Capgemini Se Ord

Ladies and gentlemen, welcome to Capgemini's half-year 2021 results conference call. I will now hand over to Mr. Ayman Izzard, CEO. Sir, please go ahead.

Yes, good morning, everyone, and thank you for joining us for this early morning call. Sorry for the 7 a.m. one. I am joined by Carol Ferrand, our CFO, and Olivier Sevilla, our Chief Operating Officer that you met at our CMD conference. So I'm happy to share with you this morning our strong H1 results. So after a good Q1, which was better than expected, the acceleration in Q2 came way ahead of initial expectation. At 12.9%, our Q2 organic growth is more than 10 points above the Q1 rate. The revenues in H1 stood at 8.7 billion euros. We had a healthy Q2. 2 billion Q2 at 1.11, and digital and cloud continue to grow at a solid double digit. Our operating margin is up 1.2 points, so we reached 12% unprecedented level for the first half, leading to a 32% increase in our normalized earning per share. And the organic free cash flow at 429 million is significantly ahead of last year. So in view of a context that has remained challenging in some regions, I first would like to thank all our teams for their mobilization and continuous engagement. It is a dynamic market with strong demand for technology driven by pressing needs for digital transformation. It is a continuous acceleration, notably in cloud and data that we have seen over the last three quarters. We do consider this as being a structural acceleration in demand for technology and not just a bump following the COVID crisis. More importantly, as laid out in the CMD, we have strategically aligned our capabilities, offerings and industry focus to fully capture the opportunities we see in the market. If you look a bit by region, You know, the performance actually has been visible across all our sectors, all our geographies and businesses. All of geographies have posted double-digit constant currency growth in H1. And the acceleration of the organic growth in Q2 is also visible across all our regions. As you know, we almost have no scope impact in Q2. France really stands out because after four negative quarters, France is reaching double-digit organic growth in Q2 and has started its margin recovery. Importantly, to see as well on the operating margin, the improvement is everywhere. Notably, we see a two-point bump in APAC and LATAM, and the UK with a tremendous 17% operating margin. The top line acceleration is also visible across all industries, especially in those that were hit hard by the health crisis. So manufacturing and consumer goods were extremely strong, but also services. The manufacturing sector even posted the strongest rebound and returned to an activity level comparable to pre-crisis level, as did the consumer goods sector in Q1. We do expect demand to remain strong in the coming quarters. It's good to look a bit historically and put these results in perspective. Be it revenues operating margin or free cash flow, we are again raising the bar and setting a new reference here. By reaching 8.7 billion euros, our H1 revenues have almost doubled in 10 years. Interestingly, this semester, revenue is now even higher than what it was in full year 2010. The same goes for our margin rate, which has doubled in 10 years, logically in absolute value. The operating margin has even more than quadrupled compared to 2010. As for our cash generation in the first half, it improved by 1 billion euros over the same period. The Capgemini group is clearly on a long-term upward trajectory. Over the past 10 years, the group has continuously created value and will continue to do so towards our 2025 ambition presented in March during our capital market space. First thing, looking a bit at some of the deals we're doing, right? One of the points that particularly supports our confidence is the relevance of the positioning that we have taken. We win the right contracts. We capture the structural shift in demand. Our portfolio is well positioned and meets the growing transformation needs of our client. And we are addressing specific client needs by industry. Let's take, for example, the example of the automotive sector. Our playing fields, you know, we have defined them, intelligent industry, customer service and enterprise management, are at the heart of what we mean. Just take one example. Have a look at this automotive supplier who trusted us to develop and validate equipment for autonomous cars. It's a concrete example of one of the three intelligent industry offerings that we presented to you last year. Digital and cloud are of course active on all levels. All clients have a strong appetite for cloud these days. For Toyota, for example, we have set up cloud native managed services, which allow Toyota to gain in agility and save money immediately. And all over the world, we are noticing a stronger and stronger interest from our clients for sustainability. In the automotive sector, we help Volvo cars in leveraging data to support their net-zero ambition with specific solutions adapted to their industry. Our growth engines are powerful and very relevant in the current market. Now we continue to invest in all areas to prepare for the future. We established a new partnership with market leaders. We partnered with Origin Microsoft in Bleu, a trusted cloud provider in France. We partnered with Zirco to take full advantage of digital manufacturing in gigafactories. We partnered with Qualcomm recently to accelerate the deployment of 5G private networks. We have raised our recruitment plan for 2021 after adding 20,000 team members to the group in the first half. while continuing to invest in reskilling, upskilling our workforce. The quality of what we do, the interest of the work that we do, is really what makes us attractive for the new talents. We're also going to accelerate our investment in H2, notably in terms of top talent acquisition and new offering development to continue to prepare for the future and to continue to fuel the growth. We remain convinced that this growth can only be responsible. In the second quarter, we launched our sustainable IT offer, in that helping our clients reduce their carbon footprint in their IT departments. This is the first of a series of offerings dedicated to sustainable development. Finally, we will be detailing our ESG policy and objectives before the end of the year. And before I conclude, I'd like to say a word about Capgemini Engineering. So engineering is back. You know, there was a big concern raised by a number of people when we made the Alphorn acquisition about the cyclicality of engineering. So less than one year since the beginning of the pandemic, engineering is back, is back strongly. 16% constant currency growth with no M&A impact in the second quarter. And even above 20% in France. As expected, this is a rise of demand in engineering fueled by connectivity and softwareization and the growth of intelligent industry. The ultra-integration has produced tangible results in terms of synergies in the first half, earlier than expected, lifting our H1 margin. Operational cost synergies reach a run rate of 69 million euros by June, driven notably by cost avoidance, real estate and procurement savings. We are above the objective of two-thirds of the target synergies by end of H1. The revenue synergies remain strong. With a healthy pipeline of these, a unique combination of our skills, relationships, enable us to win new deals, notably in the manufacturing sector. Capgemini is a global leader in the engineering services market and a pioneer in the intelligence industry. So given our strong performance and our confidence in our H2 perspective, we upgrade our outlook for the full year. We now target a constant currency growth of 12% to 13% versus 7% to 9% previously. This includes a scope impact of 5 points compared to 4.5. We expect our operating margin to land between 12.5% and 12.7% versus previously 12.2% to 12.4% and the organic free cash flow to exceed 1.5 billion euros compared to 1.3. Thank you for your attention and now I leave the floor to Carole, our CFO.

Thank you, Eman, and good morning everyone. Let me now comment the financial highlights of our healthier results. Group revenues reached 8,711,000,000 euros in H1, a reported growth of 14.9% and 17.9% at constant rate. Our operating margins stand at 1 billion and 42 million euros, or 12% of revenues, up by 120 basis points year-on-year. After the operating expenses, financial and tax expenses, which I will further comment in a moment, the net profit for H1 reached 443 million euros, up 42% year-on-year. The normalized EPS, as adjusted for transitional tax impacts, reaches €3.91, up 32% year-on-year. Finally, we delivered also a strong cash flow generation in H1, with an organic free cash flow of €429 million, up €323 million compared to H1 last year. Our quarterly revenue growth clearly reflects our acceleration over the last quarters. After a Q1 which came higher than expected, group growth accelerated strongly in the second quarter. Organic growth reached 12.9% in Q2 compared with 1.7% in Q1, with Q2 activity significantly exceeding previous crisis levels. This led to an organic growth of 7.1% in H1 overall. Changes in group scope had a significant impact in Q1, plus 22.5 points, mainly due to the acquisition of Altron consolidated since April 1, 2020. However, the scope impact was far more limited in Q2, at minus 0.5 points, due to the disposal of Odigo at the end of 2020. This means that our constant currency growth rate will be much more representative of underlying organic trends from Q2 onwards. With a total scope impact of 10.8 points, our growth at constant currency reached 17.9% in H1. Ethics had a negative impact of 2.3 points in Q2, leading to an overall negative impact of 3 points in H1. As a result, our reported growth reached 10.1% in Q2 and 14.9% for the first half of the year. For the full year, we continue to expect a negative impact for ethics, slightly above 1 point, while M&A should now contribute approximately 5 points to our growth. Let me now look at our revenues by region. Organic growth across all group regions increased significant in Q2 compared to Q1 levels. As Ayman mentions, France recorded the fastest acceleration with a solid double-digit organic growth in Q2. Almost all other regions also delivered double-digit organic growth in Q2 with North America being just below this threshold. Given the magnitude of the Q2 acceleration, These organic trends also apply to the fully fossilized period with all group regions reporting double-digit growth rates year on year at constant currency. These regional trends were fueled by global sector trends, which are highlighted on the revenues by sector slide. At constant exchange rates, growth is high double-digit in consumer goods, manufacturing, services, and the public sector. financial services and the TMT sector come next. And the momentum of the energy and utility sector fell significantly short of the rest of the group. Considering now our revenues by business lines, all business lines also reported a further acceleration of their organic growth in Q2 compared to Q1. In particular, both strategy and transformation services and application and technology services posted a solid double-digit organic growth in Q2. Last but not least, and as already highlighted by Eamon, engineering services delivered also a strong double-digit growth in Q2. This excellent performance combined with a strong organic growth in infrastructure and cloud services brought organic growth in operations and engineering services to above 10% in Q2. When looking at constant currency growth, two items have visible impact in operations and engineering. The Odigo disposal, which brings down custom currency growth below the 10% mark in Q2, and the very significant impact of the consolidation of Alphan, although this impact is limited to Q1 only, which lifts custom currency growth to 33.6% in H1. Moving now to the headcount evolution. Our total headcount reached 289,500 employees at the end of H1, at 9.2% year-on-year. We have accelerated our hiring in response to the strong demand of our services. The offshore leverage increased quite significantly to reach 56% in June, up by 3 points year-on-year, with visible progress in continental Europe. Finally, attrition stands at 15.2% in H1 on the last 12 months basis, down 2.2 points over the same period ending June 2020. However, as discussed over the past couple of quarters, the attrition is now naturally kicking up, as attrition is a byproduct of growth in this industry. Let's turn to the operating margin by regions. North America delivered a marked improvement of its operating margin, which rose by 130 basis points to 15.7%. Our operating margin in the UK and Ireland reached a record level of 17.6% compared to 14.3% a year earlier. France also improved its operating margin by 60 basis points year-on-year to stand at 7.5%. Lastly, the rest of Europe and Asia Pacific and Latin America regions delivered also strong improvements year-on-year, by 130 basis points and 200 basis points respectively. Moving on to the analysis of our operating margin. Let me first remind you that the structure of Altran's operating margin was substantially different from ours, with visible lower gross margin, higher GNA, but lower selling expenses. Consequently, the evolution presented here is noticeably distorted by the consolidation of Altran on two quarters instead of one quarter only in H1 2020. On a comparable basis, the gross margin improved by around 90 basis points in H1 2021, mainly driven by higher utilization rates. The cost synergies with Altron in annual run rate that were delivered earlier than expected in the year had positive impacts across all our cost structure. Overall, the operating margin increased by 120 basis points in H1. After this very strong achievement, and in spite of the expected return of some costs, such as travel, we have decided to accelerate in H2 our investment plan toward the priorities set in this capital markets day. We are not only convinced of the market opportunities ahead of us, but we also have good control on the margin improvement trajectories Therefore, we aim to deliver in H2 another solid operating year-on-year margin improvement. Moving on to the next slide. Our financial expenses increased to 85 million euros in H1 2021 versus 64 million euros for the same period last year. This increase is mainly due to the full impact in H1 of the new bonds issued in Q2 last year as part of the Altran acquisition. Our income tax expenses increased from 204 million euros in H1 2020 to 282 million euros in H1 2021. This amount includes exceptional tax expenses for 56 million euros compared to 26 million euros last year. These expenses relate to the transitional impact of the 2017 US tax reform, but also in 2021, the one of consequence of a recent change in local tax regulation on 2016 legal restructurings. Adjusted for these expenses, our effective tax rates stand at 31% compared to 34.6% in H1 2020 and 33% in the full year 2020. Now a quick recap of our P&L from the operating margin to the net income. The other operating income and expenses decreased to €230 million in H1 2021 compared to €241 million in H1 last year. Lower restructuring costs were partially offset by an additional quarter of Altron's intangible acquisition and by the impact of capitalized share price increase on the long-term competition expenses. As a consequence, our operating profit reached €812 million in H1 or 9.3% of our revenues, up 41% year-on-year. After deduction of financial and income tax expenses, our net profit stands at 443 million euros, up by 42% compared to H1 2020. Therefore, our reported basic EPS increases to 2 euros and 63 cents, up also 42% year-on-year. The normalized EPS is up 32% to €3.91, excluding the exceptional tax expenses previously discussed. Finally, looking now at the evolution of our organic free cash flow and net debt. We had a strong organic free cash flow generation in H1 at €429 million, up more than €300 million versus our average performance in H1 over the last two years. The net cash outflows for acquisition amounted to €70 million, relating mainly to the acquisition of RxP in Australia, which was completed in March. We also returned €329 million to shareholders in H1 with the payment of the 2020 dividend. Overall, our net debt keeps decreasing and starts at €4.8 billion at the end of H1, compared to €6 billion a year ago and €4.9 billion at the end of 2020. Okay.