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Edited Transcript of CAP.PA earnings conference call or presentation 30-Jul-19 6:00am GMT

Half Year 2019 Capgemini SE Earnings Call

Paris Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Capgemini SE earnings conference call or presentation Tuesday, July 30, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aiman Ezzat

Capgemini SE - COO & Member of Group Executive Board

* Carole Ferrand

Capgemini SE - CFO & Member of Group Executive Board

* Paul Benjamin Hermelin

Capgemini SE - Chairman, CEO & Member of the Executive Board

* Rosemary Stark

Capgemini SE - Group Sales Officer

* Thierry Delaporte

Capgemini SE - COO & Member of Group Executive Board

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* 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

* James Arthur Goodman

Barclays Bank PLC, 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

* Nicolas David

ODDO BHF Corporate & Markets, Research Division - 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 2019 H1 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 - Chairman, CEO & Member of the Executive Board [2]

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Thank you. Good morning, everyone. Thank you for attending this call. I will start with the headlines of the first semester of 2019. I will hand over to Rosemary Stark, our Chief Sales Officer; and then to Carole Ferrand, our Chief Finance Officer. And of course, we are here with Aiman and Thierry, the 2 COOs of the group.

Let's start with the performance. Our good momentum at the beginning of the year is now confirmed. First, our revenue growth is 6.2% at constant currency and 8.4% at current rates. Our revenue amounted to EUR 7 billion this semester, and this growth momentum continue since many quarters. We see a dynamic sales momentum in the second quarter leading to a total H1 bookings of EUR 7.1 billion, up 4.8% compared to last year. For the 17th time in a row, we published an improvement of our profitability. We delivered another 50 bps of margin expansion compared to H1 2018, driven by good progression of our gross margin, notably thanks to the increasing part of Digital and Cloud in our revenue. I will come back to that later. Our operating margin reaches 11.4% in this first half. Our net profit group share stands at EUR 388 million for the first semester, up 23% compared to last year. Finally, we have a healthy organic free cash flow generation, reaching EUR 90 million.

Let's look at the highlights of the semester. The group has a clear ambition to be what we call a leader for leaders. To achieve this, we notably decided to reinforce our portfolio of offers and our partnerships. And we made significant progresses I want to share with you.

First, we selected specific offers and built a global network of competent centers focused on 2 things: improving our win rates and upgrading the quality of our delivery. We have deployed centers of excellence for offers such as customer experience, AI and analytics, digital manufacturing, next-generation application development and maintenance and digital core with SAP S/4. There are currently 1,800 dedicated people both onshore and offshore working in these centers of excellence. And it works. For the first time, Digital and Cloud represent half of our revenue. In particular, during this first semester, we see an increase of our revenue of more than 40% in cloud-related activities and 70% in artificial intelligence.

Second point, we decided to manage our portfolio in close collaboration with our ecosystem of partners. Among them, we chose 4 strategic partners: AWS, Salesforce, Microsoft and SAP, and we made outstanding progresses this semester. Year-on-year, we doubled our bookings with Amazon Web Services. Our bookings with Microsoft increased by more than 70%, and we won the 2019 Microsoft SAP on Azure Partner of the Year for demonstrating excellence, innovation and implementation of customer solutions based on Microsoft technology. Capgemini was also recognized for having the greatest EMEA market impact in 2018 in terms MuleSoft practice development and of significant contribution to empowering client with expertise and best practice. In addition to our 4 strategic partners, we are delighted with the strengthening of a few other partnerships, notably Adobe and Dassault Systèmes, with both more than 30% increase.

Finally, as you may have heard, we launched on June, Capgemini Ventures to take stakes in young technology companies. It will be a key asset to connect us to a global system and will help us to accelerate our relevance to client needs to continually deliver innovative digital solutions.

Geography. As I just told you, we see an increasing demand for Digital and Cloud driving our growth and increase our profitability. In terms of geographies, Europe, representing 60% of our revenue is structurally strong, and we are pleased with excellent results in H1, notably in France and in the U.K. As expected, we have a slowdown in North America this quarter on a very tough comparison basis, and we see North America improving in the second half of the year. Once again, the growth in Asia Pacific and Latin America is strong, notably driven by a very healthy APAC region.

A few words on Altran. Our strategy is to stand as a strategic partner to CxO, notably around digital marketing and Intelligent Industry. With this context in mind, Altran is a major step to accelerate our ambition in Intelligent Industry. This combination is of strategic nature and is based on the value creation resulting from the anticipated convergence of IT, information technology, and OT, operation technology, to accompany manufacturing and technology clients in their digital transformation.

After negotiation, we arrived at the offer price of EUR 14 per share. It is based on our assessment of the business prospect, our due diligence and the planned execution risks. It represents a premium of 33% over the 3 months VWAP after a strong rally since the beginning of the year. We think it is an attractive price for Altran shareholders. It was unanimously approved by Altran Board of Directors. We expect to set the tender offer acceptance threshold at 50.1%. That's the level required to achieve control, implement our strategy and achieve the transaction benefits.

In terms of planning, we are actively working with their respective works council and on the customer regulatory approvals. The process is well on track. We already received a favorable opinion from Capgemini International Works Council.

Talking about acquisition, you noticed we continue to acquire small companies. Yesterday, we announced the acquisition of KONEXUS Consulting, a leading strategy and management consultancy for the energy industry in Germany.

To conclude, we delivered a good first semester in line with our road map for 2019, and we confirm our outlook: a revenue growth at constant currency between 5.5% and 8% with M&A contribution of 1 to 2 points; an operating margin between 12.3% and 12.6%; an organic free cash flow for the year in excess of EUR 1.1 billion.

And I now leave the floor to Rosemary, our Chief Sales Officer.

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

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Thanks, Paul, and good morning, everyone.

H1 2019 has delivered strong sales momentum with bookings up EUR 7.1 billion, a 4.8% increase year-on-year at constant currency. Our quarter 2 2019 at EUR 3.7 billion showed good growth in bookings year-on-year at 6.7%. Digital and Cloud accounted for more than 55% of our H1 bookings, and we have a strong pipeline for H2 with year-on-year pipeline growth of more than 18%. A strong development of larger deals in our pipeline, too, with growth of more than 25% in our big deals pipeline for H2 2019. And we're seeing the effect of a unified go-to-market strategy through the double-digit increase in the value of the large multi-tier deals.

So moving on to revenue. We've delivered 6.2% revenue growth in H1. And in this period, Financial Services has grown by 5.3%, with banking getting softer, as discussed earlier this year, while insurance continues to grow well. Energy & Utilities has had a strong H1 with revenue growing at 11.1%, and we see excellent Energy & Utilities growth in North America, Continental Europe and in the U.K. In Manufacturing, we've delivered 5.9% growth in H1. And for our Auto, it is expected -- affected by market conditions. We continue to deliver strong Manufacturing performance particularly in France, Continental Europe and in APAC, CPR has grown in H1 by 4.5% with 5% in the second quarter, and Europe and APAC are strong contributors to this. Telco, Media and Technology is growing at 7.7% in H1 with strong double-digit growth in North America and in the U.K., while in Services, we've grown by 7.9% in H1 with North America, Italy and LATAM as the major contributors to this growth.

Moving on to our major wins. Our H1 sales continue to progress on both Digital and Cloud deals and managed multiyear contracts. On this slide, you can see both the deal types and also the sector perspective. For Upfield Foods, the #1 producer of plant-based consumer products and now spinning off from Unilever, Capgemini will deliver its finance and accounting transformation, covering around 50 countries through FID agreements.

The Alt HAN Co in the U.K. has awarded us their operation services contract, specifically to support the rollout of Alternative Home Area Network, making smart metering a reality for all consumers in the U.K.

In Financial Services, for Skandiabanken in Sweden, we've delivered the bank's new lending user experience, mortgages lending platform, and it's specifically designed to reduce decision time and to increase transparency for its customers.

After 2 years of close collaboration between Capgemini and Airbus around the development of its data platform and solutions, we've signed the Skywise Partners program agreement with Airbus. More than 80 airlines around the world are already connected to Skywise, so this new agreement forms part of the digital transformation of the aviation sector as a whole.

At Groupe PSA, we've been selected as the preferred partner to design and build the SAP S/4HANA global core model; while for Dijon métropole in France, we just rolled out an unprecedented smart city project, which supports new services for citizens under modernizing public asset management.

Now let's cover digital and marketing, where we continue to expand significantly. We're helping clients to improve their customer platforms and experience in an increasingly end-to-end manner using the 4 key offerings that you can see on the right-hand of this slide.

Digital sales and marketing is, of course, a major part of our Consumer Products and Retail business. We're engaged in a range of programs, for example, the implementation of a global commerce platform for a global B2B retailer; and for a global top luxury brand, the rollout of customer service, marketing and commerce solutions in more than 80 countries.

For Virgin Voyages, we've designed an innovative CRM platform allowing the Virgin crew to identify each of the sailors, as they call to customers, and understand their individual preferences. The crew can then act in real time to ensure that the sailors have the service and the support acquired to create a really great voyage experience.

We're delivering similar marketing sales and service projects in Energy & Utilities and Financial Services and for Auto clients. For example, for a global auto company, we're creating a smart digital campaign for vehicle recall, while for several banks, we're working on omnichannel customer platforms.

And we are also seeing a significant focus on customer experience in the public sector, where for different governments, we're working on patient management and public health and redesigning content management systems for servicing experience.

Paul has discussed with many of you a focus on Intelligent Industry and the planned acquisition of Altran. Here, you can see some of our existing and diverse activities with digital, engineering and manufacturing services, where our Intelligent Industry approach is already in use.

In health care, for Terumo and for other clients, we're working on a number of innovative created -- connected medical devices ranging from heart pacemakers to embedded insulin and blood measurement devices. And these devices significantly increase the ability to manage chronic conditions remotely.

For EDF's nuclear plants, our product lifetime management focus is delivering productivity improvement with 3D data to design digital trends; while over Alstom, we're using virtual trains created using 3D virtual reality technology to test different scenarios and the responses to them. As you can see, it's a very interesting set of engagements and it's close to the heart of our clients' business.

Now I'd like to hand over to Carole to cover our 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 morning, everyone. Let me now walk you through the financial highlights of our H1 2019 results. Before that, please note that the IFRS 16 is enforced in January 1 and therefore applies to all the 2019 financial information. You will find in the appendix section more information on our debt impact of financial statements and the revised definition of our all-in free cash flow and net debt.

In H1, group revenue reached EUR 7,007 million, up 8.4% at current exchange rates and 6.2% at constant rates. Our operating margin stands at EUR 797 million or 11.4% of revenues, up by 50 basis points year-on-year. This significant improvement demonstrates our operating discipline and strengthen our confidence to reach our operating margin guidance for the full year. After taking into account the other operating expenses, which I will comment later in more detail, the operating profit stands at EUR 658 million, up 26% year-on-year.

Net financial expenses amounted to EUR 39 million, similar to the same period last year. Tax expenses increased to EUR 232 million, which include a EUR 30 million expense due to the transitional impact of the U.S. tax reform. Including this item, our effective tax rate stand at 32.6% compared to 31.4% in H1 2018.

Other results. The net profit reached EUR 388 million in H1, so definitely a strong improvement compared to the EUR 314 million from the same period of last year. The normalized EPS stand at EUR 3.08 before the transition of U.S. tax expense. Finally, we generated an organic free cash flow of EUR 90 million for the period compared to only EUR 11 million in H1 last year.

Looking now at the evolution of our organic free cash flow. We can see that 2019 will not be no exception to our usual seasonal pattern. As regards to our capital elevation, we have limited activity so far in this year in terms of M&A closing with a net cash outflow of EUR 152 million in H1. This mainly relates to the completion of the Leidos Cyber acquisition in February. We also returned EUR 431 million to shareholders consisting in dividends for EUR 281 million and buybacks for EUR 150 million. Given the seasonality of our cash flow generation, our net debt increased to EUR 1.6 billion at the end of H1 compared to EUR 1.1 billion on January 1, 2019.

Let's have a look now at our quarterly revenue. Q2 organic growth stands at 4.7%, which brings our organic growth for H1 to 4.9%. Considering the group's scope impact, the constant currency growth reached 5.7% in Q2 and 6.2% in the first half. This remained a tailwind this quarter, leading to a 2.2 points positive impact overall in H1 due to the strengthening of the U.S. dollar against the euro. Finally, our reported growth in Q2 and H1 reached 11.6% and 8.4%, respectively. For the full year 2019, the M&A deals closed today should contribute to close to 1 point to the group growth while we expect FX to add slightly above 1 point.

Let's now move on to revenues by region. As usual, I will focus my comments on H1 figures since most of my comments also apply to Q2. And also to be consistent with our guidance, I will refer to constant currency valuation. North America, our largest region with 32% of group revenue, grew 3.8%. As you know, this compares to a striking 7-point -- 17.2% growth in H1 last year. This unfavorable base effect would ease in H2, so we certainly expect an acceleration in North America going forward. TMT, Energy & Utilities and Services proved to be the most dynamic sectors in the first half of the year.

[Moreover], Europe conserved in Q2 the solid trends observed in Q1. U.K. and Ireland, which account for 12% of group revenues, posted a remarkable performance with an 8% growth. More specifically, Financial Services, Consumer Goods and Retail and TMT sectors posted a double-digit growth, while the Public Sector continued its positive trend as initiated a year ago.

France achieved a robust 6.9% growth, mainly driven by the Manufacturing sector, which grew in excess of 10%. By business, growth was driven by Application and Technology Services, and more generally speaking, by the Digital and Cloud demand.

The Rest of the Europe grew by 6.2%. From a sector standpoint, Energy & Utilities, Consumer Goods and Retail and Services were the strongest ones over the period.

Finally, Asia Pacific and Latin America are keeping their strong momentum with a 12.2% growth in H1, mainly driven by the Financial Services and Manufacturing sector.

Now let's look at our revenues by the business lines. First, let me remind you that since January 1, we measure our activity level by the constant currency growth at the level of total revenue generated by each business line, so before the elimination of internal billings between business line. Strategy & Transformation, which accounts for 7% of group revenues, posted a robust growth of 19.4% of its total revenue in H1. This performance was mainly fueled by the TMT sector along with Financial Services, which benefited notably from our acquisitions.

Applications & Technology, our core business line, saw its total revenue grew by 6.6%. We are now benefiting from digital transformation projects, which starts entering into the large-scale deployment phase.

Lastly, Operations & Engineering, which represents 22% of group revenues, increased its total revenues by 3.5%. More specifically, Infrastructure Services and Business Services have confirmed their stabilization as observed since Q1, while demand for Digital Manufacturing and Engineering Services remained steady.

Moving now to the headcount evolution. Total headcount reached 216,800 employees at the end of June, up 5.5% year-on-year and 2.6% over the last 6 months. Our workforce and global production centers grew by 7.1%, pushing our offshore leverage slightly up to 58% versus 57% in H1 2018. Our attrition stands at 19.7% in H1 2019, seasonally up as usual, notably in India. Let me remind you that we have updated our methodology since Q1 so as to be closer to the industry practices.

Now moving to our operating margin by regions. In North America, our operating margin rate is slightly down by 30 basis points year-on-year. The operating margin of U.K. and Ireland increased to 15.9% from 12.2% a year earlier, back to a level similar to 2017. The operating margin in France further improved by 120 basis points year-on-year and now stands at 9.6%. The Rest of Europe reported a slightly lower operating margin at 11.3% from 12% a year earlier. Finally, our operating margin in Asia Pacific and Latin America is also slightly down at 11.4% compared to 11.7% in H1 last year.

Moving on to the analysis of our operating margin. Our gross margin recorded a solid improvement of 50 basis points in H1, which is mainly attributable to a more favorable new investments. This reflects the development of our innovative offering as well as our Digital and Cloud projects scaling up progressively. Both our selling and G&A costs remained stable in percentage of revenues as a result of our operating discipline. So overall, the operating margin increase directly derives from our improved gross margin.

Moving on to the next slide. Overall, the financial expenses are flat year-on-year. Our income tax is up from EUR 169 million in H1 last year to EUR 232 million for the same period this year. As you -- regards to the impact of the U.S. tax reform, it represented a EUR 30 million expense in H1 2019 versus EUR 18 million in H1 2018. Setting aside this transitional item, our effective tax rate is up by 1.2 points to 32.6% but lower than the full year 2018 ETR by 1.1 point. In the mid-term, we expect our ETR to progressively go down to around 30%.

Finally, let's go through the recap of our P&L from operating margin to net income. Our other operating income and expenses decreased to EUR 139 million in the first half compared to EUR 186 million in H1 last year. This mainly reflects the sharp decrease in restructuring costs as anticipated. We continue to expect restructuring costs to stand around EUR 80 million in 2019 versus EUR 122 million last year. Our operating profit stand at EUR 658 million or 9.4% of revenues compared to EUR 521 million in H1 2018. After financial expenses and taxes already discussed, our net proceeds amount to EUR 388 million, up 23% from the same period last year. The average number of outstanding shares keeps decreasing by 1.5 million year-on-year as a result of our share buyback policy. Finally, our normalized EPS for H1 2019 stand at EUR 2.90 and EUR 3.08 for the -- before the transitional tax item.

So overall, we are clearly in line with the priorities that we have set for 2019. As a result of our major strategic initiatives of last year, namely our active portfolio management and our unified growth market model, we enjoyed a robust growth in H1 across our geographies and sectors. This clearly confirm the solidity of our growth profile. At the same time, we managed to improve our operating margin by 50 basis points. This performance gives us confidence in our ability to reach our 12.5% to 13% mid-term ambition. Lastly, we continue to actively deploy our cash flow. As mentioned earlier, over the last 6 months, we resumed -- we returned EUR 431 million to our shareholders and invested EUR 152 million in M&A.

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

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [5]

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Operator, can we take the first question, please?

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Questions and Answers

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Operator [1]

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Yes. We have our first question from Adam Wood from Morgan Stanley.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [2]

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I've got 2, if I could. Just first of all, on the top line and bookings, I mean, the messaging seems to be reasonably positive on bookings. You've seen an acceleration in Q2. You've talked about better pipeline for the second half. But could you maybe just go into a little bit more detail? I think during the first half of the year, you had more larger deals, transformational deals that you're hoping to sign. Did most of them get signed as expected? Did any of them slip, which should boost the pipeline into the second half? Just a little bit more color around what you had, what you'd closed and what you see. And then can I take from that, given the only commentary is on North America accelerating, that we should expect an acceleration for the revenue growth of the group in the second half of the year? That was the first one, just around bookings and top line.

And then just maybe secondly, on the margin progress as we look forward. You've got 2 geographies going up in terms of margins in the first half quite materially and 3 coming backwards. Can you maybe just talk a little bit around how much of that is different macro and environments in those countries versus decisions you're making to invest in specific areas? Just how you're managing those country margins given it's kind of an unusual margin mix, that countries are not moving up in an equal manner? We actually saw pretty big margin changes in the different regions.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [3]

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Rosemary?

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

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Yes. So thanks, Adam. Yes, we did sign a couple of big deals in H1. However, we didn't sign any of the mega deals on our longer-term pipeline. We always expected those to be signed in H2, and that is still our plan. As is always the case with very large deals, sometimes there will be some slippage because of the decision-making in clients and other factors but nothing that we haven't anticipated. And we're looking forward to a strong H2.

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [5]

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Okay. So Adam, it's Aiman. On the revenue growth, as we said, I think we reached bottom in North America, so now we should expect an easier comp and acceleration on H2. And for the group, we consider that Q2 was the bottom for the year from an organic perspective. So H2 should be better overall.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [6]

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In terms of gross margin and margin evolution per geography, as you know, you typically can have currency hedge gains and losses depending on the regions. What we look at when we look at regions is really to gross margins and operational indicators, and they are growing favorably in all regions. So really, we are -- we still consider that our potential of growth in operating margin is equivalent in all regions.

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Operator [7]

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Our next question comes from Mohammed Moawalla from Goldman Sachs.

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Mohammed Essaji Moawalla, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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I was just wondering if you can elaborate a bit more around sort of the second half acceleration dynamic and maybe also what you see out there when you talk to customers in terms of -- do you feel that we're still at a point where digital spending is not seen as discretionary? And is there a risk in your view at some point that this just potentially becomes problematic or maybe it doesn't?

And then secondly, just in terms of the firm strength in France and U.K. I mean it's quite a material pickup. Maybe talk us through the dynamics. Is it sort of big share shifts? Or is it sort of linked to specific projects? And how sustainable this is or at least partially sustainable in the back half?

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [9]

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Okay. So first on the growth dynamics. For Digital and Cloud, Mo, we expected double-digit growth to continue in Digital and Cloud. I'm not sure if it's 15%, 20% over the very long term because, if not, that means growth will accelerate materially at the group level. But overall, the dynamics continue to be good. The portfolio continues to be renewed. There's new things being launched. So we see that dynamics continuing. And on something like cloud, I think the clients are still at the beginning of the journey. So we should see -- have good days in front of us from that perspective.

Is it -- some of it will become discretionary over time? Probably. But some of it is also the long-term trends for them to be able to transform their business and to reduce costs. So that will continue.

On the growth dynamics for France and the U.K., I would love to see France and U.K. maintaining their Q2 growth, but I don't think that's sustainable. I think there have been some positive aspects in terms of some of the wins that basically fueled EBITDA. But overall, I would say demand continues to be good, and we should continue to see positive trends in terms of organic growth in both France and the U.K. for the second half.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [10]

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Mohammed, Paul speaking. I'd like to add to Digital and Cloud probably a real focus on our alliance partners. They have proven to be a good engine for growth. So -- and that has been delivered with Thierry.

Thierry, what do you think of that engine?

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Thierry Delaporte, Capgemini SE - COO & Member of Group Executive Board [11]

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(foreign language), Paul. Mo, the -- it's true that when we look at the growth drivers that we have in the business, certainly, Digital and Cloud is a big driver. And the way we have been leveraging our relationship with our strategic partners have certainly driven a lot of growth as well. Partners like Paul mentioned: Microsoft, AWS but also Salesforce, SAP, Dassault, Adobe, those are partners -- among the partners with whom we've developed partnership in different parts of the world and driving significant growth and nice potential for the months to come.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [12]

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Operator, next question? Operator, next question? Hello? Operator, please?

(technical difficulty)

Okay. We clearly have a problem with the operation. We can see some people queuing for questions.

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [13]

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So we have 8 people in the queue.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [14]

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We have 8 people in the queue, and we have lost our operator. It cannot be.

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [15]

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Yes. If we can ask you to be patient a little bit. Apparently, they have a technical problem tried to put the question. Apologies, and we thank you for your patience.

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Operator [16]

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Next question from Charles Brennan from Crédit Suisse.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [17]

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I've got 2 actually. Firstly is just a clarification on the U.S. I think previously, you were suggesting that Q2 would be a little bit soft but we'll see an acceleration in the second half of the year, and in 2H, the U.S. won't be dilutive to group growth. Do you still think that's the case?

And then secondly, we're obviously going to get a lot of questions around the Altran transaction. I know you've given some comments already. But can you just give us a flavor of what the circumstances are that would force you to consider paying a different price for Altran?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [18]

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Back to Aiman on the U.S.

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [19]

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So on the U.S., we see an acceleration in H2. So we'll have a positive organic growth. I am not yet ready at this stage to say that it will not be overall at the group level in terms of growth. It's a bit early on that one, Charles.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [20]

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Okay. Thank you. On Altran, Charles, what we say is that we think the price we offered was fair. It was based on our due diligence, our understanding of the company and including some cost synergies to reach a premium of 30%. This being said, we, of course, noticed some arbitrages including (inaudible) to sales, so we think this price is attractive and we have said that our aim is to reach 50.1%. And we are quite confident we will reach that point with the current attractive price.

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

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Does that mean you're happy to buy the majority and have a big minority interest in it?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [22]

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I think we can deliver our strategy that way.

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Operator [23]

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Our next question comes 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 [24]

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A couple from me as well. So in terms of the labor environment, I guess the attrition rate is flat using the new disclosure, new calculation methodology, but it will be up a little bit using the old method. Can you talk about how hot the labor market is now? Where -- what you're seeing on the salaries and attrition and whether that's limiting your growth?

And then just going back to the U.K. I mean that margin improvement is substantial. I mean you've added nearly -- about EUR 40 million of profit to EUR 70 million of sales. How sustainable is that? Were there any one-off around provision releases, et cetera, that drove that?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [25]

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Thierry, on labor?

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Thierry Delaporte, Capgemini SE - COO & Member of Group Executive Board [26]

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On labor, I think, Michael, I think we've seen clearly over the last semester a certain level of tension on the labor, especially around the key offerings that are growing -- that are fast growing. Now to tell you, we identified about a year ago an increase of our attrition in India in particular. Since then, situation has stabilized. The level of attrition is a little higher than what we would typically expect, but clearly not in a situation that is creating any issue internally to deliver the performance.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [27]

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And no impact on salary. We had our January round, but we have not been forced to use a new room for salary expansion midyear. Carole, on the U.K. margin?

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [28]

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On the U.K. margin, we are more or less back to our 2017 level. And as you know, last year, we were hit by a negative FX impact. So as a matter of fact, the margin is very good in H1 that we consider that U.K. is accretive to the group. So that's a -- it's very positive for us.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [29]

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Do you think you can keep that margin for the second half or the full year?

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [30]

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I think we had a specific good level of projects in H1. But globally speaking, the U.K. margin is due to be good.

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Operator [31]

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Next question comes from John King from Bank of America.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [32]

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So 2 questions. Just with the proposed Altran deal. The -- obviously, the M&A pipeline elsewhere will take somewhat of a back seat. So I'm just wondering if you look further out for North America where, I guess, a lot of those acquisitions have been made, are you confident you can continue to sustain the historic pace of growth there without perhaps the level of M&A that you had over the last 2 or 3 years?

Second one was back on the margins. And if you could just give us some details specifically on Rest of Europe, why that declined. I mean the growth seemed to be fine there. So any comments on that will be great.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [33]

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Just on the growth, historically, we told you that with our free cash flow allocation, historically, we thought we would grow by 1 to 2 points. And we have focused most of our acquisition in the U.S. It's clear that with the Altran move, we entered temporarily in a different situation where the Altran revenue for the U.S., 20% of Altran will increase our U.S. presence. Beyond that, I would think we will go back to something like 2%. So that will help our U.S. growth, but we will -- we have other objective. You saw yesterday the little acquisition in Germany. They might be a few other.

On the Rest of Europe margin, Carole?

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [34]

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On Rest of Europe margin, the comment is really linked to the mix of geographies and the general mix. And we consider that it's the growing pattern. It's the same margin in all other regions.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [35]

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And just a clarification, sorry. On the booking side, what constitutes a mega deal? How big would that be?

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [36]

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To become mega deal, these things are above EUR 250 million, EUR 300 million. That's the -- in terms of total company [revenues].

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Operator [37]

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Next question comes from Alexander Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [38]

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Just one on the quarter itself, the half itself. How much of a concern is what looks like a slowdown in the Strategy & Transformation part of the business? A 4 percentage point fall in utilization, looks like organic growth, once you strip out the M&A impacts, was maybe flattish off an easier comp? Do you see that as any kind of a lead indicator? Or otherwise, what's going on there?

And then as a second question, thinking more of the Altran deal. You've talked about OT/IT convergence. How large do you consider the OT budget to be in your clients relative to the IT budget? And how much of that budget do you think you can address as a combined entity rather than Altran standalone?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [39]

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First, on strategy transformation. I don't share your concern. I think the utilization is because of the seasonality of recruitments. I think today, we are growing organically. First point is you should think that present transformation is involved in a lot of digital projects. So we should not only look at the external review for our S&T practice but the total revenue, and the total revenue organically is really very high single digits. So it's crazy healthy, and we do not find any sign of slowdown. So today, it's going well. The constant currency figures, we no longer have the liquid impact and we have a fewer smaller acquisitions that we closed in the third and fourth quarter of last year.

Now about the Altran IT/OT. The situation might be different from client to client. If I take a typical large client of Altran, you would find a revenue per year in the range of EUR 50 million to EUR 100 million of OT in their client, of the operation technology in engineering and research; and the typical IT/OT project leveraging 5G will be a few dozens, but that's a project that might not be permanent; then there will be other projects related to connected products, IoT. So my view, it's significant. We told you the revenue synergies, and I think they are really sustainable. We gave you the figures of EUR 250 million, and I think that figure is sustainable.

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Operator [40]

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Next question comes from James Goodman from Barclays Capital.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [41]

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Yes. A couple of follow-ups, perhaps on Altran, maybe an opportunity for you just to share some customer feedback in the weeks since the deal has been announced and whether that's really strengthened your resolve that moving into engineering and R&D is the right longer-term growth opportunity for you.

And then linked to that, the U.S. exposure of Altran is a lot lower than yours. I appreciate that's partly a function of market structure. But other initiatives that you have there to, over time, sort of address this U.S. growth with more Altran exposure?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [42]

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First one, I want to correct. The revenue synergies we gave were EUR 200 million to EUR 350 million. We have the range, and I confirm that range. On -- we have been prudent with client interaction just to -- until we have the antitrust confirmation, we have been prudent. So we dropped a few phone calls, i.e, met a few clients. They all confirm the strategic relevance of the combination. And what I could notice is that Altran business is closer to the business strategy of clients. There are clients that still think in spite of digital IT is an enabling function, where, with Altran, it's clearly we move to the core business strategy and priorities.

In the U.S., you probably noticed that the Altran business that came from Aricent has some exposure to sectors where we are not necessarily that strong, and I notably think of telco, semicon and technologies in general. So I think that will open the door of a new category of clients for us.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [43]

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And just a quick follow-up I had on the U.K. market. I mean, clearly, a hard Brexit is looking increasingly likely again here. Is that something that's giving you any concern into the second half?

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [44]

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Not at this stage, to be frank. I think the -- as I say, we don't expect to grow as fast as Q2, but we should see a positive momentum in the U.K. We have some nice deals in the pipeline, customer feedback so far is positive. So I don't have any new elements to speculate otherwise at this stage.

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Operator [45]

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Our next question comes from Amit Harchandani from Citi.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [46]

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Amit Harchandani from Citi. So 2, if I may. The first question really goes back to operating margins. You have delivered another strong year-on-year increase. I appreciate you're not in a position to give us a formal guidance on the mid-term in terms of where they could go from here. But could you maybe outline for us that drivers of margin expansion which you have fully utilized so far and ones that are less to be utilized? Is it improving margin from digital, better offshoring? If you could just outline the drivers that we can think about as we think about the potential for further margin expansion. That would be my first question.

And secondly, if I may, in terms of the business overall on the top line, we have seen U.K. and France do well this time. North America was strong last year. So clearly, different parts and regions coming together at different time, which, I guess, improved the overall resilience of top line growth. Where do you think this top line growth can go from here? And what are any further drivers, if any, of resilience that are left to be exploited?

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [47]

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Okay. So on the margin expansion, the traction really comes from the mix -- the business mix. So really, since we see Digital and Cloud coming at scale and their maturity is increasing, we see the -- we start to see the benefits at a group level. So it's very positive and it's in line with what we have explained to you over the last quarters. It might be difficult to go up to 50% (sic) [50 bps] on a full year basis, but -- we are not there yet. But I think it's very positive to have achieved this performance in H1 and it's a good sign of the opportunities.

In terms of top line on U.S. and U.K, the management...

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [48]

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Yes. Carole meant 50 bps for the full year.

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Amit B. Harchandani, Citigroup Inc, Research Division - VP and Analyst [49]

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Yes, yes, I do understand.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [50]

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Yes, yes. 50 bps, very sorry.

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [51]

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We still expect to be more than 50% in Digital and Cloud from [the business].

In terms of top line, we have -- we continue to see the impact of potential growth of Digital and Cloud. I think the innovation portfolio is really the key driver of future growth. I think also some regions like APAC, as they become bigger, we still see strong traction there and LATAM. And that has become a bigger weight in the group. I think they will have bigger impact on the top line overall over time. But that's really where the major drivers are, and I do believe that still, our competitiveness will help us to continue to take some market share in some countries as industries consolidate around some of the big players. So if I look at the drivers, innovation, today Digital and Cloud but even beyond Digital and Cloud definitely; the growth of -- the fast-growth region like APAC and Latin America; and still, some gain of market share.

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Operator [52]

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Our next question comes from Laurent Daure from Kepler Cheuvreux.

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [53]

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I also have 2 questions. First one is back on the U.S. I understand the very tough comps in the second quarter. I know you've done a lot of work on your portfolio in the recent years but seems -- in the second half, it seems like on a more normal comps, you're still not getting back to 5% growth. So is there any specific issue with your sector exposure? Or anything that could justify not returning to a more normalized growth in the region?

And my second question is also back on the U.K. margin. I understand you're back to 7 -- the level of '17. But I remember in '17, you still had some help from the last contract with Aspire. Does it mean that you have replaced this business with high-margin business and solutions? Or is it exchange rates that you mentioned that have helped to go back to this record margins?

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [54]

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Okay. Just on North America, I think it's just a gradual re-acceleration at this stage. We'll be a bit more cautious. Definitely, we see, Laurent, the top line going back positively in the second half in Q3 and in Q4. But I would be cautious on the re-acceleration as usual even on easier comps. But we -- when you think about the 5% growth, it's really something I see more in H1 of next year.

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Carole Ferrand, Capgemini SE - CFO & Member of Group Executive Board [55]

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On the U.K. margin, the improvement is coming both from the private and the Public Sector, so -- and the consolidation of projects. So both of them are contributing.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [56]

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Laurent?

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Laurent Daure, Kepler Cheuvreux, Research Division - Head of IT Software and Services Research [57]

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Maybe just a quick follow-up. At this point of time in the year, are you comfortable talking about the top line to reach the mid-point of your guidance?

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [58]

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I don't think it's a moment where we want to narrow the guidance. Clearly, we think we are within the guidance. And you know where we stand in terms of external acquisitions, so everything will rely notably on the date of closure of the Altran. So it's clearly too early to give you more positions on the guidance -- on the top line revenue guidance.

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Operator [59]

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Our next question comes from Stacy Pollard from JP Morgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [60]

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Two questions from me. So Digital and Cloud at around 50%, as you think about the mid-term, where do you expect that to get to? And then is this, in any way, more or less headcount-intensive or not?

And then second question is around in terms of offshore headcount, the shift, obviously, that's been slowing down. Do you think the 58% is about the right amount longer term? And maybe any color by geography? I know we've talked about the European countries in the past to see where they stand.

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Thierry Delaporte, Capgemini SE - COO & Member of Group Executive Board [61]

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Stacy, Thierry here. Regarding the evolution of the Digital and Cloud, the mix of revenue in the Digital and Cloud at 50% today. Certainly, it will continue to go up. It will probably slow down and stabilize at a certain point in time. As you know, there is a constant renewal of all of the portfolios, so there's going to be new offerings coming up and we're going to have to invest into new -- other new offerings and so on. So you should expect that the level of Digital and Cloud is somewhere -- I don't know if it's 60%, but somewhere higher than 50% but will not go over. Keep also in mind that the other 50% of the business of the group is also an important part of our business, and we are investing into it to push it as well. So that will certainly drive a certain level of stabilization at a point in time.

Second, in terms of headcount. I think -- I'm not sure it's less or more headcount-intensive, but what's true is probably all of these offerings and at their different level of maturity have a different balance between onshore and offshore. And we see that the evolution of our leverage is somewhat impacted by the way we are developing some of our offerings. We require sometimes more presence onshore and actually more, when you are scaling up those offerings, more ability to scale offshore.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [62]

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Can I say thanks to notably to the efforts of Thierry? We have reorganized India. It will support more Digital and Cloud, so more innovation. So we have today a healthy growth in India -- the mood in India is good because we are growing again.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [63]

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And sorry, any comments on Europe in terms of how offshore-intensive there -- the offerings have become in those regions? Germany, France?

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Thierry Delaporte, Capgemini SE - COO & Member of Group Executive Board [64]

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Stacy, this is a -- we know -- in the Northern part of Europe, we are very mature with offshore. It's already significantly leveraged. There's probably a little more room for offshore acceleration in the Southern part of Europe, but it's not going to be massive either.

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Operator [65]

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Our next question comes from Nicolas David from ODDO.

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Nicolas David, ODDO BHF Corporate & Markets, Research Division - Analyst [66]

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I also have 2 questions. First one is could you please comment a bit on the trends you see on the BFSI sector? You expect a slight slowdown in Q2. What view and what business unit drove this slowdown? And what should we expect in the coming quarters?

And my second question is also could you be more specific on what had driven the outperformance in France in Q2? Was it really a specific sale or something like that? And the reason why you expect a slowdown in H2, is it really a cautious stance? Or do you have a material thing that makes you sure of that?

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Aiman Ezzat, Capgemini SE - COO & Member of Group Executive Board [67]

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So first thing on BFSI, as we say, the -- I mean -- and I think we said that before already at the end of Q1, the banking sector is definitely softer. The bank results have not been good. We have seen that a number of banks are laying off people, not surprising. And as such, there's, of course, reduction in cost including an IT cost. So it's a bit patchy. I'm not saying we're growing at some clients and we are shrinking at some clients. So it's a bit patchy across the world.

It's not like Q2 was good, for example, in the U.K. in terms of growth, but it was more challenging in North America. Continental Europe, some countries are a bit challenging. But it's not consistent from a quarter to another because we basically have had to deal with some cost-cutting measures that some of the banks are doing in the quarter or in the half before starting to reinvest. So it's patchy, I would say, on banking but insurance is better overall. So we'll continue to grow in H2 overall better, with more challenges in banking.

The second question was related to France. In France, Manufacturing was very good in the first half. We won some large deals that basically helped fuel that growth. This is why we, as I say, we don't expect that to be as high in the second half. So it's basically the EBITDA effect. And we also have a very good growth in the second half of last year so we're a bit cautious. But as I say, we expect to continue to push for strong growth in France, but we don't expect to see anything close to Q2 performance in H2.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [68]

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Okay. Maybe a last one?

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Operator [69]

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We haven't -- sorry, we haven't any question for the moment.

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Paul Benjamin Hermelin, Capgemini SE - Chairman, CEO & Member of the Executive Board [70]

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Okay. Thank you. That was a good Q&A session. Thank you, operator. Thank you, everybody. And let's see you on the road and certainly with our Q3 figures end of October. Thank you very much.

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Operator [71]

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