Earnings Call: H2 2017

Feb 15, 2018

Ladies and gentlemen, welcome to the Capgemini 2017 full year results conference call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead. Thank you. Good morning, everyone. I am delighted to welcome you today. I am here with our two COOs, Aiman Ezzat and Thierry Delaporte, as well with Rosemary Stark, our Global Sales Officer. Before starting an update on our business, I want to say that all our thoughts are with our American colleagues following yesterday's new Florida tragedy. As a global company, we feel very close to the U.S. and to the American people. Back to our performance. Our performance in 2017 confirms our strong momentum. Our revenue grew by a solid 4% at constant currency with an acceleration in the last quarter where it reached 6.2%. The transition of our portfolio continues at a rapid pace. Our revenue in digital and cloud grew 24% over the year. In the fourth quarter, they represent 40% of our revenue. In 2017, our digital and cloud revenue has reached almost EUR 5 billion. We also deliver on our main challenge for the year, bringing back North America to a solid growth at +5% over the year. We invested significantly to sustain this growth, and we continue to improve our profitability. We deliver another 20 bps of margin expansion compared to 2016, now reaching 11.7%. Our cash performance is above expectation with a full year free cash flow of EUR 1,080,000,000 and our normalized EPS increases by 11% on a comparable basis. Based on this performance, we are proposing a dividend of EUR 1.70 per share to be approved at the annual general meeting. Finally, we executed on our acquisition program to reinforce structurally our digital portfolio. In that respect, in addition to the various deals we closed over the year, we announced last week the acquisition of LiquidHub, which Thierry Delaporte will present in more detail in a few minutes. Now, let's take a closer look at our main markets. We see a good performance across the board. We deliver on our promises in 2017, and we are solidly on track to meet our midterms ambition. We managed to bring North America back to solid growth. I said 5% at constant currency in 2017. This is a testimony to our efforts during the year. The dynamism of our manufacturing, financial service, and retail clients underpin our performance. We have acquired very strong new logo and signed marquee deal this year, which underline our ability to deliver transformation at scale for our clients. We saw some price pressure and on some renewal in H1, which we have started addressing with an aggressive industrialization plan. In continental Europe, we deliver another very strong performance and gain market share in a healthy economic environment. We deliver double-digit growth in Germany, in Nordics, and in Italy, and we sustain our momentum in France. We enjoy a strong client base, and our portfolio offering, mixing full digital and cloud offering and offshoring, is perfectly suited with the technology cycle. In the U.K., we saw a softening of the market in H2 in a challenging backdrop. We saw some clients starting to delay investment at the end of the year, especially in retail. In the public sector, the HMRC re-insourcing has now been completed, and the relationship with this client continue to be very strong. We are working on regaining momentum in the United Kingdom. We already enjoyed some recent wins. H1 will be again impacted by the HMRC insourcing, but we expect to return to growth in the second half. We achieve a good performance across Asia Pacific. In Latin America, Mexico shows very strong growth while Brazil is now stabilizing. Let me also remind you that India is at the heart of our competitiveness and the deepest reservoir of talent in digital, cloud, and artificial intelligence. Let me share with you what we see, the key trends on the market, and how we are positioned to leverage them. Digital is the obsession in the boardroom and the C-suite. Some segments, like digital marketing, are more advanced than others and are already core to entire industries, while others are still in adoption mode but growing fast, like digital manufacturing, where I think we are ahead of the curve working with our clients. We are among the very few players able to execute sizable, large digital transformation program for our clients. Development of digital has direct consequences on the fast adoption of cloud. Ever more applications are being developed and maintained directly in the cloud. We see greater demand for hybrid private/public cloud and cloud-native skills, where we excel, thanks to the breadth of our skill base. In parallel to this fast adoption, we continue to see good traction for our cybersecurity offerings. Our global team provides advanced on-premises, off-premises services to secure our clients' infrastructure and system. We're growing at full speed, only limited by the number of people we can onboard. Across cloud and cybersecurity, we close significant large client wins, including top-tier accounts in automotive, financial service, energy, or professional service. Finally, artificial intelligence is a front-of-mind strategic opportunity for our clients and for us. We help our clients capture the benefit of this new trend in their business. We are expanding considerably our AI footprint, developing and deploying AI-based and machine learning solution with our clients. These deployments include working with top-tier investment banks, consumer product, and automotive companies in fields such as semantic content analysis for finance, intelligent image recognition, or cognitive fraud detection. We also invest to develop our own AI-based platform and tool to ensure we stay ahead of the curve with solid communities of 10,000 experts in AI and automation. Let's now move to our priorities for 2018. They are very clear. First, stay closer and closer to our clients in even more strategic dialogues across the C-suite. This relationship with CXO is at the core of our growth. We deliver for our key client by being able to manage large and complex transformation projects in a competitive market. To sustain this discussion, our portfolio is evolving in close collaboration with our key partner to stay on top of market evolution. We accelerate our efforts in AI and automation, and we will continue our policy to acquire digital and cloud specialists to expand our offerings and reinforce our leader status in a fast-growing market, as we did in 2017. We continue to invest in our people, retain and train the best people in the industry, and to offer leadership opportunities to our strong and diverse base of talents. In 2017, we launched an unprecedented investment to train our talent. We increased our training effort by around 40% this year with an addition of 2.5 million of training hours, and we will continue in 2018. Finally, we have redefined our corporate social responsibility priorities with our board of director. In addition to promote diversity and environmental sustainability, we have made, and we make strong commitments on what we call digital inclusion. As a responsible company aware of the digital divide, we decide to focus more and more on this topic. These are not just words. We are quantifying our efforts and our management, and I will be incentivized on our CSR success. Now, 2018 objectives. We are on track to achieve our midterm ambition on growth and margin. 2018 will be a new step in that direction. For 2018, our objective is to achieve a revenue growth at constant currency between 6% and 7%. Acquisition should contribute close to 2%. This objective reflects our expectation for the market and the fit between our portfolio and client demand in a strong economic backdrop. Obviously, we are still laser-focused on our margin, and we continue to expand our operating margin to reach the range between, in 2018, to reach between 12% and 12.2%, taking into consideration the accounting changes for resale. We need to keep in mind that we are facing a headwind linked to the relative evolution of the Indian rupee versus the US dollar. Finally, building on our successful track record, we expect an organic free cash flow for the year in excess of EUR 1 billion. I will now invite Thierry Delaporte to join us to discuss about our latest acquisition. Thank you, Paul, and good morning, everyone. I am absolutely delighted to join you today. Indeed, on February 5th, Capgemini announced the acquisition of LiquidHub, a EUR 200 million digital customer engagement firm that specializes in developing and delivering compelling customer experiences. This acquisition reinforces Capgemini digital consulting capabilities in North America and accelerates its portfolio shift in the region. LiquidHub focuses on improving customer engagement with a very rich set of expertise suited for digital businesses, bringing together about 2,800 professionals from design thinkers, experience designers, or digital architects to platform and analytics specialists. This acquisition is an opportunity for us to accelerate the speed of the shift of our portfolio towards digital offerings in North America. It also brings some remarkable accounts and CXOs relationships with clients across the healthcare, life sciences, and financial service sectors, and in particular, in asset management, which, by the way, is a good addition to our financial services portfolio. LiquidHub focuses on delivering a customer-centric set of consistent engagement patterns across marketing, sales, service, and commerce. This acquisition is a major step in our ambition for equipping North America with a strong digital platform. Let me now give the floor to Rosemary Stark, our Global Sales Officer, to discuss about our client achievements in 2017. Thanks, Thierry. Good morning, everyone. Our 2017 bookings show 1% growth at constant currency, which bearing in mind our large HMRC renewal in 2016, is good traction. We closed several large deals towards the end of 2017 with a really good Q4, and once again, we delivered more than EUR 3 billion bookings in three quarters out of four. During 2017, we've continued to expand our digital and cloud services, and bookings in digital and cloud have grown by more than 20% in 2017, with several marquee digital deals closed in H2. Digital and cloud pipeline is growing very well too, and digital transformation is a very hot topic, and it's leading to much larger digital transformation deals and stronger business relationships. It's also increasing our pipeline of project work, which has a faster burn on revenue and a tighter book-to-bill compared to many of our multi-year contracts. Our large accounts are growing well at 2% above the group average, and we feel this really demonstrates our ability to develop consistently strong client relationships. We're delivering both competitiveness and innovative propositions as a strategic partner for these large clients. Now looking at sectors, financial services have good momentum overall, and we see strong growth, notably in continental Europe and in APAC. MaaS is a growth engine for the group generally, with a strong Q4 at 11.9% growth and 10.4% annual growth, driven by PSA, by Diffa, by other marquee wins in the sector, which I'll cover in a moment. Digital manufacturing and IoT are growing very fast, as Paul mentioned, and they will be interesting for us in 2018. Auto is also doing well, with lots of work related to connected vehicles and vehicle sharing schemes and autonomous vehicles. The trough in EUC in North America is now behind us. We've had a very strong Q4 in EUC and good growth in U.K. and Europe, and there's a strong pipeline of digital projects, particularly in the utility sector. In consumer products, we have good growth, 13.2% growth in Q4, driven largely by North America and Germany. Digital customer engagement is driving a lot of this, with a strong focus from many of our consumer products and retail clients on that digital engagement. Public sector has growth of 3% overall outside of the U.K., where, as anticipated, we have the HMRC effect. Telco, media, and entertainment continues to be soft, with weak demand in Europe across the sector. Let's move on to our key wins and where our growth is coming from. On the slide, we're showing you a selection of named and otherwise wins where the client doesn't want their name known. We are maintaining and creating new long-term relationships across a whole range of clients. More than 50 new multi-year contracts signed in 2017. I'm going to cover some notable examples. A world-leading international U.S.-based manufacturing company that develops and manufactures products for the generation, transmission, distribution, control of electricity. A large multi-year deal signed with them. An American supercenter chain signed for more than six years for an interesting IT management and transformation service. Diffa, which is the Norwegian Pharmacy Association, representing all 900 pharmacies in Norway, where Capgemini is building and will run a new cloud-based solution for digital prescription service, connecting pharmacies and patients in a different way. In addition to these multi-year contracts, our focus on digital and cloud continues to play a really important part in our business. For example, for the Peugeot Citroën Group, where we're implementing the digital platform for connected cars, and for one of the top three U.S. banks, where Capgemini has been picked as the partner for their enterprise data program, where we're also helping the bank embed robotic process automation and driving operational efficiency. Some interesting engagements we're seeing with clients. I'll hand over to Aiman now to cover our financial results. Good morning. I will walk you through the financial highlights of the 2017 results. 2017 is another strong year for Capgemini. As planned, growth accelerated over the course of the year. Profitability increased, and cash flow conversion remains strong. Group revenues rose to EUR 12 billion 792 million. Reported growth is 2% at current exchange rate and 4% at constant exchange rate. Above the 3% target set at the beginning of the year. Please keep in mind that these growth rates, as stated a year ago, exclude the Brazilian hardware resale business that is discontinued. We experienced a currency headwind of 1.6 point due to the weakness of the pound sterling and the USD against the euro. The operating margin stands at EUR 1 billion 493 million or 11.7% of revenues, 20 bps progression over last year within the operating margin target that we set. After taking into account the other operating expenses that I will comment in a minute, the operating profit stands at EUR 1 billion 183 million, up 3% year on year. Net financial expenses dropped to EUR 72 million. This results in part from the action taken toward the end of last year, 2016, on the straight bond and on non-convertible. Capgemini recorded a tax expense of EUR 303 million. This represents an effective tax rate of 27.3% and includes the impact of deferred tax assets, including the U.S. tax reform. As a reminder, in 2016, we recorded a one-off non-cash tax income of EUR 180 million. As a result, net profit group share amounts to EUR 820 million, adjusted for the 2016 one-off non-cash tax income. This represents an 11% year-on-year increase. Finally, organic free cash flow reached EUR 1,080,000,000, above the target we set at 950 for the year. It represents a 72% conversion rate of 2017 operating margin. For the second year in a row, our organic free cash generation surpassed our net income, and this illustrates the quality of our earnings. Now, a word on IFRS 15, which is applicable, as you know, as of January 1, 2018. As communicated in July, the main impact relates to the resale activity that we may carry from time to time. From now on, a larger portion of these revenues will be recorded on a net basis, leading to a reduction in revenues. The impact currently under audit is estimated at EUR 270 million on revenues, with no change on the euro amount or profit or cash. This would have led to report an operating margin of 11.9% in 2017, which is the basis of comparison that we will use for our 2018 outlook. Now moving to cash, the evolution of free cash flow. The steady improvement over the past few years clearly sets us above the EUR 1 billion mark. It's important to note that the fourth employee share ownership plan had a minimal impact on our cash generation, as the EUR 360 million that we spent on the share buyback agreement to neutralize the dilution was offset by EUR 322 million from share capital increase. At the end of the year, the net debt stood at EUR 1,209,000,000 compared to EUR 1,413,000,000 a year ago. Now looking at quarterly revenues, Q4, as Paul mentioned, saw a strong acceleration with revenue growth of 6.2% at constant exchange rate, up from the 3.4% recorded in Q3. If you remember, we were aiming notably in North America to get close to mid-single digit by the end of the year. Overall, we have achieved on what we expected in terms of revenue acceleration. On an organic basis, revenue grew by 5.6% in Q4, a strong performance which is above our expectations. For the full year 2017, revenue growth was 4% at constant exchange rate and 3.6% on an organic basis. A word on the FX. The impact was a 1.6 point headwind in average for the year. The impact actually moved from a tailwind of 0.2 point in Q1 to a headwind of 3.5 point in Q4. The 3.5 headwind that you saw in Q4 is representative of what we expect now for 2018 for the full year. Now let's move by geography. It's important to know that all regions, except the U.K., contributed to the Q4 acceleration. I will mention all gross numbers at constant exchange rates unless I state otherwise. First, on North America. Growth accelerated to 12.3% in Q4, substantially above the mid-single digit target we set ourselves for the end of 2017. This illustrates the success of the investments done over the last quarters. It also demonstrates that with the right mix of capabilities and offering, we can aim to grow above mid-single digit in the region. For the full year 2017, North America grew by 5%, primarily driven by the manufacturing, retail, and consumer goods, and financial sectors. In the U.K. and Ireland, revenue was down 9.6% for the full year. This is primarily driven by the anticipated decline in the public sector. However, in the second half, as we already mentioned, at the end of Q3 there, we saw some softness developing in the private sector, together with the lengthening of client decision cycle. We are fully mobilized around returning the U.K. to growth in the second half of the year. As you know, in the first half, we will still have some headwind from the HMRC re-insourcing contract. France, 21% of the group revenue, showed a robust growth in Q4 at 6.5%. For the full year, the growth stood at 5.2%, with digital and cloud driving the strong momentum in application services and consulting. By sector, financial services and retail and consumer goods reported double-digit growth. Growth was also very robust in the rest of Europe, at 11.3% in Q4 and 8.6% for the full year. Solid economic fundamentals, investment in digital transformation, combined with a strong appetite for offshore, allowed us to continue to gain market share. Germany, Scandinavia, and Italy grew all in excess of 10%. This region is well positioned to remain a strong growth driver in 2018. Finally, in Asia Pacific and Latin America, the growth was 7.8% in Q4 and 7.9% for the full year. The trends continue to be contrasted between Asia Pacific and LATAM. Q4 was marked by the return to growth in Latin America due to the stabilization of the situation in Brazil and a buoyant activity in Mexico. In Asia Pacific, growth remained solid and continued to be driven by financial services, complemented this year by solid growth in retail, consumer goods, and energy. Now looking by business, we see a strong growth in consulting at 19.1% in Q4 and 14% for the full year, driven by Continental Europe, where demand for digital transformation is increasing, notably in the manufacturing financial services and retail and consumer goods sector. Technology and engineering services reported a growth of 4.7%, fueled by France and Scandinavia. By sector, energy and utilities was the most dynamic, with double-digit growth. In application services, our largest business with 62% of revenues, we continue to benefit from the strong demand in digital and cloud offerings. Revenue grew 6.6% over the year, with around 10% in France, Germany, Italy, Scandinavia, and Asia. Finally, in other managed services business, which, as a reminder, includes our infrastructure services, our business process outsourcing services, and our transactional and platform services, we reported a decline of 6.4%. This notably reflects the anticipated decline in the U.K. public sector, but also some weakness in the infrastructure services, which is, as you know, transitioning to cloud services. We are positive on the midterm perspective of this business. Now moving to headcount. The total headcount grew 3.4%. This was mainly due by growth in offshore, notably by the increase in demand for offshore in Continental Europe. As you can notice, the growth start to slow down as we did 5% overall in terms of growth in our global production centers for the year. We ended 2017 with close to 200,000 employees, out of which 57% are in our global production centers. Attrition slightly increased at 18.9%, but remains below our 2015 level and well within our operating range. Now moving to the operating margin first by geography. North America, in line with what we saw in H1 2017 performance. Operating margin is down year on year by 190 bps, so that's the same exactly as we saw in H1. This reflects the investment made to accelerate the evolution of the portfolio of offerings that we have discussed all over 2017 and fuel the growth. But as you know, we also saw pricing pressure around some renewals of some large contracts and, as Paul mentioned, some headwind that we see on the INR to USD trends. We consider these trends and these headwinds on the rupee to be temporary. The U.K. margin increased by 50 bps to 15.1%, which reflects the portfolio shift in the U.K. and notably the decline of the traditional infrastructure business. France's operating margin improved by 80 bps, so we are now close to 10% operating margin. We are just shy of that. We are at 9.9%. The rest of Europe continued its margin progression, again, between the strong growth acceleration and the increase offshore, 150 bps improvement to 12%, while in Asia Pacific and Latin America, margin also improved strongly to 9.8%, so a 320 bps increase. It reflects the improvement in Latin America, where we are working to restore profitability and an increasing weight of the Asia Pacific region. Now moving by business, the operating margin has improved in most business lines. Operating margin in consulting service increased by 50 bps to 11.2. In technology and engineering services, we continue to see a progression of 80 bps, and we reach 13.6%, thanks to good momentum in all key countries. In application services, which represent our largest portfolio, we see an improvement of 20 bps, driven by a mix of the portfolio shift, which is still not bringing all the expectation that we have in the short term. It will take another two or three years to get the full impact of that, but also the industrialization activities that we continue to carry. Finally, as expected, with the decline in revenues, the operating margin in other managed services went down to 9.2%. Now if you look by destination, the operating margin improvement has been driven by the leverage of growth on well-contained sales and G&A expenses, which actually came a little down in absolute value, held by foreign exchange rates. On the gross margin, we are down 20 bps year on year. That's primarily driven by North America, where we invested in delivery capabilities and faced some price pressures in H1. Currency movement have further weighed on that gross margin. Now moving to financial expenses. They show an improvement as now of EUR 74 million compared to last year, due to the lower interest charge on borrowings following our operation on the straight and convertible bond at the end of 2016 and highest interest income with the early unwinding of the USD euro currency swap, which was set in connection with the IGATE acquisition in H1 2017. We do expect 2018 financial expenses to be around EUR 85 million. Concerning income tax, as mentioned earlier in the presentation, we recorded tax expense of EUR 303 million in 2017, against EUR 94 million in 2016. As you know, in 2016, we had the recognition of a tax income of EUR 180 million related to goodwill resulting from legal reorganization. Setting this one off aside, the effective tax rate is stable for this year at 27.3. Now, on the US deferred tax asset, we had two movements almost offsetting each other, and therefore with minimal impact on the overall tax expense. The change in the US tax rate, dropping to 21%, has led to a decrease in the valuation of our deferred tax assets of EUR 295 million. Okay, so there's one movement impacted by the decrease of the tax rate to 21%. We had to revalue our deferred tax asset, and that dropped its value by EUR 295 million. The second movement has been the recognition of EUR 299 million of new deferred tax asset. We basically activated what we had off balance sheet following the improvement of outlook for taxable profit in the United States since the last remeasurement we had done of the US DTA in 2015. As of now, with that recognition of EUR 295 million of new deferred tax asset that we moved to the balance sheet, all the tax loss carry-forward have been recognized, and they're all on the balance sheet. We don't have any more off-balance sheet tax loss carry-forward in the United States. Given the evolution of tax loss carry-forward and the tax reforms adopted, particularly in the United States, we estimate that the effective tax rate should increase by 3-4 points in 2018, without any material impact on the cash tax, and therefore on our free cash flow generation. We are still investigating the impact of some of the other measures included in the US tax reform. Moving to the net profit analysis. As you see, other operating income and expense increased to EUR 310 million in 2017 compared to EUR 292 in 2016. Our restructuring costs are higher by EUR 28 million, as we have had to accelerate some industrialization initiative last year following some of the price competition we had in North America. On the other side, acquisition and integration costs went down by about the same amount. The IFRS charge for share-based compensation followed the share price and was up by EUR 13 million. We do expect other operating income and expense to be within the same range in 2018. Operating profit increases by 3% to reach EUR 1,183,000,000. After financial expense and taxes, the net profit group share is EUR 820 million, up 11% compared to 2016, when adjusted for one-off non-cash income of EUR 180 million in 2016. In 2017, the multi-year share buyback program led to visible accretion as the average number of outstanding shares went down by almost 1.5 million. All in all, and adjusting for 2016 one-off tax income, normalized EPS is up 11% to 6.22 in 2017, above the EUR 6.2 referred to at the beginning of the year. If I go to review of our priorities for 2017, we delivered on all of them. We are maintaining the right balance between organic growth, acceleration, and bolt-on acquisition to expand capabilities and accelerate the portfolio transition while progressing the operating margin towards our midterm growth. Cash flow generation remains strong with a conversion ratio to operating margin above our expectation. We keep the focus on total shareholder return with an increase in profitability, in dividend, and reduction in number of outstanding shares. Looking at 2018, we aim to maintain the momentum to reach our growth ambition in 2019. We continue to improve our operating margin while dealing with short-term headwinds on currency and working the maturity of the digital and cloud portfolio to meet our midterm margin ambition. We maintain the discipline on cash generation and the balance of return between shareholders and M&A. On that, we will open it to questions. Operator? We miss our operator. Hello? I guess there are many calls this morning. Sorry. Yeah. Just a second. Yeah, I'm sorry. We have question now you can hear me, I suppose. Yes. We have a question from Mr. Adam Wood from Morgan Stanley. Please go ahead. Hi. Good morning. Thanks for taking the question and congratulations on that very strong fourth quarter top line. Just on that top-line growth, you suggested there was about 2% M&A contribution embarked already, in the 2018 outlook. Could you maybe confirm that's what you'd expect, and if there was more material M&A, you'd change that target for the year? That's the first one. Secondly, on margins, you're at the lower end of the range for 2017. Could you maybe talk to us a little bit about the required investments you think come in 2018 and 2019 to see that strong top line continue, and how does that impact on the 12.5%-13% guidance that's midterm? I think, Aiman, you suggested that could be 2019 or 2020. Any further thoughts on what year that could be? And then just finally on the tax rate going up, could you maybe just help us understand that on the P&L, because I understand you are probably going to be able to release less of the deferred tax assets onto the P&L, but surely the actual U.S. tax charge comes down as well. So I am struggling to understand why the actual tax rate should be up. Thank you. Okay. Pretty technical. First, we did not have 2% impact from inorganic growth in Q4. Let us be very clear. We said 5.6% organic growth, 6.2%, basically, in terms of constant currency. So, it is 60 basis points overall for Q4, in terms of impact. If I look at 2018, today, we expect if we close on time the LiquidHub acquisition, we will have embarked about 160 basis points. So within our guidance, we say that in the guidance of 6% to 7%, inorganic growth is less than 200 bps. Okay? Yeah. If we are to do a big acquisition, then we will review basically our guidance for constant currency growth for 2018. On the margin, we did come at the low end. As you know, we had some headwind, plus we had some erosion in North America that weighed quite a bit, to be frank. If we had less impact in North America, we would have been at the top of the guidance. So, we expect to see, from my perspective, still some temporary headwinds, hence some caution on the margin for 2018. We will have some temporary headwinds coming from the FX because the INR is not depreciating against USD, and that weighs a little bit in terms of cost. But we are still very comfortable with the 12.5% to 13% by 2020. For me, we continue to progress the margin, which is the important thing, and we should see an acceleration in coming years as one, we have less FX headwind because it is temporary. And the second thing, as we gain more maturity in our portfolio on digital and cloud. So we have full confidence in the 12.5% to 13% by 2020, Adam. Okay. On the tax rate, there's a lot of technical discussion around that. Part of why it is increasing further is there is movement in a number of impacts across the world in terms of tax rate. And there is a lot of impacts coming from the evolution on DTAs, notably in North America. Part of what we had, we had partial recognition every year and we activated some off-balance sheet, basically tax loss carry-forward, which compensated the U.S. tax rate. As we have now recognized everything, Adam, we have nothing to activate anymore on a yearly basis to compensate some of the tax rate in the U.S. on the P&L side. And as such, even if you have a reduction in tax rate in the U.S., we will still have some tax charges now in the P&L coming from the U.S., which we didn't have before, right? That's what explained the 3 to 4 points, notably that we see in the effective tax rate increase. Not only the U.S., but it's primarily coming from the fact that we have nothing else to activate. From a cash perspective, do remember it has no impact, right? So we're not going to pay more taxes because we still have plenty of DTA on the balance sheet. However, from a P&L tax rate, the lack of activation of tax loss carry-forward implies the fact that the effective tax rate on the balance sheet will increase. Perfect. That's great. Thank you very much. We have another question from Mr. Laurent Daure from Kepler Cheuvreux. Please go ahead, sir. Yes. Thank you. Good morning, gentlemen. I have three questions on my side. The first question is if we could have some color about the integration of all the small acquisitions we have been doing in the recent past and any kind of cost saving you might have done. Also your view today, especially on the creativity part, do you still consider to partner with some advertising agency on some deals, or are you moving closer to an Accenture strategy? The second question is on the U.S. I understand you have quite an optimistic view for the long term, given what you did on your tax assets. But can we have an update or where do you stand on your investment plan and also on the recovery of the contract that you had to renew on lower prices a year back? My final question is still on the U.S. You really had a very strong fourth quarter, way ahead of about any competitor. Did you have specific A contract that contributed to growth in the fourth quarter, or is your win rate improving massively? Any color would be useful. Thank you. Thank you, Laurent. On the integration of what we have acquired last year. First, some really striking success in the traditional IT world. Itelios in France, we leverage that to be a European leader in the e-commerce platform of Salesforce, and we start to do the same with Lyons Consulting in the U.S. So very strong performance of our investment in the Salesforce world. The TCube acquisition has worked extremely well too, on Duck Creek, so that worked well. Now I move to more digital. We enjoy really a very strong growth both with Fahrenheit and Idean, and we use them to win large opportunities. So we inject Fahrenheit and Idean people and content in all our pursuit that may play a role in our good win rate in the U.S., so solid growth. As you see, it is quite important. Your question on creative skills and the need to partner or not. Frankly, today, we are not equipped with creative skills everywhere and notably in Europe. So in Europe, we favor partnership with large agencies, while the LiquidHub is a first step in that world. Most probably, some creative people will think that we follow a little bit the track of the competitors you mentioned. So it is truly a digital acquisition that includes significant creative skills. Your next question was about the U.S. investment. Let us be clear. The U.S. investment are mainly about acquiring talent, and that will not stop for a while. That explains a little bit why we have to fuel the change of the business mix of the U.S. For that, we need to recruit talents of a new kind, a recruitment of significant talent has a payback over 6-18 months. We accept that, and we drive the U.S. with that direction. You ask about the recovery on some price pressure that we saw. Frankly, on some large contracts, we have quite advanced. On some others, it's a total re-engineering on the offer, so it will still weigh a little bit in 2018. Last question, your Q4, it's not a one-off. We may see a good momentum in the first half of 2018, but frankly, the McDonald's contract has helped in the production of the fourth quarter, clearly. Okay, thank you. I think I answered your four questions, Laurent. Yes, thanks. We have another question from Mr. Gerard Vos from Barclays. Please go ahead. Hi. Thanks for taking my question. Just a few. Just maybe to start off with the guidance on the margin, the 30 to 50 basis points. Could you just give us a bit of insight on the different components? I guess there is 20 basis points impact positively there from IFRS. What is the impact you see from the rupee in 2018, and would you expect the gross margin to return to expansion into 2018? On the growth guidance, underlying growth, if I take out the Aspire impact in Q4 was around 6.5%. I think on a like-for-like basis, you guide to organic to around 4%-5% in 2018. Is that simply conservatism, or are you expecting some more headwind from the U.K. to compensate for that step down in growth? Finally, with inflation coming back into the system, what do you see on the salaries versus pricing equation across your regions? Thanks. Okay. Plenty of questions. If you are going to have three questions, not many people are going to be able to ask questions, huh? Let us start. On the margin guidance, clearly because there is 20 bps coming from IFRS impact, the underlying improvement that we have put in the margin guidance for 2018 is 10 to 30 bps, huh? Yeah. Very open about it. It appears like 30-50 bps, but 20 bps of it coming from IFRS impact. The gross margin 2018, we do aim to start to improve it again. So definitely it is really on our radar screen, as you might imagine. I always said that attaining the midterm margin ambition has to come from the gross margin. We had some setbacks in 2018 because of the erosion that we had in North America. We consider that we will recover some of that in 2018. So we basically going to push very hard for that gross margin to improve in 2018, as you can imagine. On the growth, I like always the mechanical calculation and taking the good news and see how we can improve them further. I do consider that your calculation is correct. The underlying 4%-5% organic growth based on the fact that we still have some headwind from Aspire in 2018 is already a good one, and we don't have many competitors who are basically aiming for something like that. So I think it's already a good ambition that we have, and it clearly solidifies getting to the 5%-7% in 2019. For me, it sets us on the track. If we can do better, we will deliver better as you can imagine, but we do consider this already an ambitious target. As you imagine, we have some base effect in some countries in Europe where we'd love them to continue to grow at the same rate, but we do expect some base effect at some moment. On the inflation, to be frank, impact on salaries, this is something we take into account. That's why we say we have to invest. Part of investment is retaining people. If you let people go, you slow down your growth. So we have to take the right balance between trying to fuel the growth, take advantage to accelerate the shift of the portfolio, while at the same time, being able to ensure that we're not building a time bomb in terms of cost, because at one moment, prices might start to go down a little bit. So that balance, we always keep, and that's where the 50 years of group experience play in how we manage that balance. So we manage it quite well, to be frank. I think we will not have a big salary inflation overall. We remain very cautious on that, to be able to ensure that we can continue our profitable growth journey in the future. On the FX, it weighs, to be frank, it's difficult because there's so much volatility around FX. If you give me an FX rate, I could potentially measure the impact grounded. But, I don't know where the US dollar will be in two months. I don't think you know either. Based on that, at this stage, we do expect 3.5%-3.7% headwind on the top line. There is some impact on the bottom line. Notably, the rupee holding pretty well against the USD for the last couple of years is not helping. But we do expect at one moment that we will get back to the normal depreciation of the rupee against the USD due to the inflation differential between the two countries. That is why I consider this FX headwind to be temporary and not to be something structural. Okay. Understood. Thank you. We have another question from Georgios Kertsos from Berenberg. Go ahead, sir. Yes. Hi, good morning, guys. Congrats for the results and many thanks for taking the question. Three hopefully quick ones for me. I was wondering if you could perhaps comment a little bit around the demand outlook that you see in the U.K. Second, around any sort of M&A plans, anything in the pipeline. Lastly, just to confirm on the effective tax rate. I think you mentioned 3-4 percentage points increase in 2018. Is that from 2018 onwards, or do you effectively expect the effective tax rate from 2019 to sort of fall back to the historical average? Thank you. Okay. On the U.K., first, as everybody has understood, the drag of the re-insourcing of HMRC will stop in June. That will have a mechanical effect. Then, there are some colors, maybe because we have remotivated with our team. We have some large pursuits going on, and they will determine the size of our return to growth in H2. I see notably activities in the energy and utility segment, quite solid. FS is okay, too. The consumer goods and retail is soft and remains soft. That would be what I can say. On M&A, we said in the capital market day, we would expect to spend half of our free cash flow generation for M&A, which is in the range of EUR 500 million. Now, if we buy a company that two times revenue, and it's a strong if, that could generate an addition of EUR 250 million of revenue, not in 2018, of course, it depends on the date of closing. We are still on that track, and we are still looking at additional pearls that we will acquire, which focus on digital, on cybersecurity, and on cloud, and not only in the U.S. On the tax rate. On the tax rate. So, good question. That would put currently the tax rate at 30% to 31%. We always said that we expect the midterm effective tax rate to be around 30%. As you imagine, there is some fluctuation year on year, depending on how things move. But overall, we will start to benefit also from the reduction of tax rates in France. They're going to move from almost 34% to 25% in the coming years. Overall, I think based on the trend that we see in the coming years on the evolution of the tax rate, we do expect to be at around 30%. That's usually what I would recommend that you use for your model. Thank you. We have another question from Michael Briest from UBS. Please go ahead, sir. Thank you. Good morning. Aiman, just in terms of the margin target, I guess there is this 20 basis point benefit from IFRS 15, which, you would not have anticipated two, three years ago when you gave the target. Are we to assume that, whether it is currency or perhaps acquisition dilution, you do not believe you can get more than 12.5%-13% in the next couple of years? Then just in terms of the U.K. at the half year stage, you were sounding quite cautious on margin progression there. Yet actually the margins were quite strong in the second half. I am just curious as to what caused that perhaps. Was it lower bonus accruals? Looking into this year, what do you see for the U.K. margin, given both the demand side and perhaps currency effects? Thank you. Okay. Two good questions. Michael, on the margin, the 20 bps benefit we are getting from IFRS. I would like to remind you that when we set the margin ambition to go to 12.5%-13%, which was several years ago, it represented 300-350 bps in terms of improvement. I do not think with 20 bps improvement from IFRS, we should basically change what our target is. I would cash the credit of the 20 bps and keep the 12.5%-13%. You know very well that if we can deliver more, we will deliver more. But at this stage, I do not think the 20 bps improvement from IFRS should basically change our midterm margin ambition because as I said, when we set it was 300-350. On the U.K. margin. U.K. margin benefits from the evolution of the mix. To be frank, the decline or the rapid decline of infrastructure services in the U.K. is accretive to the U.K. margin. On the 2018 perspective, as you know, I will not go into the trap of trying to set perspective on margin by region for 2018 because plenty of things can play. But definitely, our aim is always to improve margin everywhere, right? Whether we can improve the margin in the U.K. in 2018, I think it is a bit early to discuss, Michael. But just on the margin- Yeah, on the bonus, I would not say that the U.K. margin has improved because we have less bonus provision in the U.K. But just on the margin targets for the midterm, is the 10 to 30 basis points this year unusual because of currency headwinds and investments? Oh, for this year, the 20 bps for this year. Yeah, listen, I think, again, mechanically, if you add the 20 bps per year, you will get to your 12.5%. If we can make it 30 bps, we'll get a bit to the mid of the range, and we can make it 40 bps, we'll get to 13%. So it's quite clear. Now, I think we have to take it one year at a time because a lot of things play in the same year. But for me, what is important that we maintain every year a steady improvement in the margin progression. Maybe in 2019 we'll be able to do better because the portfolio maturity will have increased, and we'll have some tailwind from currencies, right? For me, it's basically the steady improvement of the margin year on year is the right thing to look at. This year because we have more headwind on FX and we continue to invest because we really want to fuel organic growth, we set 10 to 30 basis points. We will continue to try to push the margin to the extent we can every year. But for me, steady improvement in margin is definitely in our roadmap for the group. Okay. Thank you. We have another question from Charles Brennan from Credit Suisse. Please go ahead. Greg, good morning. Thanks very much for taking my question. I have two quick ones actually. Firstly, just a general industry observation. Some of your competitors have been talking about re-insourcing trends, particularly in financial services. I was just wondering if you had seen any of that amongst your client base, and how you think that trend plays out. Then secondly, just a modeling one. I understand that the cash tax rate is going to be unchanged, but can you quantify what the cash tax rate is? Thank you. Let's have Thierry Delaporte on Yeah the financial service trends. Yeah. On the financial service trend sector, I can say that we haven't seen a general trend of re-insourcing of IT. We don't consider it as a trend that impacts our business. Okay. Okay. On the cash tax rate, I can give you two numbers. I can give you what is a cash tax rate and what you should use for modeling, because, again, I don't think it's recurrent. The cash tax rate is quite low actually in 2017, right? I think it's about 13%, but I would not recommend to use that cash tax rate as being recurrent. I always say we use something a bit less than 20, around 18% is what is reasonable in the coming years in terms of what we should expect in terms of cash tax rate. Perfect. Thanks. We have another question from Toby Ogg from JP Morgan. Please go ahead. Hi, thank you for taking the question. Could you perhaps comment on the competitive environment, particularly in North America, I guess on the M&A side? I know you're up against Accenture, Cognizant, private equity, et cetera, for the type of assets. How are you faring when it comes to the price, and ultimately how is it affecting the quality of the assets you're acquiring? Thank you. The first question is notably how do we welcome what we will acquire and what does the kind of position we can offer? You should know we don't compete on price and when price do not look reasonable, we withdraw from the pursuit. In the case of LiquidHub, frankly, the role we have proposed to LiquidHub as being the platform for digital in U.S. has played a key role in the negotiation with them, and it is important for these small boutique. Notably, when boutiques are smaller, the stability of the boutique depend on the leader decision and his decision to embark with us for his career. If not, he leaves and then there is a high volatility. So, I repeat, we do not go very high and 2 times revenue in the case of LiquidHub seems to me quite reasonable. I repeat, it's a balance of being attractive in the role, in the mission, in the integration process and reasonable pricing. Okay. To be frank, we are extremely proud of the retention rates we have on all the acquisitions we have done because they are extremely good and they are not higher from my perspective, than the overall attrition of the group. So we are extremely proud on what we have been able to achieve on this acquisition and our ability to retain people, which is basically where the real value creation is. Okay. We are going to take the last question. Yes, we have a last question from Mr. Neil Steer from Redburn. Please go ahead. Hi. Thanks ever so much, Steve, for taking my question. It just relates to the restructuring expense, was focused in the second half of the year. I understand that there was a requirement to take cost out of North America. But presumably, can you give us a feel for when you actually got the benefit of that as you went through the second half of 2017? Presumably, there's a fully annualized benefit, which is to be of help as we look at the 2018 margin. Okay. So again, some of the benefit already came in 2017. If you accelerated restructuring is also to be able to protect the margin in face of some price competition. I think one of the challenges which we have in restructuring, I think, in the short term is the acceleration of the transition of our infrastructure services business consumed quite a bit of restructuring, right? Because it's an asset-based business, so things like shutting down data centers are pretty expensive. But if you want to be able to shift that portfolio quickly to more cloud-based services, it also requires, in that case, the acceleration of some of the restructuring action that we have to take. The second thing, to be frank, some of it is also to support the rapid shift of the portfolio. Sitting, I don't know, probably three years ago, I did not expect the portfolio to shift so quickly. Some of the portfolio shift do require to be supported by restructuring spend. From my perspective, we have to do the right decision in terms of basically continue to support the shift of the portfolio both in digital and cloud, and basically transition our infrastructure services to cloud-based services because that's the future for our business. If that require temporary to increase a little bit our restructuring spend, we will do it. But we have to do that to be able to do the right thing in terms of fueling sustainable and profitable growth for the business. Okay. Understand that. We remain a little bit high. In terms of payback, to be frank, the paybacks are anywhere between six months and 18 months. Okay? We very rarely make decisions that basically have four or five years payback. The restructuring spend in 2018 will be similar to 2017 or back down to the sort of 15, 16 level? At this stage, I would say it will be a good proxy to consider that it is going to be similar. We might do a little bit less, but I want to keep a bit of flexibility there. Thank you. Thank you, everybody. Now we will meet you in different roadshow and tech conference, and let us meet again with our Q1 result. Thank you, everybody. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.