Capgemini SE (CAP) Earnings Call Transcript & Summary

Good afternoon. Thank you very much for having joined us, and welcome to the 2021 Capgemini virtual Capital Markets Day. We're looking forward to spending the next few hours with you and various members of the Capgemini leadership team. We have exciting sessions lined up, during which we'll go through our strategy, our performance and ambitions. As usual, you'll find the relevant material and documentation on the investor pages of our website, investors.capgemini.com. Before we proceed. This is a virtual event due obviously to the current context. We have guests here, but I would like just to state that we have taken all the necessary measures, distancing, testing and so on. And that's why our speakers today will be quite far apart. I'd also like to remind you that this information in this call contains forward-looking statements with regard to Capgemini's financial condition, results of operation, business, strategy and plans. Actual results may differ materially from the forward-looking statements as a result of a number of risks and uncertainties; risks described in the documents Capgemini has filed with the IMF (sic) [ AMF ], the French financial markets authority; and our universal registration document. To open, CEO Aiman Ezzat and CFO Carole Ferrand will outline our strategic direction; our financial ambitions; and our approach to environmental, social and governance matters. This being said and without further delay, I will hand the floor to our CEO, Aiman Ezzat, who will share with us his vision and strategy.

Hello, everyone. Thank you for attending our Capital Market Day. I am very happy to be with you today. In the next 3 hours, we will take you through some elements of our strategy and share our new mid-term ambition, but before starting, I wanted to set the stage by saying a word about where we are coming and what we have achieved in the last years because a lot of things have changed in Capgemini and I'm proud of that. We are now a much more global and diversified firm not only geographically but also by business line and by industry. We strengthened our global account management with the implementation of a unified go to market. We accelerated our offshore and industrialization drive to strengthen our competitiveness and made India a strategic business platform with 125,000 team members. We massively shifted our portfolio to digital and cloud and constantly invested in innovation. We scaled our core capabilities organically and through acquisition, the last big one being Altran, which propelled us as the global leader in engineering and R&D. We developed a strong partner of -- ecosystem, notably with the hyperscalers, turning it in a real growth engine. And we elevated our game in terms of leadership and talent management, people being our most important asset. This ongoing transformation clearly yielded a growth, a robust margin progression and a strong cash flow generation, but beyond financial, the group has demonstrated its resilience and agility during the pandemic. With our unique positioning, we are among the global leaders in enabling client through -- to transform through technology. There has never been a better time to be in this industry. We thrive on change, and technology has become pervasive and is fundamentally transforming businesses and society at large. We see increasing wallet spends on consulting, IT and technology. This will continue in the coming years. CxOs are at the heart of the transformation journey and now actively driving IT and technology spend. Cloud, data and AI are everywhere, in every single product, service or operation. Everything is becoming digital, with growing needs in terms of connectivity and softwarization. And finally, sustainability becomes a powerful engine for transformation and renewal in many sectors. At the same time, there is an evolution in terms of market requirement. Clients need deep industry expertise. We are beyond horizontal solution that are easily adapted from an industry to another. Clients expect tailor-made solutions adapted to the industry. You need to be specific to be relevant. We need the breadth of capabilities and partners to be able to address the transformation requirements of clients. And it is without saying that clients see cybersecurity as a significant risk which is complex to manage. They need to work with trusted partners to help them manage the increasing exposure to cybersecurity. In this context, we are ideally positioned to take advantage of the fast-expanding use of technology across industries. We aim to be a strategic partner for the digital transformation of our clients. It's a new job, in a certain way. Traditionally we were mainly focused on IT services, with the CIO being our primary client, focused on providing capabilities to fulfill specific needs. Historically, IT was leveraged to help run companies more efficiently. Today, our job is to enable clients to transform through technology, to create value, whether it is by creating new products and services, making them available for customers or ensuring a great customer experience. We operate across the client's organization, from sales and marketing to R&D and operations. This is how we build strategic relationship with clients. If you look at all what comes under digital transformation and taking it through the eyes of a client, we see today's 3 main opportunities in how we apply transformation through technology. First, enterprise management. This is mainly about optimizing the management of the company functional areas such as finance, HR, logistics; and driving decision-making, of course, covering organization systems and processes. To simplify, this was the traditional [ remit of the ] CIO. Looking forward to winning this market, we need to drive cloud and data and AI as well as application development and modernization while keeping a very strong focus on cost, so agile, offshore and automation will remain key here. This today represent a bit more than 50% of our revenues. This market will continue to grow in low single digits. And let's be clear: This is not what is -- people call legacy. Second, customer first. It is what people call digital marketing and customer experience, but it goes well beyond. It's focused on the relationship between our clients and their customers to improve customer experience and satisfaction, disrupt value chains with new business models and to create new revenue streams through digital platforms. This gives us access to sales, marketing and line CxOs. It's a growth engine for our clients, and it's how they connect and engage with their customers. Now this playing field I just defined is over 20% of our revenues, and this market is growing high single digit. Third and, of course, the most promising is Intelligent Industry. This is about bringing together engineering, IT and digital. It goes beyond Industry 4.0, as you will see later today. It's a convergence between product, software and services between the physical and the virtual world. This is where we see the biggest acceleration in the market, a double-digit growth. Altran brings an important building block in engineering in several industries which enable us to be a leader in the market. Intelligent Industry addresses CxOs from R&D and engineering to manufacturing and supply chain, but they also address line CxOs and the CEO himself. This is where all our deep industry expertise and our capabilities play from invent, engineering, cloud, data, AI or 5G and application services. Customer first and Intelligent Industry are very exciting areas of growth. You will learn more about our capabilities later today. They require strong industry relevance and they are what interest CxOs. This is where we will focus our energies, including in terms of acquisitions. To succeed in our journey, there are 2 pillars that are fundamental: cloud and data and AI. They are the primary drivers of technology and business evolution in the coming years. Cloud is for us the most disruptive value-creating technology. It is the platform for technology transformation providing cost efficiency, scalability and agility. It has become a prerequisite of any digital transformation. And even if people tend to think first about move to cloud, it's just a first step in the cloud journey. The big opportunity lies in the digital transformation, new development and new businesses that follow a move to cloud. And we know the pandemic has significantly accelerated the cloud adoption. The other one, data and AI. We are truly convinced that data and AI-driven enterprises will create significantly more value and dominate markets and ecosystem. Data has taken a new dimension. It enables clients to dynamically create highly relevant products and services, to manage with a high level of precision the relationship with their clients and to create highly personalized experiences. Based on the infinite potential application, specific industry knowledge and use cases are a must. On both pillars, we have scale, and our capabilities are well recognized by the market. They are critical to enabling the digital transformation of the markets we serve, whether we talk about enterprise management, customer first or Intelligent Industry. Both pillars, cloud and data and AI, are growing double digit and present solid margin improvement opportunities. Cybersecurity and sustainability are 2 critical components of the portfolio of offerings. They are both requirements for what we do for our clients. Sustainability is a key challenge of our generation. It requires a lot of industry specificity and leads to potentially massive transformation in every value chain. We are committed to embed sustainability in our offerings to enable our clients to reduce their carbon footprint. Cybersecurity is the biggest underlying risk in technology for all firms. Cyber is not anymore an IT issue. It's mission critical for all firms. It remains a key investment priority as well as a strong market opportunity. Both topics are at the top of the [ CEO ] agenda and at the very center of our value proposition. As we expand in customer first and even more so in Intelligent Industry, industry expertise is required to deliver digital transformation. Our focus is to develop strong expertise in selected industries, enabling us to proactively bring digital transformation solution to our global clients. We want to be recognized in our chosen industries in terms of expertise and relevance, becoming the strategic partner of our clients for their digital transformation journey. Now to succeed in that journey, we're going to activate several levers. First and foremost, we are a talent company, so it's about our ability to attract, develop and retain the best talent. Not only will we continue to upgrade our skills, propose rich career passes and build proactive carrier management. We are creating a more agile and flexible workforce to adapt to a fast-evolving environment. We will also pursue the strengthening and globalization of our leadership team and increase our industry-specific skills. On innovation, we really intend to boost it across all our offering to provide the best solution to our clients. This is accelerated by recent assets we acquired with Altran such as frog and Cambridge Consultants but also the development we have on partnerships and on our start-up ecosystems. We also intend to leverage the strong portfolio management and investment we put in place 3 years ago. It enabled us in terms of portfolio transformation towards faster-growth and higher-profitability offerings. And we will continue our drive, of course, towards industrialization and automation to further increase our competitiveness and ensure the scalability and the quality of our delivery. Finally, we want to leverage a new hybrid working model, delivering on our new normal operating model, through a more flexible organization of work, reduced travel and office space and enabling more efficient deployment of resources. We want to make remote work for anyone to anywhere a reality. All these levers will support our growth and, coupled with Altran synergies, will lead to improved profitability. You will hear more about some of these topics later. Moving forward, we will build on the values, entrepreneurial culture, technology focus and operational strengths of the group. I have a strong ambition for the group. By 2025, we aim to lead in Intelligent Industry, as demonstrated by the strengths of our capabilities, our offering, our ecosystem of partners and some real market wins, leveraging the power of Capgemini and Altran coming together. We will become the strategic partners of CxOs, leveraging our strong position in customer first and our leadership in Intelligent Industry and a sharp industry focus. We intend to be a global leader in cloud and data and AI, grabbing a significant share of technology-driven investment in our strategic accounts. And of course, we'll continue to expand globally in the Americas and in Asia Pacific while building on our leadership in Europe. And finally, we intend to demonstrate clearly that we are helping our clients on their sustainability journey. We have consequently raised our mid-term financial ambition. We will undertake a focused effort to accelerate growth. Our revenue growth ambition is 7% to 9% constant currency CAGR between 2020 and 2025, visibly above what the traditional IT services market is doing. And we intend to reach 14% operating margin by 2025, representing an average of 40 bps of improvement per year. Thank you for your attention. Carole Ferrand, our CFO, will now take you through some of the details behind these figures.

Indeed. Thank you very much, Aiman. Indeed I now have the pleasure of having Carole Ferrand, CFO of the Capgemini group, join me here and to share with us how this translates into financial ambitions.

Thank you, Aiman. And good afternoon or good morning, everyone. It's with great pleasure that I will walk you through and give you more details on the key financial highlights that will lead us to our medium-term ambitions. Firstly, let's take a look back at our strong performance over the last cycle, which has been a very strong financial journey. We delivered a strong performance over the last 6 years. From 2014 to 2019, we grew our revenues at constant currency by 6.4% on average while improving our operating margin by more than 300 basis points and almost doubling our organic free cash flow. Then in 2020 and within the context of a global health crisis, as you know, we're definitely demonstrating both agility and resilience, with a very limited impact both on our organic growth and on our operating margins, thanks to a very well-diversified portfolio and much more agile and industrialized operations. In addition, we completed last year a landmark acquisition with Altran, positioning the group as the undisputed leader in the [ nascent ] Intelligent Industry market. As highlighted by Aiman, our growth will be strongly fueled by the adoption of new technologies and the accelerated IT consumptions by CxOs deploying industry solutions for their transformation. As shown on the left-hand side of the chart, we expect strong growth across our whole portfolio driven by the continued acceleration of cloud, which is central for digital transformation; as well as data and artificial intelligence, data driving new insights and actions. As you can see, these 2 pillars combined enable a significant part of our growth. Looking now at our markets on the right-hand side of the chart. Enterprise management will continue its well-established growth fueled by continued digitalization of companies and new technologies deployment. Despite a low single-digit growth rate, it still contributes to a visible part of our growth. We will leverage our position in the fast-growing customer first, market where the focus is on the relationship between our clients and their own customers; and aim for a leadership position in Intelligent Industry, which is the fastest-growing market segment focused on intelligent products, intelligent operations and intelligent platforms and ecosystems. [ Lastly ], ER&D as a stand-alone business is an active market growing high single digit that will benefit from a secular increase of R&D spend and outsourcing. The Altran synergies of EUR 200 million to EUR 350 million of run rate by 2023 will contribute to the solid revenue growth profile. In light of the strong market dynamics and given our expertise in digital transformation of our clients and our focus on industry solutions, we intend to deliver an average revenue growth of 7% to 9% at constant currency over the next 5 years. Overall, our ambition is to reach an operating margin of 14% by 2025, a significant step-up compared to 2020. I believe that we do have many and different types of levers in our hands to deliver this operating margin improvement. First lever, our innovative offerings and differentiated positioning in key growing markets combine with a deeper [ flex ] reach and are expected to bring less than 1 point of margin increase. Second lever, our continuous efforts to industrialize and automate our operation should continue to lift our margin in the future for less than 0.5 points. Of course, overall our improvement will be higher, but this is net of returns to clients. Third, the greater acceptance for hybrid working models will enable us to implement what I would refer to as a new normal operating model. Within this hybrid working model, we can scale faster our really -- real estate optimization plan and target low travel expenses. This will generate around 0.5 points. Fourth, our combined efforts to optimize resource deployment will also be accelerated. The expected margin improvement is less than 1 point. It will mostly come from our unique capacity to leverage and enhance utilization rates, notably in Europe, with our "anyone to anywhere" program, thanks to a greater acceptance for hybrid working models from our clients. Then 0.5 points should come from our new efficiencies from our own digitalization and better absorption of our G&A costs. Lastly, we will continue to invest in our portfolio offerings, our sector expertise and our talent pool. We will continue our push for digitalization of the group and make the appropriate investments to adapt to the new normal. We are well on track to achieve the cost and efficiency synergies related to the Altran integrations. We announced run rate savings of EUR 70 million to EUR 100 million by 2023. They are included here in the expected contribution of industrialization, real estate and G&A levels. As you can see, these levers will not only allow us to improve our operating margin but are also expected to have a positive impact on our gross margin. All in all, a 210 basis points operating margin improvement over a 5-year period equates to an improvement of 40 basis points per year on average. Allow me now to focus on our capital allocation framework for a moment. As you know, our CapEx-light business model and strong internal focus on cash, which remains as key metrics to measure our long-term performance, have enabled us to deliver superior free cash flow conversions. Over the next 5 years, we should continue to deliver an organic free cash flow that is well in excess of our net income. In the future, we aim to maintain a balanced capital allocation policy. This is in line with our practice over the last cycle of returning to shareholders roughly the same amount as dedicated to M&A. We also intend to bring down our net debt-to-normalized EBITDA ratio below 2x by the end of 2021. Our active share buyback policy will offset any dilution. Finally, regarding our 35% payout ratio policy, we expect to deliver an attractive dividend yield in the range of 1.5% to 2%. Regarding M&A. In this growth environment, we can create value by scaling up in targeted high-growth technologies and industries. I remain fully committed to a strict financial discipline in executing this bolt-on M&A strategy. Finally, to put it in a nutshell: The main driver of our earning growth will be our operating performance. Our operating margin improvement will continue to be a solid driver of our earning growth, and the contribution from revenue growth will accelerate to become an even stronger lever going forward. Below the operating margin, we also have several well-identified levers to sustain our earning growth. First, we intend to maintain a strict control over our operating income and expenses. Second, thanks to our strong credit profile, we refinanced in 2020 the acquisition of Altran and its outstanding debt. We have secured an attractive cost of debt of 1.8% with an average maturity now extended to 6 years. And lastly, we expect our effective tax rate to progressively come down to 30% by 2023. Combining these levers together, we expect our earning growth to accelerate. Thank you for your attention. I will now hand over to Aiman, who will share with you his ESG priorities.

Thank you, Carole.

Thank you, Carole. Very clear. Our ambition is aligned with the values of the group, our strong sense of ethics and our responsibility as a leader of the market. I now would like to share with you our current ESG priorities, and before we start, let us first watch this short video on our company purpose. [Presentation]

As you may remember, we adopted our company purpose in October. It was developed with our Capgemini team members as well as with clients, multiple stakeholders and NGOs. It is one of the fundamentals of our group, acting as a compass for each employee. Our purpose means that Capgemini intends to be a benchmark in terms of contribution to society, notably in the areas of sustainability, diversity and inclusion. There has never been a better time to leverage technology and human capabilities to tackle ESG challenges, and we in business must leverage our leadership and our operation to speed up the global transition toward a sustainable planet. We identified 11 sustainability development goals of the United Nations which are relevant to our ESG strategy. Our strategy includes action on climate change, notably by helping our clients to tackle their environmental challenge. It includes investing in our talents and leadership teams and nurturing a diverse and inclusive environment. It also includes building a diverse and accountable governance with strong data protection. Let's review in more detail these priorities, starting with our environmental ambition. Capgemini has a long-standing commitment to environmental sustainability, and we achieved great results in 2020 even before the pandemic. In January last year, we reached our target of reducing our carbon footprint emission per employee by 30% versus a 2015 baseline nearly a decade ahead of our initial goal. That's why we decided to raise the bar. Climate change is probably the challenge of our generation. Action on climate change is one of the top strategic business priorities for the group. In July 2020, I decided that we must commit to achieving carbon neutrality no later than 2025 and net 0 by 2030. This new net 0 program, which covers all our operation, consists of 3 essential elements. First, we have set new science-based targets aligned with the 1.5 degrees global warming scenario; and they have been validated by SBTi. Second, we will implement a strategy to reduce emissions in line with those targets. And we're going to focus on actionable levers such as transitioning to 100% renewable electricity by 2025, switching all our corporate fleet to hybrid and electric vehicles, significantly reducing travel and creating sustainable workplaces. Last but not least, we are developing a new carbon offsetting program to offset residual emission, with a focus on high-quality projects such as reforestation, which not only remove the carbon emissions from the atmosphere but also delivers social impacts for the local communities. As a global responsible tech company, we have to ensure that the maximum impact is achieved for the planet through helping our clients tackling their own environmental challenges. Innovation and technology can play a crucial role in shaping the solutions not just for today but for the future. We will help our clients to measure and reduce the greenhouse gas emissions. And we will support and accelerate their transition towards a low-carbon future through our wide range of capabilities, and we will soon reveal several specific offerings in that direction. Overall, I am confident that we can help our clients save 10 million metric tons of carbon by 2030, which is 20x our own footprint. In terms of social responsibility, my priorities are primarily focused on the group men and women, which are at the heart of our ambition. With more than 600,000 employees or former employees over the past decade, I want Capgemini to be recognized as a school of excellence whose talents and skills resonate well beyond the company. As a service company, we have a strong responsibility. To achieve our new mid-term ambitions, we need to create an agile and flexible workforce adapted to the skills needed; attract and retain the top talent in our highly competitive industry; invest in the development of our teams, offering notably motivating, individualized learning and skills development paths. Our new global and digital learning platform Next will be a key asset to achieve this goal. We also need to foster employees' engagement and satisfaction. And on that point, I am pleased to report that our current employee engagement reached an all-time high despite the pandemic in 2020. It is also critical for our success that our people feel enabled, supported and able to operate in a collaborative environment. Therefore, I will make sure we continue to build a diverse and inclusive environment of aligned entrepreneur where every form of diverse talent thrives and brings the best value to our clients. I would like to accelerate our diversity journey. In terms of gender diversity, we enjoyed in 2020 an increase of nearly 2 point compared to 2019, excluding Altran. We have also various initiatives to support specific communities such as people of color, people with disabilities or LGBTQ people. Finally, a word about governance, which I'm convinced is a core item of our responsibility. Leading with trust and transparency serves the long-term interests of Capgemini and its stakeholders. It relies on several factors. It first relies on implementing a diverse and accountable governance reflecting shared interests on company's long-term performance. It includes bringing a plurality of expertise and diversity across directors and leadership teams. It also includes a constructive and balanced dialogue with stakeholders. This is key to creating value on the long term. Finally, it relies on our commitment to protecting infrastructures, identity and personal data. We have high standards in terms of data protection and cybersecurity, and we perform a holistic cycle of action to proactively prevent and effectively respond to all threats from all sources. This program involves not only our employees but also our clients and our suppliers to continue raising awareness on data and cybersecurity worldwide. For us, cybersecurity and data protection are a journey focused on continuous improvement. Fighting environmental -- for environmental sustainability, committing to developing our people in a diverse and inclusive environment, leading with trust and transparency. These 3 pillars form the core of our ambition in terms of ESG action. They are at the heart of everything we do. All staff members are responsible for following these priorities with the support, direction and commitment of our leadership. There has never been a better time to mobilize technology and to unleash human capability to address ESG challenges. We in business must leverage our leadership and operation to speed up the transition to sustainability. Of course, this was only a brief overview. Be sure that I will come back to you on these topics because in the world we live in you can only lead with responsibility. Thank you very much for your attention. I'm excited about the direction and the ambition we shared today. Have a very good day.

Thank you very much, Aiman and Carole, for shedding light on your vision, strategy and financial ambitions.