Atossa Genetics (NASDAQ:ATOS) Q2 Results Conference Call July 27, 2022 2:00 AM ET
Company Participants
Conference Call Participants
Amit Harchandani – Citi
Operator
Thank you all for standing by and welcome to the Atossa First Half 2022 Results. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speakers today at the Atossa’s management team. Thank you. Please go ahead.
Unidentified Company Representative
Good morning, good morning everyone and thank you for joining us today for the presentation of Atossa H1, 2022 results. I am [Indiscernible].
As you know, since July 13, we have strengthened our governance with a new management team that is here with me today. Together, we bring relevant skills and long term experience in our industry across managed services, digital cloud finance, and more importantly, business turnaround and transformation to lead Atossa in its transformation journey.
I will let Philippe, [Indiscernible] and Natalie introduce themselves shortly. A few words on my background. I have been in this fantastic group for more than 21 years where have served and lead teams across various countries and unit. Most of my time was spent in our managed service business where I executed complex turnaround in U.S., Europe, but also growing markets. For those experiences, I developed a deep understanding of our business, global operation and our unique asset. And I have good strong relationship with our customers and our talent. Across those roles I have built and apply a consistent playbook of turnaround that has been very successful in each of those missions, and that I will be happy applying going forward. I look forward to working alongside with the entire team to lead Atossa in its new next chapter.
I will now hand over to [Indiscernible] to introduce herself.
Unidentified Company Representative
I’m [Indiscernible], Senior Executive Vice President in charge of Strategic Projects and Support Functions for the group. In my last position before joining Atossa, I was Senior Executive VP of Stress in charge of strategy and transformation and also CEO of smart and environmental solutions [Indiscernible] in particular IoT and software solutions as well as sustainable consulting. I also have a particular experience in M&A and [Indiscernible].
Unidentified Company Representative
Good morning. [Indiscernible]. So in my last position, I was the Chief Commercial Officer in the space industry and also worked 20 years at IBM, in our several leadership positions both in Europe and the U.S.
Unidentified Company Representative
Good morning, everyone I am [Indiscernible] groups here. So I joined the finance team more than seven years ago although we need to acquire over the years broad perspective on the group, business and financial fundamentals. Before — my legal and finance carrier family key strategic initiatives for companies such as acquisitions, [Indiscernible] which is useful expertise to have now. As a group CFO, I would focus on the financing of the transition period, of course, but also mostly on profitability, cost discipline, and cash generation and I’m really looking forward to having a transparent and constructive and trustful silos with the financial community.
Unidentified Company Representative
Thank you, Natalie. So going forward with this team will be on entirely focused on first, improving Atossa performance, operational performance, and second, delivering our strategic transformation project. I want to emphasize here that this management team believes that the strategic project we announced during our capital markets day is the best platform to deliver value for our stakeholders. The plan presented on June 14 is the best one for Atossa, for our customer and for our 112,000 employees. It is also the one that we are convinced will ultimately create the most value for all our shareholders. So now it’s time for action. We must execute and deliver for our stakeholder. And this is the first commitment of that Atossa new management team has given you today.
With that, let’s turn to the highlight of H1, 2022. As you know, in June, we announced our strategic project, following six intensive months of assessment strategy definition, but also reorganization. Now that we have a clear strategy in place, going forward, we will be laser focused on our customers, employees and operation improving continuously our performance. It is now our top priority for the organization, and the second commitment Atossa new management team is giving you today.
Also, I’m really happy to share with you today after a fantastic job done by Dan, Natalie and [Indiscernible] that the financing of our transformation plan is now fully secured. This is an important milestone, as we now have the means to execute our strategic project during the transition period. Now if we look at the commercial traction, it has improved a lot in Q2 with a book to build going from 72% in Q1 to 101% in Q2. I would like to stress that customer response to the announcement of our strategic plan has been very positive. We signed more than 600 million order and three announcement of which 75% are new services or new logo.
As an indicator, as we look ahead our current weighted pipeline for each tool is 30% higher than our weighted pipeline was at the beginning of the prior semester, suggesting significant continued momentum.
In addition, our H1 financial performance is consistent with the backend loaded plan, which we have previously announced, which have confirmed and refined our 2022 objectives based on detail and fully operationalized plans.
Lastly, Atossa continue to hire at scale and in line with our objective with a total gross hiring of more than 16,000 people in H1 with significant growth in recruitment, ensure the condition of our future growth and demonstrate Atossa ongoing attractiveness in a challenging talent market.
Looking at the key figures for the semester, revenue was slightly down minus 0.6% at constant currency and minus 2.1% organically. The positive momentum continued in Q2 with organic growth improving sequentially from minus 2.4 in Q1 to minus 1.1% in Q2. The organic growth will be minus 0.8 excluding the declines of our business and as a reminder, which is a business were gradually exiting due to low margins.
Operating margin was 1.1% of revenue impacted in particular by high cost inflation, which translated mostly in salary but also in energy and complement. Free cash flow was minus 555 million Euros. On top of our usual seasonality it reflects the low level of operating margin recorded in H1. Natalie, will come back to that in details later during the presentation. Headcount reached 112,000 at the end of June increasing plus 2.1% organically, mostly in our offshore centers.
Turning now to commercial activity and clearly there is some good news here that we have seen a strong sequential improvement in Q2. [Indiscernible] in Q2 strongly up compared to the 2 billion we recorded in Q1 and our book to bill was 101% in Q2 compared to the 72% in Q1. Q2 order entry is primarily composed of small shop and deal that will fit directly our revenue growing niche to. Looking forward our weighted pipeline for H2 is 30% higher than our weighted pipeline for H1 which again suggests that significant continued momentum.
With renewed commercial traction that we expect to continue in the coming quarter reflect the benefit of our new organization structure by business line and the subsequent refocus on our core offering.
On talent, again, we have been able to recruit the right talent at scale and at a steady pace in H1 with more than 16,000 gross hiring. Our attrition rate was broadly stable in Q2 versus Q1 and remained in line with industry average at around 20%. As you noticed, we did continue to grow our headcount in H1, whereas our revenue did not. This might have held back our margin in H1 but in the context of our dynamic order, entering Q2, and the return to grow, we anticipate in H2, it was critical for us to secure the right talent and to ensure the condition for successful delivery in the future.
By the way, 80% of our recruitment were in offshore or neutral location. We intensified hiring at the junior level to optimize our labor pyramid structure. It is in line with our strategy and demonstrate again, Atossa attractiveness is intact.
I will now hand over to [Indiscernible].
Unidentified Company Representative
Good morning, everyone. As mentioned by my colleagues, we are very happy to announce that we have successfully secured on the package. As said, this is time for action, and we are set to deliver. So this is really a key milestone in our transformation which we are delighted to share with you today. So we have received bank commitment covering the full amount and expect to sign the final documentation in the next few days. The success of the financing is a significant leap forward in our transformation plan, and also demonstrates strong support from our banking partners.
As part of this process, the net debt to [Indiscernible] financial covenants have already been reset at 375 times and will be tested annually. In financing will provide the group with all the funding needs during the intervening period before the potential and will significantly reinforce. I would like to stress that in the current macroeconomic context and market you see a very strong achievement as we are ahead of schedule by a month and that the operation is likely to be largely oversubscribed, demonstrating again, full support of our plan by our financing partners.
On the next slide, I’m going to give you a quick update on the progress made since our [Indiscernible] with regard to our strategic transformation plan. So, we have now clarified governance with a new experienced leadership team that you have in front of you to ensure successful delivery of our strategic roadmap both on performance and on the [Indiscernible]. We have just featured on the package as I mentioned, which is a crucial milestone. And we have also here mark, the assets for sales we have total value exceeding the 700 million targets. Execution is progressing according to plan. All preparation work streams have been launched and [Indiscernible] can progress have made on the date. In terms of milestones, we are ready to start the employees consultation process as soon as early September, we [Indiscernible]which has already been provided with information.
On the operation side, we are seeing, what we are seeing is very positive. Indeed our talent retention and change management program are deployed and effective with 90% of retention of our key people. In fact, attractiveness from the finance market and significant commercial wins including after the CMAS highlighted demonstrate strong support of the plan by our customers.
Unidentified Company Representative
Indeed our evidence project is to bring together as their expertise and the great assets on both digital and VDS in one on to teach to accelerate our value creations, profitable growth. So each of these two business are strong leadership position that we already shared with you during this end. But the real advantage and uniqueness of a vision remain the combination of both to create a differentiating offerings, which will accelerate our innovation capabilities to gain market share. Combining the capabilities of digital business line in the cloud integration and application services, with our leading and undisputed position in managed security services will make us the right and trusted partner for secure cloud.
We are positioning ourselves as a unique player, providing incremental value to all the prosecutors, and help our clients to embrace digital transformation, and data analytics in a regulatory, secure and compliant journey. We are accelerating our development to support enterprises and institutions to build trust in the cloud and to comply with regulation. This is just an example of what together digital and VDS can bring as a unified company. In addition together, and as we explain at CMD, we have all our core offerings, relying on unique capabilities with proprietary IP. We are leveraging artificial intelligence machine learning, and that’s at the core of our managed security services business to reach the highest level of efficiency.
We also provide a full service from industry consulting to application development implementation and management. And the remaining points, that is quite an important one we are also tackling massive inefficiency in IT server utilization to help our clients implementing their transformational journey and to reach them that zero commitment. In the past, we were not delivering the best rustling performance between digital portfolio and VDS customers. And commercially, VDS has a strong footprint in public sectors and defense, which will accelerate its integration to public cloud in the next years. And that creates a tremendous potential for us using digital cloud capabilities.
On the other end, customers are now looking to take advantage of high performance computing on a broader scale and not only focusing on their institutional affairs and defense, we are seeing more and more momentum in manufacturing sector and also in financial services institutions. And we are perfectly positioned to reach clients and industry in requirements.
Let me remind you that our ambition for ABM is to achieve 7% organic revenue growth on average on a five year span basis and 12% operating margin and 700 million free cash flow before interest and tax in 2026.
Now I’ll give you some color on ABM H1 performance. So our revenue grew 2% year-on-year at constant currency. This was a bit of a slowdown compared to 2021. So digital grew thanks to recent acquisitions and positive organic trends in application in clouds that were mitigated by volume reduction with a large customer and also [Indiscernible] on the value that you, value added resell. So VDS activity, cyclicality and supply chain tension, but it’s looking at a strong recovery based on the very high order entry that we had in H1.
Digital security on its side, continued to grow slowly above the markets. Looking at its June, we had a very solid book to build into to spending at 145%. And this is a significant improvement compared to the 86% we had in Q1. There’s a lot of short term and medium sized deals in this book to build figures that will underpin revenue growth as soon as H2. In terms of margin, we were at 3.5% operating margin in H1. We’ve been impacted by inflation as well as by low volume in HPC, wherever we are expecting a market improvements in 2 with HPC recovery and performance improvement actions that the group has launched in H1.
Now, I would like to highlight a few high profile contract wins in H1 reflecting the great commercial momentum that we had, and the attractiveness of our services and solution. First, we signed an artificial intelligence and machine learning deal with the major pharmaceutical players. We also partner and that’s quite an important wins with a major German car manufacturer to develop a connected vehicle software development factory, meaning industry 4.0 which is a growing area that will gain more momentum in the coming quarters.
And what is really important that it’s not the first win in this area that showed one where we are showing our theoretical stability around digital transformation and artificial intelligence development. Then we want an important contract with the national governments related to big data infrastructure for HNAI and finally, as you already know, we were the sixth supercomputer out of aid in the Euro HPC program, which is a proof to our technical and technological excellence, this award for a pre-medical excellence. This award for a pre-exist scale system that will be hosted by Barcelona supercomputing center in Spain, we are really happy to see that our R&D and our brilliant colleagues of VDS are part of this exciting journey, one that will contribute to the strengths and unlock complex application in key fields, such as medical, clinical trial and applying that research.
Moving forward, ABM will be able to further capitalize on the unique and outstanding offering sets of digital and VDS to expand our customer base and contracts, equaling what says we are one of the person’s ability to just try to do projects, and in improving the group financials and operational performance.
With that, I will now turn it to [Indiscernible] for the highlights of tech foundation.
Unidentified Company Representative
So, as presented at the capital market days tech foundation project is a complete turnaround by 2026 with most of the actions focused over the next 24 months. The plan follows the [Indiscernible] I mentioned before, across all our market to drive strong and similar transformation that we did in the past. The key element of the playbook, our first refocus phase, where we are going to rationalize our fragmented portfolio and focus on the right offering. Recovery phase where we will address our structural cost issues and the rebound phase where we are investing in sense capability and modernizing our portfolio to drive profitable growth. It will enable us to deliver full revenue stabilization by 2025, more than 600 basis points increase in operating margin to reach both 5% margin by 2026. And a stronger recovery of our operation cash flow to reach 150 million Euros by 2026 and growing 50 million per year thereafter. We wanted this plan to be prudent and realistic. But clearly our ambition with the team is to do better and faster.
So now let’s look at tech foundation performance in H1. Clearly, the momentum is building up quickly. The newly formed business line in March combined with our decision to invest in this business have changed everything for our employees and our customers. They are both excited about our decision to invest in the business which is a stark contrast to our prior strategy where part of the business were going to be disposed and where the group focus had shifted away from our core infrastructure business. Now the focus is back. And it shows up in the numbers. Revenue decline was limited to minus 2.6% in H1 which is a huge sequential improvement compared to 2021, which I remind was minus 11%, including UCC. Even further, the revenue decline would have been only minus 0.5% if we excluded UCC, end of our business that we are executing almost flat. Our digital workplace and professional services have seen significant revenue momentum and are growing well.
And in addition, we have contained a decrease in our infrastructure revenue. And that is the direct consequence of the focus and the energy that our 48,000 people have put back into this business. Recently, [Indiscernible] for the second time has positioned Atossa as a leader in its Magic Quadrant for data center outsourcing and infrastructure managed services worldwide. Our book to build is also improving significantly. Customer response to the announcement of our project has been good, and we continue to see significant momentum. Our extra H2 pipeline is 50% higher than our H1 22 pipeline six months back. I will focus on top account yielding results.
Our top 30 accounts grew at 2.2%. Now we plan to extend the playbook we have deployed over those top 30 accounts to the top 100 accounts over the course of H2. In terms of margin, we were in line with a margin reported during our capital market days at minus 1%. On this slide, you could see for example of deals that we won in H1. As you can see across those deals, we are helping our customer on all the key CIOs priorities, ranging from modernizing infrastructure, innovating on operating experience in a hybrid world and providing business continuity for mission critical application.
We have signed mainframe contract with a major U.S. insurer or second one where we provide an end to end IT managed services for an agent navigation company. I was telling you earlier that our envisage transformation plan had been positively received by our customer. So indeed, here, you could see two examples of contracts that were signed after we announced our plan.
First one, we are going to provide a large infrastructure and transformation contract for public central procurement agency. And second one, we signed a renewal as well as an extension to provide digital workplace services to global quick service. Both contracts are profitable, cash generating and in line with our midterm objectives. So in summary, we have made a huge leap in tech foundation to stabilize the revenue, and are seeing improved commercial performance and pipeline.
Going forward, we are not focused on implementing the initiative we kicked off in H1 to derive H2 financial performance and accelerating further transformation. I will now hand over to Natalie to deep dive into our financial performance.
Unidentified Company Representative
Turning now to the headlines to our H1. On this slide you can see the main financial KPIs for the first half of 2022. I’m going to detail them starting with revenue and operating margin, their net income, free cash flow and net debt. Atossa recorded revenue of 5.6 billion Euro in H1 plus 2.6% year-on-year, including a plus 3.1% for an exchange rate impact. Growth at constant currency was minus 4.6% with an organic decrease of minus 2.10% and the scope effect of this 1.6%. Our organic growth kept improving sequentially at minus 1.9% into Q2 versus minus 2.4% into Q1.
[Indiscernible] presented the performance of tech foundation in the region perimeter. I will now comment on our retinal business unit starting with revenue. Americas were plus 0.4% at constant currency driven by the contribution of the recent acquisitions. Positive trends in digital in particular with the ramp up of new contract is a major hospital chain were offset by a contraction in the past and UCC businesses, as well as situation in advance computing. Northern Europe and APAC was stable from H1, 2021 turn positive into Q1, a good momentum in digital services, particularly in public sector and defense. As well as cyber security and advanced computing.
Tech foundation activities were slightly down, but also improve sequentially between Q1 and Q2. Soccer Europe was down by 1.7% at constant currency impacted by the termination of an underperforming contract with a telecom operator and low activity diversity in HPC, and UCC. Excluding these items, revenue was stable with a marked improvement between Q1 and Q2. Southern Europe decreased by minus 2.7% due to fluctuations in the HPC business and to the continued wind down of value added resale. There was a reverse momentum in digital and a limited decline in infrastructure.
Turning now to operating margin. It was 1.1% at group level impacted by high cost inflation on salaries, but also another cost line. Continued tension on supply chain, as [Indiscernible] mentioned, increasing our headcount whereas our revenue did not grow. But again, there was key to secure the condition for the growth we expect in H2. And let’s face it probably an element of defocus as we may have been distracted from day to day operation, at certain time in H1. These impacts pertain to all of our avenues. I will also mention some trade at minus 1.7% which on top of that suffered upon challenging delivery on some contract.
Looking at H2, we are clearly expecting a strong improvement in margin driven by [Indiscernible] to restore a much better level of profitability as would explain later on.
Moving on the next slide on the income statement. The main items to highlight are the following. The impairment of goodwill and other noncurrent assets, which amounted to 91 million relating to the assets held for sale. [Indiscernible] which decreased from 164 million last year to 64 million this year, included 32 million relating to Russian activities and 25 million of exceptional costs related to our transformation plan. The net financial expenses, which includes this year a loss of 109 million related to the disposal of the world line shares in June, which I remind you generated 290 million Euros of net proceeds contributing to the financing of our transformation plan.
Looking now at our cash flow statement, free cash flow was minus 555 million Euros on top of usual seasonality, whereby free cash flow is always significantly lower in H1 than H2 that needs to have free cash flow in H1 this year reflects the low level at 369 million compared to 673 million last year. The change in working cap was minus 383 million. There is a seasonality here too, of course, and this change was mainly driven by a minus 237 million decrease in customer payments. Reorganization, rationalization and integration costs amounted to minus 170 million Euro that pertain mainly to cost saving measures launch in H1, which positive impact will unfold in H2.
In addition to the free cash flow of the period, the acquisitions amounted to 312 million Euro. This is mainly cloud ways and the proceeds from the sale of world line shares in June for 219 million Euro. Foreign exchange situation and other items amounted to 97 million Euros leading to a 1,792,000,000 net debt at the end of June. As mentioned by my colleagues, we have successfully secured our new debt package, Atossa has already received commitment from bank for the conversion of the 1.5 billion out of a total of 2.4 billion of existing FES into an unsecured term loan with a maturity of 18 months. We do six months extension at our option, the 900 million FCS is maintained maturing 2025. We expect to sign the final documentation in the next few days.
With that, I will end [Indiscernible] for the full year of objectives.
Unidentified Company Representative
So as previously announced 2022 is going to be a back end loaded year. There’s always seasonality in our margin and cash flow. But the swing is expected to be even more pronounced this year as most of the performance improvement measure we launched in H1 will be a fruit in H2. And as I said, the wall organization is now laser focused on execution and now that we have a clear strategy in place. So today with the management team, we are confirming and refining our full year objectives. For revenue, our objective of minus 0.5% to 1.5% grow at constant currency is unchanged. Growth should turn positive in H2. And this is underpinned by the good momentum in order entry that we observe at the moment. Operating margin, we are targeting the lower end of the 3% to 5% range. And as a direct consequence, free cash flow is now expected at the lower end of minus 100 million to 200 million range excluding the additional impact of a transformation plan.
So now, let’s give you more granularity on what it means for H2 in terms of operating margin first. So we do expect an uptick in H2, which will be largely driven by the improvement plan launch in H1 focused on three key levers. First, reducing our cost base. As we are unwinding the spring program, which is our prior structure organized by industry, our structure of costs are going to come down significantly as soon as it’s too soon. Since we increased our headcount rapidly in H1 going forward, we’ll be more selective in hiring and focus only on specific area like cyber security or analysis. We will reduce our use of subcontractor and increase costs discipline, which arguably we have lost a bit on non personnel cost.
Second, we are tackling our underperforming contracts. Phillip and I and the entire team are focusing on more than 30 red account that we are renegotiating commercially or as an exit and in some cases to improve the profitability thanks to both sanction. Third, increase in price in the context of a continued inflation will be key. We have a solid plan in place. We have already increased our price on some contracts, mostly the time and material and others are currently under negotiation.
This is more medium term effort and you will note that we’re not being overly ambitious for H2 on that particular topic.
In addition to reduction, the recovery as Phillip mentioned HPC volume, especially for the supply chain challenges, will also have a direct impact on our margin with better fixed costs absorption in H2. This improvement will come on top of the usual seasonal improvement that we have every year between H1 and H2.
I will now pass it to Natalie for the free cash flow.
Unidentified Company Representative
As a direct consequence of operating margin, free cash flow, excluding additional costs, our transformation plan should recover in H2. And this recovery, as you can see on the chart will be entirely driven by your NDA. While we are prudently actually on your portfolio, we’ve resolved stage one working capital outflow. This includes 150 million of [Indiscernible] costs restructuring costs, which were already embedded in our guidance. And as I said, exclude additional impact of our transformation plan. At this stage, our best estimate for such additional costs would be 250 million in 2022, which is consistent with the indication given at the capital market day of a run 150 million additional error, the final amount will of course depend on the speed of our injection. It also includes the cost of the new financing, that we’ve just secured, around 50 million effect six exceptional external costs linked to the plan.
Unidentified Company Representative
Thank you, Natalie. So few words to conclude. We now have a clear strategy and transformation plan in place. My colleagues from the management team and myself are now fully focused on our customers, our ongoing as well as the execution of the plan. We have seen a renewed commercial momentum in Q2 and continue to see even higher momentum on sales into H2, which will support our revenue growth in H2. We are executing at the pace on the performance improvement measure which will drive a significant increase in [Indiscernible] and free cash flow in H2 and give us full confidence in our full year objective.
Last, but not the least, we are moving forward with our transformation plan. And we have just made a significant progress as its financing is now fully secured.
So thank you for your attention. And I think we are now ready to take your question.
Question-and-Answer Session
Operator
Thank you management. We will now begin the question and answer session. [Operator Instructions] Our first question will come from Amit Harchandani at Citi. Please go ahead.
Amit Harchandani
Amit Harchandani from Citi. I’ve got a couple of questions if I may. My first question goes towards the financing plan. You’ve given us a bit of a detail in terms of some of the key parameters. But could you clarify a bit more in terms of the cost of financing, the decision to convert it into an 18 month term loan and not longer? What are some of the puts and takes in terms of how you’ve gone about thinking about this financing, please? And can you categorically confirm this implies there is no need for any form of equity financing down the road? And then I have a second question.
Unidentified Company Representative
Moving on to equity financing back. Yes, we can assume that means that you’re not planning to do an increase of capital with secured financing which reminds us about 1.5 billion 10% loan and 900 Yen in terms of FCS and also 100 million. On financing and maturity.
Unidentified Company Representative
So on the cost of financing it will be in line with the market rate. The cost will be disclosed later, but again fully in line with the market. They no longer stand because we are financing, the press enough and there is no need for equity financing at all.
Amit Harchandani
Second question is for me, please, with regards to the turnaround on broadly at the company and the behavior of customers. We have seen you’ve talked about some corrections in your backlog. You also talked about customer advance payment coming down. You cited seasonality in the first half. Can you give us a sense for what is the tone of discussions with customers because on one hand, we do see the bookings going up. But on the other hand, as you can imagine, customers are looking at what’s happening at Atossa and making up their mind. So could you give us a sense for the overall tone of discussions with customers, please and the comment on collections and the move in advance payments?
Unidentified Company Representative
So just to start with speaking, so to start with the battle of the correction that you’re mentioning, so it’s our business as usual. We had some bookings that were detaining, let’s say two previous periods, we decrease write off like zero, following analysis of the older parts of our backlog so nothing’s to do with the performance that we had in H1. So business as usual in our industry.
Unidentified Company Representative
On customer reaction, I think it’s important also to highlight that, especially I will tell on the tech foundation side, what the customer feeling now is we are invested in that business, we’re not trying to sell it by pieces. And we see that we are bringing more cohesiveness to that line of services that we have been pushing over the years. Yes, so the customer reaction has been pretty positive across the board. We’ve all the 1000s of customer with whom I have been speaking with, there have been positive about what we are pushing and the fact that we’re investing into their business. Yes. Natalie for the last point.
Unidentified Company Representative
So the reduction in the customer advance payments, is purely a seasonality effect. And same seasonality decrease. This is exactly the same seasonality, increase the results that we had in H1 last year, that we will catch up in H2.
Operator
Our next question comes from [Indiscernible] from BNP Paribas. Please go ahead.
Unidentified Analyst
Yes, hello. Good morning. Thank you very much for taking my question. I’ve got a few actually. So first of all, going back to the cost of financing of these new debt, I mean, I understand you just said it’s going to be in line with trade. But given your depth rating in the moment, and is it reasonable to assume something like hiking or digit rate on that new debt package? That’s the first question. And I’ve got a few bullets.
Unidentified Company Representative
On your first question on cost of financing. Again, we will disclose them later. But they are in line with the market conditions.
Unidentified Analyst
2023 specifically, we are more and more talking about a potential recession, at least in Europe. So we’re just wondering how you reflect this potential restriction in the plan that you have lined the CMD and most notably for –
Unidentified Company Representative
I think personally to be, I think in the context of recession, I will say [Indiscernible] business is a pretty good defensive business because it’s as you know, it’s a multiyear contract when we started the year we have more than 80% of our revenue contracted then the rest is only about, the turnaround over in quarter revenue plus the new logo that we assigned, which will yield the revenue during the year. So we say, entering into a recession, even macro potential situation I will say the tech foundation, business book of business, give us a more broader and longer visibility. That’s your cyclical business.
Unidentified Analyst
Alright, and second thing is taking an initial one. On HPC I mean, you announced in unit two or you have been one in the array supercomputer contract, it’s been publicly disclosed, it’s 150 million contracts in total, which I guess, already contributed to the order entry that you had in Q2 but could you help us understand the timing of the revenue recognition for that contract? And do you expect the full 150 million to basically be recording revenue in H2? Or should it be more split over time?
Unidentified Company Representative
We had multiple wins on the VDS side. So it’s not only one single contract that is materializing. Let’s say the yield assumptions that we took for H2 revenue roadmap. This deal is going to have, let’s say, multiple periods of revenue generation, depending on the milestone of the project. But our H2 roadmap is absolutely not only relying on this deal. We had a very strong book to build on momentum on VDS and HPC in Q2 and that’s multiple deals with a significant improvement of our book to bill ratio in Q2 that will generate the revenue. But you know, large deals, especially on the very complex HPC infrastructure, our large implementation projects, generally oscillating between 12 to 18 months of revenue generation.
Operator
Our next question comes from [Indiscernible]. Please go ahead.
Unidentified Analyst
Yes, thank you. Good morning, ladies and gentleman. I also have a couple of question. My first one is on the U.S. profitability, which used to be much of the roofing to the Intel business. So does this mean that in the first part of the year, for the first time you experienced a sharp decline of your shore businesses spending the drops in profitability in that region?
My second question is back on your full year guidance on the margin side, I mean, you’re basically needs to improve by roughly 4 points, the margin between each one and issue which is much more than what has been achieved in the last decade. So does it mean that the seasonality of margin has moved year-after-year, because all the action you have presented this morning, makes sense, but they might not be visible instantly. And also, the restructuring you booked in the first part of the year are not much higher than what we’ve seen last year.
And my very final question is on [Indiscernible]. If we would have more granularity because the positivity level that you have, at the moment is way, way below what you expect on the long term and below peers. And does it mean that you have a big negative impact from HPC? Or is it more utilization rate issues? Or a little bit of everything? Thank you.
Unidentified Company Representative
Yes. Thank you for your question. So let me start with the operating margin sore. So first, it’s a combination of multiple factors. We mentioned, let’s say the cyclicality of HPC. And you know that HPC it’s a manufacturing business or storage. So that means that we have, let’s say, a significant amount of fixed costs that have not been covered, let’s say in H1 so it’s purely due to cyclicality and we will recover in H2. The other factors that we are facing is really the impact of the inflation of our cost labor base and that’s, let’s say multiple actions that we do like are impacting on our business with new rate cards due to inflation, and that’s part of the recovery plan that we have in H2. There is no utilization rate issue at all, on our evident business and the remaining part is really related to lead the supply chain shortage that we faced that prevented us juristic leads into the initial delivery plans that we had on the VDS business side.
Unidentified Company Representative
On your second question on seasonality, so we are starting actually for from a very low H1 at minus 110%. We are targeting 5% to 6% in H2, which is the margin we did in H1 last year and below the typical 10% we used to do in H2 in the past. So in itself, not that challenging. H2 margin is supported by actions on our cost base which are already identify and engaged and the whole group is fully mobilized on the H2 margin.
Unidentified Analyst
And on the U.S. business.
Unidentified Company Representative
On the US business so I guess your question is related to the trend that we had, let’s say following the acquisition of [Indiscernible], and it’s still a profitable business that is running, let’s say, with the right revenue growth, or as I said there also during the presentation we had one effects of a contract. But that has nothing to do with the announcement. It was already, the scope reduction on the large accounts that we the short term signings that we had on the order entry in H1. No doubt that we will recover and grow as per the plan that we committed to during the capital market day.
Unidentified Analyst
But have you seen some structural issues on the market or the worst margin you making on offshore? Because when you bought _ it was 25% – 26% EBIT business was about a third of the size of the U.S. So it seems like you had an issue between the prices on the wages in India or can you give us a bit more granularity on what is happening there?
Unidentified Company Representative
The only additional information that I can share is that what we explain is we knew that we had to anticipate some higher ends related convictions that we had in the very strong let’s say book to build another entry that we realize if you do that as generating, let’s say, like an unbalanced business model related to incremental costs versus revenue stream that we were having, and that was required also to secure the revenue generation for H2 but there’s no specific issue related to our global recoverability. We are still winning. We are even expanding on very large contract that we have on the U.S. side. So there’s no specific information related to the business trend in North America.
Unidentified Company Representative
And if I comment on specifically on Syntel even though margin was impacted by cost inflation as everywhere, Syntel remains a good performer in America for digital business.
Operator
Our next question comes from [Indiscernible] at Deutsche Bank. Please go ahead.
Unidentified Analyst
Yes, thank you for my questions. So I have a few to ask. I’ll ask you. I’m going to ask some follow ups. Out of the 16,000 hires, how many were purely offshore and where exactly? That’s my first question. My second question is, where did you see you most of all, eventually growth would have been digital, fiber cloud or decarburization, or is there also a case that you saw some momentum also in tech foundations too? Some follow ups after. Thank you.
Unidentified Company Representative
I would take the first one and Phillip the second one. On the hiring and the headcount in HR, out of the 16,000, almost 80% of them have been in offshore and near shore location. So it’s been building up capabilities in our remote location. And also as I mentioned in the presentation, in junior, when I say junior capability lower hand of the pyramid, as we are transforming the overall pyramid of the company.
Unidentified Analyst
Sorry, before we go to second question, So, what exactly like how much is exactly an offshore not near shore? Offshore purely offshore? Is it more like 50:60 or more.
Unidentified Company Representative
Out of the 80% to be frank, I think it’s closer to 70, 75 in offshore.
Unidentified Company Representative
And on your first question, business dynamics are on the offering and business line sides or as I said, we are seeing strong momentum on the cyber security side, still above the markets. We are confirming also the trends that we’ve seen on the digital side with alignment with the plan that we had that is 7% for the new growth per year. And as I highlighted in there, we’ve been impacted, let’s say in H1 on the CDS revenue, mainly related to HPC. And that’s part of the record, we plan to maintain, let’s say the objectives that we had for revenue generation in fiscal year ’22.
Unidentified Analyst
Thank you. Just two more questions. My third question is could you perhaps elaborate more on what exactly was the tension to the supply chain? Like maybe give us a bit more granularity about that? Are these related to specifically orders and hybrids of HPC products or other moving parts? Maybe a deteriorating demand environment? Maybe because of supply chain production for certain customers? I don’t know. Any bit more detail here, it would be great. My fourth question is how much of your operating margin targets — to recovery in HPC? Could you perhaps quantify the impact in margin terms? I’m just trying to understand here whether a continued downturn in HPC cyclicality and supply chain tensions might impede materials function margins, and potentially putting items at risk. Thank you.
Unidentified Company Representative
Yes, so on the HPC side. So that we are talking about, let’s say, large and complex infrastructure that we are manufacturing. So it’s obviously a lot more difficult to drive with a supply chain that I can processes when you are in you’re just — versus let’s say, volume place. So that’s the reason why, let’s say the anticipation is directly related to the continuance that we have on the pipeline. And when we show that we can extract. So we anticipated let’s say, because our inventory grew in area in H1 to ensure that we will stick to the commitment that we had in terms of delivery milestone in H2. So this is perfectly under control. You’re free to comment on the yields that we mentioned or and the recovery between H1 and H2. On the margins so nothing more to say that they’re what I already shared at the capital market day. We are planning let’s say to operate at single digits, operating margin let’s say in 2022 and with a recovery at the end of the five years plan with a single digit margin.
Operator
Our next question comes from Amit Harchandani at Citi. Please go ahead.
Amit Harchandani
Thank you for taking my follow on questions. I’ve got two more if you may. With regards to the free cash flow generation profile, if you assume that you do minus 150 and 250 in exceptionals, that’s closer to minus 400 for total cash outflow of total free cash flow this year and we had more than 400 million negative last year. Are you in a position to comment if the free cash flow profile gets better in 2023 and beyond that? How do you think some of these exceptional transformation costs might play out in 2023 and 2024?
That would be my first question. My second question goes to the topic of the transformation that you’re embarking upon in tech foundation, stuff like rationalizing contracts, talking about looking at some of the changes to structures. I mean, for those of us who have covered Atossa for a long period of time, we have heard this before. So given that you’ve been with the company yourself for a long period of time, what is it that in your view is going to be different this time as you drive the transformation in the infrastructure projects versus what has happened in the past? What are your learning? versus what you’ve seen in the past that hasn’t worked for this one? Thank you.
Unidentified Company Representative
Really important question. I would start with your second. And then Natalie, will come back on the free cash flow. On the turnaround, I think the biggest difference that I see today, that was yesterday, if I may, is today we are finally, we finally have the funding to do that transformation. I will say in the past, we were always constrained and you know us and you have seen the revenue decline in that business in the past, and we never really addressed it. I think this time the board and the entire team acknowledge the full size of issue and have decided to address it to make sure that we could rebound. And I think that the biggest difference, I think in terms of methodology, I would say with the vertical setup we had before, it was not at all easy to apply the playbook because responsibility will diffuse in a complex matrix, if I may.
Now that we simply find the organization, it’s almost a top down organization for the military. This gives us the framework to execute in a much inadequate and stronger way or the usual suspects into those kinds of turnarounds talking about productivity, automation of show, obviously, but read accounts portfolio, but remember, in that business, the biggest impact is to stabilize the top line. So as you have seen in H1, we have been able to start seeing a huge control improvement from last year minus 11% to this year minus to 2.6 and with that, I have much less transit costs to address which are impacting directly the bottom line. So in that perspective, we feel that now with the team, we have the good, I will say trend in terms of top line to be finally able to improve the margin of tech foundation. So that’s really my key feedback to you. Natalie.
Unidentified Company Representative
On your third question on the 2023 free cash flow. So as we mentioned during the capital master day, the majority of the transformer condition cost will come in 2022 and 2023. As we already mentioned, we have already identified a launch strong action on operating margin, which will trigger benefit in H1 2022 and also on H1 and the full year 2023 going forward.
Amit Harchandani
Yes, please or thank you for that clarification and actually on the financing bit then, after 18 months, are there any term around which the renewals would be carried out? Do you need to be at a certain level of leverage? Do you need to be at a certain level of profitability? Or is it a straightforward renewal after 18 months?
Unidentified Company Representative
We have improvement throughout the barrier that’s 3.75 times. So this is a constant over the period.
Amit Harchandani
Got it. And finally, if I may, since I have your attention, you’ve got the 700 million I believe that’s due to come from assets held for sale. If you’re not able to generate that, again, I’m not sure where you are in terms of progress on that. If you’re unable to generate that, do you need to then look at debt financing, additional debt financing to finance the overall transformation plan?
Unidentified Company Representative
Just 700 million just as a program already executed 220. And for the rest of the program, we are very confident because we change our strategies in identification of these assets, which are already earmarked an exceedingly far above amount of 700 million. So to make sure that we have the right I would say choices in terms of value creation and timing on the other end. The points on the topic is the fact that these assets are in mostly — side of the business non-core as the as the previously announced that we already received a lot of mark of interest points that’s once. On the assets where we have here, so very confident on earnings, disposals and enhancements on the following order already 220 disposals that we announced.
Unidentified Company Representative
I think it’s now time to close. I just wanted to thank you again on behalf of the entire team and looking forward to speaking with you soon. Bye.
Operator
Thank you so much. This does conclude today’s conference call. Thank you all for joining. You may now disconnect.
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