Capgemini SE

Paul Hermelin - CEO Aiman Ezzat - CFO

Adam Wood - Morgan Stanley John King - Merrill Lynch Neil Steer - Redburn Amit Harchandani - Citigroup Michael Briest - UBS Gerardus Vos - Barclays Matthew Yates - Credit Suisse

Thank you. Good morning everyone and thank you for attending the presentation of the Q3 results.

As usual, I'll give you the highlights of our results and Aiman Ezzat, our Chief Financial Officer, will guide you through the details of this performance. But first as an introduction, I would like to come back on our recent views.

As you remember, I had announced earlier this year the General Assembly that I will candidate for the renewal of my term at the 2018 General Assembly while preparing the management transition. This is why on my proposal and upon recommendation of the Ethics and Governance Committee, our Board of Directors has decided to appoint Thierry Delaporte and Aiman Ezzat as Joint Chief Operating Officers of the Group and the decision will be effective on January 1st.

In parallel of these landmark year for Capgemini where we celebrate our 50th Anniversary, we decided to refresh our brand identity and we launched our new logo last week, what was important to us was to reflect our uniqueness in the market and express our humanity. Let me now turn to our Q3 results.

Our good momentum seen in H1 continued in Q3 and we delivered a very good performance this quarter. Our revenue accelerated to 3.4% at constant currency and we notably see this quarter a significant acceleration of our top line in North America, ahead of our expectation at 6.9%.

Our performance in this key market prime location for technological innovation is as you know a top priority of the year. Our portfolio shift to Digital and Cloud is our growth engine as for the last quarters.

Our activities in this field grew by 23% and they now represent 38% of our revenue in the third quarter. Finally, our bookings amounted to 2.7 billion this quarter.

It is a little below our expectation as Aiman will detail, but we do expect a much stronger Q4 in terms of bookings. If we now look at the market, so first point, we see a strong demand for Digital everywhere in all region and for cloud notably North America and less in Europe.

On Managed Service, the market is everywhere very competitive in North America in particular and it's still growing in Europe. In terms of regional trends, North America adds to 1% growth in Q2 revenue accelerated to 6.9%.

This good performance is the result of the proper investment we made in the last quarter in order to reinforce our go-to-market and our capabilities. We’re gaining traction on Digital notably in the Consumer Goods sector with significant wins and there are several ones, and we consider the trust in EUC, Energy & Utilities behind us after four quarters of sequential stability the sector positive growth this quarter.

In Continental Europe, our growth is sustained with excellent performance in Germany, Sweden, Italy and France. In this region, our growth is driven by our strength in Digital and by our solid references notably in Managed Service, Consumer Goods and Retail and Manufacturing.

In the UK, public sector declines as expected due to the HMRC base effect. Overall, like our peers we perceive some softness in the UK market.

Finally, Asia-Pacific is still dynamic with growth around 10%. Our revenues are degrading in Latin America hindered by our performance in Brazil which is still shrinking.

Our activity in Digital and Cloud, as I mentioned, they're growing by 23%, same percentages at the end of H1 and they're the key driver for our performance. In Digital as mentioned during the Capital Market Day in London, we've build a comprehensive set of offerings from consulting to solution.

We leveraged our sectorial expertise, notably in Consumer Goods, Retail and in Manufacturing and we're further developing the sectorial dimension of our offers. In parallel, we also see a sudden momentum on cloud services, notably in cloud native development and cloud integration services.

We accelerate this portfolio shift with targeted acquisition as you know we're currently closing the acquisition of LYONSCG. This company is a leading global e-commerce cloud system, system integrator, with more than 300 employees.

This acquisition will reinforce our capabilities on digital in the U.S. and in the UK, notably in the same Consumer Goods and Retail sector.

Combining these assets with our previous acquisition of Itelios in France, we ambition to become a global leader in sales force e-commerce cloud. We consider that pursuing our strategy of targeted acquisitions will bring us between one and two points of additional growth in the two, three years to come.

Some important deals this quarter, let me mention some of them, we're proud of the large multiyear deal we've signed with McDonald's, we become their key partner to implement their digital technologies underpinning McDonald's digital customer experience in collaboration with Publicis. Sapient.

The development of our relationships with this client inherited from IGATE. Two years after the acquisition of IGATE, addressed once and for all the question of IGATE revenue synergies.

This really demonstrates our leadership in digital platform thinking across the CPRD sector. We're also creating a digital factory for the PSA Group, Peugeot Citroën, delivering -- I think it's now PCA, but delivering build and run services for random digital application.

For UK utilities client, we've closed a combined apps and infrastructure transformation program to support their client, the client on their digital journey. While in Financial Service, we've closed interesting engagement on business services, finance and accounting, digital design and delivery for one of our large banking clients.

FirstEnergy, an energy company in U.S. which is a new client for the Group, we provide them application development, cloud hosting, and maintenance for web-based application for energy conservation and efficiency program.

Let me close with a few remark on market evolution. The deal, we're winning illustrate the current market evolution.

On the one side our clients have an insatiable appetite for digital which means more business side buyers, and a need for sector expertise and sector specific evolution. This is why we developed further and we'll develop further our client centricity.

It's the first pillar for our development. We want to be the partner of choice that large companies are looking for to drive their digital transformation.

On the other side, technologies are evolving at a rapid pace. The progress of artificial intelligence, automation, and other service are transforming our business and as digital is maturing we go from a small project to large scale deployment impacting the whole IT strategy for our clients.

We'll address these new areas and opportunities, thanks to renewed and reinvigorated possibility, which we mobilize the whole group assets at the service of our clients. And we'll invest further our investment in automation.

That leads to confirm our guidance based on that pretty strong, really strong Q3 performance and where we see further acceleration in the fourth quarter we can control all aspects of 2017 outlook, constant currency revenue growth at 3% and operating margin of 11.7 to 11.9 and organic free cash flow above 950. And now, I hand over to Aiman.

Thank you, Paul. Good morning everyone.

In Q3 2017 Capgemini revenues reached €3.46 billion. This represents a year-on-year increase at constant exchange rate of 3.4% and brings the year-to-date growth to 3.2%.

On an organic basis, the Group grew by 3.1% year on year in Q3 and 2.9% in the start of 2017. And as you remember, we did say that HMRC re-insourcing impact in Q3 is about 1.7 point.

As announced in our 2017 outlook, we report this growth rate after restating 2016 and 2017 revenue for the Brazilian equipment resell business that is being discontinued. And as you can see, the impact of that is about 10-basis point this quarter so it's becoming minimum.

The FX headwind increased in Q3 and stands at 2.4 point or minus 2.4% headwind coming from FX, so basically have accelerated quite a bit compared to what we saw in H1 and now stand at minus 1% year-to-date. This is due of course to the appreciation of the euro, notably against the sterling and the U.S.

dollar. We now expect a full year top line headwind of minus 1.6 point due to FX.

Now moving to the constant currency growth by geography, first North America, 31% of our revenues, as Paul mentioned, the return on the investment made in the past few quarters now fully materialized with a year-on-year growth of 6.9% this quarter, and just if you question, is a lot of acquisition impact in there, as you know at the Group level we have 30 basis point impact from acquisition this quarter, which means in North America it's less than 1 point. This acceleration is driven by the consumer products, retail and distribution and manufacturing sector, but also benefit of having the trough in the EUC sector behind us.

We expect growth in North America to stay at a similar good mid-single digit level in Q4. In the United Kingdom and Ireland which now accounts for 13% of the Group, revenues are down 10.8% year on year.

This is driven by the anticipated decline in the public sector linked to the reinforcing of the Chamasi, but we also start to see some softness in the private sector and we expect that to continue into Q4. So overall broader impact I think in the UK market in terms of softness that we see developing in the second half.

In France 21% of the Group revenues continued to see a healthy growth of 4.7% driven by good traction in Consumer Goods and Retail in Managed Services and a continued boom in digital market. For the rest of Europe, we see a strong revenue growth of 6.8%, so a good continuation of what we saw in the first half and gained double digits growth in Germany, Italy and Scandinavia while the Benelux is flat this quarter.

Finally, in Asia-Pacific and Latin America, the constant currency growth for the region is 2%, but still very highly contrasted while Asia-Pacific is growing close to double digit. The activity in Brazil continues to deteriorate, weighed in by the Managed Services sector.

Will you continue to basically look at putting Brazil on the profitable path even if you have to continue to shrink it a little bit in the coming quarters. In Asia-Pacific, the growth is driven by Consumer Goods and Retail and Financial Services.

Now moving to the next slide and the revenue by business. Still in constant currency, so Consulting Services, which represent 4% of group revenues, grew by 16%, driven by booming market in digital transformation and of course we think the benefits of the investments we are doing in North America.

This 3.8% growth in technology and engineering services which account for 15% of the Group was mainly driven by strong performance in two of our key historical markets, France and North America. Application Services which is a largest business with 63% of revenue grew 5.7% year-over-year so driving the overall growth.

We continue to benefit from the strong demand in Digital and Cloud offering notably in France, Germany and Scandinavia, where the growth rates are in double digit in application services. Finally, the revenue decline of 6.3% in Other Managed Services reflect the expected impact of resourcing in UK public sector and the continuous contraction of our business in Brazil notably in infrastructure services.

Business services remained slightly positive this quarter. Moving by sectors, Financial Services growth year-over-year in Q3 is at 4.7% at constant rates.

Outside of Latin America that growth is 6.6% is again some performance in Europe notably France, Scandinavia, Germany but also in Asia-Pacific. After four quarters of stabilization in North America, the Energy & Utilities sector posted a positive growth which confirmed the trust in North America is now behind us.

We still do not expect and acceleration view of the overall spending trends in that sector. Manufacturing is this quarter again our top performing sector with 10.2% growth, driven by traction in Digital and Cloud, notably in digital manufacturing and double digit growth in North America, Germany and Scandinavia.

In Consumer Product, Retail and Distribution acceleration this quarter at 8.2% year-over-year, with recovery in North America notably and sustained growth in France, Germany and Asia-Pacific. And as expected the public sector is declining minus 8.3% year-on-year.

In the third quarter, we see anticipated decline in the UK. Outside of the UK the public sector is growing around 3%.

Finally, Telecom, Media and Entertainment, in line with the previous quarter is slightly down minus 1.2 and we have here very mix geographic picture. Moving to bookings, this quarter it stands at 2.7 billion, as Paul said slightly below last year at constant exchange rate and also below our expectation.

And just to clarify this quarter reflects only a very partial booking on McDonald's at this stage. Overall we see still a good momentum and opportunities with a healthy pipeline in line with our expectation, the expectation we set in our H1 result and we do expect a much stronger Q4 in terms of booking.

Lastly on the headcount evolution. We ended Q3 with close to 200,000 employees, is a 5.9% growth year-on-year, mainly driven by the offshore headcount.

Driven by the offshore headcount, which shows 8.9% progression driven primarily by Continental Europe, however with our strong momentum on digital we also see more and more in terms of talent in both Europe and North America. And we expect that to continue into Q4 and next year.

To summarize this quarter confirms our improving growth profile should by an acceleration in North America which came a little earlier and little stronger than initially thought. On this basis to continue to target a normalize EPS growth of €6.1 per share in spite of the various currency headwinds.

Let me now conclude with the capital of word on our share count, since we last talked our fourth employee ownership plan in September, which contributed to associate all employees to the development and performance of the Group. This capital increase of up to 3.6 million shares will be fully offset by share buybacks essentially funded by the process of the capital increase.

And is 170 million of share buyback executed in the beginning of the year, the number of authentic shares will decrease again this year. Now, open it to question and answers.

Operator?

Just first of all on the underlying growth of the business, looks as if we ex-Aspire out the business is about 4.8% in Q3. I think you probably talked about acceleration going into fourth quarter.

And does that mean that we should be looking to be on to the low end of you mid-term guide as we enter 2018? Then just secondly on the U.S., there has obviously been a trade in the first half of the year between and the investments you needed to make in growth and the impact that had on the margins and then we're now seeing the leverage of that.

Could you maybe just update just where you think we're in terms of having to invest strong growth in North America versus able to take some of the benefits of the leverage that you get? And then finally just be more detail on the UK, is the pipeline wakening materially there any more data you could give us just help to understand whether this is slight weakness or whether we should expect some of the more North America like over the next 12 to 18 months?

Thank you.

Yes, so I mean on the first one, we defiantly we will see an acceleration because we're going to have less headwinds from Aspire in Q4, right. So that will be the main driver of the acceleration, we're not seeing it outside of its spite of we will see an acceleration at this stage.

But if you just consider the headwind, we go down from 1.7 to 1. We will defiantly have an acceleration in terms of top line and we already at 4.8% as you estimate organic that what we try to continue to sustain.

Okay on the investment, let's be clear, I think we said end of July two things, first point is we have little bit the cost of some price pressure and we said where we need several quarters to stabilize it. So we not expect that to materially change in H2.

We need a little more time that’s what we said in July, nothing new. On the investment, we just said we no longer need to spend more in business development.

We still try to recruit new people in the new digital space, so less investment in terms of operating expenses, but still some. On the UK, I would say the market is so -- there are few deals out in the market lining up on some large deal with the usual win rate for the large deal, but beside that on more the current deal flow is really soft.

So my view is in the pipeline -- the pipeline looks good because there are very few large in deals, but you must complement that with the probability of success, and so large deal and soft demand for smaller deals. The discretionary part is software in UK currently.

Really just around the bookings and also just in general the market environment, I mean obviously I guess the Q3 I think seasonally not the strongest quarter. But how would you characterize that if you were down slightly on bookings?

Is that a blip can you feel that or do you feel the market getting a bit tougher? I'm just thinking about some of the comments on your particularly the Indian peers and inside the U.S.

was pretty tough market environment, so that was the question?

Two remarks, which Rosemary Stark at my side. The first point is I insist, we really took a very minimum share of the large McDonald's deals.

It's really -- that has not helped us, but we expect we -- yesterday, we had the Group Executive Committee and we renewed the pipeline for Q4, Q4 should be strong -- should really be strong. So, I would not blame the market softness, it's possibly a little bit about us.

Some deals have slipped as usual from Q3 to Q4. We really expect some of them to slide from Q4 to Q1 this year.

That's normal, but in spite of that I would wait for a good Q4.

And just on the remarks on North America, it depends what you're going after. It is true that as we said in the Managed Services market, it's probably quite competitive.

So it's just the main focus of your offering. You're probably suffering a bit.

The growth received is in Digital and Cloud, so if your portfolio starts to shift at a faster pace in Digital and Cloud, you're going to see growth in the market. So, it really depends on the portfolio of offering, the market is not even depending on the portfolio.

Which is why in my presentation, the Managed Service market is still active in Europe, no longer in the U.S., so in the U.S., if you want growth, you must go after Digital and Cloud. And just to build on the question on -- other one, on investment, that's why we had to continue to invest in North America, right, if you want to sustain the growth, that's going to be driven by Digital and Cloud, we're not done in terms of investment and say we're done now, next year, we'll not invest anymore, because consequently to sustain the growth, we'll have to continue to invest, until we shift the portfolio.

And if I can just ask one follow-up on North America itself, obviously you're coming quite a long way ahead of where you'd expected to I think in Q2 you were saying maybe 2.5%. Can you just optimize a bit the -- what's there performed for you?

Was there -- it is a big bounce back in it, you see, or something else?

So, first, we were prudent and we've modest growth and so we grow again but that's not what drove us. It's really manufacturing and CPRD.

And here, these are several brands, we all think of McDonald's, it's not only McDonald's. We have now revived -- manufacturing has always been good frankly, all year along, but we've now fully revived CPRD.

So as you imagine, we were not going to take any risks following last year, which means that we gave you visibility based on what we were sure off, but of course some of deals came in the quarter that basically had to accelerate further.

Okay, thank you.

I see what helped also because we signed McDonald's, you've sort of seen the share in August but we started to feed the activity when we were done selected at their request. So no anticipation of the contract, but they ask us for some results.

So we had really three months of acceleration in McDonald.

Obviously, I understand that the UK has shown some weakness. But the Rosemary is there with you, perhaps is there any feedback you got from the customer base that explains why there is this weakness at this particular point in time?

I have visited a very few in the last weeks. I was -- Aiman and I, we chaired a meeting with the UK colleagues yesterday.

So, it's more as Aiman said, the discretionary, the small things that are very slowed and demands of additional million. The pipeline is not bad, but it's a weakness of the current business.

Frank, I needed there to be some hesitation because of the slowness on the Brexit. So we don't want to blame it on Brexit, but clear there thought to be some uncertainty and some people are start to hold some investment.

That's our guess at this date, but I think we'll confirm that as we look at the budget for the clients are going to put for next year.

And just can I add that in some sectors, the comparables of last year were demanding.

Okay, and in passing during the presentation, you mentioned that you may wish to take some further action in Brazil at some point. Is this likely to give rise to any kind of an exceptional charge, if it's going to be quite radical changes?

No, not at this state, to be honest we don't see it this state. We think it's more the approach we took in China, right.

We want to have a profitable business, so we'll gradually shrink what we consider as being not in line with what we want in the future. We want a more profitable portfolio.

And can I make suggestion, Brazil is not great in spite of the fact that the stock market is booming. It's not reflected in the economy and we want to shrink to profitability to be Frank and to have something sustainable.

So it is not big to be honest, Brazil is a bit more than 1% of revenue Mexico is growing fast but we think it's a bit further but not pre announcing any exceptional charges that we have to take on Brazil.

Couple if I may, my first question is going back to Financial Services. If you could help us understand at a more sub-segment level, how your performance was across maybe retail, insurance?

And how does your performance contrast to that of most of your peers who still continue to struggle a bit when it comes to Financial Services? So any insights there would be helpful?

And secondly if I could go back to your headcount evolution, as you said you've added offshore headcount to support growth particularly in Continental Europe. At what stage do you think it starts turning around in the sense that your headcount growth slows down?

And if you could call it the elements of automation can -- and you could maybe also being where you stand today in terms of your automation trajectory? Thank you.

On FS, FS is always a question as I said several times of portfolio of clients and where you're focused on. If I look at Retail, I see we still have a good traction.

You will have some slowdown and some clients have increased significantly spend. So we might not see as much growth in the coming quarters from them.

But overall because the demand is being healthy, we signed some large deals in Q3. In Insurance, we had softness in the profit and casualty market.

But it seems to be turning around a bit. Right, so we will start to see -- we have some impact to be frank in Q3 from some last contracts from clients, notably in North America, but we start to see something that start look a little bit better going to next year.

But overall I'm not sure we will go back to an 8% or 9% as we have seen earlier as well. So we continue to be quite positive about the Managed Services sector.

We see good traction and some good deals at some clients. But again, the focus is really to try to grow the new in the portfolio as you imagine, which is quite competitive on the moment at services side vision what some of our engine competitors have said.

On India headcount growth is 8.9% year-on-year but it start to slowdown in 2017. So if you look quarter-over-quarter we start to see a slowdown in terms of growth.

And yes there is start to be some productivity increase, some automation impact, we are growing faster some of our automations, especially in the BPO area but even in IT we see some progress notably in infrastructure. So it's definitely a strong focus from the Group.

We can talk about it at the Capital Market Day. We continue to invest but you know our vision is there is a lot of productivity increase, which might not lead to lot of cost savings.

So but definitely we'll see a slowdown in India in the coming quarters.

Paul, can you say something about whether what criteria you are looking for in your next CFO? And also the timing of any change, I wasn’t quite clear whether you were saying it was next May or beyond that?

So first, Aiman will certainly be there until the closure of our 2017 books. So, he will be there in February to report the full year results.

So I'll just say as you know in the roof, we don’t need incredible skills of financial engineering. So the job of CFO with the roof is really connected with operational control.

But now, with two COO that are expert in operational control, because Aiman has now been the CFO for five years, but he was an excellent operator before. And Thierry, you might not know it but you notice it in the press release as been a control of many years and now as proven to be an excellent operator.

I have a little more freedom in selection of new CFO, so attention to some additional criteria. So as you see clearly open.

And just two very quick one. How big is Energy & Utilities now in North America, dependent to revenue?

And what sort of growth did you deliver and now are you seeing any…

Everywhere in U.S. Michael, on salary pressure we're quite.

So, Michael, your question is on salaries at group level on in the U.S?

Both I guess.

So, on Energy and Utility is 10% of North America in Q3. On salary, we will start working on the 2018 increase.

I will just say we don’t see that higher pressure, but on digital frankly. And I would just say in many part of the Group, the reliability of people is about make growth.

We have an incredible pipeline or we limit the pursuit of digital to what we can face and as the bottle neck is about starting mean that we kind of approach each other some results so there are, there is a pressure on digital. Next question Operator.

First of all, if you compare your kind of long-term guidance of 5% to 7% organic growth which Accenture, which expect another same growth, but that includes some M&A. I was wondering, where do you see stronger growth than Accenture?

And secondly, could you help a bit understand how the pipeline of M&A is forming, and if you have enough in the pipe you delivered a kind of 1% to 2% kind of inorganic growth as you indicated? And then finally on the HMRC, I calculated there was around 0.7% to 0.9% impact in Q4, is that fair?

Thank you.

I will answer the last one quickly. Estimation is about 1 point for HMRC as we said also last quarter for Q4.

And then it goes down to about 0.6 points in H1 then it's gone.

0.5 to 0.6 in H1.

Now the different with Accenture, difficult to explain, we just said don’t know in detail, looks like America is softer these days organically. So I don’t know, if they have some vertical issues but you heard like me that they have reorganization with more geography in the U.S.

that’s probably to address some softness in North America and that will be my only comment. On M&A pipeline, yes, we have enough leads to fill our ambition and question is as usual the balance between the sizable one.

When I say sizable, I obviously mean small sizeable, because but we have a significant pipeline and we have ongoing discussion clearing courses on the road today, and I will be on the road next week. So we have a few nice opportunities in site.

I have three quick topics this morning. The first is I think in Europe, the only region it's not growing is Benelux which was starting to get better in previous quarter, back to flats, so any color on the market would be useful there?

The second question is. You mentioned your full year guidance on the revenue side, you're bit ahead over the first nine months, if I was to apply the Aspire impact in the first quarter, maybe the revenue gross would be more to 3.5% and 3%.

So is there any headwind we should be aware of in the first quarter or just being cautious? And finally, there's been a lot of interview in the press on long accretive part of addressing digital contracts.

So now that the CEO of Accenture said clearly that he's not thinking about acquiring a large better in company. What do you believe you would keep the same strategy teaming up with Publicis so that we'll be PO?

Anything on this following all numerous articles would be useful as well? Thank you.

So, Benelux as such that we had some growth and that was quite positive around the fact that we started with some in Benelux. We had same impact in Q3.

Right now, we see some growth back in Q4 in the forecast. So I still hope that we'll end up this year with a positive outcome on the Benelux in terms of growth for the first year in many years.

So, I would say probably a bit of softness in Q3 that should improve in Q4. On Q4 growth, no, we don't have, we -- yes we're going to remain cautious because there's no reason to basically be bullish and then come back with a surprise at the end of Q4.

So we prefer to remain cautious on Q4, but we'll see an acceleration as we said because the Aspire headwind is going to go down, But what I'm seeing the underlying excluding Aspire, at this stage, I don't see -- I don't expect an acceleration, we really start to have a pretty good reason.

I don't know frankly, on Accenture and Pierre Nanterme's comments, that's what I expected, I always said we don't think, merging these two businesses is easy and I said we see -- we can park that very effectively and that some journalists asked me the question but that were rumors and I think Nanteme has dismissed the rumors now that picture is relatively clear.

Just a quick one, I'm just trying to understand the decline in the Asia-Pacific and Latin American region just what's driving this really? And are you seeing any softness in Asia-Pacific?

Or is it LatAm that's pretty much growing it? Thanks.

As I said Asia-Pacific is growing close to double-digit and we should see more of the same in Q4, so we're quite, I mean it used to grow up to 20%, there started to be some side effect, the days after number of years. So double-digit is still something we feel comfortable with.

So the question mark is really Latin America because we've big shrinkage in Brazil. Mexico is growing nicely.

It started to become a bigger part of Latin America and Brazil used to be 90%, down to 70%. And we'll continue to grow Mexico and we'll continue to shrink Brazil until we consider we have profitable business generating positive cash flow, that's what they said at the beginning of the quarter is we don't want to have supply in Brazil we want to have a profitable business and this has been challenging.

It seems the Brazilian recession and some of the political issues that drive are in Brazil and we still consider there's a future in Brazil but it has to be a profitable future like we have done in China. So my take on others report is before we get to where we must.

Thank you, Aiman. Thank you.

So, this closes our call for Q3 and we'll see some of you in the road show and tech conference, and if not, let's all meet in February '18. Thank you very much.