EuroBusiness Media (EBM) : Paul Hermelin welcome, you are the CEO of Capgemini. Back in July your first half sales came in ahead of expectations. With the publication today of first half earnings, the question is are your improved sales indeed translating into better margins and higher profit?
Paul Hermelin (PH) : I think we can say yes to both questions. The first point is, as you noticed, we are now growing significantly, 10.4 so double digit margin, I think, that puts us as the best performers among western IT service players - still a few Indians to compete with - and now we delivered certainly a big improvement in operating margin, by three points, so we tripled our operating margin in this first half, so we will deliver a nice profit, 71 million, + 22% compared to last year. Last year we had a big capital gain, this year there is absolutely no transaction of that kind, so this is a natural profit that comes at the bottom. So I think we can say that today the group is truly showing strong recovery and its ability to gain market share.
EBM : So, in your view, what should we make of all the news and of all the noise about Capgemini being in turmoil?
PH : A few months ago people thought that the IT investments were on an upside and there have been a lot of rumours this summer saying that, because of the economic uncertainties, this could come to an end. We don't see it. In the first half we have grown and lifted margins in all our disciplines and business lines, from consulting to system integration, from Sogeti to outsourcing, and when we look at the pipeline its truly healthy. So my view is that some of our colleagues may have found some delivery problems here and there - we were lucky not to have them this time - at this time the delivery discipline is very strong in the group. But I checked with every manager of the group today at the start of the second half, because people are back from the summer break, they are quite optimistic everywhere.
EBM : Do you confirm the turnaround in your outsourcing business. Is MAP, the Margin Acceleration Programme, delivering on its promise?
PH : We said we would deliver 4% operational margin and we will. We said that the second half would even show one point more - it will be delivered. So we are just delivering to the promise. In terms of rationalisation, some disposals, big progress on the industrialisation. Impressive progress. New methodologies to track the effectiveness of what we do. I'm quite impressed by what has been put in place everywhere and I think we had a commercial breakthrough in the outsourcing market in 2004/2005, in 2006/2007 we will show that we will become truly one of the very good players in terms of delivering these large contracts.
EBM : What is the state of your business region by region? Are there any reasons to be worried about a slowdown in the business cycle in certain important zones, such as North America?
PH : I think the situation is not even. The best performing unit is by far the United Kingdom. Astounding progress with Inland Revenue and Custom Extension where we delivered superb work and apparently to the customer's satisfaction, as reported by an official report from the National Accounting Office. So very good work there - growth in the UK 22% - solid margin improvement.
United States - incredible turnaround. The margin progression is close to 9 points. We are now growing in the US. And with book-to-bill, so we sold more than we produce - we increased our backlog in the US. So it looks nice, we hear some concern about the US growth - may I say that I checked at the end of last week and the pipeline is still growing there. We may face some slowdown of the US economy - I don't think we will have a true recession - but the US customers still invest in technology.
Third good region, Central Europe. Very nice margin, growth there too. A little bit behind in terms of growth. We still have some problems to fix in Italy, for sure.
The French situation then - nice growth in the first half, 9 points, so better than the market. Nice progression of our margin in the system integration and consulting business, but we have a difficult contract, Schneider, and because of that we have accrued some risk on that contract, so the margin in France is not what we'd like it to be.
EBM : Can you provide us with an update on the ongoing mega contracts such as the HMRC which you mentioned, the TXU contract or the Schneider contract which you referred to and which some analysts have labelled the "problem child"?
PH : The first point is, if you think of very large contracts, we have eight customers where we bill more than 1 million euros per week, these are pretty large contracts. Overall they represent 2/3rds of our outsourcing revenue and the margin there is above average, but with that portfolio of large contracts there will be very good performances like the one we enjoy with Inland Revneue, and there will be more difficult periods with Schneider but I repeat, as a whole, these eight contracts deliver a margin that is above the OS average margin. So we can say at all it's dilutive and it was a true and quite fantastic growth lever.
EBM : According to some reports Capgemini may now be in a situation to increase prices but at the same time there appears to be wage inflation in your sector. What are your comments about the price/wage scissor effect that some analysts are afraid of?
PH : If you look at the first half our prices are flat or very slightly upward in H1, in the IT world, but when you put aside the Indian impact that lowered the average, the prices onshore are up 4%. And the way to do that is to specialise our people on shore on difficult tasks, so to address the wage pressure through specialisation in added value. I think that's the world that we are going for, leverage productivity wherever we can find it and specialising on added-value and innovation.
EBM : By the end of the year you will have close to 1 billion euros in excess cash at your disposal. You have already started to make some acquisitions since Sogeti recently acquired Future Engineering in Germany. What is your acquisition strategy going forward?
PH : The first thing is, we don't look just for market share and a position in some kind of consolidation at any price. That's not the issue. The issue is to execute our strategy. Clearly, we said that we'd like to invest in added value. So the recent German acquisition, which is a small one, a few hundred people, is a way to complement what we already sell as services to the aeronautics industry because it was mainly in France. We need a Franco-German situation because the biggest customer, Airbus, is mainly a Franco-German entity and we may invest in a few others of that kind.We will look at opportunities, but quite carefully, because historically I could notice that external growth harms our ability to grow organically, and at this point of time I think the group is able to gain market share organically.
EBM : You have just announced today an acquisition in India. What does this acquisition in India represent for Capgemini?
PH : We said we would look at India. Here were are not in the IT market. Here we talk about business process outsourcing. Today we have a very solid platform in Poland and in China, plus a small one in Australia and our customers are little bit puzzled by the Chinese option, so a lot of our customers were asking for an Indian platform. By closing a deal with a very large group, Unilever, we could acquire a platform of 500 seats, that we expect to grow organically very quickly, so our BPO network is now what it should be, because we have a very solid platform in Eastern Europe, a quite competitive platform, but maybe a little bit exotic in Guangxao, and in the main country where the BPO outsourcing is truly exploding, India, we'll now have a big platform.
EBM : You have said that you want to reach the level of ten thousand employees in India by the end of 2007. Are you on track to reach this target and as you build up your offshore capability, what is your plan to ensure that your onshore employees, in Europe for example, continue to retain their added value?
PH : The first thing is that we had an objective of 6.000 people by the end of 2006, I think we will be above that objective so we'll beat it another year, and that puts us well on track to reach the 10.000 mark by the end of 2007 so I'm quite confident and our Indian colleagues have truly gained the respect and the trust from all the onshore Western operations, so that works pretty remarkably. Now, as you mentioned, the question is that the market had required for a back office industrialisation, but the customer demand is evolving for something more complex that will imply a seamless delivery between the on-site, the onshore part and the offshore part, with specialisation. Let's not think that our Indian colleagues will be stuck with easy things and commoditisation, that's not true, we'll have to find a way - and that's the main task on which we are working now - how to develop industrialisation that goes from the front office to the back office with a seamless organisation between onshore and offshore people.
EBM : Looking ahead, what is your guidance and outlook for the rest of the year and for 2007, can you begin to provide some rough indications in terms of growth and margins?
PH : In July, we had to acknowledge that we are growing quite rapidly and that our previous revenue guidance was too timid, so we raised it from 8 to 10%, but frankly between late July and now there was only one month, August, that is not the best month, notably in Europe, so we maintain the guidance, which will be the 10% mark, we will grow at 10%. Regarding margin we were a little bit cautious in July because we did not know what the business mood would be in September and when people are coming back. With what we feel today I think we can say that our margin will exceed 5.5%. It's a little bit early to be more precise but we'll exceed 5.5%. That's the current consensus, and the rest will depend a little bit on the business mood in the last quarter. In October our CIOs, which are some of our biggest customers, will get their 2007 budget instructions and that's very important because if the budgets for 2007 are the ones they expect, they will spend all their 2006 budget and we'll have a very good fourth quarter. If they're a little bit disappointed they will start saving a little bit during the last quarter, but even with this buffer, I think we will deliver what we said. For 2007, I think personally that the market will still show growth and I think that we will show our ability to gain market share in that market. We will take another step in our margin recovery journey, its a bit early to be more precise than that.
EBM : And finally to conclude, for those tens of thousands of Capgemini employees who can listen to you today, if you had one message to deliver about what they should expect for their future what would it be?
PH : The first point, I would just report the satisfaction that the board expressed yesterday when they approved the H1 results, and frankly I heard, with the total support of the Board, the chairman, congratulating me and the CFO on behalf of 64.000 people. We are demonstrating today that the group is on the good track that the recovery is not fully executed, we still have a few things do to, but it smells good and we have demonstrated an ability to progress rapidly. This being said, we can deliver with the second half another solid performance, I think we need to grow, hopefully a little bit better than the internal ambition that we announced, and we can get to another stage of margin improvement, everybody is mobilised everywhere, the executive committee was with me last week, everybody knows what its ambition is and I'm pretty sure we will show that this group is able to deliver superior margin as of the second half of 2006.
EBM : Paul Hermelin, CEO of Capgemini, thank you very much.
PH : Thank you.
