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Edited Transcript of CAP.PA earnings conference call or presentation 15-Feb-18 7:00am GMT

Full Year 2017 Capgemini SE Earnings Call

Paris Feb 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Capgemini SE earnings conference call or presentation Thursday, February 15, 2018 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aiman Ezzat

Capgemini SE - CFO & Member of Management Board

* Paul Benjamin Hermelin

Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board

* Rosemary Stark

Capgemini SE - Group Sales Officer

* Thierry Delaporte

Capgemini SE - Head of Financial Services & Latin America and Member of Group Management Board

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* Georgios Kertsos

Berenberg, Research Division - Analyst

* Gerardus Vos

Barclays PLC, Research Division - Senior 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

* Neil Steer

Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research

* Toby Ogg

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Capgemini 2017 Full Year Results Conference Call.

I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [2]

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Thank you. Good morning, everyone. I'm delighted to welcome you today. I'm here with our 2 COOs, Aiman Ezzat and Thierry Delaporte; as well with Rosemary Stark, our Global Sales Officer.

Before starting an update on our business, I want to say that all our thoughts are with our American colleagues following yesterday's new Florida tragedy. As a global company, we feel very close to the U.S. and to the American people.

Back to our performance. Our performance in 2017 confirms our strong momentum. Our revenue grew by a solid 4% at constant currency, with an acceleration in the last quarter where it reached 6.2%. The transition of our portfolio continues at a rapid pace. Our revenue in Digital and Cloud grew 24% over the year. In the fourth quarter, they represent 40% of our revenue.

In 2017, our Digital and Cloud revenue has reached almost EUR 5 billion. We also delivered on our main challenge for the year, bringing back North America to a solid growth at plus 5% over the year. We invested significantly to sustain this growth, and we continue to improve our profitability. We deliver another 20 bps of margin expansion compared to 2016, now reaching 11.7%.

Our cash performance is above expectation, with a full year free cash flow of EUR 1,080,000,000. And our normalized EPS increases by 11% on a comparable basis. Based on this performance, we are proposing a dividend of EUR 1.70 per share to be approved at the Annual General Meeting.

Finally, we executed on our acquisition program to reinforce structurally our digital portfolio. In that respect, in addition to the various deals we closed over the year, we announced last week the acquisition of LiquidHub, which Thierry Delaporte will present in more detail in a few minutes.

Now let's take a closer look at our main markets. We see a good performance across the board. We delivered on our promises in 2017, and we are solidly on track to meet our midterm ambition. We managed to bring North America back to solid growth. I said 5% at constant currency in '17. This is a testimony to our efforts during the year. The dynamism of our manufacturing, financial service and retail clients underpin our performance. We have acquired very strong new logo and signed market deal this year, which underline our ability to deliver transformation at scale for our clients. We saw some price pressure on some renewal in H1, which we have started addressing with an aggressive industrialization plan.

In Continental Europe, we delivered another very strong performance and gained market share in a healthy economic environment. We delivered double-digit growth in Germany, in Nordics and Italy, and we sustained our momentum in France. We enjoy a strong client base in our portfolio offering, reaching full Digital and Cloud offering and offshoring, is perfectly suited with the technology cycle.

In the U.K., we saw a softening of the market in H2 in a challenging backdrop. We saw some clients starting to delay investment at the end of the year, especially in retail. In the public sector, the HMRC re-insourcing has now been completed, and the relationship with this client continue to be very strong. We are working on regaining momentum in the United Kingdom. We already enjoyed some recent wins. H1 will be again impacted by the HMRC insourcing, but we expect to return to growth in the second half.

We achieved a good performance across Asia Pacific. In Latin America, Mexico shows very strong growth, while Brazil is stabilizing. Let me also remind you that India is at the heart of our competitiveness and the deepest reservoir on talent -- of talent in digital, cloud and artificial intelligence.

Let me share with you what we see the key trends of the market and how we are positioned to leverage them. Digital is the obsession in the boardroom and the C-suite. Some segment like digital marketing are more advanced than others and are already called to entire industries, while others are still in the adoption mode but growing fast, like digital manufacturing where I think we are ahead of the work -- the curve working with our clients. We are among the very few players able to execute sizable large digital transformation program for our clients.

Development of digital has direct consequences on the fast adoption of cloud. Ever more application are being developed and maintained directly in the cloud. We see greater demand for hybrid private/public cloud and cloud-native skills where we excel, thanks to the breadth of our skill base. In parallel to this fast adoption, we continue to see good traction for our cybersecurity offerings. Our global team provides advance on-premises, off-premises services to secure our clients' infrastructure and system. We're growing at full speed, only limited by the number of people we can onboard.

Across cloud and cybersecurity, we closed significant large client wins, including top-tier accounts in automotive, financial service, energy or professional service. And finally, artificial intelligence is a front-of-mind strategic opportunity for our clients and for us. We help our clients capture the benefit of these new trends in their business. We are expanding considerably our AI footprint, developing and deploying AI-based and machine-learning solution with our client. These deployments include working with top-tier investment banks, consumer product and automotive companies in fields like -- such as cementing content analysis for finance, intelligent image recognition or cognitive fraud detection. We also invest to develop our own AI-based platform and tool to ensure we stay ahead of the curve with a solid community of 10,000 experts in AI and automation.

Let's now move to our priorities for 2018. They are very clear. First, stay close and closer to our client in even more strategic dialogues across the C-suite. This relationship with CxO is at the core of our growth. We deliver for our key client by being able to manage large and complex transformational project in a competitive market. To sustain the discussion, our portfolio is evolving in close collaboration with our key partner to stay on top of market evolution. We accelerate our efforts in AI and automation. And we will continue our policy to acquire Digital and Cloud specialists to expand our offering and then reinforce our leader status in a fast-growing market, as we did in '17.

We continue to invest in our people, retain and train the best people in the industry and to offer leadership opportunities to our strong and diverse base of talent. In 2017, we launched an unprecedented investment to train our talent. We increased our training effort by around 40% this year with an addition of 2.5 million of training hours, and we will continue in 2018.

Finally, we have redefined our corporate social responsibility priorities with our Board of Directors. In addition to promote diversity and environmental sustainability, we have made and we make strong commitments on what we call digital inclusion. As a responsible company aware of the digital divide, we decided to focus more and more on this topic. These are not just words, we are quantifying our efforts in our management, and I will be incentivized on our CSR success.

Now 2018 objectives. We are on track to achieve our midterm ambition on growth and margin. 2018 will be a new step in that direction. For 2018, our objective is to achieve a revenue growth at constant currency between 6% and 7%. Acquisition should contribute close to 2%. This objective reflects our expectation for the market and [the feed] between our portfolio and client demand in a strong economic backdrop. Obviously, we are still laser-focused on our margin, and we continue to expand our operating margin to reach the range between -- in 2018 to reach between 12% and 12.2%, taking into consideration the accounting changes for resale. We need to keep in mind that we are facing a headwind linked to the relative evolution of the Indian rupee versus the U.S. dollar. Finally, building on our successful track record, we expect an organic free cash flow for the year in excess of EUR 1 billion.

I will now invite Thierry Delaporte to join us to discuss about our latest acquisition.

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Thierry Delaporte, Capgemini SE - Head of Financial Services & Latin America and Member of Group Management Board [3]

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Thank you, Paul, and good morning, everyone. I'm absolutely delighted to join you today. Indeed, on February 5, Capgemini announced the acquisition of LiquidHub, a EUR 200 million digital customer engagement firm that specializes in developing and delivering compelling customer experiences. This acquisition reinforces Capgemini digital consulting capabilities in North America and accelerates its portfolio shift in the region.

LiquidHub focuses on improving customer engagements with a very rich set of expertise suited for digital businesses, bringing together about 2,800 professionals from design thinkers, experienced designers or digital architects to platform and analytics specialists. This acquisition is an opportunity for us to accelerate the speed of our -- the shift of our portfolio towards digital offerings in North America. It also brings some remarkable accounts and CxO's relationships with clients across the health care, life sciences and financial service sectors and, in particular, in asset management, which, by the way, is a good addition to our financial services portfolio.

LiquidHub focuses on delivering a customer-centric set of consistent engagement patterns across marketing, sales, service and commerce. This acquisition is a major step in our ambition for equipping North America with a strong digital platform.

Let me now give the floor to Rosemary Stark, our Global Sales Officer, to discuss about our client achievements in 2017.

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Rosemary Stark, Capgemini SE - Group Sales Officer [4]

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Thanks, Thierry. Good morning, everyone. Our 2017 bookings show 1% growth at constant currency, which, bearing in mind a large HMRC renewal in 2016, is good traction. We closed several large deals towards the end of 2017 with a really good Q4. And once again, we delivered more than EUR 3 billion bookings in 3 quarters out of 4.

During 2017, we've continued to expand our Digital and Cloud-based services. And bookings in Digital and Cloud have grown by more than 20% in 2017, with several marquee digital deals closed in H2. Digital and Cloud pipeline is growing very well, too. And digital transformation is a very hot topic and it's leading to much, much larger digital transformation deals and stronger business relationships. It's also increasing our pipeline of project work, which has a faster burn on revenue and a tighter book-to-bill compared to many of our multiyear contracts.

Our large accounts are growing well at 2% above the group average, and we feel this really demonstrates our ability to develop consistently-strong client relationships. We're delivering both competitiveness and innovative propositions as a strategic partner for these large clients.

Now looking at sectors. Financial services has good momentum overall, and we see strong growth notably in Continental Europe and in APAC. MALS is a growth engine for the group generally, with a strong Q4 at 11.9% growth and 10.4% annual growth, driven by PSA, by Difa, by other marquee wins in the sector, which I'll cover in a moment.

Digital manufacturing and IoT are growing very fast, as Paul mentioned, and they will be interesting for us in 2018. Auto is also doing well, with lots of work related to connected vehicles and vehicle-sharing schemes and autonomous vehicles.

The trough in EUC in North America is now behind us. We've had a very strong Q4 in EUC and good growth in the U.K. and Europe. And there's a strong line -- strong pipeline of digital projects, particularly in the utility sector.

In consumer products, we have good growth: 13.2% growth in Q4, driven largely by North America and Germany. And digital customer engagement is driving [allowances] with a strong focus for many of our consumer products and retail clients on that digital engagement.

Public sector has growth of 3% overall outside of the U.K., where, as anticipated, we have a HMRC effect. Telco, media and entertainment continues to be soft, with weak demand in Europe across the sector.

Let's move on to our key wins and where our growth is coming from. On the slide, we're showing you a selection of names and otherwise wins, where the clients doesn't want their name known. We are maintaining and creating new long-term relationships across a whole range of clients, more than 50 new multiyear contracts signed in 2017.

I'm going to cover some notable examples: a world-leading international U.S.-based manufacturing company that develops and manufactures products for the generation, transmission, distribution, control of electricity, a large multiyear deal signed with them; an American supercenter chain signed for more than 6 years for an interesting IT management and transformation service; Difa, which is the Norwegian pharmacy association representing all 900 pharmacies in Norway, where Capgemini is building and will run a new cloud-based solution for digital prescriptions and service, connecting pharmacies and patients in a different way.

And also, in addition to these multiyear contracts, our focus on Digital and Cloud continues to play a really important part in our business. For example, for the Peugeot Citroën group, where we're implementing the digital platform for connected cars; and for 1 of the top 3 U.S. banks, where Capgemini has been picked as the partner for their enterprise data program, where we're also helping the bank engage robotic process automation and driving operational efficiency. So some interesting engagements we're seeing with clients.

I'll hand over to Aiman now to cover our financial results.

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [5]

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Good morning. I will walk you through the financial highlights of the 2017 results. 2017 is another strong year for Capgemini. As planned, growth accelerated over the course of the year. Profitability increased, and cash flow conversion remains strong.

Group revenues rose to EUR 12,792,000,000. Reported growth is 2% at current exchange rate and 4% at constant exchange rate, above the 3% target set at the beginning of the year. Please keep in mind that these growth rates, as stated a year ago, exclude the Brazilian hardware resale business as it is discontinued.

We experienced a currency headwind of 1.6 point due to the weakness of the pound sterling and the USD against the euro. The operating margin stands at EUR 1,493,000,000 or 11.7% of revenues, 20 bps progression over last year, within the operating margin target that we set. After taking into account the other operating expenses that I will comment in a minute, the operating profit stands at EUR 1,183,000,000, up 3% year-on-year.

Net financial expenses dropped to EUR 72 million. This results in part from the action taken toward the end of last year, 2016, on the straight bond and on unconvertible. Capgemini recorded a tax expense of EUR 303 million. This represents an effective tax rate of 27.3% and includes the impact of deferred tax assets, including the U.S. tax reform. As a reminder, in 2016, we recorded a one-off noncash tax income of EUR 180 million. As result, net profit group share amounts to EUR 820 million. Adjusted for the 2016 one-off noncash tax income, this represents an 11% year-on-year increase.

Finally, organic free cash flow reached EUR 1,080,000,000, above the target we set at EUR 950 million for the year. It represents a 72% conversion rate of 2017 operating margin. For the second year in a row, our organic free cash generation surpassed our net income, and this illustrates the quality of our earnings.

Now a word on IFRS 15, which is applicable, as you know, as of January 1, 2018. As communicated in July, the main impact relates to the resale activity that we may carry from time to time. From now on, a larger proportion of these revenues will be recorded on a net basis, leading to reduction in revenues. The impact currently under audit is estimated at EUR 270 million on revenues with no change on the euro amount of profit or cash. This would have led to report an operating margin of 11.9% in 2017, which is a basis of comparison that we will use for our 2018 outlook.

Now moving to cash. The evolution of free cash flow, the steady improvement over the past few years clearly sets us above the EUR 1 billion mark. It's important to note that the fourth employee share ownership plan had a minimal impact on our cash generation as the EUR 360 million that we spent on the share buyback agreement to neutralize the dilution was offset by EUR [122] million from share capital increase. At the end of the year, the net debt stood at EUR 1,209,000,000 compared to EUR 1,413,000,000 a year ago.

Now looking at quarterly revenues. Q4, as Paul mentioned, saw a strong acceleration, with revenue growth of 6.2% at constant exchange rate, up from the 3.4% recorded in Q3. If you do remember, we were aiming, notably in North America, to get close to mid-single digit by the end of the year. Overall, we have achieved on what we expected in terms of revenue acceleration. On an organic basis, revenue grew by 5.6% in Q4, a strong performance which is above our expectations. For the full year 2017, revenue growth was 4% at constant exchange rate and 3.6% on an organic basis.

A word on the FX. If the impact was 1.6 point headwind in average for the year, the impact actually moved from a tailwind of 0.2 point in Q1 to a headwind of 3.5 points in Q4. Q4 -- the 3.5 headwind that you saw in Q4 is representative of what we expect now for 2018 for the full year.

Now let's move by geography. It's important to know that all regions, except the U.K., contributed to the Q4 acceleration. I will mention all growth numbers at constant exchange rates, unless I state otherwise.

First, on North America. Growth accelerated to 12.3% in Q4, substantially above the mid-single-digit target we set ourselves for the end of 2017. This illustrates the success of the investments done over the last quarters. This also demonstrates that with the right mix of capabilities and offerings, we can aim to grow above mid-single digit in the region. For the full year 2017, North America grew by 5%, primarily driven by the manufacturing, retail and consumer goods and financial sectors.

In the U.K. and Ireland, revenue were down 9.6% for the full year. This is primarily driven by the anticipated decline in the public sector. However, in the second half, as we already mentioned, at the end of Q3, we saw some softness developing in the private sector, together with the lengthening of client decision cycle. We are fully mobilized around returning the U.K. to growth in the second half of the year. As you know, in the first half, we will still have some headwind from the HMRC re-insourcing contract.

France, 21% of the group revenue, showed robust growth in Q4 at 6.5%. For the full year, the growth stood at 5.2%, with Digital and Cloud driving the strong momentum in application services and consulting. By sector, financial services and retail and consumer goods reported double-digit growth.

Growth was also very robust in the Rest of Europe at 11.3% in Q4 and 8.6% for the full year. Solid economic fundamentals, investment in digital transformation, combined with a strong appetite for offshore, allowed us to continue to gain market share. Germany, Scandinavia and Italy grew [2] or in excess of 10%. This region is well-positioned to remain a strong growth driver in 2018.

Finally, in Asia Pacific and Latin America, the growth was 7.8% in Q4 and 7.9% for the full year. The trends continue to be contrasted between Asia Pacific and LatAm. Q4 was marked by the return to growth in Latin America due to the stabilization of the situation in Brazil and a buoyant activity in Mexico. In Asia Pacific, growth remained solid and continue to be driven by financial services, complemented this year by solid growth in retail, consumer goods and energy.

Now looking by business. We see a strong growth in Consulting at 19.1% in Q4 and 14% for the full year, driven by Continental Europe where demand for digital transformation is increasing, notably in the manufacturing, financial services, and retail and consumer goods sector.

Technology & Engineering Services reported a growth of 4.7%, fueled by France and Scandinavia. By sector, Energy & Utilities was the most dynamic with double-digit growth.

In Application Services, our largest business with 62% of revenues, we continue to benefit from the strong demand in Digital and Cloud offerings. Revenue grew 6.6% over the year, with around 10% in France, Germany, Italy, Scandinavia and Asia.

Finally, in Other Managed Services business, which, as a reminder, includes our Infrastructure Services, our business process outsourcing services and our transactional and platform services, we reported a decline of 6.4%. This notably reflects the anticipated decline in the U.K. public sector, but also some weakness in the Infrastructure Services, which is, as you know, transitioning to cloud services. We are positive on the midterm perspective of this business.

Now moving to headcount. The total headcount grew 3.4%. This was mainly due by growth in offshore, notably by the increase in demand for offshore in Continental Europe. But as you can notice, the growth start to slow down as we did 5% overall in terms of growth in our global production centers for the year. We ended 2017 with close to 200,000 employees, out of which 57% are in our global production centers. Attrition slightly increased at 18.9%, but remains below our 2015 level and well within our operating range.

Now moving to the operating margin, first, by geography. North America, in line with what we saw in H1 2017 performance. Operating margin is down year-on-year by 190 bps, so that's the same exactly as we saw in H1. This reflects the investment made to accelerate the evolution of the portfolio of offerings that we have discussed all over 2017 and fueled the growth. But as you know, we also saw pricing pressure around some renewals of some large contracts and, as Paul mentioned, some headwind that we see on the Indian rupee to USD trends. And we consider these trends and these headwinds on the rupee to be temporary.

The U.K. margin increased by 50 bps to 15.1%, which reflects the portfolio shift in the U.K., and notably, the decline of the traditional infrastructure business. France's operating margin improved by 80 bps, so we are now close to 10% operating margin. We are just shy of that. We are at 9.9%. The Rest of Europe continued its margin progression, again, between the strong growth acceleration and the increase offshore, the 150 bps improvement to 12%. While in Asia Pacific and Latin America, margin also improved strongly at 9.8 -- to 9.8%, so a 320 bps increase. It reflects the improvement in Latin America, where we are working to restore profitability, and an increasing weight of the Asia Pacific region.

Now moving by business. The operating margin has improved in most business lines. Operating margin in Consulting Service increased by 50 bps to 11.2%. In Technology & Engineering Services, we continue to see a progression of 80 bps, and we reached 13.6%, thanks to good momentum in all key countries. In Application Services, which represents our largest portfolio, we see an improvement of 20 bps, driven by mix of the portfolio shift, which is still not bringing all the expectation that we have in the short term. It will take another 2 years or 3 years to get the full impact of that, but also the industrialization activities that we continue to carry. Finally, as expected, with a decline in revenues, the operating margin in Other Managed Services went down to 9.2%.

Now if you look by destination, the operating margin improvement has been driven by the leverage of growth on well-contained sales and G&A expenses, which actually came a little down in absolute value, helped by foreign exchange rates. On the gross margin, we are down 20 bps year-on-year. That's primarily driven by North America where we invested in delivery capabilities and faced some price pressures in H1. Currency movement have further weighed on that gross margin.

Now moving to financial expenses, they show an improvement, as now of EUR 74 million compared to last year due to the lower interest charge on borrowings following our operation on the straight and convertible bond at the end of 2016 and highest interest income. We see early unwinding of the USD-euro currency swap, which was set in connection with the IGATE acquisition in H1 2017. We do expect 2018 financial expenses to be around EUR 85 million.

Concerning income tax, as mentioned earlier in the presentation, we recorded tax expense of EUR 303 million in 2017 against EUR 94 million in 2016. As you know, in 2016, we had a recognition of the tax income of EUR 180 million related to goodwill resulting from legal reorganization. Setting this one-off aside, the effective tax rate is stable for this year at 27.3%.

Now to -- on the U.S. deferred tax asset, we had 2 movements almost offsetting each other and, therefore, with minimal impact on the overall tax expense. The change in the U.S. tax rate dropping to 21% has led to a decrease in the valuation of our deferred tax assets of EUR 295 million. Okay, so there is one movement impacted by the decrease of the tax rate to 21%. We had to revalue our deferred tax asset, and that dropped its value by EUR 295 million.

The second movement has been the recognition of EUR 299 million of new deferred tax asset. We basically activated what we had off balance sheet following the improvement of outlook for taxable profit in the United States since the last remeasurement we had done of the U.S. DTA in 2015. As of now, with that recognition of EUR 295 million of new deferred tax asset that we moved to the balance sheet, all the tax loss carryforwards have been recognized, and they are all on the balance sheet. So we don't have any more off-balance sheet tax loss carryforward in the United States.

Given the evolution of tax loss carryforward and the tax reforms adopted, particularly in the United States, we estimate that the effective tax rate should increase by 3 points to 4 points in 2018, without any material impact on the cash tax and, therefore, on our free cash flow generation. We are still investigating the impact of some of the other measures included in the U.S. tax reform.

Moving to the net profit analysis. As you see, other operating income and expense increased to EUR 310 million in 2017 compared to EUR 292 million in 2016. Our restructuring costs are higher by EUR 28 million as we have had to accelerate some industrialization initiative last year following some of the price competition we had in North America. On the other side, acquisition and integration costs went down by about the same amount. The IFRS charge for share-based compensation followed the share price and was up by EUR 13 million. We do expect other operating income and expense to be within the same range in 2018.

Operating profit increased by 3% to reach EUR 1,183,000,000. After financial expense and taxes, the net profit group share is EUR 820 million, up 11% compared to 2016 when adjusted for one-off noncash income of EUR 180 million in 2016. In 2017, the multiyear share buyback program led to visible accretion as the average number of outstanding shares went down by almost 1.5 million. All in all, and adjusting for 2017 one-off tax income -- 2016 one-off tax income, normalized EPS is up 11% to EUR 6.22 in 2017, above the EUR 6.2 referred to at the beginning of the year.

Now if I go to a review of our priorities for 2017, we delivered on all of them. We are maintaining the right balance between organic growth, acceleration and bolt-on acquisition to expand capabilities and accelerate the portfolio transition, while progressing the operating margin towards our midterm growth. Cash flow generation remains strong, with a conversion ratio to operating margin above our expectation. We keep the focus on total shareholder return with an increasing profitability in dividend and reduction in number of outstanding shares.

Looking at 2018, we aim to maintain the momentum to reach our growth ambition in 2019. We continue to improve our operating margin while dealing with short-term headwinds on currency and working the maturity of the Digital and Cloud portfolio to meet our midterm margin ambition. We maintain the discipline on cash generation and the balance of return between shareholders and M&A.

On that, we will open it to questions.

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Questions and Answers

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [1]

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Operator? Operator? We miss our operator. Hello? I guess there are many calls this morning, so...

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Operator [2]

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Sorry, yes, we have -- just a second. Yes, I'm sorry, we have a question. Now you can hear me, I suppose. We have a question from Mr. Adam Wood from Morgan Stanley.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [3]

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Congratulations on that very strong fourth quarter top line. Just on that top line growth, you suggested there was about 2% M&A contribution embarked already in the '18 outlook. Could you maybe confirm that that's what you'd expect? And if there was more material M&A, you'd change that target for the year? That's the first one. Secondly, on margins. You're at the lower end of the range for 2017. Could you maybe think -- talk to us a little bit about the required investments you think come in, in '18 and '19 to see that strong top line continue, and how does that impact on the 12.5% to 13% guidance for the midterm? I think, Aiman, you suggested that could be '19 or '20? Any further thoughts on what year that could be? And then just finally, on the tax rate going up. Could you maybe just help us understand that on the P&L because I understand you're probably going to be able to release less of the deferred taxes onto the P&L, but surely, the actual U.S. tax charge comes down as well, so I'm struggling to understand why the actual tax rate should be up.

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [4]

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Okay, really technical. First, on the -- okay, we didn't have 2% impact from inorganic growth in Q4. Let's be very clear. We said 5.6% organic growth, 6.2% basically in terms of constant currency. So it's 60 basis points overall for Q4 in terms of impact. If I look at 2018, today, we expect, if we close on time the LiquidHub acquisition, we will have embarked about 160 basis points. So within our guidance, we say that in the guidance of 6% to 7%, inorganic growth is less than 200 bps, okay? If we are to do a big acquisition, then we will review basically our guidance for constant currency growth for 2018. On the margin, we did come at the low end. As you know, we had some headwind, plus we had some erosion in North America that weighed quite a bit. To be frank, if you are able to do -- we had less impact in North America, we would have been at the top of the guidance. So we expect to see, from my perspective, still some temporary headwinds, hence, some caution on the margin for 2018. We will have some temporary headwinds coming from the FX because the INR is not depreciating against USD, and that weighs a little bit in terms of cost. But we are still very comfortable with the 12.5% to 13% by 2020. For me, we'll continue to progress the margin, which is the important thing. And we should see an acceleration in coming years as, one, we have less FX headwind because it's temporary; and the second thing, as we gain more maturity in our portfolio on Digital and Cloud, so we have full confidence on the 12.5% to 13% by 2020, Adam. On the tax rate, there's a lot of technical discussion around that. So part of why it is increasing further is there is movement in the number of impacts across the world in terms of tax rate, and there is a lot of impact coming from the evolution on DTAs, notably in North America. Part of what we had, we had partial recognition every year, and we activated some off-balance sheet, basically tax loss carryforward, which compensated the U.S. tax rate as we have now recognized everything, Adam. We cannot -- we have nothing to activate anymore on a yearly basis to compensate some of the tax rate in the U.S. on the P&L side. And as such, we will have, even if you have a reduction in tax rate in the U.S., we will still have some tax charges now in the P&L coming from the U.S., which we didn't have before. Right? That's what explains the 3 points to 4 points, notably that we've seen the effective tax rate increase, not only in the U.S., but it's primarily coming from the fact that we have nothing else to activate. So from a cash perspective, do remember it has no impact, right, so we're not going to pay more taxes because we still have plenty of DTA on the balance sheet. However, from a P&L tax rate, the lack of activation of tax loss carryforward implies the fact that the effective tax rate on the balance sheet will increase.

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Operator [5]

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So we have another question from Mr. Laurent Daure from Kepler Cheuvreux.

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [6]

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I have 3 questions on my side. The first question is, if we could have some color about the integration of all the small acquisitions we've been doing in the recent past and any kind of cross-selling you might have done. And also your view today, especially on the creativity part, do you still consider to partner with some advertising agency on some deals? Or are you moving closer to not change your strategy? The second question is on the U.S. I understand you have quite an optimistic view for the long term, given what you did on your tax assets. But can we have an update or where do you stand on your investment plan and also on the recovery of the contract that you had to renew on lower prices a year back? And my final question is still on the U.S. You really had a very strong fourth quarter, way ahead of about any competitor. So do you have -- did you have specific contract that contributed to the growth in the fourth quarter? Or is your win rate improving massively? Any color would be useful.

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [7]

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Thank you, Laurent. On the integration of what we have acquired last year, so first, some really striking success in the traditional IT world, so Itelios in France, we are really now -- we leverage that to be a European leader in the e-commerce platform of Salesforce, and we start to do the same with Lyons Consulting in the U.S. So very strong performance or investment in the Salesforce world. The TCube acquisition has worked extremely well, too, and Duck Creek, so that worked well. So now I move to more digital. We enjoy really a very strong growth both with Fahrenheit and Idean, and we use them to win large opportunities. So we inject Fahrenheit and Idean people and content in all our pursuit; that may play a role in our good win rate in the U.S. So solid growth. So as you see, it's quite important. Your question on creative skills and the need to partner on that. Frankly, today, we are not equipped with creative skills everywhere, notably in Europe. So we, in Europe, we favor partnership with large agencies. While the LiquidHub is a first step in that world -- and most probably, some creative people will think that we follow a little bit the track of the competitors you mentioned -- so it's truly a digital acquisition that includes significant creative skills. Your next question was about the U.S. investments. So let's be clear, the U.S. investments are mainly about acquiring talent, and that will not stop for a while, and that explains a little bit why we have to fuel the change of the business mix of the U.S. And for that, we need to recruit talents of a new kind, a recruitment of significant talent as a payback over 6 months to 18 months. So we accept that, and we drive the U.S. with that direction. And you asked about the recovery on some price pressure that we saw. Frankly, on some large contracts, we have quite advanced; on some, it's a total reengineering on the offer, so it will still wear a little bit in 2018. Last question, your Q4, it's not a one-off. We may see a good momentum in the first half of '18. But frankly, the McDonald contract has helped in the production of the fourth quarter, clearly. I think I answered your 4 questions, Laurent.

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Operator [8]

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So we have another question from Mr. Gerardus Vos from Barclays.

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Gerardus Vos, Barclays PLC, Research Division - Senior Analyst [9]

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Just a few. Just maybe to start off with the guidance on the kind of margin, the 30 to 50 basis points, could you just give us a bit of insight on the different kind of components? Or I guess, there's 20 basis points impact positively there from IFRS. What's the impact do you see from the kind of rupee in '18? And would you expect the kind of gross margin to return to expansion into 2018? Then on the growth guidance, underlying growth, so if I take out the Aspire impact in Q4, it was around 6.5%. I think on a like-for-like basis, you guide to organic to around kind of 4% to 5% in 2018. Is that simply conservatism? Or are you expecting some more headwind from the U.K. to kind of compensate for that kind of step-down in kind of growth? And then finally, with inflation coming back into the kind of system, what do you see on the kind of salaries versus kind of pricing equation across your kind of regions?

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [10]

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Okay, plenty of questions. If you're going to ask 3 questions, not many people are going to be able to ask questions. So let's start. So on the margin guidance, clearly, because there is 20 bps coming from IFRS impact, the underlying improvement that we have put in the margin guidance for 2018 is 10 to 30 bps. Very open about it. It appears like 30 to 50 bps, but 20 bps of it coming from IFRS impact. The gross margin in 2018, we do aim to start to improve it again. So definitely, it is really on our radar screen, as you might imagine. I always say that attaining the midterm margin ambition has to come from the gross margin. We had some setbacks in 2018 because of the erosion that we had in North America. We consider that we would recover some of that in 2018. So we're basically going to push very hard for the gross margin to improve in 2018, as you can imagine. On the growth, I like always the mechanical calculation on taking the good news and see how we can improve them further. I do consider that your calculation is correct. The underlying 4% to 5% organic growth, based on the fact that we still have some headwind from Aspire in 2018, is already a good one. And we don't have many competitors who are basically aiming for something like that, so I think it's already a good ambition that we have, and it clearly solidifies getting to the 5% to 7% in 2019. For me, it sets us on the track. If we can do better, we will deliver better, as you can imagine. But if we consider that's already an ambitious target. As you imagine, we have some base effect in some countries in Europe, where we love for them to continue to grow at the same rate, but we do expect some base effect at some moment. On the inflation, to be frank, impact on salaries, this is something we take into account. That's why we say we have to invest. Part of investment is retaining people. If you let people go, you slow down your growth. So we have to take the right balance between trying to fuel the growth, take advantage obviously to accelerate the shift of the portfolio, while at the same time, being able to ensure that we're not building a time bomb in terms of cost because at one moment, prices might start to go down a little bit. So that balance, we always keep. And that's where the 50 years of group experience play in how we manage that balance. So we manage it quite well, to be frank. I think we will not have a big salary inflation overall. We remain very cautious on that to be able to ensure that we can continue our profitable growth journey in the future. On the FX, it weighs, to be frank, it's difficult because there's so much volatility around FX. If you give me an FX rate, I could potentially measure the impact, Gerardus. But I don't know what the U.S. dollar will be in 2 months. I don't think you know either. Based on that, at this stage, we do expect 3.5%, 3.7% headwind on the top line. There is some impact on the bottom line. Notably, the rupee holding pretty well against the USD for the last couple of years is not helping. But we do expect that one moment that we will get back to the normal depreciation of the rupee against the USD due to the inflation differential between the 2 countries. That's why I consider this FX headwind to be temporary and not to be something structural.

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Operator [11]

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So we have another question from Georgios Kertsos from Berenberg.

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Georgios Kertsos, Berenberg, Research Division - Analyst [12]

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Three hopefully quick ones from me. Yes, I was wondering if you could perhaps comment a little bit around the demand outlook that you see in the U.K.? Second, around any sort of M&A plans, anything in the pipeline? And lastly, just to continue the effective tax rate, I think you mentioned 3 to 4 percentage points increase in '18. Is that from '18 onwards? Or do you effectively expect, let's say, the tax rate from '19 to sort of fall back to the historical average?

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [13]

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Okay. So on the U.K., first, as everybody has understood, the drag of the re-insourcing of HMRC will stop in June. So that will have an immediate effect. Then there is -- there are some colors, maybe because we have remotivated a bit our team. We have some large pursuits going on, and they will determine the size for our return to growth in H2. I see notably activities in the Energy & Utilities segment quite solid. FS is okay, too. The consumer within retail is soft and remains soft. That would be what I can say. On M&A, we said in the Capital Market Day, we will expect to spend half of our free cash flow generation for M&A. It's in the range of EUR 500 million. Now if we buy a company at 2x revenue, and it's a strong if, that could generate an addition of EUR 250 million of revenue, not in '18, of course, it depends on the date of closing. And we are still on that track, and we are still looking at additional pearls that we will acquire with focus on digital, on cybersecurity and on cloud and not only in the U.S. On the tax rate?

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [14]

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On the tax rate, so good question. I mean, that would put currently the tax rate at 30% to 31%. We always said that we expect the midterm effective tax rate to be around 30%. As you imagine, there is some fluctuation year-on-year depending on how (inaudible). But overall, we will start to benefit also from the reducing -- reduction of tax rates in France. You know they're going to move from almost 34% to 25% in the coming years. So overall, I think based on the trend that we see in the coming years on the evolution of the tax rate, we do expect to be at around 30%. That's usually what I will recommend that you use for your model.

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Operator [15]

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So we have another question from Michael Briest from UBS.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [16]

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Aiman, just in terms of the margin target, I guess there is this 20 basis point benefit from IFRS 15, which you wouldn't have anticipated 2 years, 3 years ago when you gave the target. Are we to assume that whether it's currency or perhaps acquisition dilution, you don't believe you can get more than 12.5% to 13% in the next couple of years? And then just in terms of the U.K., at the half year stage, you were sounding quite cautious on margin progression there and yet, actually, your margins were quite strong in the second half. I'm just curious as to what caused that perhaps, was it lower bonus accruals? And looking into this year, what do you see for the U.K. margin given both the demand side and perhaps currency effect?

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [17]

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Okay, 2 good questions. So Michael, on the margin, the 20 bps benefit we're getting from IFRS. I'd like to remind you that when we set the margin ambition to go to 12.5% to 13%, which was several years ago, it represented 300 to 350 bps in terms of improvement. I do not think with 20 bps improvement from IFRS, we should basically change what our target is. So I will cash the credit of the 20 bps and keep the 12.5% to 13%. You know very well that if we can deliver more, we will deliver more. But at this stage, I don't think the 20 bps improvement from IFRS should basically change our midterm margin ambition because, as I said, when we set it, it was 300 to 350. On the U.K. margin, U.K. margin benefits from the evolution of the mix. To be frank, the decline or the rapid decline of infrastructure service in the U.K. is accretive to the U.K. margin. On the 2018 perspective, as you know, I will not go into the trap of trying to set perspective on margin by region for 2018 because plenty of things can play. But definitely, our aim is always to improve margin everywhere, right? Whether we can improve the margin in the U.K. in 2018, I think it's a bit early to discuss, Michael. On the bonus -- yes, on the bonus, I would not say that the U.K. margin has improved because we have less bonus provision in the U.K.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [18]

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But just on the margin target, the midterm, is the 10 to 30 basis points this year unusual because of currency headwinds and investment?

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [19]

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Oh, for this year, the 20 bps for this year. Yes, I mean, listen, I think again, mechanically, if you add the 20 bps per year, you will get to your 12.5%. If we can make it 30 bps, we'll get to a bit to the mid of the range. And we can make it 40 bps, we'll get to 13%. So it's quite clear. Now I think we have to take it 1 year at a time because a lot of things play in the same year, but for me, what is important that we maintain every year a steady improvement in the margin progression. Maybe in 2018, we'll be able to do better because the portfolio maturity will have increased and we'll have some tailwind from currencies, right? For me, it's basically the steady improvement of the margin year-on-year is the right thing to look at. This year, because we have more headwind on FX and we continue to invest because we really want to fuel organic growth, we said 10 to 30 basis points. We will continue to try to push the margin to the extent we can every year. But for me, steady improvement in margin is definitely in our road map for the group.

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Operator [20]

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So we have another question from Charles Brennan from Crédit Suisse.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [21]

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I've got 2 quick ones, actually. Firstly, just a general industry observation. Some of your competitors have been talking about re-insourcing trends, particularly in financial services. I was just wondering if you had seen any of that amongst your client base and how you think that trend plays out? And then secondly, just a modeling one. I understand that the cash tax rate is going to be unchanged, but can you quantify what the cash tax rate is?

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [22]

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Let's have Thierry Delaporte on the financial service trends.

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Thierry Delaporte, Capgemini SE - Head of Financial Services & Latin America and Member of Group Management Board [23]

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Yes. On the financial service trend sector, I can say that we haven't seen a general trend of re-insourcing of IT, so we don't consider it as a trend that impacts our business.

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [24]

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Okay. On the cash tax rate, I can give you 2 numbers, I can give you what is the cash tax rate and what you should use for modeling because, again, I don't think it's recurrent. The cash tax rate is quite low actually in 2017, all right, so it's about 13%. But I would not recommend to you that cash tax rate as being recurrent. I always say use something a bit less than 20% or around 18% is what is reasonable in the coming years in terms of what we should expect in terms of cash tax rate.

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Operator [25]

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So we have another question from Toby Ogg from JPMorgan.

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Toby Ogg, JP Morgan Chase & Co, Research Division - Analyst [26]

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Could you perhaps comment on the competitive environment, particularly in North America, I guess, sort of on the M&A side? I know you're up against essentially Cognizant and private equity, et cetera, for the type of assets. How are you sort of faring when it comes to the pricing? And ultimately, how is it affecting the quality of the assets you're acquiring?

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [27]

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The first question is notably how do we welcome what we will acquire and what is the kind of position we can offer. Just usually, we don't compete on price. And when price do not look reasonable, we withdraw from the queue. In the case of LiquidHub, frankly, the role we have proposed to LiquidHub as being the platform for digital in the U.S. has played a key role in the negotiation with them, and it is important for the small boutique. These -- and notably, when boutiques are smaller, the stability of the boutique depend on the leader decision and his decision to embark with us for his career. If not, he leaves and then there is a high volatility. So I repeat, we do not go very high, and 2x revenue in the case of LiquidHub seems to be quite reasonable. And I repeat, it's a balance of being attractive in the role, in the mission, in the integration process and reasonable pricing.

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [28]

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And frankly, we are extremely proud of the retention rates we have on all the acquisitions we have done because they are extremely good and they are not higher, from my perspective, than the overall attrition of the group. So we are extremely proud on what we have been able to achieve on this acquisition and our ability to retain people, which is basically where the real value creation is.

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Operator [29]

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Yes, we have a last question from Mr. Neil Steer from Redburn.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [30]

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It just relates to the restructuring expense, which obviously has gone up this year quite considerably from last year. I'm just -- it looks as though that, clearly, the spend was focused in the second half of the year. And I understand that there was a requirement to take cost out of North America. But presumably, can you give us a feel for when you actually got the benefits of that as you went through the second half of '17? And presumably, there's a fully annualized benefit, which is to be of help as we look at the 2018 margin.

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [31]

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Okay. So again, some of the benefit already came in 2017. So if you accelerated restructuring, it's also to be able to protect the margin in the face of some price competition. I think one of the challenge a bit we have in restructuring, I think, in the short term is the acceleration or the transition of our Infrastructure Services business consumes quite a bit of restructuring, right, because it's an asset-based business, so it seems like shutting down data centers are pretty expensive. But if you want to be able to shift that portfolio quickly to more cloud-based services, it also requires, in that case, the acceleration of some of the restructuring action that we have to take. So the second thing, to be frank, some of it is also to support the rapid shift of the portfolio. I mean, sitting probably 3 years ago, I did not expect the portfolio to shift so quickly. Some of the portfolio shift do require to be supported by restructuring spending. So from my perspective, we have to do the right decision in terms of basically continuing to support the shift of the portfolio, both Digital and Cloud, and basically transition our Infrastructure Services to cloud-based services because that's the future of our business. And if that requires temporary to increase a little bit our restructuring spend, we will do it. But we have to do that to be able to do the right thing in terms of fueling sustainable and profitable growth for the business. It will mean a little bit high. In terms of payback, to be frank, the paybacks are anywhere between 6 months and 18 months, okay? We very rarely make decision that they basically have 4 years or 5 years payback.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [32]

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And the restructuring spend in '18 will be similar to '17 or back down to the sort of '15 level?

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Aiman Ezzat, Capgemini SE - CFO & Member of Management Board [33]

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I will say it will be a good proxy to consider that it's going to be similar. We might do a little bit less, but I want to keep a bit of flexibility there.

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Paul Benjamin Hermelin, Capgemini SE - Group Chairman, CEO, Group MD & Member of Group Management Board [34]

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Thank you, everybody, and we will meet you in different road show and tech conference, and let's meet again with our Q1 results. Thank you, everybody.

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Operator [35]

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