero LatAm Region. We have seen a large number of contracts with leading players in the digital and tech environment that we call e tech clients now, and they represent 36% of our revenue. We have been is actively involved since H2 2022 in support for service government for vaccination campaign, mainly in the Netherlands and in the United Kingdom guidance. Excluding this temporary support activity that might be temporary, presenting an impact of around €400,000,000 or H1 organic growth. And despite this continuing negative effect on the Visa Management business and the Hospitality and Touring sector, the group like for like growth remained at exceptional level, surpassing 20%. This is absolutely important to notice. I would like lastly, of course, we benefited in the first half from favorable prior year comparison, which impacted the global crisis global health crisis that began in March last year. I would like also to analyze the capacity of the group to accelerate and to adapt to this model. We are now in what I call an hybrid business model. That means that TP Cloud platform compass, is our system of managing people remotely, is now in place in 52 countries in Serve 32 by the end of 2020. Today, this is something that is going to last. We do believe that in the future, this is going to be a part of the hybrid model. So far, roughly 35% of our clients have asked have agreed to stay remote to work remotely, and this is something that is going to continue. More than 240,000 people employees are still working from home, and this is going to continue at least for a certain period of time. What we say so what are the key, I would say, development is clearly the fact that we continue To support the government, I mentioned that we support mainly Europe, meaning Netherlands, France, Germany and the United Kingdom in vaccination campaign, and we continue to do that. We have a strong commitment for employees. As I mentioned earlier, we are certified best employer in 60 countries as we speak, more than 90% of the group workforce. And we start to vaccinate our people across the country where we are authorized to do so. We have more than 15,000 people that we vaccinated in India, 1,000 in Dominican Republic, Philippines and Colombia. So this is exactly what we aim to do. And of course, I'm sure you remember, we have completed the acquisition of Health Advocate last June, 22nd June finally. We get the authorization to do that. So that is the first half highlights, so growth, good margin, better cash, continuing development on work at home and strong commitment to employees and support, of course, of the vaccination for some government in Continental Europe and in U. K. Let's go to the figure precisely now. I think that beyond this commercial performance, which is shown here, which is a 36% like for like growth on which I will come back, we have been able this year this quarter this half year, sorry, to deliver also a very good operational performance because we achieved this 14% like for like rate in margin, which never achieved at H1 level, and this is something that we have been able to do so for a different reason. I'll come back in a minute to that. We never achieved such a level of margin, and I do believe this is going to be unacknowledged by the market. Let's move to the understanding of the sales figure. We increased our sales by €924,000,000 in like for like. This is absolutely outstanding. Of course, a part of it is coming from the vaccination support of that service for government. I mentioned around 20% of the growth 16% of the growth, sorry, 20% is the other part. And of course, we had a favorable basis of comparison in H1, but we took advantage of the development of the digital economy, this famous support line, and we adjust for that. The like for like growth remained exceptional above 20%. We have been hit by the currency effect, mainly for the U. S. Dollar but also from some Latin American currencies that has slipped versus the euro and also the Indian rupee this year. This is what we have done. If we enter in detail in the presentation and by sector, I just wanted to highlight 2 or 3 things. First of all, in Q2, everything is growing. Everything is growing at different pace. We are going to come back to that, but every region, every sector is growing. When it comes to Core Service, the strong performances, of course, is in CMEA and Ibero LatAm. This is absolutely amazing. We are at exceptional level in CMEA but also in LatAm. We have the positive contribution from COVID-nineteen support in CMEA and EUAP because U. K. Is based is considered in the EUAP region. And on top of that, we have a growth back to growth in India significantly, as planned. And we have a significant growth in Specialized Service, mainly driven by LLS, while TLS is starting at the very, very end of the quarter of the half year, sorry, to start to grow again, but this is very, very limited. And globally, on the first half year, TLS is down versus last year, not only in sales but also in margin. If we move to margin, you will see that everything is growing too. Of course, the recurring margin rose to 14%, coming from 9% 9.5 was last year. What are the reasons of this growth? You have the operating leverage, that's for sure. You have the nonrecurring of Health Crisis Management Outlay. Of course, we are no more spending a lot of money to put people at work at home marginally, but not on top of that. We had a disciplined cost management all along this first half. This is something that we are very, very strict on, not only on CapEx, you will see that in a minute, but also on the management cost just to make sure that we will be able to deliver good margin. And of course, we have the favorable basis of comparison. Whereas the highest performance are in CMEA in India. And of course, I mentioned that back to higher than pre crisis level in H1. Let's move on region by region. First of all, EUAP, English World and Asia Pacific. So we have a satisfactory like for like growth in H1 in this market with faster gain in Q2. Clearly, we have the support of the government that we did in U. K. That helps also in the growth, even if the growth in Q2 was less important than in Q1. And in Asia, we, as a business, enjoy another period of fast growth. Although, comparative, we are less favorable in Q2 because the crisis was much more in Q1 in China last year. Profitability improvement in Philippine, notably in offshore, in U. K. And in Asia Pacific. It could have been better if we would have been in a position to hire much more people in U. S. Domestic, but as you know, the market has been, I would say, temporary, I I would hit by the consequence of the crisis. Let's move to Ibero LatAm. I would say few to say. Everything is green there, strong like for like growth, new contracts with eclient and quick and effective deployment on work on home, which was not so easy to make. The best top line performers are Colombia, nearshore operation in Mexico, Dominican Republic, El Salvador and also Portugal and Spain that have been very, very active this first half. And the margin gains are everywhere and supported by the growth in the business, notably in Spain, Mexico, Portugal and Salvador and everywhere, I would say. I would say this zone is either running I know it's the Olympic gate. It's running the marathon and the sprint in the meantime. Let's move to Continental Europe. Here is the growth is absolutely amazing because we are at 70 more than 70% like for like and in Q2, 68%. Of course, twothree of this H1 growth is coming from the fast ramp up of the service that we support for the government vaccination campaign, notably in Netherland. But there is still one sort which is significant, which is stemmed from other fast expanding segments, including the e tailing and online entertainment. And as a consequence, there is a robust improvement in margin, notably in the Netherlands, Greece and the Italian market. I just wanted to stay a minute there because for those who know the group for some years, very few would have bet on such a level of margin on H1 and even for the full year for CMEA. That was a difficult zone some years ago. Moving to India. India, we had accelerated growth in Q2. Of course, we had a very favorable favorable comparison And visavis lockdown, but this year, we have been able to develop largely a work at home solution. And frankly, we have not been hit in last April by the overcome of the pandemic resurgence. We have been able to swallow it and to support it. Margin improvement, as mentioned, of course, the margin is significantly better here because as you might remember, we have stopped low margin contracts starting Q4 last year, and now we are seeing the impact. And this is absolutely amazing. This is the highest level in terms of rate of results of the group. I do believe that the growth will be less vigorous in second half because of the basis of comparison. Let's move to Specialized Service. Acceleration of the growth here too, 36% in Q2 versus 10.1 in Q1. This is due, of course, to LLS that continue to deliver a fantastic growth, but also for the fact that TLS is back positive on Q2, even if it's still low. But this is still it helps to grow. So finally, the margins are increasing also, and we are very, very Optimist, it's probably too early to tell, but we are we hope that the 2nd part of the year will be significantly better for TLS because we are going to go through a base of comparisons that will be favorable for tourism and industry and this industry. So let's move now to the other part of the P and L. Very few things to tell. I must You probably remember that we had nonrecurring item last year that was mainly noncash linked to, of course, the performance share plan and the impairment of goodwill of Soft French Business, notably in Offshore. This year, we don't have that except that the Performance share plan is increasing given the value of the stock, but this is still non cash and has no big impact on the cash We'll come back later on that. Coming to the other parts. Net financial result is better. This is linked to a better results on FX on our hedge that has been positive versus last year. The cost of the debt is roughly the same. And the effective tax rate is now 28%. I remember you, it was last year very high because this was you had this impact of the impairment of goodwill, but without that, we were roughly in the same range of 29%, 29.5% versus this year, CHF 28.1. And lastly, we are able to deliver Net profit of €255,000,000 which is 4x than last year and close to double versus 2 years ago. More interestingly for me is the cash flow. Here, we have been able to deliver a very good performance. Of course, you have the cash flow that is after lease payment and interest paid and tax that is growing following the figures that I just showed. But on top of that, we have been able to monitor properly our working capital needs. It's only €38,000,000 increase Persuis, I remember you, €924,000,000 increase in sales over the half year, while last year, we had a positive effect that is, of course, no more existing today. So this is something positive. On top of that, we have been able to monitor Properly, our net capital expenditures that is below last year in absolute term and, of course, in relative term Because we have deployed most of our people working at home, and we have limited CapEx in new facility. We have opened only 3 new facilities this year in the first half, sorry, in 2021. So very good performance in cash flow, and this is good for the future. I'm not going to comment on the balance sheet except if there are questions later on, on that. But what I just wanted to show is what's happening to the debt. The debt is increasing, of course, because We had to pay for language health advocates, sorry, at the end of the month, but the growth is limited since further increases of the debt is limited given the fact that we had so good figures in the first half. And of course, This shows that the debt will be come down in the second half because we won't have dividend anymore in the 2nd part of the year and no acquisitions so far that are prepared. So that is the result of the first half. So what happened, here you have the capital allocation. As you can see, net CapEx is there to over the years to sustain the like for like growth. But clearly, this year, the model has changed given the work at home approach, and this is going to help us. I estimated that the CapEx will be roughly in the range of 3% of the revenue, maybe a little more, 3.2%, 3.3%. It's difficult to tell today, but clearly, we'll be significantly less than last year. M and A, of course, you know that we are targeting high value mid sized business, looking for expertise and assets and positive track record over the last year helped us to make accretive acquisition. We are looking to different file, and I'm sure you are going to ask the question. But so far, nothing has been enhanced. In terms of dividend payout, we are going to to the payout, which is classical, around 33% over the year. So what are our guidance for the full year. Of course, given this figure, we are going to increase we increased our guidance of like for like of around plus 18% versus a target of at least 12%. And we increased our EBITA margin target of more than 14.4% versus 14% before. Some of you will say this is probably conservative, maybe probably, yes, and probably this is much more the style of the company to be conservative than to be too much optimistic. But frankly, what we see is that we continue to have a dynamic business development and sustained acceleration of this digital transformation that is going to accelerate, and I'm convinced of that. Of course, statically, we are going to have lower revenue contribution in the 2nd part of the year versus last year of the Government Support Service. And we had a comparison that is difficult to beat in Q4, but this is technical. And of course, we'll have Health Advocate consolidated for the full second part of the year. But as a whole, we are reasonably optimistic for 2021 and Aiza for 2021 and on the trend for the future. For 2022, it's probably, of course, too early to announce anything in terms of guidance. But what is clear is that there will be some impact of the basis of comparison, specifically of the H1, That could have an impact on the global figure. But fundamentally, we are positive, and we are clearly, I would say, reasonably optimistic or at least confident about the next months to come. That's what I can tell you, and I'm ready to answer the questions you will probably raise. Thank you. The first question comes from the line of Antonin Baudry calling from HSBC. Yes, Olivier. Thank you very much and good evening. I have three questions. My first question is that It would be to know in the current growth, would it possible to know what is related to existing clients, the growth of existing clients and the new clients? And if I calculate correctly, your full year guidance for top line growth implies a flat revenue growth in H2 Beyond the decrease of the COVID-nineteen contracts, is there any headwinds that we have to keep in mind In H2. And my second question is about employees. Will it possible to have your view on employees' Your capacity to hire enough to fuel the demand on potential wage inflation on the will it be possible to see The pressure on your margins related to that. And last question is about your M and A strategy. Can you Explain again your M and A strategy in terms of geographies, business targeted, price spread and your capacity to self finance Acquisitions. Of course, I see that you could be interested by a big asset in India. Will it be possible for you to finance that Internally. Thank you, Olivier. Existing client or new client, I have no major change versus what we have believed in the past. This is in fact, you have to put out, of course, the COVID line for the support of the governments, which are new clients. So somewhere, it's difficult to make the analysis with this new client because this is new client, and probably this will be longer term client for the future. I'm quite convinced of that. But there is no change, so we are roughly at the same level that we were before. Headwinds in H2, no. We have no headwinds in H2. We are very, very so First of all, I have no idea what's going on with this client government clients. We have no idea, so we are very careful on that. And of course, you remember that we had a Q4 that was very, very high last year. I'm reasonably confident that we are going to deliver a good second half, but this is too early to give much more detail on that. So we will be probably We will probably have a better view by September, but frankly, there is no headwind ahead of us. About the employee attrition, the story is much more linked to U. S. But also in some countries in Europe. In U. S, you have this domestic U. S, you have the situation where people have been They get some helicopter money, and they wanted to stay home. And some people have changed their way of work, of living. And people are starting to come back to work. This is going to last until probably mid September. At that time, most of the federal, I would say, program will ended, and we will come back to a situation that is more classical. And at a time where there are some pickup in the Q4, as you can as you know, notably in U. S. Domestic. Frankly, about potential pressure on margin, we have no issues there. Either we go offshore, and I'm sure you have seen that we have been able to proven to increase our Filipino business, and as I told you, through the margin. Or either we are able to convince our domestic client, to continue to sustain the growth and to pay the people. So we will be close to $15 an hour close to everywhere to 80%, 85% by September, October in U. S. And this is not going of course, this is something that is happening. So there are some difficulties in some place, and we are not the only one to do that. That's the reason why you need to deliver a good promise to your people. But frankly, This is not so easy. It's not specific to Teleperformance. It's for the full competition and for the other sector in retail, in hotelry, in tourism and everywhere. So this is part of the job now, and we are able to manage it. So sometimes, is difficult as we do believe that in Q4, starting Q3 and Q4, the system will be over in U. S. M and A Strategy, no change. So as a result, we are going We are looking for not buying more of the same. We have no interest to buy the things that we are that we know how to do, and there is no reason to put debt and goodwill on our balance sheet on some things that we can do organically. So we are looking for something that there are Azzan, companies that are well managed with a good management, profitable and that you can enlarge the enlarge our distribution of product or services across our network. So there are different possibilities. Of course, you have understood that The world is more and more digital and that helps for us. It's important for us to be part of this story. We are looking to that. Whether it will happen or not, this is frankly something that is difficult to tell, and I'm not sure. About financing, Of course, we prefer to use debt. Given the price of the debt today, we are going to use debt. But if there is a fantastic opportunity that we cannot miss, We might ask the shareholder to join us provided and I'm sure and I can promise on that provided there will be no deletion for them. Thank you very much. The next question comes from the line of Nicolas Tabo calling from Stifel. Please go ahead. Good evening. Thank you very much for taking my question. The first question would be if you Give us the July exit rate at the end of Q2. Second question would be on the government's COVID support contract. So it seems that it was stable in Q2 versus Q1. And I was trying to understand why maybe the acceleration of the COVID vaccination did not Any changes or increase in revenue? And what are you expecting for Q3 in terms of revenue for that part of the business? And then on the rebound of the Specialized Services margin, can you give us an idea of How much is driven by LS? Is it only LS? Or are there some loss mitigation at TLS ahead of the rebound of the activity? And what's the The moving parts there. Thank you very much. By the last one, all the improved the rebound in the margin coming from LLS and then to a lower extent from our small business of receivable stuff, Alain Swain, but this is not coming from TLS, which is still doing losses in first half, of course, has not improved versus last year. We hope that this will happen in the 2nd part of the year, but depends a lot of the travel. What we see is a small pickup on the visa demand in June July, but it's too early. Government line is made of different things. And that's just for you to understand, there are, of course, first line was information line, after it was trace and track line, after it has been vaccine line. So there are different stuffs that happen in different regions. So that could last. That could last. And frankly, this is difficult to predict what is going to be the story. What we see is 2 things. 1st, we have shown through all these governments that we are serious and able to, I would say, to cope with the difficulty to answer so many issues so quickly. And that is probably something which is very important for us to have shown to a big Continental government. Of course, we were already working with the government of Her Majesty for years. So but in Continental Europe, in Netherlands, Germany, France, we have shown to this government that they can rely on us on a big stage, on a big step. And I do believe this could continue for other stuff, but this is difficult to tell. 20 days maximum because people are reacting, of course, to the situation of the pandemic. And by nature, There are ups and downs, peaks and valleys, if you see what I mean. So it's not only vaccination, but of course, vaccination is not over by far and not over in other countries on which we are looking for, there is a sanitary pad. There are other stuff that could happen. The exit date of July, I don't have it so far. What I can tell you is reasonably good so far. Great. Thank you very much. The next question comes from the line of Anvesh Agrawal calling from Morgan Stanley. Please go ahead. Just to clarify on this COVID benefit. I think in the Q1, you said that the ex COVID benefit the business is plus 26% organic. And in the first half, it's close to 20%. So that implies there is Some slowdown in the core business between Q1 and Q2. Is that the right way to interpret? Or there is some sort of one offs in there which we are missing? And then just if you can, I mean, it's obviously out in the press, the potential bid for Exaware? If you can make any preliminary comment around what would be your interest in looking into that company and how sort of it fits within I have no comment to do. On Q1 and Q2, you have to keep in mind and the COVID impact COVID line impact, you have To keep in mind that the impact of the COVID line are higher, you have to take also the reference base. We are not going down in core business between Q1 and Q2, but the size of the business of the COVID business in Q2 versus The reference is higher than it was in Q1 because in Q1 in 2020, we had some business that was still working well. So it's part of the story. This is the main story, and it's exactly The next question comes from the line of Laurent Geribard calling from Exane. Please go ahead. Good evening, Olivier. Just one question on my side regarding your full year EBITDA margin expectation that you are seeing at 14.5%. It is fairly cautious regarding what you expect in H2. And normally, H2 is higher margin than H1 by far. And on top, you get The contribution of Health Advocate, which is accretive to the group, and you get probably a restart of TRIC. So can you elaborate EBIT and your expectation for the full year EBITA margin, please? The 14.5% is looks conservative, but Today, we are not ready to be much more precise on that because we have not it's Teritoire Anconu, if I may say, for the group because we have not been at this level forever. But clearly, you're right, ASL Bouquet will have an impact. It's not a big one, but it's an impact. And of course, we hope that TRS will be back on track. So on top of that, you have the Q4 impact of the COVID line of last year, especially in Simees, that might be less good than there will be a reference that would be difficult. But clearly, clearly, we are when you start to know us, we are conservative because we This is I don't know you said that in English, but in French, I will say, Marc de Fabric. Okay. I have a follow-up question. If you had to strip out the contribution of COVID-nineteen related contracts in CMEA top line, what would have been the EBITA margin of the division? In such computation, I might make it next year, but when I will have the full picture. But clearly, the contribution of the COVID line is not very, very different from the other activities in term of margin itself. There are different model between different countries That could be different, but finally, this is, of course, positive, and I do believe that The main question will be for 2022, whether we will be able with what we have we will regain in case this line disappeared, which is something that is still questionable, but I don't know whether this pandemic will be over in 2022. But if this line disappears, what we are going to have in front of that, I'm thinking of TLS. I'm thinking of everything. But in terms of sales, it could be probably deferrable. But in terms of margin, I don't see that deferrably. Let's put it this way. Okay. And I have a last question, Olivier. Have you Explain the difference of gross margins of Ewab, for instance, with the other businesses. I mean, do you see we could be better by far. We agree on that. You have two things. You have a part of the business, especially in the first half, that has moved From the E WAP zone, notably Philippine to Latin America, notably Colombia, that didn't help. That was very true in the first quarter less true in Q2, but this is going to adjust. You have also a model which is a little different on COVID line in U. K. Versus is Europe that is not exactly at the same level. And you have this domestic business that has been hampered or when the growth has been reduced in U. S. Domestic. So all of that has an impact, but I strongly believe we should come back to a normal normative level during starting in H2 and probably in 2022, we are addressing this point very, very precisely, very firmly. We have no further questions coming through on the phone lines, so I'd like to hand the floor back over to your host for any closing remarks. Thank you. Thank you to all. So you have understood that we have done an outstanding first half. We are, as I told you, reasonably optimistic for 2021. We are engaged in a big change of digitalization acceleration of digitalization, sorry. And I'm really confident that the group will be able to catch it. Thank you to all. And let's speak later individually to some of you. Thank you. Bye bye.