Capgemini SE

PAR:CAP

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Capgemini 2018 Q1 Revenue Conference Call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.

[Paul Benjamin Hermelin]

Thank you. Good evening, and good afternoon, everybody.I'm pleased to announce this Q1 revenue that reached EUR 3,153 million. On a constant currency basis, this represents a growth of 7.2% year-on-year. More importantly, this is fueled by a 6.1% organic growth rate. Definitely a strong start of the year, especially North America and Continental Europe. Consumer Product, Manufacturing and Financial Service are the most dynamic sectors. Bookings activity has been strong, with a 15.3% progression year-on-year.The Q1 momentum continues to be supported by our Digital and Cloud portfolio, which is growing at a pace of 20%. It, of course, now represents over 40% of our revenue.In March, we finalized the acquisition of LiquidHub, a North American digital customer engagement firm. This represents a quite major milestone in the development of our digital service offering in that region. We also crossed the 200,000 people marked during the quarter. With the strong start, we are clearly ahead of our growth plan, and we confirm all aspects of our guidance for the year.Let's go into more details about this first quarter. I move to the geography. As you can see, our 2 biggest geographies performed above expectation in the first quarter. North America post a 14.8% growth year-on-year. Consumer Product and Retail, Manufacturing and Financial Service have been the engine for that strong growth. Continental Europe revenue is up 7%.We maintained a strong growth in France, our largest European market. In Germany, we note a clear traction for SAP S/4 and we signed large implementation with a major retailer. Traction in the auto market is sustained, driven notably by the connected car investments. And they continue to be a good traction in the offshore business in Germany, including a growing acceptance in the public sector.In Italy, growth is driven by telecom, automotive and finance sector, where digital transformation is a key part.Nordic is also dynamic, with new contracts in cloud-based solution for a global retailer as well as for a financial institution on mortgage automation.Moving to the U.K. and Ireland. Revenue is down 4.7%. We still have in the first half the base impact from the HMRC partial resourcing, while the private sector is now growing, and we are clearly on track to return the region to growth in the second half.APAC and LATAM are up only 1.4%. We won several new logos in APAC, but we are impacted by the base effect due to last year's growth rate. Last year, we achieved 25% growth, so it's are very demanding comparison base.The situation continues to improve in Latin America. This quarter, again, our top customer across all geographies are growing faster than the group average. Developing our customer centricity is one of our top priorities, the second one being the active management of our portfolio, where innovation is a key driver.Let's spend a little time on innovation. Innovation is, by far, the main driver for our Digital and Cloud business, which is growing 20%, and as I said, represent clearly more than 40%. We maintained a strong growth rate in spite of Digital and Cloud having become such a large part of our business, and we now target to reach 50% of our revenue. But it is important to realize this innovation is a business accelerator across our entire portfolio. For example, in SAP, S/4HANA is particularly hot on the market. We have tripled the size of our S/4HANA pipeline year-on-year. And now S/4HANA-related work represent 1/3 of the total SAP pipeline, and we see traction across various sectors and notably in Europe.At the group level, the overall SAP business continues to expand. In Digital, Manufacturing and notably in PLM, very strong demand in several sectors for PLM, namely aerospace, automotive, but also in energy. Artificial intelligence gained momentum. We are involved in a rising number of projects from pipeline defect tracking to online competition tracker or fraud detection. We have executed so far over 500 engagements, including significant artificial intelligence investment in various sectors.Automation, we see demand everywhere across all markets, from media to insurance to high tech. Clients enjoys [ strong ] efficiency plans, creating a virtual circle for demand.E-commerce and marketing innovation drives growth through front-end business digitalization. This enabled the group to leverage its Salesforce solution, and through cross-selling, penetrate new clients and generate sell-through business. In that regard, our recent acquisition have proven to be a booster.Let's -- a few words about this acquisition. I'd like to highlight some value created by recent moves. Obviously, they are contributing their stand-alone growth to the group. In addition, with Itelios in Europe and LYONSCG in North America, we have become a global leader of the Salesforce commerce cloud. With Idean, we are currently developing a global network of creative design and user experience studio, which will require some further bolt-on acquisition. But this is only a part of the story. These acquisitions have proven instrumental to transform our portfolio. They are improving our ability to be selected and win some deals.Since the acquisition of Fahrenheit 212, we benefited from go-to-market synergies. Most recently, Fahrenheit 212 was key to win a contract with a big North American financial institution. This was repeated with Itelios for a truly major global leading cosmetic firm that we didn't count as a client for years. So we finally entered it, thanks to Itelios' reputation. With LYONS Consulting in the U.S., same thing for U.S. food company. Idean is generating revenue level[Audio Gap] example to illustrate that. For a large government agency in the U.K., we created a design-led organization. We also won an [Audio Gap]pursuit. As you can see, acquisition is a contributor to growth and we will continue to target bolt-ons in the coming quarters. We are currently assessing opportunities in additional creative studios in cyber security, in digital manufacturing and in analytics.A last word on new logo. We closed a number of interesting deals in the first quarter, including new wins in Cloud and Digital. They illustrate our global reach, ranging from new clients in China and Australia to new deals in the U.S. and European heartland. For example, our new logo, Yuexiu Group, and you possibly do not know them, but this is still a $50 billion Chinese conglomerate for which we are delivering a large SAP program.EnergyAustralia, the primary supplier of electricity and gas across Australia, was partnering with Capgemini to transform their finance and accounting process, leveraging automation and robotics to deliver improvements in efficiency and cost.A few example of sizable wins in Cloud and Digital. For Hydro One, we've signed an extension to our existing managed service contract, but we have focused it on increased automation, on cloud technologies and end-user service improvement. For IP Australia, a very interesting deal where we have signed a 3-year partnership to build and run a big data based on Amazon Web Service platform. The system will capture over 100 years of Australia IP data. Capgemini will work closely with IP Australia as their analytics partner to better leverage their data by providing access to innovators, industry and academics.While at Enerco in Holland, we have been awarded a new multiyear contract to advance their digital customer experience offerings and provide very new innovative service such as smart home energy solution.As you can see, the very good growth in Q1 illustrate the benefits of innovations throughout the entire portfolio and the synergies we start to derive from acquisition.I now leave to Aiman on financials.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Thank you, Paul, and good morning, afternoon or evening, everyone. First, let me start with an update on IFRS 15. We report revenue under IFRS 15 since January 2018. As such, 2017 revenue figures have been restated for IFRS 15 for comparison purposes.Now let's go back to Q1 numbers. On a reported basis, revenues stand at EUR 3,153,000,000, 1.2% published growth. The currency headwind this quarter is high at 6 points, driven primarily by the U.S. dollar. The constant currency growth rate, as Paul mentioned, is 7.2%. This includes 1.1 point from acquisition, taking into account between other things 1 month of LiquidHub. And the organic growth rate is 6.1%, so slightly above Q4.On a full year basis, we continue to expect close to 2 points of contribution from inorganic growth. As we mentioned before, we have about 1.5 points which is already embarked. And we anticipate around 3.5 points of headwind from currencies.I will also give you an indication for Q2. We currently estimate the currency headwind for Q2 at 4.3%, and the inorganic contribution at 1.7%. So the year has definitely started on a dynamic basis.Now looking at constant currency growth rates by region. North America growth remained strong at 14.8%, above double-digit like in Q4. Growth is primarily driven by Manufacturing, Consumer Products and Retail and Financial Services. And the Energy & Utilities sector is stable year-on-year.In the U.K. and Ireland, which now accounts for 12% of group revenues, revenue has declined by 4.7% as anticipated. We still have the headwind from the partial resourcing of HMRC, as Paul pointed out. The private sector is positive, fueled by Financial Services and Manufacturing. And we do expect to be on track to return to growth in the second half.In France, which is 22% of group revenues, we record a solid growth of 5.4%. This progression close to or above 10% in Financial Services, Manufacturing and Consumer Products and Retail.The Rest of Europe continues to have a very solid quarter, 8.3%, double-digit growth in Germany, Nordics and Italy. Spain is also growing high single digit, and Benelux remains positive.And finally, in Asia Pacific and Latin America, we record a slower growth this quarter of 1.4%. As Paul mentioned, we do have the base impact in Asia Pacific, which grew 25% in Q1 last year. And we do expect an acceleration in that region throughout the year.Now moving by business. Consulting Services continue to grow nicely at 21.6%, with demand driven by digital transformation and the addition of recently acquired businesses. And we have strong contribution from North America, U.K. and Germany in this quarter. The 4.2% revenue growth in Technology & Engineering Services reflects solid performance in its 2 largest operation, as such France and North America. Application Services, 63% of group revenues. It's growing double digit, benefiting from sustained demand in Digital and Cloud, with strong performance across most units. Finally, in Other Managed Services, we report, as expected, a 5% decline in revenues. So this continues to reflect the anticipated decline in the U.K. public sector and the continued shift of our Infrastructure Services portfolio towards cloud services. Our Business Service activities, which combine BPO and platforms, are reporting a positive growth this quarter.Now let's move to the sectors. Financial Services, again, a solid quarter with 8.6% growth. And we have strong performance in all key region, including North America. Energy & Utilities report for the fourth quarter in a row of positive growth. This is primarily driven by Continental Europe. And as already mentioned, North America is stable. Manufacturing is benefiting from solid investment, driven by Digital and Cloud and continues to perform very well with a growth of 9.5%, driven primarily by North America, Germany and Nordics. Consumer products and retail report an impressive 18.9% growth, driven by North America and France. 1 year ago, this was a sector in an investment phase. We are reaping the benefits of deals that we want, notably in the second half. The public sector growth in mid-single digit, if you were to exclude the U.K., but at the group level, we do report a decline of 2.4%. And finally, the telecom sector, with 6% of group revenues, continues to face some challenges in Europe. The sector has declined by 3.9%.Going to bookings. We have a strong 15.3% constant currency growth rate in Q1, so it gives a strong booking numbers of EUR 3.2 billion for the first quarter, leading to a book-to-bill ratio greater than 1. And our overall pipeline is up 10% year-on-year.On the people side, global -- the group total headcount grew 3.9% year-on-year to reach 203,000 employees at the end of March. Offshore growth was 4.1%, driven by European penetration, while onshore growth was about 3.5%, driven by Digital and Cloud. As a result, offshore penetration is stable this quarter at 57%. We did recruit 12,000 people in Q1, 56% of them in our global delivery center.The attrition is up 17 -- at 17.2%, so 1.9% above Q1 2017. It's about 1% above the historical averages that we expected for a Q1 that reflects the stronger market demand, of course, but it remains well within our operating range. The wage increase remained under control for this year, with an average salary increase similar to what we have achieved in 2017.And as Paul mentioned, we conform all aspects of our full year guidance, and we now open it to Q&A. Thank you. Operator? Operator?

[Operator]

[Operator Instructions] And we have our first question from Stacy Pollard from JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Two quick ones from me. You seem to be running right at the top end of your full year guidance. Is this a rate you think you can sustain throughout the year? Even bookings were strong. So I'm just wondering if there's maybe an opportunity for you to raise guidance for the full year. And then second question on the innovation side. You talked about PLM, AI, marketing, et cetera, but you once mentioned specializing around certain platforms. Can you tell us more about that, the specific areas where you think you have the solutions that are sort of leading the competition?

[Paul Benjamin Hermelin]

So Stacy, I cannot -- that said, we were expecting the question on the guidance. And frankly, I don't think I ever recall us raising a guidance at the end of the first quarter. So clearly, what Aiman said, as well as I said, is we are ahead of plan. There is still 3 long quarters to execute. So at this stage, we quietly confirm the guidance. And of course, we imagine that the pressure could become up at the end of the second quarter, if we have the same trend. But let's wait and let's deliver. Now on platform, clearly, we have -- we invest in several domains. Notably, AI is less a generic issue than a question of [ feasible ] assets and we build assets notably in Financial Service and insurance. We build some assets in pharmaceutical companies. Clearly, we have some with good track record. And we have some in Energy & Utilities. But it's -- today, the list is not complete and we work on that.

[Operator]

We have another question from John King from Bank of America Merrill Lynch.

[John Peter King, Research Analyst]

I guess, the other obvious question alongside the guidance is going to be the drop-through to profitability. So maybe can you comment on how the strong demand is impacted on prices. We've obviously seen your utilization is also slightly up. So any commentary around there -- around that? And how, let's say, if 2018 is a strong year for revenue growth, would we naturally assume there should be some operating leverage there? Or actually, would you reinvest in order to kind of build out your capabilities? The second question was on GDPR. Paul, I think you mentioned on -- this is something about some headlines around that potentially having been a driver this quarter. Perhaps if you could expand on that. What are you seeing in terms of the work you're getting? And is that something that will potentially fade in Q3, Q4? And maybe lastly, Paul or Aiman, if you can comment on any impact from the number of billable days in the quarter, whether that was a tailwind perhaps as well.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Okay. So let me take the first one, John. On the margins, clearly, the fact that we have growth is going to help basically us deliver on the margin. But do remember that we still have quite a lot of investments. And to be frank, we want to be able to reap up all the benefits of the potential organic growth, so we have to continue to invest. And as I've mentioned already for a couple of quarters, in North America, we are not done. So we have good growth. We're very happy about it. But we have to continue to work in terms of the portfolio rotation and we are not done yet. So I did clearly state when we did the full years, that we still have 4 to 6 quarters to basically finalize all the portfolio rotation that we need to do in North America. So clearly, it's a balance between investment and profitability. Today, I think we maintain the balance to be able to ensure that we deliver our full year targets.

[Paul Benjamin Hermelin]

On GDPR, it's funny because the title is focused on GDPR. While if you read my quote, it says that it has helped, but not a major help. So GDPR has been an addition, not a very material one. And contrary to what you think, what we see with client is they start to realize and we think they will not only work for a couple of months, but for a couple of quarters, if not a couple of years. My view is people start -- they have started with compliance updates. And now they realize that, that triggers some additional work in the way they work, in the way they collect data, in the way they manage data. So my view is the GDPR core delivery is ahead of us. So it's not material so far, and my bet, it will grow. If you speak about the number of days, I think it was...

[Aiman Ezzat, CFO, COO & Member of Management Board]

I mean, there is an impact. But to be frank, as you know, we did not flag it when we provided the guidance. So for us, it was embedded. And I did not have people basically telling me they were short because of number of days. So it probably had some impact, but I -- it was not flagged as major for us, John.

[Operator]

We have another question from Adam Wood from Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

Maybe just first of all, over to U.S. Again, it's really impressive growth for the second quarter on the run. I know there's some discussion at Q4 about whether there's some large contracts in there, particularly the deal with McDonald's, whether that had boosted it. Could you maybe just talk a little bit about the breadth of the strength there and what's driving that U.S. business? And given the ongoing investments, the comfort levels of that continues, maybe not that level but continues to be good through the rest of the year. And then maybe just a little bit longer term. I mean, the U.K. business now is down to 12% of group. It's the largest market in Europe. I know everything, particularly what's going on in the U.K., you might be comfortable with a lower exposure in the short term. But specifically, what do you think about that sort of longer term and the exposure to that big market in Europe?

[Aiman Ezzat, CFO, COO & Member of Management Board]

Okay. On the growth in North America, I think we have another strong quarter. And we should have a good year overall. But again, don't expect 15% to be sustainable. As I say, Christmas doesn't last forever. So we have good configuration with a lot of positive wins. We had a pretty good win rate that basically helped to have a strong growth. Our -- what we consider sustainable growth organically is in the -- it's 7%, something like that. That's really what we like to employ in a good innovation cycle. So we have very good growth. We will probably have a few more good quarters, but we will not stay at 15%.

[Paul Benjamin Hermelin]

On the U.K., Adam, you're quite right. First, you know we have rebalanced our portfolio. With the reduction on the public sector, we now have a private sector strength and mix that we like. And we are growing nicely and some good progress. So let's be clear, we are investing again in the U.K., and you should find in the second half some quite satisfactory growth rate. And maybe a bit of pound appreciation would also help.

[Operator]

Our next question from Mohammed Moawalla from Goldman Sachs.

[Mohammed Essaji Moawalla, Equity Analyst]

I had 2. One, just on the Continental European geographies, particularly even outside of France. You have been growing, I think you call that, double-digit growth in Germany and the Nordics on relatively tough comps. Can you maybe talk us through the sort of dynamic there? Is it -- we know the macro is buoyant, but is it also -- so how much of this is share gain and what have been kind of the big differentiators for you? And again, how sustainable is this? Can you grow -- continue to grow these rates on what are still tough comps? And secondly, just a point of clarification. Can you tell us, Aiman, what the headwind was for sort of HMRC? Is that in the U.K. or at a group level on growth?

[Aiman Ezzat, CFO, COO & Member of Management Board]

So let me start with the second one quickly. On HMRC, as we pointed out, the impact from the re-insourcing is about 0.5 point at the group level, okay? And it will be something similar in Q2, and then it should fade away in the second half.

[Paul Benjamin Hermelin]

Okay, on Continental Europe, the first point is, we have, as you understand, some very buoyant countries. While in Netherlands, it's just growing a little bit. So that's not our best country, as we have seen over the last quarters. But I'm rightly impressed by our German growth, Nordic growth and Italy. And Italy keeps growing double digit now for many, many, many quarters. So we have an excellent team. I think they will continue. I'm impressed, too, by Germany and I would guess they will continue, too. Nordic, possibly. But I'll just say, no reason to slow down and that will compensate for the more sluggish Spain and Holland. So we have a good momentum in Europe.

[Operator]

So we have another question from Laurent Daure from Kepler Cheuvreux.

[Laurent Daure, Head of IT Software and Services Research]

The first question is on your offshore penetration, which is now more or less stable at 57%. I was wondering what's happening in the U.S. Is most of the additional demand is through now with locals and if this has an impact, positive impact, on your organic growth going forward? The second question is on your strong growth in bookings. If we could have a little bit more color, if there were specific renewals during the quarter where we see something we can extrapolate on for the coming revenues. And my final question is on the M&A. You made a few comments. Was just wondering if we are still talking about relatively small acquisition or more like the one like LiquidHub?

[Aiman Ezzat, CFO, COO & Member of Management Board]

Okay. Laurent, the first one, so on the offshore penetration. In North America, I think we -- I think the offshore penetration is stable. It's true that we have more headcount growth from offshore now. It will not have a lot of movement on the offshore penetration itself. But definitely, more addition of onshore people is basically helping to fuel growth. So -- but we -- the offshore penetration continues to be quite strong, and we still have deals that basically have a large offshore penetration component. But more and more, we also -- Digital and Cloud is really onshore addition at this stage.

[Paul Benjamin Hermelin]

If you remember, Laurent, when Aiman first issued a 5% to 7% organic growth, it was notably taking into account the fact that we would probably reach a plateau on the offshore substitution. And that is materializing in the U.S. and in the U.K. We are still growing offshore ratio in Continental Europe. But as we said, and we will report figures, so last year, we had an offshore ratio that moved by 1 point. So over 1 quarter, you would expect 0.25, so it's not material clearly. Can I say -- on the bookings question, clearly, there were some large deals. We mentioned the Hydro One renewal. Besides that, it was active. We don't say every quarter will be the same because I don't think we should measure that.

[Aiman Ezzat, CFO, COO & Member of Management Board]

I mean, if your question, Laurent, did you have a megadeal? We don't have a megadeal in there. I think just -- we have good win rate, and today, I think, as I said, the pipeline is 10% bigger. So we definitely have a good level of activity currently and there was a lot of deals in the pipeline.

[Paul Benjamin Hermelin]

And on M&A today, I will just say several targets. Some of them are small, some of them are 50, 200. But I don't see another 200 in the very near future.

[Operator]

So we have another question from Amit Harchandani from Citi.

[Amit B. Harchandani, Vice President and Analyst]

Amit Harchandani from Citi. Two, if I may. My first question is more in terms of the outperformance that you have delivered in the quarter. If you were to take a step back and look at it from a high level, would you say this outperformance is more a function of your own execution, which is a better execution than what you had hoped for? Or is it down to simply a stronger market? Or would you say it's competitive or market share gains? I'm just trying to understand, to what extent is this a function of internal versus external factors? And secondly, if I look at your infrastructure business, you've talked about the headwind from the cloud and the shift to the cloud. Could you give us your views on how we should think about the growth in that part of your business as we look towards the rest of the year? So primarily within Other Managed Services and the impact from shift to the cloud over there.

[Paul Benjamin Hermelin]

On your first question, frankly, if it was only the external, I would expect our peers to enjoy the same growth rate. So as clearly, I tend to believe that we are in the top range of the performance of our peer group. It's not only the market demand, clearly. The market is good, definitely. But apparently, we leveraged it better than some other. So that will be the way to answer. On our [ infra ], my view is we have now completed a few renewals. This market is not positive, but we progressively will reach a stability. Not far from now, I was with them yesterday. I still see a few negative quarters, but rapidly, I would say, we will see a stabilization, notably because the share of portfolio that is driven by cloud integration start to be very material, and here, it grows quite fast too. So progressively, historically, the share of transition was in the range of 15%. We now get it. Clearly, we will reach soon 30%, and with a strong growth of that, that will help us to have, in France, related service stabilizing.

[Aiman Ezzat, CFO, COO & Member of Management Board]

We definitely should see some improvements in the second half, Amit.

[Amit B. Harchandani, Vice President and Analyst]

And just a clarification on the first question. Would it be fair to assume that the whole repositioning of portfolio that you're trying to do in North America, the returns on that repositioning are probably coming through faster than you would have anticipated? Would that be a fair comment to make?

[Aiman Ezzat, CFO, COO & Member of Management Board]

It's a fair comment. And I already made it in Q4. As you remember that basically, we are ahead of what we thought we could achieve. We did have some base effect in Q4. We probably have a bit of base effect in the first half. It would probably be a bit tougher comp in the second half. That's why I say Christmas doesn't last forever. But I think definitely, the work we have done and the investment we have done around the portfolio shifts are really paying off and they are actually paying off a bit ahead of what we expect.

[Operator]

So we have another question from Charlie Brennan from Crédit Suisse.

[Charles Brennan, Research Analyst]

It's obviously a very strong revenue performance, but I was wondering if we could just circle back on the margin debates. I know you've reiterated your full year guidance, but we have seen some of your competitors down-ticking margin expectations recently. Even Accenture have lowered margin expectations on pricing, on contract renewals. Can you just give us your sense of where we are with the overall market backdrop? Are you sensing intensifying pricing pressure? I know you're having to run harder on some of the efficiency initiatives to hold your margin guidance.

[Paul Benjamin Hermelin]

So I mean, we have a bit of tale of 2 worlds, as you imagine. We have, I'd say, more traditional business where you have a higher offshore percentage, a bit more managed services or more traditional development projects. And they are definitely, on this part of the business, is quite competitive. We did say that we continue -- have to continue to ride the industrialization wave to be able to maintain margin on that portfolio and this is what we are doing. As you know, we did suffer at the beginning of last year from some of the renewals, that some of our competitors apparently have also suffered a bit later from. But here, we are back to competitive pricing, but it's not irrational. So definitely, we feel comfortable competing in that environment than in an irrational pricing one. On the other part of the portfolio, as I say, I think the margins are starting to improve bit by bit as we start to scale, but we're not yet at optimum margins there. It is slightly accretive, but it's not yet fully accretive because we're still investing a lot on the innovation side. You have to take advantage of the growth of -- in the market to invest and reap the inorganic -- the organic growth benefits and take a larger position in larger market share there because that will fuel the future of our growth, but also of our profitability. So I mean for us, we are comfortable with the guidance that we gave. As I said, we are aiming to continue to improve margin every year. Maybe not at the rate of 50 bps that we have done in the past because we don't have the same levers and we are basically balancing between growth and profitability, so sustainable improvement in margin. But ensuring that we invest enough to be able to continue to fuel a strong organic growth.

[Operator]

The last question, we have a question from Michael Briest from UBS.

[Michael Briest]

Just in terms of Sogeti, the 4% growth, it sort seems a little bit out of sync with what I would expect, just the market is so buoyant. It's traditionally been one of the earliest in and out of cycles. Can you talk about the trends there? I didn't catch if you said anything about Latin America, whether there's been any improvement there. And then just finally on the innovation areas that you're seeing strong growth. You did talk about Financial Services, but one of the topics we heard is doing well -- or areas that's doing well is core banking. Is that something you can say is particularly brighter than a moment for yourselves? I know you're working with terminals at the Bank of Ireland, for instance.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Okay. Sogeti. Sogeti, as you know, it's a mix of business, right? The largest country there would be France, U.S., Sweden and Benelux. So what's weighing in there is the fact that the Benelux is still not -- is not great, okay? So it is positive, but it is not great. So it does weigh quite a bit overall on the Sogeti business. France is good. North America is good. But we have a drag a bit from the Benelux on this overall growth on Sogeti. We do hope for an improvement in the rest of the year. Quickly on your LATAM question and I leave the last one to Paul. On Latin America, we have an improvement of the business, but do remember that we -- like we had in China, our focus is initially on regaining profitability, not necessarily on top line growth, okay? We do have good top line growth in Mexico. Things are improving in Brazil. We hope we'll be back to a positive growth rate by the end of the year, but priority #1 is get back to profitability and positive cash flow generation, while getting back to slight growth. Once we have a reasonable profitability like we start to have in Spain, we will look for acceleration.

[Paul Benjamin Hermelin]

If you allow me, Aiman, on Sogeti. Sogeti takes advantage of the cloud, less of digital. And probably when we say 40% for the group, it's probably less so for Sogeti that remains more technology, if not technically oriented with even Sogeti High Tech. So I'm not surprised by the difference of performance. And it may last a while because I don't think we will move to digital in the same proportion than the rest of the group. On innovation, first, you have a question on -- if I heard you well, Michael, on core banking. And if you, I think, laid the famous core banking challenge and the terminal story and we do make in core banking project, frankly, we said it. We lead the core banking project in Ireland as the market is quite aware. This goes okay. But we do not see a big momentum on core banking adoption, large banks.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Not mega projects.

[Paul Benjamin Hermelin]

Not bigger projects. They are small projects, not mega projects.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Just on your question on core banking or beyond that?

[Michael Briest]

Well, if it's not core banking, what is sort of -- what are the banks spending? Is more retail, insurance, capital markets?

[Paul Benjamin Hermelin]

More customer engagement, frankly. They're starting to spend significant money on data analytics, organization, artificial intelligence, automation and robotics, RPA. So there are a lot of investment in banks.

[Aiman Ezzat, CFO, COO & Member of Management Board]

Frankly, just on the banks, one way or the other, they have to come to it. But what we mainly hear, Michael, is basically we're not touching the core banking part. We want it to be stable. We're not going to invest in there. We're not going to touch it, but we need to build our digital layer. We need to move on artificial intelligence. We need to move on automation. We will have to get back to it, but not now. So a lot of people. But we see, for example, projects. I was in Asia for a week. I met a number of clients. We see large projects around architecture simplification. But it's not coming to the core banking layer. It's above the core banking layer. Banks are working on architecture to be able to increase flexibility, but without touching some of the big ugly systems for the moment.

[Paul Benjamin Hermelin]

Okay. Thank you, everybody. Thank you for listening to us so late in the day. I just pre-warn you that in July 2, we will issue our results after the closure of the stock exchange. And in between, there will be a few tech conference where we will meet some of you and our general assembly of shareholder, late May. And I thank you for attending this conference, and hope to see you soon in different opportunities and circumstances, myself and Aiman. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.