Earnings Transcript for AEXAF - Q2 Fiscal Year 2024

Jean Pierre Mustier: Good morning to everybody. Thank you for joining us to discuss our Half-Year 2024 Results. On the call today will be Carlo d'Asaro Biondo, our Group COO as well as Jacques-Francois de Prest, our Group CFO. Before we start, I just want to draw your attention to the customary disclaimer that you find on this slide. Now for the agenda, I will share some key messages related to our first half 2024. Then Carlo will cover in more detail our performance by lines of business and region. And then Jacques-Francois will go over our financial statement for the half year. And then I will come back with closing remarks and we will take your questions. As far as the highlights of the semester are concerned. First, the opening of the accelerated safeguard proceedings by the Commercial Court last week marks another important step in Atos' financial restructuring process. In three words, Atos is saved. We now have an agreement with our financial creditors that secures the financing for the short and long-term and provides ample liquidity to run the company. This plan establishes strong foundation for the company's future with a total debt reduction of €3.1 billion and no debt maturing before the end of 2029. With this stronger capital structure, we target an improvement of our credit rating profile to BB by the end of 2026. So this is really the start of a new period of commercial recovery and the development for the group with reinforced focus on serving our customers through innovation and high quality of service. Second, our revenue and operating margin for the first half of 2024 are in line with the business plan we shared with you on April 29. We are investing for our future and our free cash flow for the semester reflects increased investments for customer and one-off reduction as announced of our working capital optimization. Finally, on the operational side, we have seamlessly delivered the UEFA Euro Football Club. And as you know, our teams are currently fully mobilized for the Paris Olympic and the Paralympic Games. Our commercial activity was resilient during this semester. Our success rate on contract renewal was 88%, which demonstrates the confidence of customers in Atos. Let me now give you an overview of our first half 2024 financial performance. Group revenue was €5 billion, down 2.7% organically compared with the first half 2023. Eviden revenue was affected by the general market slowdown in the Americas and by contract scope reduction in the United Kingdom. Tech Foundations revenue decreased due to lower scope of work with certain clients in America and Central Europe. Group operating margin in the first half of 2024 was €115 million, representing 2.3% of revenues compared with 3.3% in H1 2023. The group operating margin was impacted by the allocation to the business of SG&A costs, previously allocated to other expenses below the line as part of the separation project in prior year. Eviden operating margin decreased beyond the allocation of SG&A costs. The profitability was also impacted by revenue decrease and lower utilization of resources. Tech Foundations profitability improved. The business benefited from the continued execution of its transformation program. There was also a positive impact from the accelerated reduction of underperforming contract via renegotiation and improved delivery, which more than compensated the SG&A cost allocation. Group free cash flow was at minus €1.9 billion for the first half of 2024, reflecting the planned reduction of €1.3 billion of working capital optimization compared to December 31, 2023. In addition, a decision was made to prioritize client capital expenditure and R&D, which will translate into future earnings and conversely to save on restructuring costs in order to manage our cash position. This translated into higher capital expenditure for H1 2024 compared to H1 last year and to lower restructuring costs. Now I hand over to Jacques-Francois – to Carlo, sorry.

Carlo d'Asaro Biondo: Thank you, Jean Pierre, and good morning, everyone. Jacques-Francois will cover the financial elements more in details later on and I would now like to share our key business highlights. Let me change slide. Let me introduce our H1 business highlights by providing some updates on our commercial activity. First half of the year was soft for the industry in general. We had, nonetheless, in the course of the semester, several commercial successes with, in particular, four large contract renewals and two new customers. Also, a limited number of customers decided to leave us and some contract awards were delayed as some customers are waiting for the formal finalization of our financial restructuring process. In this context, we had intense customer engagement and were able to secure a contract renewal rate of 88%. As stated in this context, commercial activity was lower in the first half of 2024, with a book-to-bill ratio of 73% compared with 93% in H1 2023 as contract awards were delayed. Eviden book-to-bill was 85% in the first half of 2024 and Tech Foundations book-to-bill was 63%. I would like to highlight four illustrative deals, including renewals and wins. We signed new deals to lead to provide application services to two large customers in Europe. We have also signed a four-year renewal contract with Eurocontrol to provide mission-critical systems as well as hybrid cloud and security services. Lastly, we signed a three-year renewal contract with a U.S.-based used vehicle retailer to deliver computing, hosting and networking solutions. Those example wins illustrate our commercial strategy focused on contracts with fast implementation and on large contract renewals leveraging partners. Turning now to our revenue performance by region. As you can see, our business has well balanced geographic mix, with Northern Europe and APAC representing 31% of group revenue, Americas representing 22% and the rest of Europe, 44%. Let me provide more details on each regional business unit in the next slide. Southern Europe was stable organically. Eviden revenue grew low single-digit. Digital activities grew, benefiting from the ramp-up of large contracts in Spain and with a major European utility company in France. Revenue in BDS grew, thanks to HPC deliveries, high-performance computer deliveries in France. Tech Foundations revenue declined low single-digit due to contract completions with select customers. Americas revenue decreased by 6.9% on an organic basis, reflecting the current general slowdown in market condition, as illustrated by the performance of some of our peers. Eviden revenue was down low double-digit, impacted by contract completion and volume decline in health care and finance. The delivery of a supercomputer project in South America in H1 2023 also provided a higher prior year comparison basis for BDS to this year. Tech Foundations revenue declined low single-digit due to contract completion as well and scope reduction with select customers. Central Europe now. Central Europe revenue was down 4.5% on an organic basis. Eviden revenue declined mid-single digit, impacted by a project delay in a mission-critical system and contract ramp-downs in manufacturing and defense. Tech Foundations revenue declined mid-single digit, reflecting volume reductions in manufacturing in banking sectors and delays, mostly delays in public sector spending. Northern Europe and Asia Pacific revenue decreased by 1.3% on an organic basis. Eviden revenue declined low single-digit. The revenue increase at BDS due to new business in advanced computing with an innovation center in Denmark was offset by the decline of digital revenue, reflecting a lower demand from public sector, health care and insurance customers. Revenue in Tech Foundations was down single-digit, with volume decline in health care, insurance and public sectors. Let me finish by talking about headcount evolution. You can see details on this slide. First, we were able to hire 1,900 employees in our global delivery centers, thanks to the certification program that we've put in place. Second, we managed to adjust our headcount to the business environment. And third item to be noted, our attrition was lower than in H1 2023 and in line with our historical ratio. With that in turn, I turn the microphone to Jacques-Francois, who will comment in more details our financial results.

Jacques-Francois de Prest: Thank you, Carlo, and good morning to you all. Our consolidated interim financial statements were established as usual on a going concern basis. I will now give you a snapshot of our key financial numbers for the half year 2024. Group revenue amounted to €5 billion in the first half 2024, down minus 2.7% compared with the first half 2023. [Indiscernible] down minus 4.2% and Tech Foundations declining by minus 1.4%. Group operating margin was €115 million, representing 2.3% of revenue, down 100 basis points compared with H1 2023, with contrasted performance between Tech Foundations, which improved in the first half and Eviden mainly impacted by market softness. Our H1 2024 revenue and operating margin as well as cash are in line with the business plan that we presented on April 29. Free cash flow was minus €1.9 billion for the half year, largely explained by €1.3 billion lower working capital optimization at half year compared with December 2023, as planned. Also, we decided to increase our investments and conversely to lower restructuring costs, as Jean Pierre explained in his introduction. Net debt was €4.2 billion at the end of June 2024. Net loss group share was €1.1 billion, mainly impacted by goodwill and other intangible impairment charge of €1.6 billion. I will now comment more in detail these numbers. You can now see on this page the detail of the revenue growth. This revenue bridge is explained mainly by the revenue organic decrease of 2.7% that Carlo commented as well as scope disposals last year. This leads us to a half year revenue of €5 billion. Group operating margin was €115 million, representing 2.3% of revenue, down 100 basis points compared to H1 last year. This margin decrease comes mainly from the allocation to the business of SG&A costs, which were previously allocated to other expense as part of the separation project, which was conducted last year. Eviden's operating margin was €58 million or 2.4% of revenue, down 230 basis points. Beyond the allocation of SG&A cost, profitability was also impacted by revenue decrease and lower utilization of billable resources. Tech Foundations operating margin was €57 million or 2.2% of revenue, up 30 basis points organically. The business benefited from the continued execution of its transformation program. There was also a positive impact from the accelerated reduction of underperforming contracts via renegotiation and improved delivery, which more than compensated the SG&A cost allocation. Let me now comment on the financial elements of the rest of the P&L. Net loss amounted to minus €1.9 billion and I will comment upon the key elements there. Firstly, reorganization costs amounted to €60 million, a strong reduction compared with the €430 million cost incurred last year. Secondly, goodwill and other non-current assets impairment amounted to €1.6 billion. The group performed impairment for this June closing, considering the ongoing financial restructuring of the group and the resulting offers received. At risk of stating the obvious, I remind you that this impairment charge is a non-cash item. Thirdly, in the first half 2024 other items were a net expense of €150 million. Those items mainly included an additional loss on past disposals for €55 million and advisors fees on the financial restructuring of the group and Advisors fees on asset disposals for €51 million. Net financial expense amounted to €175 million. The net cost of financial debt was €73 million and increased by plus €33 million due to higher interest rates on the Term Loan A and the multi-currency FCF for which additional portions were drawn in the second half of 2023 and in January 2024. Also, interest income was lower as a result of a lower level of deposits. Turning now to our free cash flow statement. Free cash flow was minus €1.9 billion for the half year. Let me comment on the key elements there. Firstly, the free cash flow for the semester reflects the planned reduction by €1.3 billion of working capital optimization compared to December 31, 2023. Details of these working capital actions are provided in the following slide. Then decision has been made to prioritize clients' capital expenditures and R&D, which will translate into future earnings and conversely, to save on restructuring costs in order to manage our cash position. This translated into €168 million higher capital expenditures in H1 2024 compared to H1 2023 and to €103 million lower reorganization, rationalization and integration costs. You can see on this slide the various components of working capital optimization reduction of €1.3 billion. For your information, this is not written on the slide, but that's on top. Working capital optimization amounted to €1.6 billion at the end of H1 2023 a year ago. To conclude my comments on cash flow, let me give you clarity on the other change line. Cash out related to other changes was €167 million, stable compared to H1 2023. This amount included €96 million of cost incurred on onerous contracts, €34 million of advisors fees paid related to the restructuring of the group and to asset disposals and €13 million of legal costs. In conclusion, the group reports a negative cash flow of minus €1.9 billion in the first half 2024, reflecting primarily stronger investment on customer contracts and a €1.3 billion reduction of one-off working capital optimization as planned. I would like now to comment on the financial restructuring plan of the group. As a reminder, we announced on July 2024, the opening of an accelerated safeguard proceedings by the Specialized Commercial Court of Nanterre. This approval from the court is a major milestone in securing our company's future and it is based on strong financial terms. Firstly, this will provide sufficient liquidity to fund the business at near and long-term. We also secured €800 million interim financing, providing the liquidity necessary to fund the business until close of the financial restructuring plan. This interim financing will be refinanced at closing when the €1.7 billion in new financing will become available. Secondly, we will reduce significantly our net debt by €3.1 billion through €2.9 billion of loans and bond debt converted into equity and €233 million capital increase open to existing shareholders, which is backstopped. Thirdly and finally, we will push out our debt maturity to 2029 and beyond, which will provide more financial flexibility to operate business. Thank you very much for your attention. I will now turn the mic back to Jean Pierre for the conclusion.

Jean Pierre Mustier: Thank you very much, Jacques-Francois. So let me now close with some key takeaways. First, the opening of the accelerated safeguard proceedings marks the completion of an important step in the finalization of our financial restructuring process. This is the start of a new period of recovery and development for the company. Second, we are also fully focused on restoring trust with our clients and partners and on leveraging the best of Eviden and Tech Foundations capabilities to continue growing our business and deliver unmatched value and innovation to our customers. And finally, I would like to take this opportunity to thank our 92,000 employees for their ongoing strong commitment. And with that, I would like to thank you and turn the call back to the operator for the Q&A session. Operator?

Operator: Thank you. [Operator Instructions] Thank you. We will now got to our first question. One moment please. And your first question comes from the line of Nicolas David from ODDO BHF. Please go ahead.

Nicolas David: Yes. Good morning. Thank you for this insightful presentation. I haven't seen the press release. Any comment regarding the outlook? Could you give us some insight about what you see for H2? And maybe comment the outlook compared to the one which was exposed at the time of the financial restructuring, the business plan, which was including an organic decline of minus 3.3% for 2024, a margin of around 2.9% and I think a free cash flow of minus €600 million, excluding unwinding of specific working cap optimization. So could you comment on this outlook? And the second question is what do you plan to do on the working cap optimization action in H2? Do you plan to unwind the rest? Or on the contrary, could you intend to increase or do more actions? Yes, this will be [indiscernible]. Thank you.

Jean Pierre Mustier: Thank you for this very good question, Nicolas. Well, a couple of questions. The first one, I understand is what's the outlook for H2 compared to the – what we call, the updated business plan, which are the latest numbers we have shared with the market on the 29 of April. So here, I can confirm that H1 is trading in line with this business plan. And our outlook for H2 has not changed. So we are on track to delivering this business plan or the numbers as they have been communicated. That's the answer for the first question. On the second question, in terms of working capital, what are our plans. We have said already in the last two results earnings release that this is our plan to unwind and to no longer repeat this one-off working capital optimization specific actions. So we have implemented that already somehow in Q1. We are keeping, as you can see, the numbers today, the unwind and the decrease of these actions is pretty significant today. And this is absolutely in our plans to keep on this trend going forward.

Nicolas David: All right. And could you clarify that the €600 million was excluding those unwinding – this unwinding?

Jean Pierre Mustier: Yes, that is correct.

Nicolas David: So if we want to make an assumption, we take the €600 million minus – minus €600 million and minus 1.8 billion to get to the...

Jacques-Francois de Prest: Your assumption is correct Nicola. Yes, we stated in our numbers from the 29 of April, that this was excluding the unwinding of working capital actions.

Nicolas David: Perfect. In terms of commercial activity, how do you see the book-to-bill evolving in some incoming quarters? Do you expect further recovery and be back to a level which would be closer to 100% in coming quarters?

Jean Pierre Mustier: I will just give you a brief answer and Carlo might add. We have now a focus on client growth and development and restoring trust with our clients with the funding of our accelerated safeguard procedure. We see already early signs of clients looking at us with a different approach and going back to normality, if I may say. So this should have positive consequences on our ability to develop new activities and new contracts with our clients. And the team is now fully focused on doing that. Carlo, I don't know if you want to [indiscernible].

Carlo d'Asaro Biondo: No, I want to confirm. I want to confirm, Jean Pierre, what you just said. What I can outline is we've seen the sales pipe and the order entry reaccelerate significantly in the second part of the semester, in particular in June and August. We know that there's been delays in customers to take decisions because they are happy with our quality of service. So they wanted to be reassured before to renew. So these two elements will certainly help the order entry to increase. And we know as well that with the return to normality, obviously we'll be back into the tenders and the normal activities. So these three elements will, for sure, bring us back to a situation closer to our normal book-to-bill. And I expect that to happen now, pretty fast.

Nicolas David: Perfect. That’s helpful. Thank you.

Operator: Thank you. [Operator Instructions] And your next question comes from the line of Aditya Buddhavarapu from Bank of America. Please go ahead.

Aditya Buddhavarapu: Hi, Jean Pierre, Carlo. Thanks for taking my question. Just a couple from my side. You spoke about the market softness in North America. Could you maybe just talk about what you're seeing in terms of the broader demand picture in the U.S. for both Eviden and Tech Foundations? And maybe just also how you think about the outlook for the second half of the year? And then second, you also mentioned a few – and there are a few regions where you had the impact from contract completion. So what should the impact from that be for the second half, again, at the group level?

Jean Pierre Mustier: Carlo, do you want to take these two questions? Carlo, are you still on the line?

Carlo d'Asaro Biondo: Yes, I'm here. [Indiscernible] In the U.S., we see a phenomenon which is that customers, in particular in the infrastructure deals, are rethinking about their approach given the importance of AI and given the growing importance of hybrid and, let's say, less complete usage of public cloud. This is delaying decisions. It's a market trend. And – but it's also an opportunity because it implies that rethinking that we do that with the customers. So this is the first part. The second part, on the outlook, the second part of the year, our sales pipe has increased significantly in the last two months and the number of deals around Gen AI has increased very significantly as well as hybrid cloud. So I hope in the second part of the year, given also the improvement of our situation, to see recovery in our numbers. For the third part, no, I don't believe there will be very significant reductions of scope in the coming future. I think we saw the biggest part of that.

Aditya Buddhavarapu: And maybe just one follow-up on BDS. That was down low single-digit in the first half. I know you mentioned delay in ramping up a large project in Europe. Could you just maybe talk about BDS outlook for the second half? And when that large project should start to contribute to revenues? Is that maybe in 2H or 2025?

Carlo d'Asaro Biondo: So BDS sales in high performance – do you hear me?

Aditya Buddhavarapu: Yes.

Carlo d'Asaro Biondo: Okay. BDS sales in high-performance computing have been very successful. When BDS sales in high-performance computing are successful, there is an initial part where we build the machine, do research and work for the machine, which obviously has – means capital expenditure and cost. And then there is reaping the benefits when you deliver. So we will deliver this significant sale in Central Europe next semester and it should be significant return for us. Then, as you said, we sold also in South America, and we have other sales around the world, one in India, and we have other sale – another selling coming up. So we will see the HPC activity during the next semester and the first semester of next year reaping the benefits of all that by delivering those contracts.

Aditya Buddhavarapu: All right. Understood. Thank you.

Operator: Thank you. [Operator Instructions] There are currently no further questions. I will pass the call back to you.

Jean Pierre Mustier: Thank you very much. So let's close the call here and let me just remind you that we see, as I mentioned in my conclusion, a new phase for Atos, where we're going to focus on industrial development, client growth, and making sure that we can restore the trust of our clients to grow our activities. So thank you very much, and we are, of course, always available to answer any of your questions. Bye-bye.