Capgemini SE

Paul Hermelin - Chief Executive Officer Rosemary Stark - Group Head, Sales Aiman Ezzat - Chief Financial Officer

Mohammed Moawalla - Goldman Sachs Stacy Pollard - JPMorgan Michael Briest - UBS Charles Brennan - Credit Suisse Laurent Daure - Kepler Cheuvreux Adam Wood - Morgan Stanley Gerardus Vos - Barclays Alex Tout - Deutsche Bank Neil Steer - Redburn

Good morning, everyone and thank you for attending the presentation of our H1 results. As usual, I will first give you the highlights of our results, then we will have Rosemary Stark, Group Head of Sales, going into more inputs on our business, and finally, Aiman Ezzat, our Chief Financial Officer, will guide you through the details of our H1 performance.

So first half 2017, the momentum is confirmed. Our good momentum at the beginning of the year is confirmed and we delivered a very good performance during this first half.

Our revenues grew by 3% in H1 at constant currency, with an acceleration in the second quarter to 3.3%. The transition of our portfolio continues at a very rapid pace, with the growth of 23% of our revenue in digital and cloud.

These activities amount to 35% of our total H1 revenue and 37% for Q2 alone. With the sheer dynamic sales momentum with 30 bookings in Q2 which brings total H1 bookings to €6.4 billion.

We recorded good progress on our profitability. The 30 bps year-on-year margin expansion lifts our operating margin to 10.5%.

In 2016, we delivered, for the first time, a positive free cash flow for the first half year, thanks to a stringent execution. We did it again this year with a €64 million organic free cash flow.

Finally, our normalized EPS reflect this good performance, with an increase of 12% reaching €2.81. We have a strong set of growth driver.

The buoyant demand in digital and cloud is the main engine of our growth and our consulting activities are instrumental to address this demand and grew by 10.7% in H1. We continue to see an excellent momentum in Continental Europe, notably in Germany, Italy and the Nordics, thanks to our combined strength in application and consulting services.

Asia-Pacific is also growing very fast at 20% in the first half. In terms of sector, we gained market share in manufacturing and financial service, two strategic sectors where we have a strong expertise and we manage this acceleration of our growth while improving our operating margin and our free cash flow generation.

Let’s now turn to a geographical view. We see a good growth in all our main markets.

North America is returning to growth with a plus 1% at constant currency in Q2 after minus 0.2% in the first quarter. In this geography, the dynamism of the manufacturing sector and the massive adoption of cloud by our clients are strong drivers of our activity and in Energy, Utilities and Chemical, with the fourth quarter of sequential stability, the trough is behind us.

We are investing for further growth. And in Q3, our forecasts are around 2.5% and we still expect to be trending to mid single-digit growth by year end.

Note that this geography is under price pressure on managed service, which weighed on our margin in H1. Consequently, we are spinning up our competitiveness plan with accelerated industrialization.

In the UK, we delivered a solid performance with a mid single-digit growth in the private sector. Energy, utilities and financial services sectors are growing fast.

And overall, we still perceive limited impact of the Brexit on our activities this semester. In the public sector, the HMRC reinsourcing has now been completed as planned.

In Continental Europe, I think we can say we reinforce our leadership with a continued momentum. We delivered a double-digit growth in Germany, Nordics and Italy and we sustained our momentum in France.

We also improved our performance in Benelux. Growth in this region is driven by a buoyant demand in digital.

And we managed to improve our profitability in Continental Europe, notably thanks to a fast offshore transition. We gained 4 points of offshore leverage in Continental Europe.

Our growth is fueled by our rapid portfolio transition toward digital and cloud. For digital, our sectorial expertise and our consulting capabilities are now key asset to address the business side of the demand.

62% of the bookings of Capgemini Consulting are now digital-related. We have chosen 8 sectorial bet in consumer product and retail, in automotive and in financial service, in which we developed specific value solution with clients.

To support this portfolio of transition, we leverage our global strategic partners, focusing on new approaches. For example, we launched an offer on digital manufacturing and IoT with SAP for discrete industries.

We also grew an ecosystem of emerging partners. We worked with Splunk, which has a cutting-edge technology for analytics in the financial sector and we are ramping up our activities with Blue Prism and UiPath in robotic process automation.

In addition, our targeted acquisition in the last months, have brought us key capabilities in the new. We built a global network of creative studios combining assets from Backelite, Idean and Fahrenheit.

These acquisitions have also brought us new logo, of which some prestigious names of the Silicon Valley and a triggered discussion with CXOs on new opportunities. Thanks to our strategy, we won exciting deals in Digital in the last months.

To pick two of them, for leading aerospace company, we built a digital factory providing data analysis that shall be used to monitor the production of satellites. We transformed the customer relationship at a French international retail company, deploying several digital marketing solution from advanced analytic on client data to targeted marketing campaign.

On the cloud and cybersecurity service, two key enablers of digital transformation, we delivered strong growth. In cloud, we see a strong demand for hybrid cloud and cloud native development.

Thanks to our global cloud factories, we also win several deals of massive application migration to public cloud. And with our combined capabilities in Infrastructure and Application service, we have built solid reference in cloud integration and API development.

We are partnering with the major players in cloud, Microsoft Azure, AWS, Google in public cloud or Pivotal for cloud native development. In cybersecurity, where we focus on service, the demand is buoyant with a strength in momentum these last months.

We have launched a very successful offer in Europe to help our client to enforce the GDPR regulation. We also see good traction on hybrid cloud protection and on security monitoring where we have good reference and world-class onshore and offshore security operations center.

To mention a couple of wins, we are enabling Ikano Bank, the bank of IKEA by migrating them to a managed hybrid cloud environment. We won a 5 years contract with a large building and industrial service company, which includes private cloud deployment and cybersecurity services.

In that environment, we accelerate our growth but we’re also adapting to a competitive environment. We transform our infrastructure service towards a regional and more efficient model, and we will industrialize further our BPO activities.

On application development and maintenance, we have launched a new offer fully leveraging our global cost efficient factories. We are strengthening our pyramid management and pushing further our offshore leverage, notably in Continental Europe, as I already mentioned.

In parallel, we are accelerating automation following the launch in 2016 of our Automation Drive offer. We have developed now more than 2,500 robots for more than 270 customers.

We have built a solid community of 4,000 experts in automation, RPA and artificial intelligence, leveraging our Automation Academy. The most dynamic field appears to be RPA, notably in financial service and we are winning a growing number of engagement in this domain.

For several banks, we deployed robots with automated middle and back office processes and we win this kind of deal against our best competitors. We won, as an example, the ISG Paragon Award for our RPA work with Zurich Insurance.

Thanks to our steady progress in industrialization and automation, we managed to increase by 30 basis points our operating margin this semester, in spite of the price pressure in the market of large contract renewals. Based on this, we think we delivered a rather strong performance in H1.

It’s true too that compared to 6 months ago, we have this year some margin headwinds due to price pressure in North America and a strengthening of the euro. But on the other side, we have clearly gained confidence on our top line trends.

We continue to target a niche to constant currency growth at 3.5% that takes fully into account the UK insourcing impact that will peak at 1.7% of revenue in the third quarter, but also North America trending again towards mid single-digit growth in the fourth quarter. Therefore, we can confirm all aspects of our 2017 outlook, a constant currency growth of 3%, an operating margin of 11.7% to 11.9% and an organic free cash flow above €950 million.

On this, I hand over to Rosemary, our newly appointed Head of Sales. Rosemary is an experienced sales leader and was until recently the Global Account Executive for a major UK bank as well as a Head of Financial Service for the UK and Ireland.

Rosemary?

Thank you, Paul. Good morning, everyone.

It’s exciting for me to be doing my first results call. As Paul said, we have enjoyed good sales performance in H1 2017 at €6.4 billion, noting that in H1 2016, we benefited from a large multiyear booking in the UK public sector.

Bookings have been strong across most regions. However, we continue to see some softness in Latin America.

We have delivered 5% bookings year-on-year growth in Q2, even though we had an excellent Q2 in 2016. Q2 2017 is our third straight quarter of more than €3 billion bookings, and we expect to have a strong performance in Q3.

The funnel is also showing strong growth with a 12% increase year-on-year for deals expected to close in our second half. The funnel is fueled by significant digital inquiries – opportunities.

On average, these deals tend to be smaller and we see an increase in the number of small to medium-sized deals in the funnel. However, these deals also tend to close faster and burn faster.

Now, let’s look at our result by sector. Financial services, our largest sector, has performed strongly in H1 with 7.7% growth compared to the same period last year at constant currency, notably with double-digit growth in financial services in the UK and Asia Pacific.

Energy and Utilities is steady, with a negative impact from North America due to the base effect. This is compensated by growth in the UK and Nordics.

Manufacturing remains one of our leading sectors, with growth of 9.7% overall and notably, double-digit growth in Germany and Benelux. Consumer products and retail distribution is showing a good recovery with strong growth in Q2 of 6%, leading to H1 growth of 4.8%.

We have growth notably in Asia-Pacific and France. As expected, public sector is declining due to the UK but we have low single-digit growth in public sector in other geographies.

TME remained soft in H1 overall. Moving on to our clients, we continued to improve our account management, attracting new clients as well as driving strong growth in our existing clients.

You can see a number of new client logos in the H1 2017. We mention here those who have given the permission for us to use the names or logos.

Many of these new clients are attracted by our digital and cloud expertise. These include Mr.

Bricolage, a French leading hardware retailer program for maintaining our Odigo platform for the contact center to improve their customer relationship management and M1, Singapore’s third largest cellular operator. Capgemini is currently deploying their sales service portal on an Amazon Web Services platform, but also winning digital and innovative work with our existing clients at Zurich, leveraging our insurance knowledge which secured a major multiyear SAP HANA implementation program for North America.

For the House of Fraser, we have extended a remit to support their IT simplification strategy and as well as providing IT infrastructure and application support for developing new innovative services designed to provide additional value to House of Fraser. Two numbers demonstrate the strength of our client intimacy and accounts management.

97% of our revenue comes from existing customers and our top 100 accounts are growing at an average rate of 5% in H1, faster than our overall account portfolio. I will now hand over to Aiman to cover our financial results in more detail.

Thank you, Rosemary and good morning. So, I will start with an overview of our result.

In the first half, as Paul said, we have performed beyond expectation. So first, as a reminder, as mentioned in our 2017 outlook in Q1, we have decided to remove the Brazilian equipment resale business from the organic and constant currency growth numbers to ensure basically that as we discontinue that business, it doesn’t disrupt the analysis of quarterly trends.

So I will start with the group revenues, which totaled €6.412 billion in the first half, up 3% at constant currency rate and 2.5% as published. Organic growth reached 2.7%, so difference between organic and constant currency growth is a net impact of acquisition, mainly TCube, Idean and Itelios and the divesture of IBX.

The ForEx impact in H1 is a headwind of 20 bps, mainly driven by the depreciation of the British pound, compensated partly by the appreciation of the U.S. dollar and the Brazilian real.

Our operating margin stands at €672 million, so 10.5% of revenues, 30 bps above last year and clearly within our guidance. I will comment later on the other operating income and expenses.

The operating profit rose to €538 million, up 6% versus the first half of 2016. The net financial expense is €28 million, so less charges than last year, €34 million less year-on-year following a reduction in the group debt and again realized from the early unwinding of the cross currency swap we setup in connection with the IGATE acquisition financing.

The income tax expense is €140 million, representing an effective tax rate of 27.4%. And the net profit group share is €375 million, an increase of 3% versus 2016, which if you remember, had benefited from a one-off €32 million non-cash income from DTA recognition.

Organic free cash flow generation continues to improve at €64 million, an increase of €33 million versus 2016. It’s a second year of positive cash flow in the first half.

And our net debt stands at €1.929 billion. Looking at our quarterly revenues, Q2 organic growth came in at 2.9% after 2.6% in Q1, leading to a first half organic growth of 2.7%, in spite of a lower number of days in Q2.

So overall, this was a very good performance in terms of growth, supported not only by some recovery in North America, but also by a very strong European momentum. The currency impact was negative in Q2 at minus 0.6%, bringing H1 to minus 0.2% in terms of currency impact.

We now expect ForEx headwind slightly over 1% for the full year as opposed to a slight headwind when we announced the full year guidance in February. The constant currency growth came in at 3.3% in Q2, so an acceleration compared to Q1 and leading to a 3% constant currency growth in H1.

We are well on track to deliver our full year growth guidance. Looking now by geography, in the first half as planned, North America, 30% of group revenues began to restore its growth momentum, reporting a slight increase of 0.4% at constant exchange rate.

However, Q2 showed an improvement, as expected, at 1%. In this region, Energy and Utilities sector confirmed its recovery with a fourth quarter of sequential revenue stability, while financial services and manufacturing sector were the most dynamic.

And here again, as Paul mentioned, we do expect to see an acceleration to 2.5% in the third quarter, the United Kingdom and Ireland, 14% of group revenues, reported revenue down 5.9%. That reflects the decline in the public sector in line with our forecast.

The public – the private sector remains healthy, with a good growth close to mid single-digit, notably in financial services and Energy and Utilities. And the private sector now represents 63% of our revenue.

France, 21% of group revenues, showed a good growth in the first half at 4.7%, driven by application services, but also a good recovery in Technology and Engineering Services. Consumer goods sector, manufacturing and financial services were the most dynamic.

In the Rest of Europe, we reported a revenue growth of 7.9% at constant exchange rate, even with an acceleration in the second quarter with all geographies and sectors contributing. The group reported double-digit growth, notably in Germany and Italy for the first half as well as in retail and consumer goods and manufacturing sectors.

Finally, in Asia-Pacific and Latin America, the growth was 11.1%. Asia-Pacific, which now account for three-fourths of the activity in the combined region, the growth momentum continues to be buoyant fueled by financial services and retail and consumer goods.

Activity in Latin Americas continued to decline with growth – good growth in the Mexico, but a challenging environment still in Brazil. Now if I move by business, Consulting Services grew 10.7% at constant exchange rates driven by digital transformation, with notably strong growth in Continental Europe.

Technology and Engineering Services grew 3.5% in H1, with some slowdown in the second quarter, but that’s due to the level of activity, which is semi-material and heavily impacted by the reduction of number of days. And we had good fraction notably in France and Scandinavia.

In Application Services, the largest part of the group business with 62% of revenues, continued to fully benefit from the new demand driven by digital and cloud offering. Recorded revenue growth of 5.6%, constant exchange rate in the first half and the growth is approaching or exceeding double-digit in many European countries, France, Germany, Sweden, Italy, and in Asia.

Other managed services reported a 6.6% decline in revenues. This is mainly attributable to the Infrastructure Services business and notably it reflects the anticipated decline in the UK public sector.

Business Services covering our BPO and transactional platforms is stable. Now, moving to headcount, the headcount growth in the first half is 1.7%, still driven by offshore.

The onshore headcounts are flat overall, but on the one side, growth is notably strong in Germany and Sweden due to the level of project activity in digital and cloud and we continue to see a decrease of headcount in Brazil due to the shrinkage there. Overall, we ended H1 with 196,000 employees, 57% of them are in our global delivery center.

We recruited over 25,000 employees in the first half, 63% in global delivery centers. Attrition is quite stable at 18%, and offshore headcount grew 10% year-on-year.

If you look at the offshore leverage, we see 57%. So, we continue to see an increase compared to the end of the year and year-on-year.

This is now driven primarily by Continental Europe. We have stability in offshore penetration in other regions.

It has improved by 4% year-on-year in Continental Europe to 41% and we are notably now at 64% in Nordic and Germany, 39% in Benelux and 35% in France. Penetration remains low in Italy and Spain, even if we start to see some appetite in Italy.

Now from a margin perspective, we continue to drive the margin progression. Continental Europe taking the relay is driven by better revenue growth and a portfolio shift, while we are increasing investment in North America to fuel the growth through the portfolio evolution there.

As a consequence, North American operating margin fell 190 basis points to 13.2%, impacted by price pressures that we have talked about around large renewal of consolidation and increased investment and less depreciation, as you have noticed, on the INR. The UK margin increased by 60 bps to 15.1%, reflecting in part the portfolio shift and see somewhat shielded from the British pound depreciation against the INR.

France improved another 50 bps at 7.1%. And as you know, we have a strong seasonality so the margin will be quite higher in the second half.

The rest of Europe continues its margin progression. We see a strong improvement of 220 bps to 11.1%, with improvement across all geographies in the rest of Europe.

Finally, in APAC and LatAm, margin have improved 220 bps to 6%, supported by a smaller loss in LatAm than last year and an increasing weight of APAC in the combined region. Now looking by business, we continue to see some improvement in most of the businesses.

Consulting operating margin increased 20 bps to 10.6%. The Technology and Engineering Services continued to progress by 90 bps at 12.2%, thanks notably to a good momentum in France.

Application Services, which is the largest part of our portfolio, shows another 50 bps improvement, driven by the portfolio shift, but also by industrialization activities. Finally, we see a decline in Other Managed Services of 150 bps, as it’s the most affected both by the speed of transition to the cloud and the customer cost-reduction expectations.

If you go now by destination, we see that the overall, the gross margin is resilient at 26.4%. So we have resisted quite well in spite of some of the price pressures that we have seen in North America and also the first half salary increases in India, which are not compensated by the rupee depreciation anymore.

The selling expenses continued to increase slightly to 8.5% that reflects the shift of portfolio to more project work. And finally, we have had a good improvement in G&A of 40 bps to help drive the margin improvement in the first half.

Moving to financial expenses, they show an improvement of €34 million compared to last year. So we are now down to €28 million, due primarily to two things: one, a reduction of €70 million in interest on bonds following the reduction or refinancing of debt at the end of last year, an increase of €22 million in other interest income, which include €14 million year-on-year impact from the early unwinding of our USD/euro currency swaps, which we setup in connection with the IGATE acquisition financing.

Financial expected are – financial expenses, excuse me, are estimated at €45 million to €50 million in the second half. The taxes, if you remember, in H1 of 2016 benefited from this one-off €32 million DTA recognition.

If we neutralize that, the 2017 effective tax rate has slightly increased to 27.4% versus 26.5% last year. This is primarily due to the evolution of the geographic profit mix.

We still estimate a full year effective tax rate of around 28%. Now going through the recap of the P&L from operating margin to net income, items recognized in other income and expense represent €134 million in H1 compared to €128 million 1 year ago.

The main evolutions are: an increase in restructuring cost of €50 million, driven by the expiration of the portfolio shift in Infrastructure Services, a reduction in integration and acquisition cost of €17 million; an increase in expenses related to share gains by €9 million to €32 million. Operating profit post a 6% progression at €538 million.

After financial expenses and taxes, the net profit group share is €375 million, and the normalized EPS increases by 12% to €2.81 per share. Looking at the priorities we had for 2017, we have successfully integrated all new acquisition, as Paul mentioned earlier, with a strong staff retention, which is of course, one of the most important things on this small new acquisition which are innovative.

And we are focusing now on creating value by expanding capabilities and expertise. We manage the right balance between investing in the portfolio transformation, while improving our managing – our margin in a challenging environment with stronger headwinds than we initially anticipated around the price reduction and also we have some unfavorable FX impact from the euro appreciation.

We estimate actually that the unfavorable translation impact have increased by about 10 basis points since the beginning of the year due to the strengthening of the euro. Free cash flow generation has improved by €33 million and we have written €338 million to shareholder while maintaining our M&A activities.

Thank you, Aiman. Before we open the Q&A, let me wrap up this publication.

In the first half, we delivered a solid set of numbers across the board, which confirmed the momentum we had been seeing at the beginning of the year. While we continue to expand margin, we are also on track to restore our North American growth profile.

We have solid trends in our three largest sectors and we continue to win or increase our leadership in Europe. If we step back a moment, the first half demonstrated we can actively manage our growth to margin trade-off in order to expand our earnings at a solid pace and we do so by focusing our journey towards more industrialization and automation of our operation, actively transitioning our portfolio to our innovative digital and cloud stack, strengthening our sector expertise and always increasing our client eccentricity.

With this in mind, we confirm our mid-term ambition to reach an organic growth of 5% to 7% and an operating margin of 12.5% to 13%. Can we now, operator, take the first questions?

Great. Thank you very much.

I was wondering, Paul and Aiman, you could perhaps isolate some of the sales structural drivers in your business that are driving the sort of revenue acceleration versus some of the cyclical elements that we are seeing, particularly around sort of the recovery in Continental Europe. And I noticed that the guidance is obviously for the full year unchanged.

Do you sort of still stand by the acceleration comments you made earlier? And is there anything in the second half that sort of concerns you whether it’s sort of the UK potentially slowing down?

And are you just simply keeping a buffer for that? So yes, that would be my main question.

Thank you.

Thank you for this question. The first point, I will start with the last question, which is we today continue to say 3.5% and we didn’t think we should raise the full year guidance for 20 bps.

I would just say that’s a little small, but we are confident we can grow 3.5% in H2 and if you remember that the peak of the HMRC reinsourcing will be in Q3 with 1.7 point equivalent to the revenue. So, that’s significant.

And we do not expect a slowdown in the UK. Now if you say what drives it, frankly, you would see that digital is everywhere, probably cloud a little more in the U.S.

than in Europe, so digital everywhere, cloud more in the U.S. And the difference between the Europe and the U.S.

is that in Europe, we still grow our offshore presence. Aiman and I said 4 points of increased leverage.

Our Indian headcount servicing Europe client has grown by 20%. So in Europe, we have the double benefit of an increased momentum in digital and cloud and a very steady momentum in managed service, thanks to our offshore capabilities.

In the U.S., frankly, it’s a plateau of offshore. There is aggressive pricing demand from some clients as we said and we have push for growth.

And frankly, if at the end of the year, we trend towards these 4% plus growth in the U.S., the difference between U.S. and Europe will be the difference in managed service, where in Europe, because they are late on offshore, we can grow faster, because we still deploy further offshore asset.

Okay?

Great. Thank you.

Next question?

Hi, thank you very much. Can you – I guess, you have already touched on your North American business.

Can you just maybe tell us what your expectations are for the energy sector going forward? And also just digging in on the margins, digital, I believe you said the deals were smaller on average, but maybe close or closing faster.

Can you also discuss the margin trends in the digital business versus your traditional historic business? And maybe the same question for cloud margins versus the managed services?

On the margins, Stacy, so you saw we had the clearly a decline in the margin in North America. There is several things that fuel that.

One, we definitely have price pressures. So when you have price pressure on some of the renewals, you take the upfront hit.

Then you improve productivity and you recover margin after that. So one is quite steep, end up by showing up in the overall number, and here as we are trying to fuel growth, we are a bit more aggressive in prices, but we know that we will recover part of that in the next 12 months.

The second thing, as you have seen also from some of our Indian competitors, there is no more depreciation of the INR. So you take the hit of the salary increases in H1, which affect quite a bit our North American business.

Then we have – we work on de-leveraging the pyramid during the year and recovering some of that. So Indian is the second headwind.

In the first half that basically put a bit of pressure on that margin. And the third thing is that we are definitely investing to accelerate the shift of the portfolio toward Digital and Cloud.

Now if you talk about the margin between digital, cloud and the rest of the business, again, overall at the group level, I would say, I would not consider them as being highly accretive, although we start to see in some of the segments where we have started to scale the capabilities that the margins start to really to become nice, hence, you also see that double impact in North America – sorry in Europe, but we still need to improve that a bit in North America. So we are still working on it, but it’s true that today, I would say the erosion coming from the increase of compensation in India’s lack of INR and the price pressure on the managed services more than compensate any improvement that we start to see on the digital and cloud side.

A couple of points that you raised. EUC, we said it’s the fourth quarter of stability.

As you see, the oil price looks stable in a band $45 to $55 per barrel. In this area, I do not assume we will see a massive ramp-up in oil and gas.

There are a few project, but not very sizable. We have a little better momentum that might materialize in the utility sector in the UK and even in North America.

So EUC should start growing again. A point on the margin impact, I would just say the shift for infra for the large managed service to infra cloud project will be positive in terms of margin because managed service are really highly competitive and cloud integration for infra will be positive.

And I think that’s a point. And last point which would give more direction, we said that our pipeline has increased and it has increased in spite of higher proportion of small deals, which means we have a lot of these small deals in digital and cloud.

And I heard one of the group key managers saying the average size of a digital deal is one-third of the previous typical project. But the chance of a repeat a year later or a few months later are 3x higher.

So, the question is will we see a reduction in BD costs if we get repeat business in digital to be seen. For the time being, as you say, because of the smaller size of BD costs have increased, but only a point by 10 basis points.

Thank you.

Next question?

Good morning. Aiman, your sort of comments around the North American price pressure and the lack of offsets to the Indian rupee or salary inflation rather, are you implying that in the second half, the North American margins should improve?

Can you maybe give some context around by how much? And then you also said in the UK we haven’t yet seen the impact of the rupee’s appreciation.

Are you guiding that the UK margins come down a bit? And then just finally, in terms of the general and admin savings, how much more do you think you can account there.

40 basis points is quite a big move year-on-year? Thanks.

Okay. So North America, as you imagine, I am not going to guide you for a margin on North America in H2.

I tried to explain what are the drivers from some of the margin headwinds we see in North America, the rest is a question now is both on the recovery in terms of the acceleration of industrialization to improve and absorb some of the salary increases in India that were not compensated by rupee depreciation. And on the other side, the time to digest and the transition increase of productivity of some of the large contracts or on the renewal that we have taken in North America.

So, it’s a bit early to talk about the margin of North America in H2. What I confirm is basically overall at the group, we are confident in our margin progression to meet the guidance for the full year.

On the UK, I was surprised by the stability of the margin in H1. So, we had some good improvements in some places.

We also had some good coverage, to be frank, on the British pound against INR that basically from a hedging perspective, shielded us. But I do expect at one moment or the other, some of these hedges will start fading away because we do not have the same position.

And unless we are able to reduce significantly the cost, we will see a bit of erosion in the UK margin. On the G&A side, as you know, we hit 7% last year.

I said we are going for the next 50 basis point. I’m not saying we’re going to deliver them this year.

I think we had a good effort in the first half to be able to compensate for some of the erosion that we have seen in other places. I’m not giving, again, too details to try to give a guidance for the full year, but we are still working definitely on the next 50 basis point of improvement in G&A at the group level.

On North America, you would expect that the rate of decline in H2 would be less than H1 on margins?

Again, we said, we will not give you...

Yes, we are not supposed to be speculating on that.

It’s clear that we do not accept North American margin where they are. So we have started the program to lift the margin.

It’s too early to say when it will impact our figures and what proportion could be already taken into account in H2.

Alright, thank you.

Thank you.

Yes, just a couple of questions, if I can if that’s possible. Firstly, you have talked about investing in the North American business.

In the past, you have talked about being underway some digital capabilities and needing to do M&A. Have you decided that it’s easier to organically fill that gap now and is that why you are investing or are you still expecting to be doing modest M&A as we go through the year?

And the second question is just trying to get to underlying growth rates for the second half of the year. You called out Aspire at minus 1.7% in Q3.

What does that look like for Q4? I am just wondering if we can bridge from 3.5% to something north of 5% on an underlying basis.

Thank you.

So just – I will take the first question, Charles. Investing in digital, first, we always said we are strong in digital manufacturing and we have recorded superb bookings, but we are – we have reinforced our hands.

We have hired expensive people. And as you know, when you hire opinion leaders, you usually need 6 month to 12 month to amortize the cost of the recruitment.

So that’s what we called investment and in business development. So, there had been some investment.

On digital marketing and digital customer experience, we will do acquisition. So I have spent the second quarter looking at relatively sizable acquisitions, several hundreds of million.

But I thought they were a little bit painted in digital. So the real digital side of these larger entities were digital for no more than 30%, 50% of the revenue, and they were asking for kind of digital premium price that we were not ready to pay.

So we are back – so we have now a couple of dialogues with smaller entities, a €50 million plus in terms of size. I hope we will conclude some of them early in – before Q4 and they will more bring some addition in the digital skill set of North American operation.

Aiman?

Okay. On the growth, so the headwind on Aspire is 1.7 points in Q3.

It will be less than 1 point in Q4, as we mentioned, since end of Q3 last year. So we are consistent from that perspective.

Don’t look too much at the underlying growth rate by quarter. But what I can tell you is definitely, yes, we should overall see a better Q4 at the group level, notably thanks to North American acceleration.

So, Q4 should overall be better, but I would not speculate yet on what is – what you call the underlying growth rate by quarter. Definitely, I am still very confident as I have said several times, about the fact that we will hit our mid-term organic growth guidance of 5% to 7%.

So, we are definitely on the acceleration course and I am quite confident on the direction where we are going.

Great. Thank you.

Thank you, Charles.

Hey, guys. Thank you.

Good morning, gentlemen. Couple of questions.

I would like to come back on the U.S. profitability.

I think post the IGATE deal you were hoping to get margins in the U.S. to really high level like 16%, 17%.

So what’s happening now on the pricing side? Is it changing your long-term goals?

And then I have a two follow-up.

Laurent, you have a short memory. All the margin accretion has been delivered and more.

So, we delivered on our U.S. margin the total impact of IGATE, 50 basis point in the second half of ‘15 and more than 50 basis point in the first half of ‘16.

So we delivered the full impact of IGATE. We have not seen any evaporation of the IGATE margin.

This is not what I meant, not at all. I was just wondering if your long-term ambition, because of market conditions...

Don’t think we ever said 17% to 18% in North America, we think that with high leverage, North America should be accretive to the group and we will think it will be. But there is – and notably, as you now look at the Indian published results, a lot of them have seen their margin shrinking or crumbling and there has been some price pressure probably at the initiative of some competitors.

We think this has stopped now. We think the Indians have seen the impact on their margin and we think the market price pressure as led by them is less than it used to be a year ago.

Laurent, just to clarify, we haven’t changed anything to our midterm guidance of 12.5% to 13% now. We are still quite comfortable with that.

I think, we explained some of the headwinds we saw in North America in the first half. As you imagine, we cannot factor at any moment in time what could be some of the headwinds that are coming from external environments.

So yes, there was more price pressure in North America, currently in the first half of 2017 than I would have thought 2 years ago, but this is not something you can anticipate. Our job is to ensure that we are able to find the different pockets of improvement to continue to maintain our track in terms of improvement.

And yes, we are definitely putting pressure to recover some of the margin lost in North America. But we cannot commit on that on a quarterly basis in terms of when we going to recover that margin.

So our ambition in terms of what we want to do in North America and at the group level hasn’t changed. And today, we are able to accelerate in some places to compensate some of the external factors that were not anticipated in other places, but we are quite confident in our margin trajectory and our ability to continue to drive improved margin in North America.

So next question?

And on just a small few things on your deconsolidation of the business in Brazil, where do you stand on the disposal? And finally, there has been a bit of churn at IGATE, I think very few departures.

I was wondering if you would continue to track the churn overall and if you still feel confident that the company has been fully integrated now?

So on...

Brazil. Yes, on Brazil, we said we either discontinue or we sell the business.

To be frank, right now we are looking at both options, but definitely that business, as you have seen, has scaled down. So, we will see.

We will fulfill the commitment that before the end of the year, it will either be discontinued or sold. But I cannot comment further, but definitely, this is still progressing, Laurent, and in the second half, it will happen.

And on the IGATE retention, out of the 72 that were tracked as Vice President, we have lost less than 3, I think over 2 years, which I think shows that the integration is completed. You have noticed that the predecessor to Rosemary has gone.

He was a recent hire from Infosys and he followed the previous CEO that was from Infosys, too. So it was an Infosys connection.

I don’t think it had any impact on the IGATE community.

Okay, thank you gentlemen.

Hi, good morning Paul. Good morning, Aiman.

Thanks for taking the question. Just first one, that impact on pricing and the investments in the U.S., maybe as we look outside the U.S., is there any reason you think that we wouldn’t see that type of pressure elsewhere in the rest of the world?

What is the fact that the Indian presence is just much lower outside the U.S. maybe with the exception of the UK, it means that there is just much – much less likely.

And on the digital side, you are already much more advanced in Europe so there is no need to accelerate investments. And then secondly, I noticed much more focus in the presentation, on the topic of automation.

I think it’s certainly you may have been a little bit more skeptical on in the past. So, is that a change of view there or you are just making more noise about it?

And could you maybe just help us understand how much of that is internal versus external work that you are doing and changes that would have to the offshore model, in particular? Thank you.

So, first on the pricing, Adam, I really think that this trend has been started by some Indian competitors. We clearly see that in their results that they just published and we see them far more calmer.

So, we don’t see the same pressure out of the U.S. and even in the U.S., I think the situation has settled somehow.

So, that’s one point. On automation, I leave the floor to Aiman, but I would just say Aiman was skeptical about too bold cost reduction ambition, but the appetite for automation is there and we deliver external service to clients.

Yes. So I mean, on automation, as you know, I have clearly voiced it several times, the skepticism around the promises done by some of our Indian competitors in terms of cost reduction due to automation.

I never believed them. I think that clients have realized that, I can tell you feedback as from many clients in banking, who said whatever they do they never see less – more than 10% of savings coming from automation, okay.

And these recent discussions, as – whether they are Europeans or North American clients, I can promise you they don’t see more than 10% whatever happens. So it confirmed what I have been saying so far.

Now in terms of level of activity and automation, we are doing a lot of work because we do consider there is value creation around coming from automation, but it is not necessarily cost reduction. I think this is where the big difference is.

And the discussion I have with clients by the way, we are saying if you focus on automaton, on the one you are going to create business value, then you will do the right thing. But I think the big hype in terms of it’s going to save 40% of cost by doing automation is gone and people are now focusing on where we actually going to create value.

So, some of the aspects, for example, we are working on with some of the banks is on specific processes on securities. These are not big volumes, but the value of being able to automate some of these processes is quite high from a business perspective.

And what we have been able to leverage is that now we are doing a lot, a lot of work around automation for our clients. So as consulting work as well and we are winning to be frank, against most Indian players, but also some of our famous Western players.

We have displaced them in a number of clients, where basically client considers that what we are doing is real high quality and delivering value compared to some of our competitors. So we are quite bullish not only on how we create business value on what we have outsourced from clients, but also on the work we are doing today for clients.

Thank you. And sorry for misrepresenting you, Aiman.

Thank you.

Okay, thank you, Adam.

Hey, good morning. Just on the kind of top line, could you just help me on the headwinds you had in the second quarter from Aspire?

I think there is still a little bit from North America and the working day impact. Then secondly, on the cloud, could you help me there on the growth you did in cloud and digital?

And then as the margin question is very popular, I might as well chuck one in there as well. When would you expect to kind of gross margin to start expanding again?

Is that think – do you think that’s already kind of second half or do you think that’s more for next year again? Thank you.

Okay, headwinds, first, on the headwinds, Gerardus, on Aspire, it was about 1.3 points in the second quarter. And we had still about 20 bps coming from EUC, so about 1.5, I would say, more or less, on the headwinds that we had flagged last year.

And non-working days you had around...

Again, I think it’s variable. As you know, we have said potentially could be 50 bps.

I am not sure what we ended up with and it’s not as easy to measure as everybody thinks. We are definitely on purely time and materials business like Sogeti, we did see the slowdown.

We have seen an acceleration in some of the other businesses. So, it will be difficult for me to say that overall we had the 50 bps headwind.

It probably ended up being a bit less than what we expected. On the gross margin, again, I don’t want to put one more constraint in terms of one number you are going to look at and tell me oh you said you are going to do that, you are not going to it.

We definitely see work on improving the gross margin, but I don’t want to commit that it’s going to improve in the second half. It might improve a bit or not, but I don’t want to commit to that at this stage, because it’s very difficult to commit exactly on every single element of the P&L.

It’s a bit complicated. So, I don’t want to put myself one more constraint on that right now.

We are working on the overall P&L to see how we deliver our margin for this year. The improvement of 20 to 40 bps and we are quite confident that we will deliver it, but I cannot tell you exactly, where it’s going to come from.

Gerardus, you asked a question about the cloud. I would just say in the new, where we report growth above 20%, the cloud acceleration is materially above, materially above.

And we have really now a very strong tailwind in cloud and notably in the U.S., I would just say, possibly because as we miss a little bit of consulting in the U.S. our U.S.

colleagues are focused on cloud benefits, because they play with the cloud they have, but I am struggling – today, cloud transition has really accelerated.

Okay, perfect. Thank you.

Yes, hi. Good morning, guys.

Just on North America, do you consider the price pressure in some of the client trends that you have seen ever as sort of evidence of IT budget pressure or kind of late cycle demand or would you see it as more kind of isolated within a few large contracts perhaps on the former IGATE business? That’s the first one.

And secondly, I think you said that there would be €45 million to €50 million of net financial expense in the second half, which is quite a lot more than the first half. I didn’t quite catch the reason for that or maybe I misheard and it’s actually the gross financial expense rather than net.

But could you just clarify that? And then finally, did you say you are planning to discontinue or sell the entire remaining Brazilian business and how large a business is the remainder there?

Okay. So, on the first one, on the margin, you tried to put it on the IGATE account.

We had clearly said it has nothing to do with the IGATE account. It’s a mix of accounts, where we have seen some renewals, where we have seen the price pressure plus some investments as we said.

So, we don’t at all put it on the IGATE account. We said it’s on some of the renewals, in some of the large account.

I don’t think it’s across the board. It’s really for accounts with very, very large offshore population, where we have seen some of this pressure on some of the renewals and as I say, again, nothing to do specifically with the IGATE account.

On financial expenses, it’s €28 million. But I told you there was a one-off linked to the unwinding of the cross-currency swaps.

So, if you add the €40 million back, you basically grow to €42 million. €45 million to €50 million from our perspective is a good estimate based on the uncertainty on some of the interest income.

And finally, we did not say that we are going to discontinue all the Brazilian business, but only the Brazilian hardware and software resale business, which was about €60 million last year.

Right. So sorry, how much of that business remains?

Right now, I think we did about €15 million in that business in the first half. And second half, probably like the same, more or less for the moment, but I said we’ll discontinue that before the end of the year or end up by minus selling it.

Okay, thanks.

Last question, maybe? Sorry.

Thanks very much. Actually, I have one quick one following on from the last question.

So, just to confirm the total net interest charge in the second half of the year is going to be €45 million to €50 million is that right?

That’s correct, for the second half of the year, yes.

Thank you very much. And sorry to go back to North America and the margins there, I feel as though we discussed these to death.

But you mentioned when you were presenting and in response to an earlier question that if you look at the dynamics there, you have effectively seen the price pressure on renewals and the impact of the Indian currency movement offsetting any leverage that you naturally would have got from digital and cloud, where the margin is higher. If you do the math that would suggest that if the other factor is investments, you have basically had a net investment in North America that’s been around about €30 million to €40 million.

Is that correct? And where specifically have you made that investment?

So, two things. One, I didn’t say that the margin in digital and cloud are better.

I think we have – we see an improvement. As we scale digital and cloud, the margins are improving.

So any benefit you are getting from the fact that the digital and cloud margins are improving, for scalability is more than offset by the fact that we have this headwind from the salary increase that are not compensated anymore by INR depreciation and some of the price concession we have to do. The investment that we do is capabilities, right.

The investments that we do, is in accelerated hiring of capabilities in digital and cloud to be able to fuel the growth. That’s typically is the cause, because you hire faster than you are deploying and that tends to basically hit a bit your margin, but you do that in advance to be able to fuel the growth.

If you do just-in-time hiring, you basically don’t get the benefit and you slow down significantly, the growth.

Okay. And just a follow on from that, you also mentioned that one part of the strategy going forward is to re-leverage the pyramid in North America to gain some efficiencies from that.

How easy is that to do given potential wage increases in the market as obviously the frequency or availability of Visas looks as though it’s going to be under a bit of pressure in the future?

So, two things. I mean, while we tried to recover the salary increases more in India, so it’s a normal yearly exercise.

You do promotion salary increases and you try to absorb most of them by the end of the year. So that’s a normal cycle we always follow in India every year.

I think when you come to North America, right now, blaming a little bit the salary increases coming from the lack of visas, to be frank, we haven’t seen it so far. So I cannot blame today salary increase in North America coming from the fact that suddenly visas are drying out and salary are going up.

At this stage, it’s purely speculative. And we haven’t seen a major change for the moment.

There has been a slowdown of Visas, but to be frank, there is nothing significant compared to what we have planned for this year.

Okay. And the restructuring charge in the first half, can you tell us what the corresponding figures likely to be in the second half and just add some colors to regionally where that restructures – restructure cost is being spent at the moment?

Okay. So it has increased and we see the increases mainly attributable to the infrastructure services.

And as you have seen, we have had some challenges in terms of margin already also there. So that basically goes together.

We have more in areas like North America than we had in last year, for example, because we are shutting down data centers, et cetera, and so on and that kind of carries some of these elements in terms of restructuring. Not ready to give a number yet for the second half, because as I said, we are going to accelerate our industrialization drive to be able to accelerate the improvement of the margin to compensate for some of the price pressure.

So, it’s a bit early to talk about the second half for the restructuring.

Thanks very much. Thank you.

We still think we are among the most frugal of the industry when it’s about using a restructuring charge and we will keep our frugal policy. I would like to close by saying that frankly the growth momentum is giving us a strong confidence that we will achieve our mid-term ambition, be it on growth and margin.

I totally understand your focus on the North America. We are quite transparent.

We have, as you see and as you remember, we have started rejuvenation of our North American leadership starting the year. We wanted to give them all the means to be successful.

We saw the success coming. So we are rather optimistic on North America, be it on growth, recovery and on margin r recovery too.

This being said we will talk further during the roadshow and during several meetings and Vincent is available to answer any question. And our next meeting will be with the third quarter result late October.

Thank you very much for having attending this conference, and for those that can, I wish you the best possible summer break. Thank you.