Earnings Call: H1 2019

Jul 25, 2019

Ladies and gentlemen, welcome to the Teleperformance Conference Call. I now hand over to Mr. Olivia Rigari, Group Chief Executive Officer in charge of finance. Sir, please go ahead. Good evening, everyone, and good morning for those who are based in U. S. Thank you for your participation to the webcast. We are together tonight to comment on the clip performance group resulted at the end of June 2019, which I've joined this release. You may have received the press release at the closing of the stock market. Today. As usual, my presentation will be followed by a Q And A session, and I will present each one result teleper from teleperformance in English and slide are available through the webcast and online on corporate website. A replay of the webcast will be available online tomorrow. Connection details are included in the H1 press release. Today's presentation contains forward looking statements that address or expect your future performance and that by their nature and risk matters that are uncertain, this expectation are subject to a number of factors and uncertainties that could cause actual results to differ naturally from those described in the forward looking statement. For a detailed description of this factor, and uncertainty, please refer to the section of risk factor in our registration document available on our website, corporate website. Okay. Let's start now with, with the key factor and the key figure for the 1st 6 months of the the 1st year 2019, the 1st half year twenty nineteen, and we'll go deeper later on, activity region by region and finish with the 2019 final outlook. That is the 1st, figure of, the first m the major figure of the first half. I do believe that the first half hour was very solid in all of our business, in term of revenue, profitability, and cash. And that's probably the main fact the main point that I just want you to get in mind is that we are good in sales, margin and cash. And I'm very happy to announce that. We benefited from more of our dynamism market, and we took also advantage the benefit of the strategies that we have implemented for the beginning of the year, especially, through the deployment of digital solution that we are working on for now some months. I do believe that this is a key factor for differentiation that partly explain the strong growth of our business in the first half and the acceleration of this growth between Q1 and Q2. We're also pleased with a very, significant increase in the EBITDA, sorry, which is beyond an accounting effect of IFRS 16 on which I'll come back in a minute, and, and shows that we are progressing also in term of profit. At the same time, and I'll come back also later on that. We continue to strengthen our financial structure with operating cash flow, which grew at the same pace as our business, illustrating the management disciplines that we are demonstrating since some years. So if you look now at this figure, we reported a 23.9% growth on the reported base, which a 10.4% like for like growth in for the first half. More and thirdly, this has been achieved with acceleration in Q2. The Q2 like for like growth was 10.9%. The increase in EBITDA margin is significant from 12 from 11.9 last year to 12.8. Out of this 12.8 you have to remember. You have to note that 50 basis points are coming from the implementation of the new rules, that's on which I'll come back in later on, which is IFRS 16. But despite that, we have grown by 40 basis points in H1, on a pro form a basis. The due to the earning per share grew by close to 19%. Even if it has been reduced, this growth has been reduced by the as the impact of the IFRS 16. I'll come back later on that too, but showing a significant growth, anyway. And we have been able to develop a good cash flow, which is growing to €172,000,000 at the end of the first half, of this year. So we are very pleased with this result. They are, showing a a significant growth, a significant improvement of profitability, and a better cash 2. What has to be mentioned too also is, in the meantime, a lot of stuff happened during the 1st half. We had, a significant increase in number of workstation, we increased our operational footprint by close to 13,000 working station in each one. Notably, for new site and for expanded site. As you can see on this slide, it's also in US and but not only, in this country, in a lot of country, in Colombia, Portugal, Portugal, Greece, Greece, Turkey, India, and we developed a we did expanded site also across the world. I just wanted to highlight one point, which is important. Last year for the full year, we increased the workstation by 12,000 amount. So 12,012,000, workstation for the full year. Here, I know it's part particular, and I'm not sure we'll do that. We dub we'll double that this year, but we increase our number of workstation by 12,000 in the first half, so significantly higher than last year. Of course, we are, for the first time, the consolidation of, the accented activities that we bought last year in, H2 2018. We have the worldwide development of the Deeps digital solution. I remember you, Deeps' digital integration business solution which now represent 20% of our revenue, which is interesting to notice, and the digitization of the world of business of client portfolio continue to grow, which is now 20% of our 22% sorry, of our group revenue versus 'nineteen at the end of last year and and 13, years ago. So developing deeps, the the the developing new station 1st, 1st consolidation of Intelinate, new, development of Deeps and development of digitalization of client. Of course, We have 2 other issues. 1 is the new IFRS 16, which is, which is, norms that we are obliged to to follow. The second one being the new presentation by linguistic region, following the acquisition of this business. First half results. So that's as a result. Just before we, we, we, I command the result. I just want to, to explain you what we have been obliged to do. We have, following the new standard of the FS 16 which obliges to, recognize an asset on the balance sheet, linked to the rents that we are going to have all along the year, all along the different years, but also different regions that we could have and expense and record the lease expense between to between interest and debt repayment. That is exactly the the rule that we have to follow. What has the impact on the P and L? We have some we have put that on the line, on the right side of the, of the sky. To make it simple, to make it simple, you have to understand that, we grew or, we are obliged to to have an impact, which is 10,000,000 more EBIT EBITA minus 20,000,000 in financial charges, which is less net of tax. It's minus 7 percent minus 7,000,000, sorry, at at net result, level. So that is a global story of, of the impact of the IFRS 16 on our first half figures this year. Of course, there is another stuff, which is important to mention, is the fact that our debt, net debt grew by 688,000,000 following this following this new disclosure. That's, somewhere, not a financial debt, if I may say. But it's it's a new depth that has been, that have been recorded in front of the assets that we are going to amortize, or during the life of the, of these friends. Come back to the figure. So 23.9 percent like for like gross reported gross, 10.4% in, in growth. EBITDA is now 12.8, 12.3 if you take out the 50 basis point coming from the from the IFRS 16, and, net profit that is growing by, 22,000,000 to 145,000,000 less 7,000,000, including the the the addition of 7,000,000 from the FS 16. Let's move on to understand what is behind that. First of all, the growth, there is a positive currency effect, which is mainly dollar, which is, above 48,000,000, dollar, but there are some negative figure, but you have a positive effect on the dollar and translation effect on the dollar. That is 48,000,000 for of of the FX, which is 48 versus last year. You have the growth of 10.4% that I just mentioned a minute ago, plus to change his scope, which is, consolidation for the first time of, Intellenet X Intelenet figure. I just wanted to show that finally, if you look to figure, we are growing by a little a little less than €500,000,000 in the first half of this year. We had 207 202,070,170,000,000 last year to 2,564,000,000,000 this, this first start. I just wanted to remember that this figure for half year was roughly what we announce in 2013 2014 for the full year. More interesting is just to have a look to the diversification of our portfolio, for the first time, the telco or so called telco business is below 20% of those sales, 18% of our sales, despite the fact that they are even growing still still growing in the first half that we are growing significantly more in other sector and we, took out 2 specific we pointed out 2 specific vertical, 1 in transportation and logistic, and the other one is media and at and 10th, 10 months, that are beyond 4% this, this, on this first half. I do believe this will continue all along the year. As far as, digital economy, we have, as I told you, just before, moved dramatically over the last 5 years from 5 percent of the sales to, 19. This growth is continuing in the first half and even accelerating because we are 22% as we speak for the first Again, this growth will continue all over the year. Let's move to a more detail explanation region by region. And I just wanted to stay a minute here just to tell how we are happy with the figures that are shown here. I'm sure you remember most of you that we had exceptional performance in, Ibero Latam and in CMEA. This in Q1, this is continuing. We continue to deliver very good figures 16 or 13 point or 14 or 14.14%. This is, clearly exceptional What was the question or the main questions that you had was the fact that the English speaking market and the specialized division, specialized service division were less growing. In fact, they are growing back. They are they are back to a normative growth. The Ewap world is now growing at 6.1% knowing that and all of you know that that we have a bad or difficult momentum in UK. So that means that the growth of the North American business is higher than the the one that is shown here. And you have the specialized service that is back to growth again at the normative level. So that's the reason why we're now accelerating or growth despite the comps which were difficult to beat in Q2. I just wanted to stay to remember, to remember you this point. So not only we have the 2 engines that we are doing well in the first half that continue to do well, but the 2 other engines that could have been, I would say, it could have been considered as a, as a weaker, are now back on track and and and that generates this growth that we are seeing today. If we move to margin, we have the same impact. I just wanted to say that as far as the affairs is concerned, you have an impact of 50 basis points in all the core service division. While it's 30 basis points only in specialized service division, it's because of the nature of the rents that are significantly higher for service in Dibs and for our specialized service. But if you take that out, you see that wherever you go, you have an increase, except in the overall LatAm. And it's not a surprise. It's not a surprise. Out of the 12,000 new workstation, half of them have been, ramped in, Iberia all at times that in Portugal, Colombia, Brazil, Peru, and, and Mexico. That was the reason of this potential, which is more reduction of margin, excluding IFRS 16, while being at a very high level, still being at very high level. But you see that the English world is back on track. You see that the continental Europe continued to grow, in each one. And the India and Middle East also take advantage of the consolidation, the 1st consolidation of the ex internet business. Finally, I know there was a question about the sustainability of the March of the specialized division, and especially on LLS. Hope this figure will show you that despite the 0, 30 basis point coming from, from the IFRS 16 that we are able to increase the margin either in TLS and ISO in LLS. Let's go back in more detail in each in each division. So, English world, so like for like growth accelerated sharply in q 2 to 6.1. We continue to recover in North America with e tailing health care, transportation, service, and logistics, while we have a decline in revenue in UK, with a global gloomy environment, which is difficult to predict. In Asia, we have a growth, mainly sustained by Malaysia with a recent opening of a second multilingual hub in Penang. Consequently, the margin was increased to increase by 100 basis points so we are happy with that. You know that the second part of the year is key, but it shows that we are back on track in, in, in the work world. If we move to Iberia LATAM, I would say, little to say is that, I'm already that I've not said to that I've said before. 16% in Q1, 60% on H1, again, everything is doing it growing significantly in, in Iberia or LatAm, maybe a little less Spain, but it's a small business, but Colombia, Mexico, Brazil, Portugal, everywhere, we are growing significantly. And this is going to continue all of us, all of us a year I don't know at what pace exactly but significantly again in, in this, in this division. Margin remain high. As I told you, We have new major sites that are going to open that are starting to happen in Q1, in Q1, in Q2, and will continue to happen in Q3. That has a small impact on the, on the margin, on the net margin. But, we are gaining significant market share in Latin America and again, it will continue. Back on track, Europe, Europe, 14% growth, whether it's Q2 or Q1, of course, you have the fast growing, market leader, which is, Greece, Eastern Europe, Turkey's, and he's back on track also. The French people, the French speaking market continue to perform better, and we are going to be making money, including, including the Offshore Business, in France in the French speaking market. As a consequence also, the margin is increasing 200 basis points. If you strip out the IFRS effect, we are at 150 basis points for the 1st, for the first half. Again, we are on good on track. Be the list, it's, as far as sales are concerned, it's difficult to to to explain that because what you see here, it's only TIP India as a previous that is growing. So, the growth will probably con will reduce all over the year until we reach we pass over the the fourth quarter within Telenet because, here, you have only the TPA India business that's open new site. Last year in Q1 and developed it ramped in Q1 and Q2 and partially in Q3. So the growth will reduce the like for like growth of Tipping here will reduce over the year, but the over the as the year goes by, but the the full result are perfectly online with what we had in time. Intelented business ex intelligent business is also growing at double digit, as mentioned, as a at schedule, when we make the acquisition. Specialized Service, significantly acceleration in, in, in Q2, 6.3% versus 3.7% in the first quarter. Back on track for our language line solution, back on track also on TLS, which is developing itself, especially in value added service in UK. You remember it was an issue last year and people were, questioning about the way we computed that. But so we are now benefiting from that, and we are, I do believe this will continue all over the year. In terms of margin, I mentioned it earlier on, We have very good margin. And again, we took advantage of the development of the video in, LLS, and the added value service in TLS UK, savings this margin, of which 30 basis points are coming from, IFRS 16. So if we take out if we look now to the other part of the, of the P and L, little to say you have, Only one thing to well, I just want to mention is about the others that is 5,000,000 this year versus 3 last year. It's the end of the cost of, rebranding across the group, you know, that we changed our branding last September. We did the alphabet, half of the group, last year. And now it's over. It has been finished in, in end of April, sorry, and it is the last course that we are going to incur in the in this area. If we move now to the level of the other part of the P and L financial result. Of course, you have 21,000,000 here. Coming from ZFS 16. That was not existing last year. So if you take out, if you strip out this 21,000,000, you have a, you compare the 19,000,000 of last year at 26. Out of the 26, you have less. In fact, we have less foreign exchange gains that we had last year. So that means that the financial charge, cost of interest, is exactly the same than last year. It is 20,000,000 versus 'nineteen, while we have 800,000,000 more debt. It shows that we have been able to manage the cost of the debt at a good level. About that effective tax rate, there is an increase, it's mac it's mechanic. It's, and, and I believe we will stay there around 30% by the end of the year. The fact that we now have, Intelynet and all the Indian business that is coming, in off, in off scope. Remember that the corporate tax rate in India is 36, that you should take out all the, if you take in account really, effective tax rates that mean avoiding, taking account of things that are non deductible, you are much more closer from 45. That's the reason why we have such an increase in the effective tax rate. So net profit, 145, as I mentioned earlier, on 18% growth. Not only we're happy with the growth, not only we're happy with, result, but we are happy also with cash flow. So cash flow has grown significantly, to 107 free cash flow to 172,000,000 coming from 156 while in the meantime, we have been able to limit the change in working capital to 13,000,000. And I just want you to have a look to the 13,000,000 versus the increase of the sales that we had over the, of the first half. I mentioned earlier on that we had roughly half a billion of increase of sales, that generates only 13,000,000 needs in term of working capital. I think it's, something that I just wanted to highlight showing that we are, having, a clear, and on the cash disbursement. As far as capital expenditure are concerned, we stay at the same level of last year, but as I said, are growing, we are now over the $100,000,000 to $100,000,001 to be precise. Little to say about the balance sheet, I just put it because it's interesting. You see the debt increasing because the impact of the AFS 16, but there are little to say and the level of the dollar is roughly comparable from, from the end of last year at the closing date to, this year, this half year. I just wanted to give you the information. More interesting is to show what happened and, on the cash. And I strongly believe we are going to be able to deliver quickly this business. If you look precisely, if you take out the IFS impact is 688,000,000. You see that the debt is flat. While we have been able to pay the dividend, 111,000,000, to make some financial investment, especially in minority interest and in shares, and to pay 100,000,000, of CapEx. So the second part of the year will be generating cash only for repaying debt. So I do believe it's going to show a significant decrease in the 2nd part of the year. Not only we have a low average cost of debt, I hope to be below 1.7 this at the end of the year. But the free cash flow generation is such that we believe that we will be, around 2 times EBITDA, excluding IFRS impact. On net debt by the end of this year. Of course, we have been able to, to, to, to get the confirmation of our BBB minus rating and a stable outlook despite the fact that we, bought internet last year. As a consequence, we, we, we, we, we change our guidance, and we say that general like for like for growth would be at least 8.5%. And we know an increase of at least 20 basis points in the EBITA margin before non wrecking item. I know most of you are going to tell me you are shy. You should be better because you have done 40 basis points in the first half, it should be better in the second half. So different reason for which we believe that we are going to have a good year, but, I'm not sure we will make 40 basis points in the 2nd part of the year. First of all, the impact of the dollar will reduce in the H2. Secondly, you will have less impact of Intellenet because will be only 3 months versus 6 months, even the fact that we consolidated Intellect in this, in the last quarter. And lastly, I do believe that this spite improvements, the rate of the pace for improvement of CMEA would be probably decreasing, but reducing. So that is the reason why we believe that we should be at least at 20 basis point and no more at, no more. And lastly, we believe that we are going to deliver a strong net free cash flow to repay the debt. So that's what I just wanted to explain you, of course, available for any questions that you might have. Thank And our first question comes from the line of Bilal Aziz of UBS. Please go ahead. Your line is open. Good evening, everyone. And three quick questions from my side, please. Firstly, can you give a bit more detail around the growth splits between LLS and TLS, please? And secondly, in TLS, you clearly flag a small pickup due to value add services in the UK contract. Can you perhaps talk a bit more about the pipeline there? We know there's a few material contracts coming up for tender and perhaps the role you're hoping to play within those And lastly, within Intellinix, can you perhaps give us a organic number as if it was consolidated, appreciate it isn't now, but just for modeling purposes, we get towards the 3rd quarter. Thank you very much. About the growth between LLS and TLS, TELS is growing faster than LLS, not not a little more. LLS is around 6 a little more than 6% and TELS is above that. Closer to 10. The pipeline on TLS, it's too early to tell. I know everybody is waiting for a different contract. I don't believe we will have a clear view until, hope, August, but frankly, it's not beyond the, it's beyond my control, beyond our control. You know, this government sometimes take time to make decision. They ask you more stuff. And, but I hope to be able to, to, to announce something at least to to start, to announce something in Q3. Remember, especially on the U. S. Contract that we are that you have in mind, there are two steps. The first step is to be able to compete, and there is a second step to compete after. So as far as pipeline entails is concerned, don't dream. It won't have an impact on 2019 figures. If we get something, it would be in 2020. For Intellin heads, the growth is beyond between 10 and, over 10 close to, close to 11% growth. Which is, which is in line with what we are seeing everywhere. Our next question comes from the line of Edward Stanley of Morgan Stanley. Evening. I've got a few. You said that the group level that's, those 40 base point increase from IFRS 16. And you also said Samir would have been 150 basis points rather than 200 because of IFRS 16. Can you just run through each of the divisions and say what the IFRS 16 benefit was so we can try to model more clearly it's 50 in each division. Sometimes it's 45, sometimes it's 50. Let's take 50. The only thing is, in division, that is below its specialized service, 30 basis points. So it's roughly exactly the same between 4550. I must confess it's difficult to predict, and you will, you will, we will give you the information for the last time. At the end of this year, but after, we'll stay with the IFRS 16. It's difficult to predict because it's very volatile. It depends a lot when you open, when you open, I would say, sun center, how long is the rent where is the actualization rate, which is different in Egypt than in U. S. But today, it's 50, 50 basis points everywhere in all division, except in a specialized service is 30 basis points. Excellent. Thank you. That's very clear. And on On the multilingual hubs, can you break out how much of a portion of revenue it is for the entire group? And what organic growth rate those multilingual hubs are growing at? I'm not sure I'm able to answer you like that. It's clear that multilingual hubs are are pushing the growth either in CMEA in, in, in Nivial LatAm, and to a set to a certain extent also in in Penang, but it's just starting clearly, these two countries are enhancing figures that are beyond double digit you get at that point. So I've had time to tell what is exactly linked to the multilingual hub because in each country in Asia is 2 country. You have also, a local market, even if it's a smaller one, but it's growing not at the pace. So, I cannot answer you like that, but keep in mind that in both in both two countries, Portugal and Greece and Lisbon, we are growing at higher speed than the, the neighborhood. Any other question? It's over. Doesn't work? Or not sure. Not sure to understand whether there are still questions that that wanted to be raised or are are we over? Lebon collection, shampoo, and Peugeot Pre, Jeanandelier, the bike, if you wanna say, the, the, let's let's make 2, 2 minutes of break and, just to, to solve the technical issue and we'll come back, in 2 minutes. Excuse me. Okay. Thank you very much for your patience, ladies and gentlemen. We will now resume the call and go back to ours. Speaker light and to our Q and A session. And we were taking questions from Ed Stanley of Morgan Stanley. So we'll return to that now. That you might have? I think we got most of the way through the multilingual hub question. The only other question, I guess, is on, the synergies from IntelliNet, which you couldn't quantify when you acquired it, but I was wondering whether you have any update on that. No, there is no update. I'm sure you have seen that we are in the process of developing a digital day, we are going to host a digital day mid October in Santa Clara in California. And probably this topic will be, will be covered at that time. Excellent. Thank you very much. Sorry for this interruption. I'm really sorry as well. Other question? Thank you. Our next question comes from the line of Patrick Gerson of Societe Generale. Please go ahead. Your line is now open. Yes, good evening, Olivia. I have two questions. First question is on the IBS could you, let's say elaborate a bit on the growth of this specific segment? We see that the revenue was 1,000,000 in Q2. It was 1,000,000 in Q1. Does the sequential growth of something like 15% means something. And the second question is on free cash flow. There is a Bloomberg report mentioning that you said you expect at least 1,000,000 free cash flow over for the full year. Could you confirm that? And could you elaborate about this 330 1,000,000 compared to the 172,000,000 of the first half, please? On the cash flow, I have been questioned by Bloomberg on that point. And what I just what I was just saying that he wanted to have a fee specific figure on cash flow for the full year, and I said it was difficult to predict, especially in the light of, of the, of the working capital, movements that could occur at the, at the end of, of the year. But I believe we are going to deliver at least this figure in 2019. For the Deeps figure, the like for like growth is difficult to explain because what you have in this, in the Middle East, Indian Middle East, you have 2 stuff. You have a significant part of the internal business that is mainly India, either domestic and international. And you have on top of that, the Indian business that was, conducted by the EWA before. He has a like for like growth. He's only the EWA figure. Of course, because the Indian business of internet was not part of the group last year. So the like for like growth as limited, as limited, the, I would say, value because, because it depends a lot of, the time that we opened when we developed Tippy India last year. And there was a lot of, development of Tippy India last year, but they are going to to reduce or as the years go by. More interestingly, is that the total level of, of, of this division, which is to, 255, including most of the business of Intelenet, but not all because some part of the business of Intelenet has been either reclassified in Europe with Poland, either reclassified in U. S. With, the U. S. Business of Intellanet, is already classified in the bill. This has, this is shown in, is this described in, in page in page 28 of the presentation that tried to explain you how the different division are now set up. So the like for like growth of Middle East India has limited the limited the, limited value until we pass over the fourth quarter where we will have the full, the full division in place. My question was actually more on the IBS, the last call in table, page 12, where you have 1,000,000 of revenue for H1 and 1,000,000 for Q2 this year. So both this year, So it means that basically $235,000,000 for the 1st quarter, $272,000,000 for the 2nd quarter, so strong growth It was about this growth that I was asking if it was something on No. I get your point. Sorry, sorry, to have not been, to have not been catch your question. The question is that in fact, here, you have, here, you have in this division, you have, of course, a significant part of the in, Indian and Middle East, and all the business that are done I would say, digital across the cost service division. And as you have understood, there are some growth coming from the digital client to make simple. And that's where you are, what you are seeing in this, in this, in this division. That's a year ago by us. You will have all the information coming on stream. Because we don't have 2018 this way. But, clearly, we are growing, we are growing in this division in this current with what I just told about digitalization of our client base. Thank you. Our next question comes from the line of Lorn Gillibald of Exane. Please go ahead. Your line is now open. Good evening, Odessey. I have two questions. So the first one is regarding organic growth in Q2. Could you share a gift color or is a mix between existing and new clients? That's the first question. 2nd question regards a specialized services improvement in H1 EBIT margin. So it's 160 bps ex IFRS 16. And I would like to understand if it is due to cancellation or if it is due to underlying improvement of TLS and LLS businesses. Coming to your question, it is mostly coming from, from for LLS is, of course, in terms of freight because it's only the lights, It's real. It's not translation. 2 things are stake, in fact. In LanguageLine solution, you have the growth, which is linked to the fact that we are developing more and more video, more and more business that is, happening. And you had last year, and I'm sure you remember that We had some issues last year that reduced the growth and reduced the profitability. So that has vanished. And now we are taking the full advantage of the decisions that we took and the implementation of the what we have done what we have done in Video and in developing the business. For TLS, it's a main story. The main story is a developed, of course, there are good volume, there are volume stuff, especially in UK via in the UK government, that also the ability to sell more and more added value services that are, that have good margin. So most of that is real and translation. About the organic growth, most far, far, you know, on a long term and it's true this, this first half, we are fifty-fifty between hunting and farming. But but I must say that the problem is that the farming, that the business that you go you you you you get last year. So it's very quick, very quick farming. So, a significant part of that is coming from the fact that we are growing with new client on digital business. Yes. And that have been, that have been granted recently. Thank 1 on your telephone keypad? First of all, first of all, I want to apologize for this, technical issue, and I'm, I'm really, sorry about that. It's beyond my control. Secondly, I want to tell you how pleased we are with this, 1st half result, either I had told you in terms of activity, margin and cash. And, I wish you for those who are going to see you a good holiday. Thank you. Bye bye.