EuroBusinessMedia (EBM): Steria, a leading European IT services company reports earnings for 2008. Francois Enaud, welcome. You are the CEO of Steria. What are your comments on the group’s 2008 results?
François Enaud (FE): First, I would like to precise that it’s the sixth year of permanent profitability improvement. From 6.8% pro forma in 2007 we have posted a profitability of 7.7% for 2008, including 20 basis points negative impact of the forex, meaning that we have increased our operational profitability on a like-for-like basis by 110 basis points, with a significant increase of profits in U.K. first, up to 11.4%, a very good performance in Germany as well, up to 9.3% of profitability, and as well a good performance in the other European countries, with Scandinavia on top. And all of that has compensated the decrease of profitability we experienced in France last year.
Regarding the net results, we have increased in absolute value our net result, up to €51 million, despite the cost of restructuring for Xansa, and despite the deactivation of the deferred tax in Spain for a quite significant amount. The current net result has increased by 15% in 2008 for the first year after the merger with Xansa.
EBM: About one year after the Xansa acquisition what is the outcome in terms of integration and synergies?
FE: We can really qualify it as a good success. As a great success, I will say. First, we have retained all of the assets: people first, but contracts and clients as well. It’s important to remind that we have renewed 100% of contracts inherited from Xansa coming to renewal in 2008.
Regarding the integration itself and especially regarding the synergies, we have delivered more synergies than planned, for less. We have delivered €30 million of synergies compared to €23 million planned, and we have spent only €23.5 million compared to the €32 million committed: €10 million less costs for €6 million more synergies. And finally, along the year 2008, we have created a new momentum for the U.K., especially in the business where we have developed a good growth for the second-half. On a like-for-like basis our revenue has grown by 7.8% in the U.K. in the second-half. And we have finalized a year with a fantastic booking – 1.7x book-to-bill for the last quarter. And last but not least, we have improved the profitability in the U.K. resulting from the merger between Xansa and Steria. In the U.K. market we have increased this profitability by 270 basis points in 2008.
EBM: The market is worried that your balance sheet may be too stretched. What is your update today on your financial situation, in particular your level of debt and the potential risk of finding yourself in breach of certain bank covenants?
FE: First, I would like to indicate that we have reduced in 2008 our indebtedness by one-fourth. At the end of 2008 the ratio for indebtedness on equity is 40%, and our leverage on EBITDA is only 1.5x to be compared to the 2.25x for the bank covenants. We have been fully compliant with the bank covenants in 2008.
Furthermore, we have significant liquidity: €141 million in cash plus €236 million in available financial facilities. And this overall amount has to be compared to the repayment we have to make for the next three years: it’s on average of €60 million for each year, to be compared to our free cash flow capacity which has been over the last three years in the range of €50-60 million per year. Definitely, Steria has a very sound financial situation.
EBM: As the first quarter of this year is now almost over, what do the first three months of business in 2009 look like?
FE: It’s obvious to remind that we are in a general environment which is tough. The start of the year is a bit slow and the visibility we can have on the market is quite limited. It’s limited simply because our customers themselves don’t have a significant visibility. Consequently of that, of this environment, we have a slight decrease of revenue at the end of February. But it’s fair to say as well that we have two billable days less than last year on the same period. Globally, on a like-for-like basis it’s roughly the same revenue as last year.
Regarding inter-contracts, which is as well an indicator, a short-term indicator, we are one percentage point above last year, which is manageable at this level. And it’s important as well to insist and to keep in mind that Steria started the year with a good backlog. This backlog is a result of a very good book-to-bill of 2008, especially in the second-half, where the booking has been quite high and intensive to fuel the backlog for 2009.
That’s why I do consider that even if the start of the year has been slow, as I said before, I’m more confident for the first-half.
EBM: What operating leverage do you have in order to be able to adjust and to adapt to the declining environment?
FE: Obviously, from the end of 2008 we have engaged in a strong cost control program, regarding internal cost structures, salaries, external expenses. For example, in France, the overall salary increase has been below 1%, mainly applied to the low salaries, plus exceptional cases. Regarding overhead, in France as an example, we have downsized the overhead by 1%. We have also engaged in some internal programs to reduce our internal costs around IT, around telco, around traveling and so on, just to benefit from the scale of Steria and to improve our overall internal efficiency.
In 2009 it’s important as well to remind that we have our own agenda regarding cost management, especially linked to the Xansa merger. Xansa has not yet delivered all of the potential synergies planned initially. We still have €14 million to extract from the integration in 2009. €6 million are already embedded in the actions engaged in 2008. And €8 million will result from actions we are engaging in now. And we have potential savings to be eventually engaged in case of a tougher environment than the one we are facing today.
EBM: With the acquisition of Xansa your offshore resources had been primarily addressing the U.K. market. Are you now successful in using those offshore resources to address the French and the German markets which are lagging the U.K. and Nordic markets in terms of use of offshore? Does the current economic downturn make it easier for you to convince clients in France and Germany to use offshore solutions?
FE: Yes, I’m definitely convinced that offshore has become a top priority for our clients overall in Europe. And it’s even more so, I will say, in the current economic context. It’s the natural way for our clients to decrease the IT spending without downsizing their programs, their transformation programs. That’s why offshore is now, I will say, not just an option. It’s definitely an obligation for our clients if they want to deliver their programs, their transformation achievements.
And for that Steria has definitely the right profile at the right time, with our very large capabilities in India. And as a proof of this responsiveness of our clients, regarding offshore, is what happened to us in 2008: we have increased by 11% our headcount in India, up to 5,700 at the end of 2008, meaning that India for us will become in 2009 the first country in terms of headcount, above France. And if I look further, my plan, and it’s clearly a realistic plan, is that we will have roughly 40% of our overall headcount in India at the end of 2010, meaning that in the next two years it would net increase again by 2,000 people in India. So offshore is definitely the way to provide the right value proposition with the right cost to our clients, and Steria has really the right profile for that.
EBM: What is your guidance and outlook for this year?
FE: Before speaking about guidance, it’s important to remind that we are in a tough environment characterized by a very limited visibility. More important than giving a guidance, as we would in a normal period, is to look at our profile to assess our capability to resist and to go though the crisis in good shape. And for that Steria has definitely a good profile. It’s not new. We have already experienced our capability to resist in tough times some years ago. With 60% of revenue being already recurrent and engaged in pluri- annual contracts. 60% of our clients are public customers, or utility customers, which means they are definitely not cyclical. And on top of that, I will say 90% of our business is done for service operators, meaning that only less than 10% of our revenue is done for manufacturing, which is definitely the most risky business segment. But our exposure on that is very limited.
In addition to the capacity to resist and to go through the crisis in good shape, we benefit from two assets. The first is our offshore dimension. With these capabilities and the size, sizeable and scalable offshore capability we have in India, we have definitely a strong capacity to resist because we can, without downsizing our profit, propose very productive and competitive solutions to our customers.
Secondly, from Xansa we have acquired a new value proposition: BPO (Business Process Outsourcing). And definitely clients seek out not just outsourcing the IT but they are clearly considering the outsourcing of some processes, not necessarily core processes but processes related to their support functions like finance, accounting, HR services, in which Steria has already a leading position.
So that’s why I’m quite confident to resist on the top line. With the cost control program I previously mentioned, we also have this capability to protect the bottom line. So to summarize, I will say our priority for this year is definitely cash: first, we will replicate the performance, cash performance we have delivered for 2008; secondly, protect and resist on the top line with the benefit of our profile, and protect the margin with the benefit and the result of our actions.
EBM: François Enaud, CEO of Steria, thank you very much.
FE: You’re welcome. Thank you.