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Edited Transcript of CAP.PA earnings conference call or presentation 26-Jul-18 4:30pm GMT

Half Year 2018 Capgemini SE Earnings Call

Paris Jul 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Capgemini SE earnings conference call or presentation Thursday, July 26, 2018 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carole Ferrand

Capgemini SE - CFO & Member of Group Executive Board

* Paul Benjamin Hermelin

Capgemini SE - Chairman & CEO

* Rosemary Stark

Capgemini SE - Group Sales Officer

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Conference Call Participants

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* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* Amit B. Harchandani

Citigroup Inc, Research Division - VP and Analyst

* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Laurent Daure

Kepler Cheuvreux, Research Division - Head of IT Software and Services Research

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Mohammed Essaji Moawalla

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Capgemini 2018 H1 Results Conference Call. I'll now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [2]

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Thank you. Good evening, good afternoon, everybody. I'm delighted to welcome you today. I'm here with Rosemary Stark, our Group Sales Officer; and also with Carole Ferrand, our newly appointed Chief Financial Officer. Carole has joined the group at the beginning of June. She replaces Aiman Ezzat. She will be with me next week during our roadshow. And for those whom we won't see next week, you will have the pleasure to meet with Carole at our Capital Market Day end of October. Aiman is Chief Operating Officer alongside Thierry Delaporte since January. Both of them are here with me today as well, and they will participate to our Q&A session at the end of the presentation.

Let's start with the highlights of this first half. Our good momentum at the beginning of the year is confirmed and we delivered a very good growth performance and even accelerated during this first half. Our revenues grew year-on-year by a dynamic 8% at constant currency and 3% at current rates. North America, our largest geography, continues on a strong trend with a sturdy growth at 17.2%. Overall, our organic growth, which excludes ForEx and group scope impact, reaches 6.4% for the half year. This adds another quarter to a sequential strong achievement. We see a dynamic sales momentum with sturdy bookings in the second quarter, which brings total H1 bookings to EUR 6.64 billion.

The transition of our portfolio continues at a rapid pace. Our revenue in Digital and Cloud continues to grow above 20% year-on-year. It now represents 45% of our revenue.

We also continue to improve our profitability. We delivered 20 bps of margin expansion compared to H1 2017, now reaching 10.9%. The group combined, as expected, contrasted trends across geography with areas in an accelerating investment phase, a visible currency headwind in the U.K. and the U.S. and also a sizable underlying margin expansion that fully surfaced across all Continental Europe operating margins.

Our normalized earnings per share before the transitional U.S. tax impact stands at EUR 2.75, impacted by ForEx evolution headwind, but in line with expectations.

Our organic free cash flow is lower than last year at plus EUR 11 million. Carole will give more details of the June cutoff that leaves our free cash flow targets for the year unchanged.

Finally, we continued to execute our acquisition program in order to boost the transformation of our digital portfolio. After the LiquidHub acquisition we announced in Q1, Adaptive Labs has been closed and Leidos Cyber is under way. This represents major milestones for our Cloud and Digital acceleration in Europe and North America.

Let's say a word about all our geographies. They all enjoy a rather favorable global environment. As I was telling you, North America posted 17.2% growth year-on-year. As discussed at the beginning of the year, in this context, we have decided to continue to invest in our portfolio despite the temporary headwind from currency. Qualitatively, the recent wins demonstrate the relevance of our merger and acquisition strategy and we are now changing scale in Digital and Cloud.

On that matter, I'm very happy with the integration of LiquidHub, which is progressing very well and we already see several wins leveraging LiquidHub capabilities in traditional Capgemini customer base.

We see a healthy pipeline in Financial services and Manufacturing and we expect year-on-year growth in North America to remain close to double digits in the second half.

In Continental Europe, we delivered another very strong performance of 7.1%. Our strategy that combines innovation and industrialization enable us to gain market share in the region, with 7.1% constant-currency growth and very substantially expand our margin. We see good growth continuing in H2, driven by opportunities that will leverage our Digital and Cloud expertise in several of our key European countries.

Moving to the United Kingdom and Ireland. Revenue is down 5.5%. We have the expected decrease in the public sector in the range we had anticipated, while the private sector is stable. We focus on new digital deals, we see the pipeline shaping and we are confident that we will come back to growth in the second half.

Last, APAC, Asia Pacific and LATAM are up 3.4%. Situation was stable overall in LATAM, with strong growth in Mexico and situation is improving in Brazil.

In this favorable market, we are structuring and investing around 2 key priorities for the group, both aiming at improving further the value we create for the client. First, evolving our client relationship and positioning the group as a strategic partner. While leveraging our sector specialization, we aim at staying close to our client in even more strategic dialogues across the C-suite to build stronger and long-term strategic relationships. We hope to see better opportunities in digital marketing and sales, in digital operations, digital manufacturing and other digital functions, fostering technology and business.

The second top priority is the active management of our portfolio of offers to anticipate every innovation and gaining agility. That is what we are doing with artificial intelligence through our entire portfolio. In this priority, the quality of our assets and team in India plays a key role.

Finally, in order to accelerate on our portfolio transformation, we sustain our acquisition edge in our Digital and Cloud specialists. You will see more small and midscale acquisition in the second half to continue.

So increasing our client footprint, developing our CxO intimacy while developing our portfolio agility at the same time is at the core of our growth and our profitability. Each one of these strategic priorities become the scope of responsibility of each of our 2 COOs sitting next to me. The evolution of our client relationships now sit with Aiman Ezzat; the acceleration of the transformation of our portfolio of offerings, with Thierry Delaporte. The 3 of us make an appointment with you next October at our Capital Market Day to drive -- to further detail and showcase our group evolution.

But before this, let me share with you some highlights on our key strategic offers. We are focusing on a set of 7 innovative priority offerings to support our client in building their digital models.

We regrouped these offerings in 3 groups. First, the established market, where our focus is on renewing, revamping our core offers, such as next-generation application development and management and also next-generation of ERP such as S/4HANA with SAP.

The second group is made up with fast growth offerings where we want to reinforce our leadership. On this, we focus on offerings such as Digital Customer Experience, cloud services and cybersecurity.

And then the third group is with emerging areas where our goal is to establish a position of leader. This covers the emerging digital manufacturing and analytics. We bring systematically artificial intelligence to all our offerings. We aim at becoming an AI-infused consulting technology and digital transformation company and the leading provider of intelligent process automation, cognitive insights and intelligent application.

Our portfolio evolution is managing close collaboration with our key strategic alliance partner. This enables us to stay on top of market evolution, and we are actively working at building exclusive partnership with selected alliances for each key sector. As an example of recognition of those type of relationships we look forward to strengthen, you might have noticed, we announced last Monday, we have been recognized as the Partner of the Year in Microsoft in France.

I will end with an update on our guidance. As you see, we raised our growth guidance for 2018. I can say now, instead of the current -- the previous range, we will be slightly above 7% at constant currencies. We confirm our 2 other objectives: first, to increase our profitability with an operating margin of 12% to 12.2%; and second, to generate an organic free cash flow in excess of EUR 1 billion.

I now leave the floor to Rosemary Stark, our Chief Sales Officer, to give you more colors on our sales results. Rosemary?

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Rosemary Stark, Capgemini SE - Group Sales Officer [3]

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Thank you, Paul, and good afternoon, everyone. H1 has delivered strong sales momentum, with bookings of EUR 6.64 billion. This represents 11% year-on-year growth at constant currency. Our H2 pipeline shows 8% growth year-on-year; and Digital and Cloud, of course, continues to increase well with more than 17% growth.

Paul mentioned the synergies we're realizing from acquisitions, and in particular, LiquidHub. We've had some interesting examples of those: a global pharmaceutical conglomerate, where we're creating the digital strategy and road map for their new product launches; a global investment company, where we're implementing digital workplace with Office 365; and for a major French bank, a really interesting proof-of-concept to create a single interface for customers via chat and chatbot channels.

We've also entered several interesting new business partnerships where we're selling innovative services with our clients as well as to our clients. For example, our digital edge partnership with Eneco uses sensor-based technology to deliver smart home, smart factory and smart building services. It also monetizes customer-generated power and excess battery capacity for electric vehicles. At GE-Baker Hughes, we've developed SmartShop, a digital manufacturing solution improving efficiency on the factory floor. And we've now implemented that in 8 countries.

Looking at our sectors. You can see Consumer Products and Retail Distribution is a real growth engine for the group, with almost 20% growth H1 year-on-year. This sector is performing very well in North America, in France and in the Nordics and the growth is driven by several key wins in retail and in hospitality.

Financial services continues to have good momentum overall, with continued growth in North America and in Continental Europe.

Manufacturing, at 8.1% year-on-year growth at constant currency, is delivering excellent growth in the U.K. and Germany.

Public sector is performing well outside of the U.K., with strong growth in North America and Germany.

Energy & Utilities is growing very well in France, Italy and LATAM; and telco, media and entertainment continues to be soft in many countries, however, it was double-digit growth in North America.

Now let's look at some of the wins that have contributed to our strong H1 sales performance. We've been working with our large European general insurers for several years now and we've recently entered a further 6.5 year agreement to provide a new hybrid cloud solution. This will support the client's business application transformation and it's underpinned by Capgemini's end-user services.

We've achieved impressive wins together at NAVBLUE, an Airbus company, our high-tech experts who support Airbus with the development and implementation of cutting-edge electronic flight bag software application. And we're also implementing a comprehensive post-merger integration transformation plan for and with NAVBLUE's On-board+ business.

For Virgin Voyages, we're doing an integrated -- integrating a new CRM, a state-of-the-art recommendations engine and content management, all underpinned by cloud management using AWS. It's a very interesting program because it uses facial analytics to measure customer engagement, something quite new for us.

At SMCP, the French group that contains well-known women's clothing brands, such as Sandro and Maje, Capgemini is transitioning their finance applications with Oracle Cloud.

Royal Bank of Canada, which is aggressively transforming its processes to increase automation and reduce time to market and deliver better products. There, we've secured a large 3-year win to help lead the transformation efforts for RBC's Wealth Management and Retail lines of business.

So some very interesting deals. Good examples of how our long-term partnerships with clients are helping them to transform their businesses. And of course, these successes are very heavily focused on Digital and Cloud.

I'll now hand over to Carole to talk you through our detailed financial results.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [4]

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Thank you, Rosemary, and good evening, everyone. I will now walk you through the financial highlights of our half-year 2018 results. Please note that unless otherwise stated, all H1 2017 figures included in this presentation, have been restated for IFRS 15, which is in force since January 1.

We achieved a robust performance in H1, with combined revenue growth acceleration and operating margin rate expansion. Group revenues reached EUR 6,467,000,000, up 3% at current exchange rate and 8% at constant rates. Our operating margin stands at EUR 707 million or 10.9% of revenues. This is up by 20 basis points year-on-year. This is also consistent with our margin expansion outlook for the full year.

After taking into account the other operating expenses, which I will comment later, the operating profit stands at EUR 529 million (sic) [EUR 521 million], slightly down year-on-year. Net financial expenses were EUR 39 million. Tax expense increased to EUR 169 million, including an EUR 18 million tax expense due to the transitional impact of the U.S. tax reform. Excluding this income tax item, the effective tax rate was, as expected, around 31%.

As a result, our net profit amounted to EUR 314 million in H1 compared to EUR 375 million for the same period last year. Normalized EPS stand at EUR 2.75 before the transitional U.S. tax expense. Finally, the organic free cash flow stands at EUR 11 million for the period.

On to the next slide. This organic free cash flow compares to EUR 64 million in H1 '17. The EUR 53 million gap is attributable for EUR [23] million to higher tax payments in 2018 and to the early unwinding of our cross-currency swap that contributed EUR 24 million to last year's free cash flow. We told you that cash tax should normalize up in 2018 back to 2016 level toward 20%. This will be -- further be lifted this year by transitional impact of the U.S. tax reform. However, we confirm our free cash flow outlook for the year of at least EUR 1 billion.

Our capital allocation continues to balance return to shareholders and reinvestment in faster transition of our business to digital via bolt-on acquisitions. In H1, we returned EUR 684 million to shareholders, combining dividends for EUR 284 million and buybacks for EUR 200 million. The acquisitions completed, namely LiquidHub and Adaptive Lab which closed at the end of June, represented a net cash outflow of EUR 409 million.

Considering the natural seasonality of our cash flow, our net debt increased in the course of the first half to close to EUR 2.2 billion. This compares to EUR 1.2 billion as at the end of last year and 1.1 -- EUR 1.9 billion 12 months ago.

Let's have a look now to our quarterly revenues. Q2 organic growth reached 6.7%. This brings H1 organic growth to 6.4%. Group scope impact was 1.6 points in H1. Looking forward, we only expect the acquisition of Leidos Cyber to close towards the end of the year. Acquisitions should thus contribute to around 1.7 to 1.8 points to full year revenues, in line with what was said back in February.

Constant-currency growth reached 8.7% in Q2 and 8% in the first half. Currency headwinds decreased to 4 points in Q2 and we have revised down the anticipated full year currency headwind to 3 points.

Finally, reported growth in Q2 and H1 were 4.7% and 3%, respectively. If I -- if we step back and look at the left-hand graph, clearly, our comparison basis ramps up in the second half, primarily because of North America.

Our raised growth guidance also tells us -- tells you what we can deliver nice growth on tougher comparison basis and that's key in view of our midterm growth ambition.

Let's now move on to revenues by region. I will focus my comments on H1 figures as most of the comments also apply to Q2. And to be consistent with our outlook, I will refer to constant-currency variation.

North America, our largest region with 31% of group revenues, was the most dynamic in the first half, with a 17.2% revenue growth. The double-digit organic growth was further lifted by the recent acquisition in the Digital business. This strong performance was mainly driven by our Retail sector, followed by the Financial services and public sector.

U.K. and Ireland revenues, which account for 12% of group revenues, were down by 5.5%, driven by the decline in the public sector, in line with our expectation; while the private sector remained flat. We still expect that the U.K. will return to growth in H2.

France has achieved a solid 6.1% growth, mainly driven by the Application Services business line. Financial services, Consumer Products and Retail and Energy were the most dynamic sectors.

Our growth has also been solid in the rest of Europe at 7.9%. Germany and Scandinavia posted double-digit growth. From a sector standpoint, Financial services has been our largest contributor to growth, followed by the Retail, Manufacturing and Energy sectors.

Finally, Asia Pacific and Latin America reported 3.4% growth in H1. Asia Pacific has been driven, in particular, by Consumer Products, Retail and Financial services. Revenue in Latin America remained flat overall. Brazil was negative as our priority has been set on the return to profit. And Mexico was very robust.

Now looking at our revenues by businesses. Here again, Q2 has been pretty consistent with Q1. Consulting Services, which digital transformation practice has been boosted by the recent acquisition, reported a 31.5% constant-currency growth. This performance notably reflects our strong momentum in North America, Germany and Benelux. U.K. also recorded decent growth despite a more subdued environment.

Technology & Engineering Services saw growth in all group regions and report a 5.1% growth. Energy & Utilities has been the most dynamic sector; and North America, the largest contributor to the growth.

Application Services, our largest business, with 63% of group revenues, benefit from the strong demand for Digital and Cloud offering and report double-digit constant-currency revenue growth. North America, France and rest of Europe were particularly strong.

By sector, here again, Consumer Products and Retail, Manufacturing and Financial services were the largest contributor to this performance.

Other Managed Services posted a decline of 4.4%. The softness in traditional infrastructure services was driven by the U.K. public sector but it was partially offset by strong growth in cloud integration and orchestration services. In this business line, automation is a key competitive driver, especially in Business Services.

Moving now to the headcount evolution. Total headcount reached 205,600 employees at the end of June, up 4.4% year-on-year and up 2.9% over the last 6 months. Our offshore leverage remained stable at 57%. We continued to add capacity offshore, but the net addition onshore is now back up with our strong momentum in Digital.

In line with trends reported by other market players, attrition is up year-on-year at 19.5%. This is still within our operating range and we can probably expect attrition to trend back towards -- down towards the end of the year.

Now moving to our operating margin by region. For North America, we discussed at the beginning of the year that in spite of the currency headwind on this region margin, we decided not to slow down our investment toward Digital. In H1, our operating margin decreased slightly to 13.2%. However, at a more operational level, our indicator now trends favorably. So on our plan for the region, we are where we wanted to be, if not a little ahead and margin should improve going forward.

Also qualitatively, the group wins mentioned by Rosemary that leveraged the recent acquisition demonstrate the relevance of our M&A strategy. In U.K. and Ireland, our operating margin decreased as expected. It stands at 12.2% versus 16% in H1 last year. If we -- if our currency hedging provided a boost last year, it is now down -- it's now over and we get the reverse impact. We had also a less favorable business mix this year.

The operating margin in France improved by 120 basis points year-on-year and now stands at 8.4%.

The rest of Europe saw an increase of 60 basis points year-on-year to reach 12% operating margin.

Finally, in Latin America, the plan to return to profit has paid off and drastically lifted the operating margin in Asia Pacific and LATAM from 6.2% in H1 2017 to 11.7% this year.

Now by business. Operating margin of our Consulting Services is up 150 basis points to 12.1%. Technology & Engineering Services margin is down by -- to 11.8%, with some visible currency translation impact. Application Services posted another increase in operating margin to 12.7%. Operating margin in Other Managed Services is currently under pressure in the transition phase and contracted to 6.9%.

Overall, the profitability of our Digital stack tends to improve. This clearly contributes to the performances of the 2 business lines most recalled up by digital transformation demand, Consulting Services and Application Services.

Moving on the analysis of our operating margin, let's start with gross margin. You might remember that last year, gross margin was stable in H1 but came down year-on-year in the second half. In 2018, we catch up and already recovered half of the ground in the first 6 months. All operational indicators are moving into the right direction. I would say that we are on track with our plan.

Our spend on selling is up by a couple of percent at constant exchange rate, but down at current rates as a percentage of revenue. It reflects better efficiency in our selling efforts.

Finally, G&A remain under control and are stable year-on-year as a percentage of revenues.

Net financial expenses are up year-on-year by EUR 11 million. This essentially relates to currency impact and hedges on nonoperational transactions. Income tax is up from EUR 140 million last year to EUR 169 million in 2018. It includes an EUR 18 million expense from the transitional impact of the U.S. tax reform. Setting aside this item, in line with our comments, the effective tax rate was up 4 points to 31 -- 30.4%.

This transitional impact relates to the measures that were still under evaluation back in February. To summarize, the cash impact of those measures is limited to 2018. We speak of onetime impact of around EUR 40 million that only applies to 2018. Beyond 2018, the impact will be noncash and last for 3 years for an estimated amount of the same magnitude. As you may know, clarification on this matter is still expected from the U.S. authorities by the end of the year.

And now let's go through the recap of our P&L from operating margin to net income. Other operating income and expenses increased to EUR 186 million in the first half compared to EUR 134 million in H1 '17. This reflects, notably, the seasonality of some costs which tend to be higher in the first half of this year, restructuring and acquisition costs, and this year, some reorganization charges that weight the line item Other Costs in H1.

We told you to expect restructuring costs to be similar this year to those in 2017 at around EUR 130 million. This also applies to amortization of intangibles and M&A-related expenses even though we are more active this year.

For share-based compensation, as you know, the IFRS charge is proportional to the share price and is, therefore, expected to increase this year by about EUR 30 million.

But our key message today on other operating income and expenses is the following. Restructuring should go back to EUR 80 million as early as next year.

Our operating profit stand at EUR 521 million, 8% of revenues compared to EUR 538 million in H1 last year.

Taking into account financial expenses and taxes discussed earlier, our net profit amounts to EUR 314 million compared to EUR 375 million in H1 2017.

With our buyback policy, the number of outstanding shares comes down this year again by about 1 million.

Finally, normalized EPS for H1 2018 stands at EUR 2.64 and EUR 2.75 before the transitional tax item, down only 2% year-on-year despite the 5% currency headwind on revenues.

As far as 2018 priorities are concerned, I'm clearly in line with the priorities we set at the beginning of the year. We have demonstrated strong financial performance during the first half of this year. It reflects the continued success execution of our midterm growth strategy, in particular, the rapid rotation of our business to Digital and Cloud high growth areas.

The level of our business in Digital and Cloud is high and growing, thanks notably to staff upskilling or reskilling investments, packaging of new portfolio offers. This is a group priority managed by the 2 COOs that I fully support.

Our move towards Digital and Cloud is also sustained by our recent acquisitions with very strong and successful integration processes into existing Capgemini business lines. This growth evolution is realized while increasing our margin rate by 20 basis points, in line with 2018 outlook and the capacity to continue to generate over EUR 1 million of organic free cash flow.

We are also committed to maintain the balance between the return to shareholders and M&A. Over the last 18 months, the return to shareholders stands at EUR 922 million and the cash dedicated to M&A at EUR 647 million.

On that, we'll now open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Amit Harchandani, Citigroup.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [2]

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Amit Harchandani from Citi. Two, if I may. My first question relates to the increase in the guidance and the strong performance in the first half. In terms of the increase in guidance, to what extent would you attribute it to: faster-than-expected organic evolution versus higher-than-expected M&A contribution? And how do you think that sets you up going into, say, beyond 2018 and towards your medium-term trajectory? So that would be my first question in terms of the sustainability of the organic growth acceleration. And secondly, in terms of headcount, it's interesting to see that you added onshore and offshore roughly the same headcount in the 6-month period. I appreciate part of this could be LiquidHub. But is this a sign of things to come? How should we think about offshore leverage from where it stands today?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [3]

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Thank you, Amit. On the guidance, the first point I really pointed, Carole stressed, our M&A objective should be in line with what we said at the start of the year, in the range of 1.7%, 1.8%. So our growth guidance does not rely on an acceleration of external growth. It's a little early to talk about '18, frankly. I'll just say we project for the second half, we'll speak later on, on 2018. On the headcount and evolution, Amit, I will just say, first, you're right, the speed of onshore and offshore resource of LiquidHub is relatively balanced. But it's probably a trend notably since in India, automation will start to bite into the headcount growth. So quite probably, we will see a slow evolution of the 57% offshore leverage. I think it will move slightly up, but certainly, at a slow pace.

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Operator [4]

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The next question comes from Stacy Pollard, JP Morgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [5]

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Two questions on North America, please. First of all, on the revenue growth side, what was the organic constant-currency growth in North America? I think you said double-digit, but maybe just confirm that. And then -- or sorry, maybe you were guiding for double digit in the second half, that might have been what you were saying. Is that midterm guidance now? Do you think double digit is what you can do going forward, say, into 2019 as well for North America? And then the second quick question is really in North America again about operating margins. You talked about recovery. Was that by second half or not until 2019? And then when you think about your midterm guidance of 12.5% to 13%, is that mainly driven by the digital product -- projects being higher margin? Or is that the geographic mix or something else?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [6]

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Stacy, several question. The first point on North America, we said both. We said first, the growth in H1 includes a significant organic growth. And we don't want to give you detail per geography, but we are double digit organic. And we said, too, which is the second concept, that we expect to be close to double digit in H2 at constant currency this time. Do remember that the comparison base is far more demanding between the first half in North America, that was 0.4%, and the second half. Long term, I think we should repeat what Aiman and I were -- used to say on North America: we would be happy with an organic growth in the range of 6%, 7% in North America and that has always been our target. Now, on operating margin, we told you that there was an impact notably of currency in the North America operating margin. We warned you about that since February. We expect an improvement in the second half. And last, on the 12.5% objective, clearly, the growth of scale of digital projects will allow us to grow our margin certainly.

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Operator [7]

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The next question comes from Michael Briest, UBS.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [8]

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I'm just curious on the sort of balance of the year. If you've done nearly 6.5% organic growth in the year, you're talking about 7% plus, less maybe 150, 180 basis points of acquired. It's just a little over 5% organic, so quite a slowdown in the second half, maybe even less than 4%. Is that just natural caution or do you genuinely see, with the tougher comparatives in North America, for instance, that the business will decelerate to that amount organically? And then secondly, just on Sogeti. I think I asked on the Q1 call, again, the growth rate's on the low side, margins are down and I'm just curious why this very sort of pro cyclical business isn't reaping more rewards in the current climate.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [9]

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On the first question, our underlying trends are expected to remain broadly the same in H2. And the comparison basis, as we told you, is ramping up in North America more specifically, which last -- I remind you that last year, we moved from 0.4% growth in this region in H1 to 9.6% in constant-currency growth in H2. So the growth rate for H2 implied by our guidance really demonstrates our ability to deliver nice growth on much tougher comparison basis, which is key in view of our midterm ambitions.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [10]

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Sogeti, there are several points technically. You're right about the cyclical nature of Sogeti. But do think that here, we have -- we may have a currency impact because the most profitable part of Sogeti, we always said it, is North America; and because of the drop of Sogeti North America in the mix, that weighs. But I do not see reason for an eroding margin in Sogeti. Okay, Michael? Thank you.

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Operator [11]

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The next question comes from Mohammed Moawalla, Goldman Sachs.

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Mohammed Essaji Moawalla, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Just coming back again on sort of the implied guidance and sort of slowdown in H2. I mean, obviously, you've got the tougher comparators. But you seem pretty optimistic on North America. I think you're saying U.K. also comes back. So again, just curious, is it a capacity issue that perhaps also -- you, perhaps, don't have enough capacity to deal with demand? And then secondly on the U.K., what sort of gives you the confidence around sort of that stabilization and recovery in H2?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [13]

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I want to dismiss any ambiguity: we expect our organic growth to be above 4.5% in H2. Let us be clear. The calculation is done. We are prudent because of the demanding point of comparison, but we do not see a big slowdown, but we have a base that is more demanding. On the United Kingdom, frankly, we have seen the pipeline growing. We told you that in the first half the private sector is stable. We have a good pipeline of opportunities that makes us comfortable of a return to organic growth in the U.K. It's several sectors. So in spite of all Brexit alarm, we monitor that closely. Might be a little less optimistic that my British colleagues because they are really too optimistic, but I'm confident we will be positive in the second half.

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Operator [14]

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The next question comes from John King, Bank of America Merrill Lynch.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [15]

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Two questions on the bookings, if you can. So could you -- sorry, on the acquired businesses. So first of all, could you talk about the growth rates that you're seeing in the businesses you've acquired over the last couple of years? And then related to that, perhaps Rosemary could comment on the amount of the bookings or the pipeline that is either through those businesses or has a component of some of those businesses being used, I guess, to drive the bookings. I know you integrate those businesses fairly quickly but any qualitative comments would be useful.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [16]

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I would take a few examples which are relatively different. If you think of small boutique and Fahrenheit 212 or IBM, they are growing nicely. But what is more important is the win rates that increase when we present pieces of their skills in a complex offer. And we had several wins on that. We were quite happy. Now when we talk of, notably, Itelios and Lyons Consulting that were both on the e-commerce platform of Salesforce, here, we have superb growth, more than 20%. So these are extremely rapidly integrated units, both in Europe with Itelios; and in the U.S. with Lyons. For LiquidHub, it's a little early to draw any conclusion. It's software. We are in line with the biggest of the acquisition, but we are only a quarter into it, so let's wait the end of the year. So today, in the very recent acquisition, at least, I'm very happy. Your second question was on?

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [17]

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Yes, so I guess it was -- I think you pretty much answered both of them. I did have a follow-up, was going to be probably for Carole on the restructuring. I missed a little bit what you were saying about the full year restructuring costs. So if you could just repeat that. And maybe any comments as to why the restructuring is seasonally higher in H1? Obviously, I guess simplistically, the growth is good and you would have almost imagined the restructuring to be lower. So just maybe some repeat on the restructuring topic.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [18]

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Okay. On the restructuring, so the total amount for 2018 stands at EUR 130 million as it was disclosed to you earlier, back in February. And the fact that we had some phasing here in H1 compared to H1 last year is linked to some real estate programs that are in place in the first half. So it's just a phasing issue. And what is important there in terms of message, that's what I underlined during the presentation, is the fact that we will move back to EUR 80 million restructuring cost early -- as early as next year. So that's the key message for this caption of our P&L.

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Operator [19]

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The next question comes from Charlie Brennan, Crédit Suisse.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [20]

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Just 2 questions from me as well, actually, if I can. Firstly, just on your sales efficiency. It's nice to see the accelerating revenue growth coming through. But you're managing to achieve that at the same time as reducing sales costs as a percentage of revenues. Can you talk about where that sales efficiency is coming through? And are you confident you're investing enough to sustain momentum into next year? And then secondly, just on the U.K., can you reiterate your comments on the margin? Last year, you were able to maintain profitability in the face of declining revenues. Why are we seeing margins under pressure now? I'm just wondering if there are any sort of contract execution problems in there.

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Unidentified Company Representative, [21]

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I'll pick this one up. On the sales costs, we have a bit less sales support cost on large deals in the first half. It is not really something intentional but we also have some better sales efficiency because we see our bookings are going up. And sales and bookings tend to be completely related from that perspective. We'd probably ramp up more some of these sales investments in the second half. So you'll probably see that line going up a little bit. But overall, it's some sales efficiency which basically coming from the fact that we increased top line without having to basically increase a lot of sales costs. But I do expect that with some of the deals we are working on, which are quite large, to see some of the sales investment go up quite a bit in the second half, Charles.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [22]

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Charles, on the U.K. margin, Carole?

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [23]

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On the U.K. margin, what we see there is a headwind -- currency headwind, which was not the case last year. So we -- the positive effect we had last year, we don't see them this year. So we have the reverse effect. And we also suffered a little from a less favorable business mix. But we've got no contract issues there.

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Operator [24]

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The next question comes from Laurent Daure, Kepler Cheuvreux.

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [25]

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In fact, 2 questions as well for me. The first is on the strong improvement you recorded on the margin side in APG in Brazil, I think it's like 6 points or even more. I understand Brazil did better, but it's a small part of the region. So was there anything specific, any one-off either last year or this year overall that could explain this big improvement? And my second question is, sorry to come back, on the guidance for the year and the deceleration in the second half, which I understand is close to 2 points, if you want to be cautious. I want to make sure I understood your -- and I read your comment. Is it basically saying that the U.S. [growth] is likely to be like 6 points lower on an organic basis than in the first half, and that's how you constructed your guidance? Or is there anything specific on the other regions?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [26]

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So Laurent, your first question, they were actually negative one-off...

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [27]

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Last year.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [28]

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Last year. So you see, we have cleaned several situation, notably, in APAC, in Australia; and we have cleaner situation with 1 client that we rolled out in Brazil. So now we are back to a more sound and stable mix. On the guidance, I would repeat. First, there is 1 [point] difference in the comparison points. We have absolutely no reason to be pessimistic on H2. We are, as you can expect, a little bit prudent. And I want to say that I still read what you start to write. Just say, we expect to do a good second half, more than 4.5% organic. And we will be delighted, but it's a little bit too early in front of the more demanding base, to commit today on something more bolder than what we say, which is slightly above. So we don't encourage you to put you in the above 7.5%. To be clear, we think it's, at this stage, more prudent to see you above 7%, but not too high. Am I clear?

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [29]

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It's clear. And to be very clear, your second half was in the U.S. double digits is including acquisitions, right?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [30]

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The second half last year was at 9%, including a small acquisition that didn't weigh that much. So no, the -- that is high and we will jump and we will pass it, and you will see a good second half in North America.

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Operator [31]

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The next question comes from Alex Tout, Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [32]

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Just noticed that there was a huge fall in the Consulting attrition, whereas, you had record attrition in the other parts of the business lines. I mean, could you just dig in a little bit on the trends there and how you expect those to evolve in the next few quarters? And then, just secondly, any signs of recovery in the North America energy sector? It didn't look like it came through this quarter. But we see commentary from players in the market suggesting that there is recovery in that market. Does that give you something of a tailwind into the second quarter?

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [33]

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On attrition. First, you're right, there were specific measures because we were bleeding in Consulting. We took drastic action, and the situation is back under control and our Consulting group is happy with the level of attrition they have reached. The over-attrition is higher and you probably noticed, notably, that our peers in India, we all suffer from the same trend. There is high attrition in India because we are not that generous in terms of salary given the price constraint. And as we are all doing that and we all suffer from attrition, they must find jobs somewhere else, but not in the IT service industry. That's the trend, and we'll manage it by managing career better and we expect to be back under control by year-end, which is what Carole told you. On energy, we didn't point at that. I was in the plant last week and I talked to the head of the energy market unit, Randy, and actually, he came with some nice project back. To my surprise, some of them around the drilling again and ERP focused on drilling and exploration. So you are probably right, the outlook looks better in energy. We don't -- we didn't see better figures for H1, but the guidance is more optimistic for solid pipeline for H2, at least in bookings. Let's wait for the revenue. Maybe a last one?

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Operator [34]

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We currently have no further questions over the phone.

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Paul Benjamin Hermelin, Capgemini SE - Chairman & CEO [35]

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Okay. Thank you. Thank you so much. So we'll see some of you during the roadshow of tech conference, and we'll see all of you at our Capital Market Day end of October. Thank you.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [36]

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Thank you.

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Rosemary Stark, Capgemini SE - Group Sales Officer [37]

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Thanks.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.