Capgemini SE

PAR:CAP

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Capgemini 2020 Q1 Revenue Conference Call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.

[Paul Benjamin Hermelin, Chairman, CEO & Member of the Executive Board]

Thank you. Hello, everyone. And thank you for attending this call. Given the context, I will start by a focus on COVID-19, then I will give you the highlights of the quarter. Carole Ferrand, our Chief Financial Officer, will then guide you through the details of our results; and my successor, Aiman, will tell you about the perspective. Before I start, let me share with you that these results have a special taste for me. They will be my last one after 103 financial announcements since I first discovered this exercise in '93, and I must confess, I am not sure I will miss them. Now let's move to COVID -- I will miss you, of course, and my relationship with you, but not with this kind of early morning call. Okay. Let's move to the COVID-19. On the COVID-19 pandemic, let me, first and foremost, thank all of our colleagues for their intense mobilization. What they achieved by maintaining the links with their clients and delivering remotely what they are committed to is outstanding. Our first concern is and remains the protection of our teams. I think we have been the fastest in our industry to take immediate measures, possibly because we were exposed in Italy. As early as February, we issued global guidelines and safety rules. We restricted travels then forbid them, launched awareness campaigns and put in place a 24/7 governance. Each of our 43 countries reports daily to this group crisis management, which in return, organizes daily conference call. We monitor closely the situation and keep informed of the health of our sick collaborators. Remote medical assistance has been put in place as well as psychological support. We are in the process of extending health coverages to families in India. We will also issue strong guidelines for the resumption of lockdowns. In less than 3 weeks, which is an achievement, our workforce shifted to work from home at almost 95% all over the world, including India, where we have moved more than 100,000 colleagues. For India, for example, we've provided thousands of laptops. We paid a particular attention to our IT infrastructure, the quality of our networks and the VPN, giving also access to 4G dongles when necessary. As a technology leader, we demonstrated our ability to cope with agility and ensure the quality of the delivery. I'm proud of the way we guaranteed distributed delivery. We receive every day in Italy, in France, in India or in the U.S. testimonies of our clients praising our work. As a global company, we had the experience of what had happened in Asia and were able to prepare to the wave coming. In countries still under lockdowns, we continue to maintain strong relationship with our clients and to proactively approach new ones. In APAC and also in other countries, we see the restart is already coming. Aiman will give you more details on this. Coming back on the business side, Q1 was a good quarter, and not only considering the situation. Regarding cash, I am pleased to see that our cash collection is good and slightly ahead of last year at the end of Q1. Another important announcement I want to share with you considering the COVID-19 crisis and among other measures, the Board of Director, during its meeting on April 27, suggested to reduce the dividend by 29% to EUR 1.35 per share instead of EUR 1.90 initially announced. This will be proposed for approval by the next general assembly which will take place on May 20. This being said, our results in the quarter are in line with our expectation, which is per se quite remarkable, given the fact that some of our entities were affected by the lockdown before the end of March. For example, Italy started to confine on March 9, Spain on March 15 and France on the 18. We kept saying the group was resilient, considering the crisis we face, I would even say the performance is outstanding. We're growing 2.3% in constant currency, supported by Digital & Cloud growing by 20%. And I want to highlight some successes. APAC is growing by more than 10% and is back on track after severe lockdowns. Our consulting activity, Invent, Capgemini Invent, knew also how to meet the clients' needs with almost 10% of the growth -- of growth. And what about France growing by 3.3% despite 2 weeks of lockdown at the end of March. And Italy reaching almost 10% growth when the country was so terribly hit. I said it before, but I have to praise again the incredible work of our teams. Our bookings grew by 0.8%, which we consider a very decent figure given the impact of the COVID at the end of March, and the strong base effects of Q1 '19. We are happy that many of our key sales enable our client digital transformation during this period of turmoil. Another positive point, our flow of deals continued right up to the last day of the quarter. Interestingly, we are closing deal with clients in heavily affected industry, for example, Cathay Pacific, or a large restaurant group based in the U.S. Our service meets our client needs, and they will continue for the restart. Possibly, the whole group switched to tele-work in 3 weeks proves our agility and our client focus, for which we redeployed our portfolio of offering. I will give you now some details on the deal we signed. Let me cover a few example briefly. First, our partnership with Matalan, the U.K. retailing giant, spans more -- for more than 15 years, the longest in Capgemini U.K. retail portfolio. We just signed a new 5-year agreement supporting their transformation with the migration of application and service to the Capgemini Cloud platform. In telecom and media, for Univision media, the USA largest supplier of Spanish language, we've signed a 5-year infrastructure managed service deal. While we nested a world leader in renewable fuels, we signed also a 5-year renewal to support them on their cloud and digital journey. Last example, Liberty Seguros, which manages Liberty Mutual Group retail operation in Europe, has selected Capgemini for a 5-year strategic partnership deal, covering application and infra-managed services. We were chosen for the quality of our solution, our flexibility and our ability to present as one single organization. In addition to this, we are seeing many consolidation opportunities as clients look to reduce their cost. Let's switch now to another key point of our quarter. Q1, as you know, was a major moment in Capgemini's history because we saw the very last steps of our acquisition of Altran. I can only express my satisfaction at the complete success of our offer. I will not come back on the detailed chronology of this acquisition that you have followed in the last few months. We now fully control 100% of Altran's capital, which will allow us to implement the synergies we have planned and called the Intelligent Industry, reach of 270,000 talents, we will expand together with an unmatched scale. As we had planned, this powerful combination will be a game-changer, thanks to our expertise in 5G, IoT and AI; and our in-depth knowledge of our respective market, product as well as operations, support and services will benefit from our convergence and our exploitation of data. Let me finally have a word for our Altran's colleagues and tell them how happy I am to welcome them in the Capgemini family. Thank you very much for your attention, and now I hand over to Carole.

[Carole Ferrand, CFO & Member of Group Executive Board]

Thank you, Paul, and good morning, everyone. Before I walk you through our financial highlights for Q1, please keep in mind that all our Q1 figures in this presentation are stated before any contribution from Altran, which will be consolidated only from April 1. As Paul mentioned, Q1 revenues came overall in line with our expectations and trends already observed in Q4 last year. With revenues of EUR 3,547,000,000, our constant currency growth reached 2.3% in Q1. This growth was mainly fueled by a 2% organic growth with only 30 basis points coming from acquisitions. FX was a tailwind this quarter with 80 basis points of positive impact which can be attributed to the strengthening of the U.S. dollar against the euro. Let's look now at our constant currency growth by regions. North America came in the wake of the last quarter of 2019 with a 0.6% decrease in revenues. While the Manufacturing and Energy & Utilities sectors underperformed in the past quarter, Financial Services recorded a slight growth. U.K. and Ireland recorded a slight improvement with an as-expected revenue contraction of minus 2.6%, so a touch better than the minus 3.1% experienced in Q4 last year. Financial Services remained clearly under pressure, but it's worth noting that the Manufacturing sector proved quite dynamic. France posted a 3.3% growth, mainly fueled by the public sector and services. The Rest of Europe delivered another quarter of robust growth at 5.1%, with notably a solid momentum in Manufacturing and Consumer Goods & Retail. Last but not least, Asia Pacific and Latin America maintained a double-digit growth rate with 11.2% increase, mainly driven by Financial Services, Consumer Goods & Retails and Energy & Utilities. Moving on now to our constant currency growth by business lines. Let me remind you that our activity level by business line is measured by constant currency growth of total revenue generated by each business line, so before the elimination of internal billings between business lines. Strategy & Transformation, which represents 7% of group revenues, delivered another quarter of strong growth of its total revenues, plus 9.6%. The growth was notably fueled by client demand to support their digital transformation which remained quite strong during the first 2 months of the year. Application & Technology, our main business line with 71% of group revenues, recorded a decent growth of 2.1%. Finally, Operations & Engineering, which accounts for 22% of group revenues, posted a 3.5% growth mainly driven by our Infrastructure Services. Moving on to our bookings. Bookings for the quarter reached EUR 3,403,000,000, up by 0.8% in constant currencies. This is again a slight increase after a strong growth that we have experienced in 2019, with 11% constant currency growth for the full year. Finally, a few words on the headcount evolution. Group headcount totaled 219,000 employees. It's up year-on-year by 6,300 or 2.9% and slightly down sequentially by 200 from December 31. The offshore growth was 2.4%, so our offshore leverage remained stable at 57%. Lastly, our attrition rate went down by 3 points in Q1, a logical move considering the uncertain environment. With this, I now leave the floor to Aiman.

[Aiman Ezzat, COO & Member of Group Executive Board]

Thank you, Carole. Good morning, everyone. So I will focus on the current COVID-19 situation, how we adapted to this new reality, of course, how we see the market, our resilience, how we prepare to take advantage of the rebound, before discussing Altran integration and our societal contribution. But let me start with some thoughts. The last week has strengthened my conviction on the group's ability to adapt to a very fast-evolving situation, driven by the level of alignment and strength of our leadership team, our ability to mobilize our team and execute fast, our client intimacy, our strength and resilience and the strong values that embodies this group since its foundation. We have demonstrated a quick, strong and efficient reaction to the COVID-19 outbreak. First and foremost, as Paul mentioned, we have taken the necessary precautionary measures to ensure the safety of our employees. And we have fulfilled our commitment to our people, honoring our planned increments and rewarding them for a solid 2019 performance. We are also using some of the additional capacity currently available to accelerate the re-skilling to better position their career development, but also to develop new offers. From a client standpoint, we moved rapidly towards a work-from-home model in agreement and within the constraints set by our clients without disrupting services. We have maintained a strong level of client satisfaction and delivery quality. We have, in this crisis, reinforced our client intimacy, which positions us well for the future. On the business activity side, sales and offerings, we continue to generate new opportunities, including some driven by COVID-19 crisis, but also by Digital & Cloud. And as we signed -- and we signed new deals across geographies and industries. We have established task forces to identify and spread best practices across geographies in terms of sales and delivery efficiency in a work-from-home model. Last but not least, our discipline around cost management has been exemplary. From the day 1, all levers are identified and are being used, from recruitment to vacation, subcontracting and, more generally, all external spend, including of course travel, but also capital expenditures. All senior management and employees are contributing to the effort, with some teams or individuals proposing sacrifices beyond the call of duty. The speed and reactivity around cost containment is a very important factor to protect our margin. Now I want to spend a few minutes to share with you some perspectives on the market and what we see. The impact being -- tends to be more sector- than geography-driven, recognizing that the business mix and the level of lockdown in a specific country, of course, cannot be ignored. What I'm sharing with you is our view by sector for the next 2 or 3 months. We have scenarios on what's happened beyond, but I consider it's too early to comment them. The most impacted sectors are the one where activity has significantly come down due to the lockdown. Notably, travel and transportation of course, but also aerospace, automotive or non-food retail. We estimate that, at the combined group level, that represents about 25% of our business. Our exposure in these sectors, including Altran, is primarily to the auto and aerospace; and -- but in the travel and transportation, for example, is limited to a few client situation with minimal exposures to airlines. On the other end of the spectrum, the broader health care sector, the telecom sector and the public sector are doing well due to the increased level of activity and demand. And here, again, we estimate it represents about 25% of our revenues. Let me remind you that notably the telco and health care sector have been reinforced by Altran's position in these sectors, notably in North America through the acquisition of Aricent. Now we see Q2 as the bottom of the crisis, driven by the lockdown. Announced exits from lockdown during May should drive improvement starting end of Q2 into the rest of the year. The 2 element that create really volatility in perspective today are, what will be the slope of demand increase coming out of the lockdown, and this will drive the acceleration in Q3 and Q4; and also not to neglect a potential reconfinement risk later this year. The volatility of these perspectives remains important and does not provide enough visibility for the group to provide a guidance at this stage for 2020. I still have full confidence in the resilience of the group and our ability to sustain the crisis as we have started in Q1. From the scenarios I'm looking at today, we should show, including Altran, a better resilience than in 2009, both on the top line and margin front. So let's talk a bit about the resilience of the group and what has changed. For me, it has significantly increased since the global financial crisis. And this is not linked to just one aspect, but to a combination of a number of levers we have worked on over the last decade. The initial response on the cost side is critical. We today benefit from an increased alignment throughout the organization and from a much stronger discipline around cost and cash management. This is a solid foundation to deliver a resilient performance. We then can extract the incremental value from the agile operating model that we developed over the past decade. Like all European-originated players, we suffered during the global financial crisis from a rigid model: Essentially onshore, primarily European, manage at the level of metropolitan areas. Capgemini is now recognized on the market as a global player; and for a distributed delivery model, leveraging a large, industrialized, competitive and structurally flexible offshore platform. And the agility of this model is well illustrated in this Q1 performance. Our business mix is also more resilient. On the client side, our base -- client base is well diversified, both from a geographic and sector basis, with limited concentration. This base of existing clients will contribute, on average, 95% of the next 12 months' revenues. On the offering portfolio, we now combine both industrialization and innovation with an increased sectorial focus, driving both cost efficiency as well as growth for our clients. Innovation and transformation fueled by Digital & Cloud remains the priority for our clients as an enabler of flexibility and efficiency. Finally, building on that, we have now become more relevant than ever to our largest clients. Our client-centric organization, bringing the whole value of the group through a single interface, has enabled us to build more strategic and intimate relationships. With this, our top clients have consistently exceeded the group growth over the past few years.Now while we continue to focus on improving the work-from-home efficiency in sales and delivery, we are prepared to take advantage of the rebound. This regard, we are prepared to exit the lockdown period, acknowledging it will be progressive. We are ready for the return of our employees in our offices and client premises. We have finalized our processes and protocols, collected the required certification and equipped our offices with all safety measures and equipment. We were already proactive for several quarters, as you know around framing transformational deals with our client. We clearly see the COVID-19 crisis as an accelerator in terms of large deals focused on cost transformation or driven by vendor consolidation. We are well positioned in many cases, based on our ability to successfully achieve cost efficiency while driving transformation, as illustrated last year with the Bayer deal. Additionally, we have developed new offerings related to COVID-19 to adapt to the evolution of the situation. This new offering, framed around respond, restore and relaunch, aim at helping clients accelerate their restart, support their workforce transformation and the evolution of their operating model. Beyond the coming month, we also see opportunities coming from the COVID-19 outbreak and its consequences. Indeed, our operating and delivery model will evolve as well as our work environment becoming even more digital, with an evolution of the use of our offices, we will lead in workforce transformation.Progressively, with clients becoming more aware and convinced of the working-from-home model and its performance, we should be able to digitally deploy people from a country to another, including from our onshore operation. We will hence become more agile with less geographical constraint, while at the same time providing in a more fluid and less costly manner, additional access to our capability to clients all over the world. We already have a task force working on the application of the remote delivery model, a model that will ensure agility, productivity, security, while improving our client satisfaction. Now moving to Altran. Of course, securing 100% of Altran share capital has moved the integration to full motion. And it is articulated around 3 phases. So the first phase, from April to September, which has already started, the main objective will be to secure the initial onboarding of Altran, which is well in progress; gain common understanding of the existing organizations, capabilities, processes; and of course, design an integrated organization that we want to put in place. From October to December, in the second phase, we will focus on designing the detailed implementation plans and prepare the budget for 2021 for the integrated organization, and we will start rolling that out in Phase 3 across 2021. We already have a program structure set up with a dedicated team of both Capgemini and Altran experts reporting to an executive steering committee that I chair. The work is organized around 10 workstreams which are currently finalizing the detailed work plans. The integration pace is fast, and there is no slowdown due to the COVID-19 crisis or the work from home. Finally, on synergies, we fully confirm the annual cost synergies of EUR 70 million to EUR 100 million and the revenue synergies of EUR 200 million to EUR 350 million run rate after 3 years. The majority of cost synergies run rate should be achieved by middle of next year. Now what have you achieved so far in the last 2 months? Integration program has paved the way for a smooth onboarding of Altran. First, on the leadership side, despite of lockdowns, we carried leadership meetings and operational reviews with leaders from Altran and Capgemini in all key countries. We welcomed Dominique Cerutti to the group Executive Committee, while one of our senior executives, Hubert Giraud, was appointed as Executive Vice President of Resources and Integration for Altran. All leadership exchanges have been very productive, and the passion for value creation at clients is the integration driver. Lot of activity on the go-to-market. We proactively reached to all top clients, our sales and account teams have been fully briefed with clear commercial guidelines and rules of engagement. Our account teams have already identified over 70 joint opportunities to pursue, some of them in the tens of millions. On the portfolio front, we have mutual discovery of capabilities and assets to identify potential synergies. We expect to launch at least 2 convergent offerings around Intelligent Industry before the end of this quarter. And there is, as expected, an excellent cultural fit, demonstrated by the ease of working together over the last few weeks, even remotely, which paves for me the way for a very smooth integration. And I want to finish on the contribution of Capgemini and its teams to the fight against the COVID-19 crisis, which beyond affecting our business and day-to-day lives, is having and will continue to have a significant impact on the world economy and people's lives. Facing a global crisis, it only seem natural for us to protect our employees, but also to contribute to the fight against the virus. Our employees have launched dozens of initiatives throughout the group, highlighting our solidarity and entrepreneurial spirit. I refer you to our press release on COVID-19 and some of the examples listed on this slide. Overall, 250 ideas and initiatives were generated across the world. Hence, we decided to create a social response unit to steer most of the initiatives already launched and to be staffed in the coming weeks, an effort which will continue beyond the current crisis. We are now ready for your questions.

[Operator]

[Operator Instructions] The first question comes from Adam Wood from Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

Paul, congratulations on 103, that's, perhaps, pretty good innings. So I hope you enjoy the early mornings without the calls in the future. Maybe 2 if I could. Just first of all, kind of -- I think we all understand the difficulty about trying to guide on top line through this crisis, but I guess you do have more visibility onto what happens on the cost side. Could you maybe talk us through a little bit more detail maybe with some actual numbers and what you're doing on costs? Give us a feel between the split on fixed and variable. And then maybe most importantly, if we look back to the financial crisis, it looked as if, in the worst 4 quarters, the revenues were down about 7% and maybe about 9% in the worst quarter. And that hit your margins over 2 years by about 1.7%, 1.8%. I think in the past, you have said that you felt you could cut that impact down to 1% or less if we reran the financial crisis. Could you maybe talk about whether you still think that's the case? Or whether the suddenness of the impact that we've seen here would mean that there are differences. And whether also the difficulties around changing delivery so quickly would also have greater impacts. That will be really helpful on the cost side of things. And then just secondly, I appreciate your saying the second quarter is going to be the most impacted. I wonder if there's anything you could say around what happened in March to the revenues of the business. And what you've seen in April that could at least give us a quantum for what we should expect in the second quarter. Are we in the little area of minus 5%, minus 10%, minus 15%? Just so at least we can kind of calibrate the models to where that impact has got to, at least on the basis of what you've seen on March and April.

[Aiman Ezzat, COO & Member of Group Executive Board]

Okay. These are 2 questions but very long questions, Adam.

[Adam Dennis Wood, European Technology Equity Analyst]

I'm sorry about that.

[Aiman Ezzat, COO & Member of Group Executive Board]

Okay. Listen, I'm sorry, I will let Carole -- no, no, that's fine. I'll let Carole talk about the details around the cost. But what I want to -- what I said, which is very clear is, today, from what we see in the scenarios we're looking at in terms of the slope of recovery of demand, we expect to be better than in 2009, okay? The 100 basis point is still what we are targeting, right? So still have that in mind, targeting 100 basis points or less in terms of degradation on the combined group compared to last year, okay? And from what we see today, we consider it as being achievable. But as I said, there is volatility around the forecast and slope of demand. And this is something I don't know for the moment to date. The second thing is, on the top line, we also see good resilience. I mean, in March, as we said, Italy overall for the quarter, grew by double digits, which was a country that went into confinement at the beginning of March. We haven't seen a lot of impact on the activity. And the quick move of work from home has allowed us to be able to maintain utilization pretty high in some countries. But of course coming into this quarter, with some factories shutting down, et cetera, there is definitely impact in some sectors. Aerospace, automotive, transportation. I cannot tell you we're not impacted. We are, of course, impacted like everybody else, and that's going to impact Q2. And we see Q2 is the bottom, yes, because a lot of it is coming from the lockdown and the fact that some of our clients have very limited revenue coming in and had to take cost measures and we had to help them coming out of that. But I can promise you, when I look at some of the discussion we had with some of our clients, the level of intimacy, has in some cases, allowed us to maintain or move potentially some of our competitors positioned at some of these clients because they value the speed at which we have reacted, they value what we are bringing them and all the solution we are trying to propose basically to support them in this crisis. Carole, on some of the costs?

[Carole Ferrand, CFO & Member of Group Executive Board]

On the cost side, as you know, Adam, we have a very flexible and agile model with an offshore delivery center primarily in India. If we look at our cost base, of course, we have worked on all the levers we've got at hand to reduce our costs. And as you know, the levers are numerous. If we start with the staff costs. You know that 2/3 of our people are located in countries where flex -- with high flexibility, socially speaking. We have also implemented a strict control of all hiring with a structural attrition that is reduced for sure. We've got also a large base of variable compensation for all our staffs, and we are speaking of several hundreds of millions there. We have, of course, worked on flexing all our subcontractors, not only on direct expenses, but all discretionary expenses. And I remind you there that the subcontracted costs, if we look back, Capgemini for the entire 2019 year, is about EUR 1 billion. We have revisited all purchasing, and the total purchasing for Capgemini in 2019 was around EUR 1.3 billion. Of course, needless to say, that travel expenses are scrutinized. It represented EUR 0.5 billion last year. And we have also flexibility model, where we -- I remind you that since 2.5 years now, we have a centralized model where all our innovative portfolio offerings are orchestrated centrally. So our investments in innovation and high-growth markets is also flexible.

[Aiman Ezzat, COO & Member of Group Executive Board]

Next question? No, there was a second question from Adam. Yes. Again, listen, I don't want to guide for the second quarter because there will still be some volatility. I do believe, overall, on H1, we will prove that we have good resilience, okay? But I don't want to guide on a specific number at this stage, Adam, because I still consider there is still some volatility around the month of June. But if I tell you, you can look at the overall year, if I tell you that we're going to be better overall on the top line and more resilient than 2009, it will give you an idea about what we will show in Q2.

[Operator]

The next question comes from Mohammed Moawalla from Goldman Sachs.

[Mohammed Essaji Moawalla, Equity Analyst]

I had a couple as well. First, just on the digital business. Can you talk about the relative resiliency of this business, both in the shorter term? But as we kind of come out of the crisis, how you expect that business to kind of fare in terms of as we see structural shifts in terms of shifting to the cloud, how you expect to potentially benefit? And then secondly, on Altran. Again, as sort of we think of the kind of new world, how do you think the structural case for kind of Altran changes? And what are your kind of conversations with customers yielding around the whole digital manufacturing space?

[Aiman Ezzat, COO & Member of Group Executive Board]

Yes, digital. So Digital & Cloud first. Actually, we see an acceleration notably on the cloud side because cloud provides quite a few cost savings. So we actually see clients increasing the cloud. And if I look at our growth with some of the cloud providers in terms of bookings in Q1, we are around 25%. So it's still pretty good rhythm there, and I see the demand will remain same even during the coming months. On the digital side, I see it as a prerequisite to the evolution that the clients are looking for. If you look at the evolution of the delivery model and the supply chains, I do not see how we're going to see any slowdown in digital. Now in the short term, some clients, because of the cost-cutting measures, will put a few things on hold. But wherever it's possible, in some industries that we see, like in health care or in telco, the digital pace is still pretty high. So I'm still quite confident on the fact that Digital & Cloud will remain a pretty strong growth driver as demand start to recover. But even today, as I said, the cloud part remains paramount, specifically when you look at some of the cost transformation program we are discussing with clients, basically, as they look at how to become more efficient coming out of the crisis. Second, yes. On Altran, in terms of -- when you talk about the structural changes. Again, I mean, remember what -- the model we have created is really to be able to create a single interface to the customer with what we implemented about 2 years ago, and Altran will come into that model. So what we look forward is basically to see how we're able to bring the whole value of the group, including with Altran now, with a convergent offering on the brand, Intelligent Industry, for a single interface to our client. And that will enable us to basically see that growth acceleration that we expect. I mean, having generated only in a few weeks already over 70 joint opportunities, with some of them in tens of millions, shows the potential that we see in terms of the integration of Altran. And one point to mention as we talk about Altran, basically related to the question of Adam just before, is the resilience of Altran compared as well to the last crisis has increased significantly. Why? Because the mix has changed as well. When we see the sectors of Altran, there are definitely sectors like aerospace and automotive which are going to be more volatile. But on the other side, we also have all the growth generated by sectors in the health care and life sciences and in the telco segment. So it has provided a much more equilibrated picture that also has increased significantly the resilience. So I do believe, overall, the combination will provide even something more resilience, having basically a more balanced exposure in terms of sectors, including sectors that we see growing very fast coming out of the crisis.

[Mohammed Essaji Moawalla, Equity Analyst]

So you think that Altran, the 8% growth rate they kind of delivered, is still very feasible over the medium term?

[Aiman Ezzat, COO & Member of Group Executive Board]

I don't know. I'm not looking at Altran growth rate in separate frame. As you know, our focus is really around the Intelligent Industry and the converged offering. I do believe that with Altran, the overall group will have a strengthened growth profile. But we're not looking to deliver on an Altran plan because we haven't done an acquisition just to increase our business and incorporating new business line in engineering and R&D. We have done this acquisition to focus on the convergent offering that we expect coming from the convergence of IT and operation, which will strengthen the group growth profile.

[Operator]

The next question comes from Michael Briest from UBS.

[Michael Briest]

Paul, I'll add my congratulations to your long tenure and for putting up with us analysts on these calls. I'm sure it can be quite wearing. Just a couple from me as well. On the dividend, I'm curious as to why the 29% cut. Why not halving or 1/4? What's got you to that point? And should we assume that you're not using any of the sort of government furlough arrangements? I think a lot of companies have found it difficult to pay dividends if they've been using those resources. Can you talk about the thinking on the dividend? And then just in terms of clients, as you mentioned, there are some sectors which are very challenged. We're expecting another company who said that those clients in those sectors are asking for extended payment terms, reductions in pricing. Can you talk about what you're doing to protect that long-term relationship while also making sure that you don't surrender something on price or margin, which is very hard to recover in, say, auto or aerospace?

[Paul Benjamin Hermelin, Chairman, CEO & Member of the Executive Board]

Michael, Paul on the dividend. As you may know, I am a member of the Board of AFD. AFD being the association of the key public and private company in France. And as AFD we have determined that if we use furlough subsidy, the members of AFD should first cut their dividend by 20% compared to '19; and second, the CEO should volunteer to give 25% of his compensation during the furlough, usage to social activities. So we strictly complied with that with the unanimous support of the Board of Directors that was convened yesterday. And in the case of a pay cut, Aiman and myself, we decided to get further, since we have applied the 25% cut throughout the full year 2020. I just want to say that furthermore, it is important that we show to our shareholders that we have absolutely no cash concern, so that's not the reason. And that the dividend is a remuneration of 2019. And as we have paid bonuses to our managers and implemented pay raises when they were relevant in January, we thought we were owing our shareholders this dividend. So we strictly complied to the asset orientation and decided not to add any additional cuts. Aiman, on clients...

[Aiman Ezzat, COO & Member of Group Executive Board]

Yes. So on clients, yes, of course, as you imagine, you always get in this period like every company in this sector. As clients are trying to cut costs, the same way, we put pressure on some of our suppliers and partners, the same thing is happening with us. And it's always a part of discussion and negotiation. It's a give and take kind of environment that you have to deal with. And yes, we do resist things which will be structurally very negative for the company over the long term because the short term gains are, basically, we will pay them later. You know very well our discipline around that and how we basically ensure that we protect always our future in some of these. But there are situation, of course, where we will consider basically what is in the best interest of our mutual partnership with our clients and see where we need to make efforts, even if for a period of time. And sometimes, we come up with creative ideas about how we can deal with the situation and how we can embark the client into a bigger transformation versus just looking at very short-term costs. So payment terms, the same thing. We have -- we're resisting all delays in terms of payment terms. Paul did mention the fact that our Q1 cash collection were ahead of last year, and so far, we are performing well and we are able to maintain. But yes, we have some clients coming up with delayed payment request, et cetera, and so on. And you have to manage the balance between maintaining good client relation and resisting potentially some of the short-term demands.

[Michael Briest]

And just to follow-up on the dividend and the furlough. When you say 95% of your workers are working at home, should we conclude that 5% are on furlough? Or there's some people who haven't got computers or access to broadband, perhaps, that means they're not working, so there's a utilization impact? What is that 5% gap?

[Aiman Ezzat, COO & Member of Group Executive Board]

First, there are some countries which are not in lockdown or in partial lockdown, like Sweden. We still have some people who are on-site for critical activities, for some activities of some clients cannot be performed from home. You also have, in the case of India, for example, our -- typically, our [ pressure ], we do not consider them in our percentages because they're not doing productive work. So we basically don't feel that we need to enable them in the short-term with laptops, et cetera, because they are not currently very productive. So this is what gives this 95%, Michael. In China, people are back on site. They're not working from home.

[Operator]

The next question comes from Charlie Brennan from Crédit Suisse.

[Charles Brennan, Research Analyst]

Great. I was wondering if you can give us a sense of what's going on with your customer conversations at the moment. My recollection from 2009 is that we went through a phase of vendor consolidation. Are you starting to see those conversations now? And clients have already been through a number of iterations of vendor consolidation. I guess doing it from here feels potentially quite painful. Are you expecting a phase of pricing pressure as we come out of this crisis as the bigger suppliers are jostling for position?

[Aiman Ezzat, COO & Member of Group Executive Board]

So yes, there are some discussion about vendor consolidation. I cannot say there are many but there are some. And it depends on the client situation. There are actually some clients who are much more fragmented than others. Some are already very concentrated, and we really don't see much more client -- vendor consolidation there, but there are opportunities. And to be frank, we are proactively not waiting for clients to come up with that. See, on the other question, on the -- and it's very important to really understand what's going on. If you stay still and you don't do anything, you come under price pressure, okay? Which means if you're not providing any solution to your clients on what they can do in terms of evolution, they have to find a way to cut cost. So what we are doing is exactly the opposite, is we are extremely proactive, going to a lot of our clients, coming up with solution and proposals around how we can help them drive significant cost transformation. I mean, think about the Bayer deal that's potentially coming out of this, plenty of Bayer deals. I'm not going to say we -- not saying we're going to sign 5 Bayers this year, but there are definitely opportunities to provide cost transformation. And we have proven our ability to be able to do it. And in that, things like Digital & Cloud are very important because they are part of the levers that provide the flexibility and agility and provide new opportunities in terms of cost transformation. So I do believe, actually, this crisis, in a number of cases, is going to accelerate some of these deals as the pressure on clients to find ways coming out of that, to be able to create some space for investment for the recovery, is going to become more important.

[Operator]

The next question from -- comes from Alex Tout from Deutsche Bank.

[Alexander William Tout, Research Analyst]

Firstly, Paul, congratulations and all the best for the future. Questions from me. So firstly, could you give us an idea between your time- and materials-based engagements and fixed price? Secondly, I appreciate your comments that you're trying to be disciplined around pricing concessions, but what are you seeing from your competitors, particularly the offshore competitors? Are they also being disciplined or aggressive in this environment? And finally on the industrial automation and IoT-type activities, the motivation behind the Altran deal. A lot of manufacturing is suffering currently. So how do you see those industrial automation and IoT initiatives playing out over the next 6 months or so? Do they get very badly hit just because of the position of the sectors that they're in? Or do they behave more like the digital engagements and stay resilient per your previous comments?

[Aiman Ezzat, COO & Member of Group Executive Board]

So listen, on the first one, beyond T&M, because a lot of models around products which are T&M, so it doesn't change. This is quite resilient. What I call the pure staffing model, where you just give bodies to a client and he's going to decide what he does with them, which for me, is really the one that did that, is less than 20%. Now we have activity which is higher than that done in time and material, but it's managed time and material, like delivering a project, but is done in T&M. For me, it is not of the same nature. But the purely staffing model is a much lower percentage of our business today, including for Altran, by the way, yes? So I'm talking here the number is a combined group one. Now going to your question regarding pricing -- pressure on pricing from -- I think, at least what I see for the moment, people tend to be quite disciplined, because a lot of the offshore vendors, as you know, came up and say they want -- they will protect their margins and they will show resilience. So I think we have discipline for the moment. I think the proactiveness is like what we are doing, it's more around the transformational deal and the cost transformation deal versus pure price reduction [ for long term ], right? But I'm not saying there will be no cases where this will happen. But I don't see desperation for the moment in terms of this happening in the short term. On the last point, on the Intelligent Industry for any industrial players, I don't see that slowdown. There's not going to be a slowdown about doing -- moving to electrical car and autonomous systems. There will not be a slowdown around the industrial automation. Remember that this was going to provide the agility, flexibility and overall drive the speed of innovation, but also the cost models. So on the contrary, this investment is what's going to provide potentially some light at the end of the tunnel for a lot of companies, and it actually might drive an acceleration. So I don't see them as being investment for growth only. I think a lot of this investment, especially on the industrial side for the technology company, industrial companies, is to provide the agility and the cost flexibility they need to be able to react better to crisis and to evolutions in demand and environments.

[Operator]

The next question comes from Steer, Neil from Redburn.

[Neil Steer, Partner of Software and IT Services Research]

Firstly, huge congratulations, Paul. I have 2 questions. Firstly, one, when you make your forward-looking commentary about the turnover and the margin trajectory of the business today compared to 2009 and so forth, what are you assuming in terms of the economic aftermath of a sort of a COVID-19 marketplace? Do you assume that it's -- the economic impact is less than the financial crisis, in line with the financial crisis or a lot worse than the financial crisis? And I have a follow-up.

[Aiman Ezzat, COO & Member of Group Executive Board]

Okay. So on the first question, I do believe it's more brutal initially on the front end. That means when you look at it, it happened suddenly, it happened across industries, it happened everywhere. So that's quite different from the financial crisis where things were much more gradual. So I believe that based on that, the rebound is going to have a different picture, but we see it as gradual. I don't expect to see the demand having recovered completely. And there could be a cycle. I mean, the things we are, as I say, a bit concerned about, which makes it -- which creates some volatility, is a potential reconfinement, okay? Which is a scenario that's difficult to be able to predict at this stage. But overall, from my perspective, from an economic perspective, it is more sudden initially, but then the cycle should also, to a certain extent, be shorter in terms of [ recovery ]. And it is by sector. It is not overall. Sectors are different. As you know, I don't see a slowdown in telecom for the coming years. With an evolution of the overall how people work, the digital work environment and the work from home, there will be investments in telco that will continue. Same thing on the health care sector or the public sector to be able to sustain demand. It might be slower in terms of recovery as we expect in things like aerospace.So what we look at is realistic, overall, I think from an economic perspective in terms of what we see as evolution, because we look at clients and clients within sectors. And we have done a heat map around that by sector and by geography, and it's quite consistent across sectors, what we see. So that's what we base, basically, our scenarios on, is the speed of recovery in some sectors and, within that, some of our clients.

[Neil Steer, Partner of Software and IT Services Research]

Okay. And the follow-up question was just -- I think, Carole, on the -- you mentioned the figure for the subcontractor costs that you have. Was that -- I think you mentioned EUR 1 billion. And the question is, to what extent can that change? I mean, that cost alone, could that come down from EUR 1 billion to a EUR 500 million? If indeed the EUR 1 billion was the figure that you mentioned, what flex do you have specifically on that cost?

[Carole Ferrand, CFO & Member of Group Executive Board]

I won't provide you a figure, but of course, it's a case-by-scale study. So we study all discretionary expenses. And when it comes to subcontracting and direct cost, if we can, we can move to own staff, if we can. So there are several cases and several way to handle that. But what is true is that we scrutinize all captions of subcontracting, and the basis of that is very significant.

[Neil Steer, Partner of Software and IT Services Research]

And that base figure was EUR 1 billion for Capgemini stand-alone in 2019, but presumably be greater than that with Altran...

[Carole Ferrand, CFO & Member of Group Executive Board]

Exactly. Yes, EUR 1 billion. Yes, EUR I billion indeed, yes.

[Operator]

The next question comes from Nicolas David from ODDO BHF.

[Nicolas David, Analyst]

I have 2 questions, actually. First one is regarding COVID-19. Could you please try to quantify the impact you've seen in Q1 at group level first? But maybe more interestingly, if you take the case of France, what has been the deviation of growth or the trend of growth you have seen during the last 2 weeks of March compared with the trend you were seeing initially? And secondly, regarding the free cash flow. So I understand that you are disciplined in term of the payment terms of -- you expect from the client. But should we model a negative development of working cap at the end of H1 and also at the end of the year on top of any impact or so you should -- we should model on the operating profit?

[Aiman Ezzat, COO & Member of Group Executive Board]

Yes. Your question regarding the last 2 weeks, et cetera, I think is a bit detailed. Definitely, we saw in some cases a bit of evolution of activity. But I would not be able to size it and give you a number because it's a bit different across the different countries. But yes, in some cases, we already saw impacts, of course, in the last couple of weeks of March, where we were in purely staffing model and things like that and where clients had to react because of lockdowns, it had some impact, yes. But I will not be able to provide you a number.

[Carole Ferrand, CFO & Member of Group Executive Board]

On the cash flow side. Of course, we are keeping our cash discipline. And as mentioned, so far, we have experienced a good cash collection that we are scrutinizing all sectors. And of course, some sectors are under pressure. So we don't compromise between short-term and long-term partnerships. So we will see case by case what -- how the situation will evolve, and we need to be very cautious on that. What is at -- needs to be noticed there, that in most countries, all the budgetary and mandatory measures taken by governments and central banks are facilitating the liquidity of our clients when they need it. So that should be seen as a facilitator in the context. But again, we will see how it evolves in the coming weeks and months. And of course, it's something that we will look at in depth.

[Aiman Ezzat, COO & Member of Group Executive Board]

Just to be -- like I said, we are very comfortable with -- from a cash perspective. I mean, we have stress test very, very, very hard scenarios. And from that perspective, our cash standing is absolutely not a concern. There are of course scenarios we look at where there could be some impact in terms of DSOs by -- at the end of the year. But again, it's all hypothetical at this stage, but it's things we look at, of course.

[Carole Ferrand, CFO & Member of Group Executive Board]

And that, if any, that will be a shift which is a temporary one.

[Aiman Ezzat, COO & Member of Group Executive Board]

Exactly, from 1 year to another. So it's not a degrading -- we don't see this as a degradation of our cash profile. We see potential shift from 2020 to 2021. But so far, we know it's not showing up in our numbers, but it's something we consider, of course.

[Nicolas David, Analyst]

Okay. And maybe another way to put my first question. I understand that it's difficult for you to give more details, but it seems that you had a lower impact than what we have seen for other peers, either Indian peers or French peers, which has something like 1 point of impact from COVID-19 in Q1 or even more. Is it true that you experienced a lower impact? And if so, why so? And could you explain why you show such a resilience already?

[Aiman Ezzat, COO & Member of Group Executive Board]

I think I spent quite a few minutes talking about why we are more resilient. So maybe we should -- I'm not going to go back and tell you all what I said there. But I do believe that the client intimacy is the resilience of our model, the speed at which we shifted work from home, everybody shifted immediately -- I can promise not everybody shifted immediately, contrary to what I heard. All of this is what helped basically protect. And there is one thing that plays in this group that you have to remember, the group is very entrepreneurial. The speed at which our managers on the ground react to situation is extremely high. And when I started by saying the strength of the leadership team, the confidence and the values that carries this group's foundation is definitely some of these elements that come very strongly when you move to a crisis model. Our managers on the ground in any city around the world did not wait for instruction from the top to start reacting, okay? They have all proactively reacted. And the resilience is coming from the fact of basically the entrepreneurship in this group is so high that people react immediately to what they see. They don't wait for instruction from the centers to start basically behaving.

[Paul Benjamin Hermelin, Chairman, CEO & Member of the Executive Board]

I'd like to mention, in India, we started -- we were -- we ordered the last laptops in the country very early to help our people to work from home. I think we were really the first one to react, and we bought any kind of laptop we could to equip our work for home. I really think we were the first one.

[Operator]

The next question comes from Ross Jobber from Citi.

[Rosslyn Antony Jobber, MD & Deputy Head of European Research]

I just want to ask a question, if I may. I'm interested to know a bit more about your thoughts around vendor consolidation. And the question really is this: Do you see more of an opportunity for you to gain similar contracts for existing operations? So for example, to gain a global contract where you may have historically had a regional contract on the same activity. Or do you think there's a greater opportunity to actually move into related disciplines with customers where you have different operations at the moment?

[Aiman Ezzat, COO & Member of Group Executive Board]

I think, listen, both are possible. But again, the vendor consolidation, sometimes the primary driver on that is not -- there could be 3 big players and maybe 4 or 5 small ones, right? To be frank, the vendor consolidation is not necessarily to kick out one of the big players that we could be one, but basically, more to consolidate some of the smaller ones. And it tends to be an accelerator for some of these things that people are looking for quick -- basically, potentially quick wins. So that's where we see the activity. On the geographic side, yes, of course. I mean, I think when I talk about some of the joint opportunities with Altran, definitely our position or our combined position at some clients provide for a different discussion than what we could have had 3 or 4 months ago. And the value perceived by the client about the importance of keeping the Capgemini group as one of its key supplier and potentially expanding our scope is also reinforced by the combined position that we have at some clients.

[Rosslyn Antony Jobber, MD & Deputy Head of European Research]

And do you think the concerns your customers may have around smaller vendors is related to the financial health and stability of those vendors? Or the fact that you might have a pricing advantage?

[Aiman Ezzat, COO & Member of Group Executive Board]

It can be pricing advantage, it can be basically ability to really drive cost transformation, because some clients, which we have considered for some activities moving offshore are now moving offshore. I can have discussion with -- exactly with some clients who basically say, "The remote -- the work from home has opened our eyes about how much can be achieved in terms of remote work." Things where we saw resistance before, where people said, "It cannot be done because it's impossible." With everybody working remotely, we really see that it can happen, and this can actually accelerate in some cases the move to offshore. So if you are working with some small vendors that cannot provide that, it becomes a big challenge to basically work with this vendor to drive this kind of evolution and this kind of cost transformation.

[Operator]

Your last question comes from Jay Goodman from Barclays.

[James Arthur Goodman, Research Analyst]

Paul, yes, good luck for the next chapter. It is impressive to note the performance having held up in places like Italy and Asia through the quarter. So specifically on Asia, I just wondered if you could build on some comments I think you made that you've seen a strong early recovery in the region. And maybe, therefore, just put in context, to what extent you think, actually, the sort of magnitude of impact is behind you in Asia. I know it's a small part of the business, but it's interesting the way the rest of the business will go from here. And then specifically, if we drill secondly into Financial Services, up until this quarter, it's been probably the most talked about aspect of the backdrop. And clearly, if we're comparing to 2009, it was the behavior of that sector that was very significant. So I was wondering if you could give us some commentary there around what you're seeing if the nature of projects is changing or maybe contrast the sort of demand across the different subparts of Financial Services.

[Aiman Ezzat, COO & Member of Group Executive Board]

So on Asia, I mean to be frank, the evolution is good on Asia. But remember that Australia came late in terms of lockdown and impact. So there are some impacts in Australia now that were not showing up in Q1. The rest of Asia, frankly, the demand tends to be good and we see a good flow of deals. And China is actually in a growth mode now. So that's our perspective. And of course, we are in some countries in Asia. We are not everywhere, but based on the countries where we are positioned, overall, we consider the level of demand being normal, except in Australia. On Financial Services, it's a contrasted picture from what we see. To be frank, insurance is still doing well and is holding up pretty well. The banking sector is more mixed, probably more impact in Continental Europe than we see for the moment in North America, looking at the crisis. So there are some impacts in Continental Europe, but North America is showing more resilience so far. Thank you. And I just want to close by saying I'm not going to challenge Paul on his duration, on the -- and relationship with the analyst. So I'll leave that one to him.

[Paul Benjamin Hermelin, Chairman, CEO & Member of the Executive Board]

And I will support Aiman as the Chairman of the Board. And I have absolute full confidence in what he will deliver to this wonderful group. Thank you, everybody.

[Carole Ferrand, CFO & Member of Group Executive Board]

Thank you.

[Aiman Ezzat, COO & Member of Group Executive Board]

Thank you. Bye-bye.

[Carole Ferrand, CFO & Member of Group Executive Board]

Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation, you may now disconnect.