Earnings Call: H2 2018

Feb 14, 2019

Ladies and gentlemen, welcome to Capgemini 2018 full year results conference call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead. Thank you, operator. Good morning, everyone. I am delighted to welcome you here today. I am here joined by Aiman Ezzat and Thierry Delaporte, our two Chief Operating Officers, by Rosemary Stark, our Chief Sales Officer, and Carole Ferrand, our CFO. 2018 was a great year. We demonstrated once again our ability to improve profitability while delivering sustained growth. We are pleased to announce that we have achieved all our targets. First, let's look at our revenue guidance. In H1, we guided you for a growth between 6% and 7%. at the end of H1, we raised it a little bit, and again in Q3. Ultimately, we outperformed our revenue growth by 8.1% at constant currency, with the fourth quarter at 7.8%. With these results, we have now met our midterm organic growth target ahead of schedule. The transitioning of our portfolio continues at a rapid pace. Our revenues in digital and cloud represent 45% of our revenue, and I will come back on this a little later. We also continue to improve our profitability. We deliver another 20 bps of margin expansion compared to 2018, now reaching 12.1%, and our cash performance is above the EUR 1 billion objective we set a year ago, reaching €1.16 billion. Finally, our normalized EPS is at €6.06, adjusted for the transitional tax expenses, a level close to that reported in 2017. These great results are all the more satisfying because we have been able to deliver them while transforming heavily the group. Last year, we reinforced the group with two strategic priorities that we presented to you during our Capital Markets Day last November. We decided to deploy changes in our organization under the responsibility of Aiman and Thierry. Our first objective is to build a group fully centered around client and what we call our unified go-to market, so that all account manager are incentivized and measured to sell the whole end-to-end portfolio of the group to our clients. Aiman transformed the go-to market. What used to be the exception in Capgemini, only applied to specific account, is now the norm. We have now more client-facing people with in-depth sector expertise and understanding of our client business issues. More people able to interact with the full CXO suite. We are working on duplicating this in key sectors like consumer product and retail or automotive. The successful setup that we already have in the financial sector, which by the way, outperformed clearly the competition last year. Our second objective is to continue to accelerate the rotation of our portfolio. Thierry established a dynamic organization to stay on top of market evolution and at the forefront of innovation. He selected specific offers and built a global network of competence centers focused on two things: improving our win rates and upgrading the quality of our delivery. Of course, we continue to leverage our strong offshore capabilities for both innovation and profitability, notably in India, where we have now clearly over 100,000 people. I think we reach 106,000 people. This portfolio evolution is managed in close collaboration with our ecosystem of partner. Among them, we chose four strategic partners: AWS, Amazon Web Services, Salesforce, Microsoft, and SAP. We made outstanding progress with them. You all remember the buoyant declaration of the Salesforce head of sales in London, that we are now Microsoft's sixth partner and the fastest-growing, while we were not even in the top 10 a year ago. On the acquisition front, in the past year, through LiquidHub in the U.S., Adaptive Lab in the U.K., June '21 in France, and Doing in Italy, we further strengthen our capabilities in customer engagement, digital marketing, and design. You know corporate social responsibility is a key priority for us. We made progress on our three priorities: gender diversity, environment sustainability, and our last pillar, digital inclusion. We are proud to contribute to reducing the digital divide. We help a growing number of people, and this is building enthusiasm and motivation among our people. That's how we are building a genuine leader for leaders. If we look at the market outlook, let's look a little bit inside the group, and let me share our vision of the market for the coming year. First, digitization is there and looks unstoppable. Everywhere, business executives need partners able to identify, test, and industrialize innovation. This is a need which goes beyond typical macro cycle, notably in areas such as digital manufacturing, digital operation, and marketing. We continue to see solid appetite from CXO for technology. Second, CIOs, our historical clients, start the year apparently with a solid budget, about the same than last year. Be it for innovation or for cost competitiveness, the demand is there. Overall, in what will probably be a less buoyant economy, we see a strong appetite for technology everywhere, with data at the core of all our discussions with clients. Finally, from a geographical perspective, we see a good start in Europe with strong momentum in digital cloud and S/4HANA, although we expect some slowdown in sectors as automotive and retail. In the U.K., we see a good traction in public sector and some hesitation in private sector at this stage. In the U.S., the overall market looks good, but of course, we will no longer take advantage of the full extension of the McDonald's contract and of the LiquidHub acquisition. Finally, we continue to see a good market in emerging countries and in Asia-Pacific, as well as Latin America. Our strengths to thrive in 2019, I want to highlight a few of our strengths that will help us in 2019. First, we will reap the benefits of our reinforced unified go-to-market. It went live last year. Now is the time to reap the rewards. We see more collaboration, and we see new multi-tower deals showing up in our pipeline, more strategic dialogue across the C-suite, larger deals, and more growth of our top strategic accounts. Second, we will develop further and align further our portfolio management. We will sell the new everywhere, and digital and cloud will rapidly pass the 50% mark as a percentage of our revenue. We will also drive further our sector-based approach to get even close to business clients. Third, we have an ambitious industrialization agenda. A few months ago, Capgemini was ranked number 2 by HFS across all robotic process automation service provider, a clear recognition of our technology leadership in intelligent automation and RPA. We will go further in this domain. Finally, all this is about people. Talented people is an industry challenge today. We are working actively on enhancing our attractiveness as an employer to hire and retain the best. We are now at the forefront of interactive management, thanks to the introduction of digital tools, combined with relentless effort to train and reskill. This will have a strong positive impact this year. With technology expertise and ability to anticipate business challenge, we are ready to grow fast, faster than the market, and improve our profitability. Consequently, I now turn to our outlook in 2019, confident that our key strengths and solid financial performance will support our success in 2019. Our objective is to achieve a revenue growth at constant currency between 5.5% and 8%. We expect to have an M&A contribution to this growth of one to two points. The low end of our constant currency outlook assumes around one point of M&A. We are laser-focused on our margin, and we intend to continue to expand our operating margin to between 12.3% and 12.6% in 2019. Finally, for 2019, we expect an organic free cash flow for the year in excess of EUR 1.1 billion or EUR 1.15 billion in the 2018 definition of the free cash flow. With that, I now hand over to Rosemary Stark, our Chief Sales Officer. Thanks, Paul, and good morning, everyone. Looking at our strong sales momentum, we realized bookings of EUR 13.4 billion in 2018. That's a 9% increase year-on-year at constant currency. Q4 2018 was the largest ever quarter at EUR 3.9 billion and a strong finish to the year. We see a continued shift in cloud and digital, and cloud and digital bookings accounted for 49% of our 2018 bookings. This is supported by the acceleration of our business with two key public cloud partners, and in general, working with partners accounts for an increasing proportion of our business. 2019 starts with a strong pipeline, and we currently have more than 11% year-on-year growth in pipeline. Our unified approach to clients is definitely paying off, and we're seeing that strong pipeline growth in key sectors, consumer goods and retail, manufacturing, and public sector. Moving on to look at revenues. We had a similar growth trajectory in revenue with 8.1% growth year-on-year, again, at constant currency. Let's have a look in more detail at where that revenue growth is coming from. As you can see here, consumer products and retail have had a strong year with 16% year-on-year growth. This is fueled by North America, our largest consumer products and retail business, which has grown by more than 30% in 2018. There is also strong double-digit growth in France. As Paul mentioned, financial services with 9.1% revenue growth year-on-year continues its excellent growth trajectory, especially in North America. Energy and utilities grew by more than 12% in both France and the U.K. and had a very strong Q4 finish at 9.1%. Despite some challenges facing some of our automotive clients, our manufacturing business grew by 7.3%. This is fueled by cloud and by ERP transformation and an increasing demand for digital manufacturing and engineering services. Growth was notable in France, in Europe, and in Asia-Pacific. Public sector delivered a Q4 year-on-year growth of 11.2%, and we see strong demand across Europe and a good pipeline of public sector projects developing for 2019. Telco, media, and entertainment remains flat. Looking at some of our wins, many of our 2018 wins demonstrate the key role that Capgemini plays as the bridge between IT and the business, really enabling successful digital transformation for our clients. Our clients continue to drive digital services deeper and faster across their businesses. Let's look at some of these examples. For Enel's energy distribution business in Italy and Spain, Capgemini is developing and will also maintain infrastructure and network systems and processes, and crucial digital control systems operations. In financial services, with ABN AMRO, we continue to extend our digital delivery across a whole range of digital projects delivered through Agile at scale. We have also won a five-year contract renewal with La Banque Postale to support their workplace service centers in France and in Poland. In manufacturing, Capgemini is being chosen as the new S/4HANA transformation partner for a global chemical industry leader, and we start with a rollout in Asia Pacific. For a major automotive client, we have embarked on a large transformation of their delivery model, and we are implementing a scaled Agile approach with them and a distributed delivery model. It brings to a new level the direct customer collaboration for both the client and for Capgemini teams onshore and offshore. In the services sector, we continue our cloud successes. We are helping Lloyd's Register with their transformation into a digital business, migrating their applications and their infrastructure to the cloud. Moving on to consumer products and retail, let me illustrate how our unified approach to clients is driving success in the luxury goods market. With seven of the world's 10 leading luxury good brands as our clients, we are positioned to be a leader for leaders in this market. We are covering a whole range of business and technology challenges with these clients. In this sector, outstanding customer experience is just expected. It is mandatory. Luxury goods customers demand a seamless experience across channels, really looking for a genuine omni-channel experience. To support this for one of our clients, we recently developed the facility to track how a specific customer can move around a store, what they purchase, and then how they use social media effectively to show off their purchases. It's an interesting example of how to bring together in-store and digital experience, and deliver insight on customer behavior, not just before the purchase, but also afterwards. We're combining our consulting experience, behavioral analytics, deep AI-based data science skills to mine social networking sites for this insight. Using these capabilities together, we've developed this idea for the client from the concept through the business case and have delivered the solution. We're also delivering technology-enabled business advantage in many other ways in this luxury goods segment, and these range from global e-commerce solutions, smart customer engagement platforms, Agile deployment at scale, and of course, cloud migration. In this market, cloud is absolutely the norm, and it's critical to support these fast-paced businesses. Now please let me hand over to Carole, who is going to cover our financial results. Thank you, Rosemary, and good morning, everyone. Let me first highlight our key financial achievements in 2018, which proved to be a very good year for Capgemini. We delivered superior growth and maintained our margin expansion. This is fully in line with the objective discussed during our Capital Markets Day. First, we grew our revenues by 8.1% at constant rates, substantially over the 6%-7% target that had been set at the beginning of 2018, and in line with our raised target of above 7.5%. As Paul explained, we clearly benefit from structurally positive trends, which translated into a solid 6.2% organic growth. The group scope impact stood at 1.9 percentage points, in line with our capital allocation policy. Second, our operating margin increased to 12.1% of revenues, up by 20 basis points year-on-year, as targeted. We are pleased to see that all our regions are now standing above 11%. This performance demonstrates our ability to find a balance between sustained growth and continuous investment into innovation and our offerings portfolio. Finally, our organic free cash flow reached EUR 1.16 billion for the period, substantially above our objective to generate an organic free cash flow of EUR 1 billion. Going forward, we expect our organic free cash flow to continue to largely exceed our net profits, which demonstrates the quality of our earnings. Let me now go through the key other aspects of our P&L. First, let me remind you that all our 2017 figures included in this presentation are restated for IFRS 15. Group revenues reached EUR 13.197 billion in 2018, up 5.4% year-on-year, after taking into account the 2.7 points of currency headwind. With the 20 basis points of margin expansion, the operating margin increased 7% to EUR 1,597 million in 2018. After accounting for the other operating income and expenses, our operating profit stands at EUR 1,251 million, up 6% year-on-year. Income tax expenses increased by EUR 144 million to reach EUR 447 million. This takes into account the anticipated increase in underlying effective tax rate, but also a higher transitional impact of the US tax reform at EUR 53 million. As a result, our net profit group share decreased to EUR 730 million in 2018 compared to EUR 820 million in 2017. Adjusted for the transitional US tax expense, our normalized EPS amounts to EUR 6.06 for 2018. Finally, our organic free cash flow increased by EUR 80 million to reach EUR 1,160 million in 2018. This represents an outstanding 73% cash conversion of our operating margin and 160 of the net income. Looking now at the evolution of our organic free cash flow. It reached EUR 1,160 million, above our target of EUR 1 billion. In 2018, our organic free cash flow benefited from a EUR 65 million reduction in working capital, driven by a two-day improvement in DSO. As discussed at the Capital Markets Day, we will continue to tightly manage our working capital requirement, but obviously you should not factor that we can get two extra days of DSO again in 2019. 2018 perfectly illustrates our capital allocation framework. We have redeployed all our free cash flow generated the previous year while keeping a balanced pattern. Acquisitions, namely LiquidHub, Adaptive Lab, Dream21st, and Doing, representing a net cash outflows of EUR 461 million, and we returned a net amount of EUR 580 million to shareholders. This amount combines dividends for EUR 284 million and buybacks of EUR 464 million, less the EUR 230 million of net capital increase for the employee share ownership program. As we have redeployed essentially all our free cash flow, net group debt is almost stable at EUR 1,184 million. Let me pause there for a couple of words on IFRS 16, which is applicable since January 2019. All leases, operating lease and financial lease, will now be accounting the same way. If this is pretty neutral for the operating margin and the net income, this is very different for the organic free cash flow. There, there were left two options. One, keep the definition unchanged and leave the reporting free cash flow by more than EUR 200 million as we would then exclude our lease payment. Or two, take all lease payments as operating, including the EUR 50 million that were previously accounted as finance lease repayments. To minimize the distortion on our free cash flow, we went for the second option, and we will account all lease payment as operating items starting January 2019. So if we were to rebase 2018 for the change in definition, the organic free cash flow would stand at EUR 1,108 million. Moving on to revenues. Despite a high comparison basis, we managed to keep our momentum into Q4 with a constant currency growth of 7.8% and an organic growth of 5.7%. The currency headwinds faced in the first nine months of 2018 disappeared in Q4 and reported growth was equal to constant currency growth. For the full year, growth was robust at 8.1% at constant currency. Taking into account the group scope impact of 1.9 percentage points, the organic growth stands at a solid 6.2%. Over 2018, the currency impact on revenues fueled by U.S. dollar weakness against the euro was negative at minus 2.7 percentage points, and the reported growth was therefore of 5.4%. We achieved, overall, a very good performance in 2018, all the more that the comparison basis was tougher compared to the end of the year, and we actually continue to be in H1 2019, especially in North America, before easing in H2. Looking at 2019, acquisition should bring 1-2 percentage points of incremental revenues while FX impact on revenue is expected to be, at this stage, slightly positive by 0.5-1 point on a full year basis. Let's now move on our revenues by region. As usual, I will focus my comments on constant currency variations. North America was our most dynamic region with a 14.4% revenue growth. Our strong growth has been fueled by our investment and was further lifted by our bolt-on acquisitions in digital, consumer good retails, financial services, and manufacturing sectors were the main contributors into this performance. In the U.K. and Ireland, we return to growth in H2 as planned, actually even a little stronger than initially planned. With this, our revenues are almost flat year-on-year. The private sector was notably felt by financial services and energy and utilities, while the public sector posted positive growth in H2 after the anticipated decline in H1. France recorded a robust 6.4% growth with great performance in application services and double-digit growth in consumer goods and retail, and energy and utilities sectors. In the rest of Europe, all our main countries are up year-on-year. This region is up 6.9% in 2018, with Germany and Scandinavia close to double digits. Apart from the telecom sector, all verticals benefited from a good momentum with revenue growth ranging from 5%-10%. Please note that the lower growth observed in Q4 is primarily due to a high comparison basis generated by 11.3% growth recorded in Q4 2017. Finally, Asia Pacific and Latin America revenue grew by 6% in 2018. Asia Pacific benefited this year from an acceleration in the manufacturing sector, and Latin America fueled by another strong performance in Mexico returned to growth. Looking now at our revenues by business. Overall, our Q4 has been in line with the trends observed since the beginning of 2018. Consulting services posted a remarkable 37.4% growth over the year. While acquisitions have obviously contributed to this performance, we also benefited from a good momentum in many geographies. Technology and engineering services reported a 5% growth in 2018, with all regions led by North America and the U.K. contributing. Application services keeps benefiting from an unfading demand for digital and cloud and delivered a 10.1% growth in 2018. All our main sectors have reported growth rates close to or above 10%. Lastly, our managed services are down by 4.2%. This negative trend reflects adverse market conditions in our business process outsourcing activities. On the infrastructure services, after the marked decline in H1, primarily driven by the U.K. public sector, the contraction has been much more limited in H2, thanks to a strong growth in cloud integration and orchestration services. In infra, strong progress has been made, but the transition is not yet fully behind us. As a side note, you may remember that we had mentioned during our Capital Markets Day a change to come in the way we report our activity by business. You will find in the appendix a slide which explains the new reporting format to be applied from Q1 2019. Moving now to the headcount evolution. Our total headcount is a little over 211,000 employees at the year-end. This represents a 5.8% increase year-on-year below our constant currency growth in revenue, which implies that the revenue per head went up again. The workforce in our global production centers grew 6.7%, primarily driven by the increased demand in continental Europe. Overall, our offshore leverage is up one point, roughly the same pace as in 2017 and stands at 58%. As discussed in Q3 and as experienced by other market players, the attrition rate went up in 2018. It now stands at 22%, up by 3.1 points year-on-year. We are confident that measures taken in H2 will enable us to reverse progressively this trend in 2019. Moving to our operating margin, let's have a look first at our performance by region. In North America, our operating margin was essentially flat year-on-year, minus 5 basis points at 13.6%. As planned, the operating margin did show some improvement in H2. In the U.K. and Ireland, our operating margin decreased as expected and stabilized at 12.6%. You may remember that our currency hedging provided a boost in 2017, so we got the reverse impact in 2018, adding to a less favorable business mix. In France, our operating margin has improved by more than one point at 11.1%. Over the last three years, the margin in France has closed a big part of the gap with the group average. The rest of Europe is also improving with an increase of 80 basis points year-on-year to reach 13%. Lastly, thanks to the priority successfully set in LatAm to return to profit, the operating margin in Asia Pacific and LatAm improved by 270 basis points year-on-year at 12.8%. In terms of margin by business, the operating margin of consulting services is up 160 basis points to 12.9%. The technology and engineering services margin is slightly down to 13.2%. Application services profitability is improving with an operating margin up 50 basis points at 13.6%. Finally, the operating margin of other managed services remain under pressure, down 100 basis points to 8.7%. Overall, the profitability of our digital stack tends to improve as we get scale. This supports the performance of the two business lines most frequently called up by digital transformation demand, consulting services, and application services. Moving on to our operating margin by destination. Let's start with our gross margin, which recording a noticeable year-on-year improvement of 40 basis points in H2. For the full year, gross margin is up by 10 basis points. Our selling expenses as a percentage of revenues were down by 20 basis points. This certainly reflects our increased focus on our sales efforts efficiency and is consistent with our more efficient unified go-to market. Finally, G&A expenses remained under control with a minor increase of less than 10 basis points. Moving on to the next slide. Net financial expense are slightly up by EUR 8 million year-on-year. Income tax expenses are up by EUR 144 million year-on-year. As discussed earlier with the latest information issued by the U.S. tax authorities late 2018 and early 2019, the transitional impact stands at €53 million instead of the €40 million we had initially estimated in July. Setting that aside, our underlying effective tax rate is up to 33.7%, so slightly more than anticipated. We expect something similar or maybe slightly up in 2019. In the near term, we think that our ETR should go down around 30%. On top of that, and based on the latest information available, we now estimate that the transitional impact will amount in 2019 to some €60 million in the P&L, of which some €25 million with cash items. Finally, let's go through this recap of our P&L from operating margin to net income. Our operating income and expenses increased €36 million to €346 million in 2018, mainly due to higher amortization of our M&A intangibles. The mechanical increase of share-based compensation expenses due to the share price increase in recent years, and some non-recurring reorganization charges, including in line of other costs. On the other hand, our restructuring costs are down roughly €10 million to €122 million. We expect to bring them down to around €80 million in 2019. Overall, our operating profit is up 6% to €1 billion €251 million for 2018. Net profit group share amounts to €730 million, down €90 million from 2017 because of the higher tax expense. With our share buyback policy, the weighted average number of outstanding share is down this year again by about 1 million. Our reported basic EPS stand at €4.37. Our normalized EPS stand at €5.74, and €6.06 when restated for the transitional U.S. tax impact. Let's now quickly review how 2018 turned out in respect of the priorities set for last year. Broad-based growth is certainly a key feature of 2018 performance. The rotation of our business to digital and cloud not only continued at rapid pace, but also we are pushing for more vertical offers with carried initiatives on the portfolio. We've also maintained our margin expansion trajectory and our top-tier cash conversion. Finally, we'll fully redeploy our cash flow while maintaining the balance between returns to shareholders and reinvestment in the business through M&A. For 2019, with our strengthened go-to market and active portfolio management, the focus will be to maintain an above-market growth profile to confirm our ability to reach the medium-term operating margin ambition to deploy our strong cash flows in a balanced way. With that, we are now ready to take your questions. Operator, can you help us with the questions? Thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. The first question comes from Adam Wood from Morgan Stanley. Please go ahead. slow down organically versus 2018- Hello, Adam, we missed the first words. Hi. Sorry. First of all, thanks for taking the question. Just on the outlook for 2019, you are only guiding to a relatively small slowdown versus 2018, and obviously there is a lot of macro concerns out there. I wonder if you could just talk a little bit about what you are seeing with customers. IT services is generally seen as quite a late cycle sector, so a lot of people would say you would be one of the last groups to see a potential slowdown. But what are companies telling you around their spending on digital and their plans that gives you the confidence that this technology cycle really can offset weakness on the macro? Then maybe secondly, just on the M&A, I think this is the first time you have actually assumed an M&A contribution in the guidance. Could you just talk a little bit about where you are on that? Does that imply that you have very firm plans and you are close to executing on a number of transactions, or is that just a change in the way that you are going to guide in future? Thank you. Adam, on the first question, which is the economical environment. Today, the demand is there. The pipeline is growing. We are, of course, very conscious that an economical significant slowdown would have an impact. Today, we do not see it, and I would even add that we see a growth of large deals in the pipeline. Pretty large. I mean sizable, above 500. Possibly, I see Aiman that thinks I am raising the bar for his challenge. So, a slowdown might also be the opportunity of some large cost-oriented deals that would help our growth. Today, that explains the guidance, but we do not ignore at all, and we watch with care, the economical environment. Now, on M&A, the fact, if you remember, Aiman and I, we said we allocate half of our free cash flow to bolt-on acquisition, and that will deliver between 1% and 2% of external growth. We took 1% in the conservative guidance. We took 2% in the more bullish guidance. But it is the same direction, 1%-2%. It is in line with what I think Aiman shared with you when we talked about the total shareholder return. So before even Carole joined the group. Perfect. Thank you very much. Thank you. Thank you. The next question comes from Stacy Pollard from J.P. Morgan. Please go ahead. Hi. Thank you. A few questions from me. Just the U.K. growth in Q4, you may have mentioned it, but can you split the public versus private, and then what your outlook for 2019 is on that one? Secondly, what was the underlying growth in consulting? Maybe if you excluded acquisitions, just so we can get a sense of the trend there. Those two, please. On the U.K., we will not, because then we would have to decompose HMRC, the rest of the public sector, and we will not do that. But it's clear that today, in the spring, in the late winter and early spring of the U.K., where we are still some optimism on U.K. growth, the public sector is clearly better than the rest. We see hesitation in several vertical segments. On consulting, Thierry? Yes, on the consulting side, the underlying growth in 2018 was double digits. Solid activity across the organization. Organic? Yes. Okay. Thank you, Stacy. Thank you. The next question comes from Michael Briest from UBS. Please go ahead. Thanks. Good morning. A couple from me as well. In 2018, I think you added about a point of offshore leverage, the same as in 2017. But the rate of increase has slowed quite a lot, and we are beginning to see revenue per head actually grow year-on-year. Is this a trend you expect to continue in 2019 and beyond, given the mix shift towards digital and maybe some more onshore activities? The second one is around the sort of attrition. It is still relatively elevated. Where are you on sort of salary awards and your management of the cost base and the balance between hiring and sort of letting the attrition rise? Then just a quick follow-up for Carole in a moment. On offshore, Michael, significant contrast between the first half and the second half. In the first half, our headcount in India were rather stable and with a good growth in H2. It looks like a continuing trend. Notably, if you opt for an economical slowdown, you would think that costs obsession will come back, which should push offshore again. I would not be too negative. I think we are planning certain mid-single digit growth in India and maybe more, in spite of automation where we accelerate. On attrition, two points. It is clear that our salary guidance has been a little higher in Europe, in Western countries. We work on the India adjustment because, as you know, it occurs on April 1st. We are just starting on that. We will look at the competition and what we do. But overall, the goal is still to have salary adjustment being absorbed by the renewal of the pyramid. The main concern, as we shared before, is more with hot talent, digital talent, because there the attrition is high. There, if I speak of cybersecurity or digital talent, there the salary adjustment are significant, and we have spoken about the profitability of the new. It is clear that we sign with better contribution margin, but the cost of salary is higher in that segment. Okay. You had a special question for Carole, Michael, I think. Yes. It was just on the tax rate. I think the adjusted tax rate was 34% for 2018, so the EPS was a bit below consensus. What are you expecting going forward on tax rates? Do they come back towards 30%, or? As you know, the environment made out by the tax local regulation is quite unpredictable today. What we see is that the transitional impact of the U.S. tax reform will have faded by 2022. What we expect in 2019, as I said, is a transitional impact of the U.S. tax reform about EUR 60 million, EUR 25 million being a cash item. We do expect a tax rate going to 30% around 2022. Okay. Thank you. Thank you. The next question comes from Laurent Daure from Kepler Cheuvreux. Please go ahead. Yes. Thank you. Good morning. I have two questions. The first one is on your margin guidance, which is calling for slightly larger extension on average than this year. Is it just reflecting the lack of currency headwind this year, or is it something more structural? In more general terms, all the regions have now reached a margin over 11%, so I was wondering where the improvement is going to come from on a regional basis. The second question is more a clarification on one of your answer concerning the growth in 2019. You mentioned the possibility to win some large deals. How much of this is included in your guidance? Thank you. Laurent, good morning. On the margin, we think we have now reached a decent level. Europe at France at 11%, that is not the end of the journey. We told you the second half margin in North America was better than H1, so we hope to continue. That will help us and reach what I regard as a modest increase. But we now enter our targeted zone of 12.5%, or we are very close. We try to enter that target. Now we will have reached our midterm organic growth target, and we are soon ready to reach our midterm margin guidance. On 2019, no, we just pointed that if there were alarms on the classical demand, it could be compensated. There are no bet in our guidance on revenue from large deals. Okay. Very clear. Thank you. Thank you. The next question comes from Neil Fear from Redburn. Please go ahead. Hi. Thanks very much, and thanks for taking the questions. Just two quick ones. Firstly, the dividend maintained, could you just give some context for the decision there? Also, I think, Paul, in your early remarks, you commented that the U.K., there have been signs of hesitation. Could you say where that was and, obviously, how significant that is at this stage? Thank you. I presume it's Brexit related, but if you could add some context there, that'd be great. Dividend is quite clear. We always said our normalized payout ratio is 35%. Maintaining the dividend leads us to 36%, which is clearly in line with our payout policy. That was pretty obvious. We often pointed at retail as a difficult vertical in the U.K. because of the Brexit, because of the purchasing power of English consumers. We will wait for the rest. But clearly, on the private sector, we do not expect a strong demand. Thank you. Thank you. The next question comes from Lucas David from Oddo BHF. Please go ahead. Hi. Yes. Thank you for taking my question. Actually, I have two. First one is regarding the U.S. You reported a strong solid performance by tough comps. Were you positively surprised there? And if so, where does the surprise come from? And how is it sustainable for 2019? My second question is regarding the phasing of your growth in 2019, because your guidance is quite clear. But I do expect to enter faster in the year than you will end it, or on the contrary, you are expecting your growth to be more back-end loading due to comps. Thank you. Good morning. It is Laurent. I will answer your question regarding North America. I think in North America in Q4 is more or less in line with what we expected. Remember that we are still fueled by the McDonald's contract and by the acquisition of LiquidHub, which both Contributed quite a bit, but we still have good underlying organic growth in North America. We expect that to continue overall in 2019. Paul, you want to take the question on the start of the year or the phasing of the overall growth? Clearly, H1 had If you remember, last year, the start of the year was somewhat better. We came with a good Q1, so I would be prudent at this stage, but we do not intend to guide per quarter. We will see the year developing. Okay, thank you. Maybe one follow-up, if I can, a very quick one to Carole Ferrand. Do you take a positive Forex impact in your margin expansion for 2019? Thank you. As you know, we don't expect any positive or negative impact on FX in 2019. As we always explain to you, in terms of currency movements, they do reflect the inflation based in the cost base. So at the end of the day, if this is not the case, prices end up adjusting. If there was a close relationship between currency movements and margin, then the Indian pure players would have seen their margin expanding over the last few years, which is not the case. So we don't make a direct connection. Thank you. Thank you. Thank you. The next question comes from Charlie Brennan from Credit Suisse. Please go ahead. Great. Thanks very much for taking my question. Can I just ask a question about the overall pricing environment? A few of your competitors have started to talk about some sustainable positive pricing power in the digital area of your business. As that gets a bigger proportion of the overall group, are you starting to see pricing as being a tailwind for growth? Or is that still being offset by what's happening in the traditional side of the business? As an extension of that, can you talk about the competitive environment at the moment and whether you see competitors being more or less aggressive on pricing? Thank you. Charles, it's Simon. On the pricing, yes, prices in digital are better. We all know that. But as Paul was very clear, we also have higher cost of talent that come with it. Is it overall could be a tailwind for revenue? Yes, because if our average price is increasing, we'll basically benefit from that on the top line. It will not have necessarily a positive impact on the margin, at least in the medium term, yes. But in the short term, because we have higher costs that come with it. So tailwind to revenue, yes. On the other side, if we talk about the pricing environment, it's very competitive. I think we shouldn't fool ourselves. It's basically on the niche deals, there's a lot of good players fighting for it, and it's always very competitive. Very importantly, we don't have the irrational pricing behavior we had two or three years ago. So we have a good competitive environment where you have to fight on price, but where you can earn good margin as well. You don't have to basically make huge sacrifices to be able to win deals because some people are behaving irrationally, which I think for me is the important part. Thank you. Next question. Perfect. Thank you. Thank you, Charles. Thank you. The next question comes from Alexander from Deutsche Bank. Please go ahead. Yeah. Hi. Morning, guys. Thanks for taking the question. Just on the other managed services dynamic that you expect in FY 2019, you talked about improvement on the infrastructure side versus a still tougher BPO situation. What roughly is your ambition in FY 2019? Can you do better than FY 2018 and perhaps grow on that side of the business? Just in terms of cash impacts, could you just clarify the cash tax rate that you expect in FY 2019 and whether that is sustainable, and the restructuring expectation in FY 2019 as well? Thank you. Thierry. Looking at the infrastructure and business process outsourcing, they both have been in transformation. Certainly, infrastructure transformation journey started earlier towards a significant push in cloud and cybersecurity, and we see growth happening. In business services, there is more transition to BPO business, more sector content, digital operations, automation leverage, and so on. We are through this transformation, and it will take the year to get back to growth. Carole, on the cash impact of tax. The cash tax rate should be around 20% next year. The restructuring, as we committed in July, we bring it back to EUR 80 million. Okay, thank you. Thank you. Thank you very much. No question, I think. Yeah. We met your appetite. We will meet many of you during roadshow and tech conference. We wish you a good first quarter, and we will meet again end of April for the Q1 result. Thank you, everybody. Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.