Capgemini SE

PAR:CAP

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the Capgemini Q3 2021 Revenue Conference Call. I will now hand over to Mr. Aiman Ezzat, CEO. Sir, please go ahead.

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Thank you. Good morning, everyone, and thank you for joining us for this early morning call. I'm joined by Carole Ferrand, our CFO; and Olivier Sevillia, our COO. So I'm happy to share with you our excellent Q3 results. Our revenues reached a record of EUR 4.5 billion, up 12.9% at constant currency, and 13.2% on an organic basis. So slightly higher than Q2 organic growth of 12.9% in spite of a much more demanding comparison basis. Bookings remained dynamic, up 15% at constant currency. The book-to-bill ratio is over 1, which is a record for a third quarter. And Digital and Cloud continues to progress at a rapid pace. We have recorded a very strong double-digit growth powered by our constant effort to push innovative offerings to address client expectation. So in this context, and especially since the health crisis continues to be a challenge in certain regions of the world, I would like to take a moment to thank again all our employees and our leadership team for their dedication and for their sustained performance from quarter-to-quarter. Now diving a bit more in detail. The strong growth we have achieved, of course, is a great satisfaction. It reflects the strengthening of the positive trends over the past few quarters in all sectors and regions. All regions are growing double digit on a like-for-like basis, which translates in strong constant currency numbers. This is particularly the case in North America, where we finished rolling out the transformation we initiated a couple of years ago. In this region, we start to fully benefit from the strong positioning on both intelligent industry and customer first, following the integration of Altran. We have also increased our investment in North America in terms of assets, senior talent and ecosystem of partners to take full advantage of the great digital transformation opportunities in the market. And we have strengthened our brand positioning. So we are very confident around basically perspective moving forward in our North American business. Performance was strong across most sectors as well for the group with very high growth, as you can see, in the Consumer Goods & Retail, in Manufacturing, but also in Services. On the business side, all the businesses are performing well, in line with the second quarter trends. We have mid-teen growth in Applications & Technology and in Engineering. In Strategy & Transformation, we are growing at 28%, fueled by the client appetite for innovation and digital transformation strategies. We fully benefit from a high level of cloud, data and AI demand and it's also the demonstration of the relevance of our strategic choices. We're looking a bit at some of the deals. We can see that we are clearly positioned as a strategic partner for the digital transformation of large corporations and organization leveraging, of course, the Cloud, Data & AI. Our offering covers the entire value chain today from product and services designed to customer experience. We accelerate on Intelligent Industry and Customer First, and we continue to leverage our strengths in Enterprise Management. We are today recognized by both analysts and the market for the excellence of our offerings and the breadth and the depth of our know-how. But I would like in particular to highlight something exciting we launched recently, the Customer First domain. It is what we call the new frog. With this renewed ambition and offerings part of Capgemini Invent, we intend to help our clients reinvent completely their businesses to stay ahead of the curve and orchestrate what I would consider as being fluid customer-centric journeys. The new portfolio of offerings that we have developed under the new frog will support the continued expansion we are aiming for in the C-suite and our successful positioning in customer experience. In the Intelligent Industry, we continued to refine our positioning industry by industry. We have now finalized specific strategies by industry to address the needs of our clients. And we tirelessly invest in content, industry knowledge and offerings as exemplified by the deals you can see when we design a smart factory or new intelligent products. We have never been so industry-focused than today. Cloud, Data & AI are the key pillars of our growth and the primary drivers of technology and business evolution. However, we apply them more and more by industry. Whether it's about building data lakes, cloud apps, move to cloud or smart AIs, we cover the whole spectrum of expectation. We not only provide best-in-class technology, but we also have clear business value to our clients. So this basically brings us that we have a very solid pipeline for Q4, which makes us really confident. The talent front, which is an important subject today. So this quarter, we had a milestone. We passed the 300,000-employee mark. It's a bit symbolic, of course, as a milestone for us. If I take a moment to look at -- in the rearview mirror, I remember that we closed the 200,000 mark just 4 years ago. So what a long way we have come in such a short period of time. In the fast-growing industry like in the technology industry, it's a priority to attract and retain the best talent. So beyond the symbolic numbers, of course, our constant head count growth proved that we are, indeed, one of the most attractive employers in the market providing opportunities to work on some of the most exciting digital transformation projects. In the third quarter alone, we increased head count by nearly 20,000 people bringing the total growth 17% (sic) [ 15% ] in the last 12 months. We are recruiting a significant number of young graduates as you can see, across the world while expanding also our leadership ranks. We continue to increase our investments in training and reskilling. Since early 2021, our employees have completed almost as many learning hours as they had completed through 2020. I'm also proud of the fact that we have not sacrificed diversity in any way. And despite the immense recruitment needs and the tight labor market, our gender diversity continues to progress, and of course, I'm very proud of this. The new normal is also a revolution, we talked about it before. It's a revolution in the way we work, we commute, we manage, we onboard people. By the end of this year, we'll have rolled out full flex policy to all -- to 80% of our employees. All across the group, we are taking advantage of the new normal to continue to gain in agility and attractiveness. And this growth is also supported by our new brand promise. It's particularly effective in terms of recruitment and allow us to continue to attract the best talent. Finally, in the context of the COP26, which will open later this week, I would like to say a word about the group's commitment to sustainability. The context, of course, is clear. The recent report of the International Energy Agency estimates that global CO2 emissions of the world economy in 2021 will be roughly equivalent to those of 2019. Capgemini commitment is strong and results, of course, are already there. Our emissions during the first half of the year has fallen by more than 3/4 compared to 2019, helped by the limited amount of travel. We are on track to be carbon-neutral no later than 2025 and net zero by 2030. This is, first and foremost, a result of constant work for the group to control their carbon footprint, notably in terms of travel, commute reduction, work environment transformation and quality offsets. We are also investing in sustainability to help our clients achieve their targets. And this is where we can even have an even bigger leverage. So in Q3, we launched 2 important offerings around green IT and net zero strategy. And of course, we have more offerings in the works that we'll be launching in the coming months. On the subject of sustainability, the demand is there from our clients. The pipeline is getting stronger month after month. We really see good traction across all sectors, and it's very diversified in terms of project. It goes from product design to analytics monitoring through to green IT projects. We really consider that fighting global warming is a challenge for our generation. It's our responsibility as leaders and it is also a must if you want to meet the expectation of our talents. We are also accelerating on this topic and will notably disclose in the coming weeks our detailed ESG policy, including priorities and specific objectives. It should be a strong and visible signal of our ambition. You will know more about it during an investor event we will organize by the end of the year. Now coming to the outlook. In this promising context, given our excellent performance and our confidence for the rest of the year, we upgrade once again our outlook for the full year. It is a second upgrade, substantial and across all our targets. We now target a constant currency growth of 14.5% to 15% versus the 12% to 13% previously. Expected M&A impact remains unchanged at 5 points. And just a reminder, in February, we were targeting 7% to 9%. On the operating margin side, we expect it to be greater than 12.7% versus 12.5% to 17% -- to 12.7% previously. This would represent a margin improvement of more than 80 basis points year-on-year. And we raised again by EUR 200 million our organic free cash flow target to above EUR 1.7 billion for the full year. Now this second upgrade demonstrates the quality of our offering portfolio, the strength of our operating model and our ability to grow in a sustainable way and manage our talent pool. So thank you for your attention. And now I leave the floor to Carole, our CFO.

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

Thank you, Aiman. Good morning. Let's first review the key trends of the third quarter of 2021. As Aiman already pointed out, Capgemini achieved another strong quarter with very solid growth across all our regions and all our business lines. With revenues of EUR 4.552 billion in Q3, our growth at constant currency reached 12.9% compared to the same period last year. As in Q2, scope impact was negative but limited in Q3 to minus 0.3 point. The organic growth, therefore, reached 13.2% in Q3. This is slightly higher than the 12.9% recorded in Q2. This is another meaningful achievement given that the comparison base was much more demanding in Q3. Indeed, you might recall that the 4-point acceleration were recorded between the second and the third quarter of last year on an organic basis. FX had a slightly positive impact of 0.7 point in Q3, mainly coming from the British pound. This brings the year-to-date impact to minus 1.7 points. Consequently, the group reported growth stands at 13.6% in Q3 and 14.4% for the first 9 months of the year. For the full year, M&A will contribute around 5 points to group growth, while the FX headwind should be limited to around minus 1 point. Let's now look at our revenues by regions. All the group's regions reported double-digit organic growth in Q3 2021. We are particularly pleased with our sustained traction in North America with accelerated over Q2. The transformation plan launched before the pandemic contributed to the strong performance. U.K. and Ireland and Asia Pacific and LatAm also further accelerated, reporting growth rates visibly higher than the already very strong Q2 growth rates. France grew double digit organically, but at constant currency this was partially offset by the scope impact mainly driven by the sale of Odigo. Taking into account the much more demanding comparison basis, the Q3 underlying growth momentum is even stronger than in the previous quarter. You might indeed remember that France constant currency growth rebounded by 8 points between Q2 and Q3 last year. These geographical trends are fueled by positive dynamics in almost all sectors, which are quite homogeneous across all our regions. Actually, sector growth rates in Q3 are comparable to those achieved in Q2 despite a much more demanding comparison basis. Manufacturing and TMT sectors maintained their strong group momentum of the previous quarter. Same for the Public Sector whose strong traction has been remarkably steady since Q2 of last year. The Consumer Goods and the Services sectors even accelerated in Q3. Only the Energy and Utilities sector remained muted with a slight contraction in activity during the past quarter. Now let's have a look at our revenues by business lines. All the group business lines maintained double-digit growth rate in Q3 2021 on an organic basis, continuing the trend observed in Q2. Services in Strategy & Transformation and Applications & Technology fully benefited from the strong demand for digital and cloud services. They recorded constant currency growth of plus 27% and 16%, respectively, in Q3. Services in Engineering & Operations also maintained this strong momentum with double-digit organic growth, but at constant currency, this is partially offset by the sale of Odigo. As in Q2, this performance was driven by mid-teens growth in Engineering Services. Business services and cloud infrastructure services also grew nicely. A quick look at our bookings now. Our bookings continued to grow faster than our revenues. Bookings amounted to EUR 4.6 billion in Q3, up 15% at constant currency. The book-to-bill for Q3 stands at 1.01, above of last year and above the average of the past 4 years. Year-to-date, our bookings amount to EUR 13.7 billion, up 18.2% year-on-year at constant currency. And finally, a few comments on the head count evolution. The total head count reached 309,000 employees at the end of September, up 16.9% year-on-year. The offshore leverage is now back to pre-Altran levels at 57%, up 4 points year-on-year. Lastly, as expected, attrition picked up. It now stands at 19.5% on the last 12 months basis, up by 5 points on September 2020. After the low point reached in 2020 due to the pandemic and given the strong demand environment, this was fully expected. With this, I now hand over back to Aiman to open the Q&A session.

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

So operator, can you please open the queue for the Q&A? Thank you.

[Operator]

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

[Adam Dennis Wood, European Technology Equity Analyst]

First of all, congratulations on another great quarter. Very strong performance. So maybe just 2 questions from my side. The first one, there's a lot of debate in the industry about this whole employee attrition, wage inflation and the risks it poses both to your top line growth if it becomes harder to recruit, but also to the margins over time if you're forced to pay more. I guess I just about remember IT services companies having pricing power in the industry, it's a little while ago that I think that last happened. Could you maybe just help us understand the dynamics of how that works in terms of what stage the pricing comes in and you can pass it on to customers and how that impacts the top line and the margins just to give us a better feel for how that kind of flows through if that's what we see as we go through the next 12 months? And then the second one is just thinking more broadly about the top line growth. And obviously, it's exceptionally strong at the moment, but part of that is you're coming off easier base comps. I mean could you try to frame this if we hadn't had that collapse last year, what the demand environment would look like? Would it be at the very high end of your guidance range for the midterm? Or do you think you'd actually be running above it in terms of what the underlying demand in the market is at the moment and maybe put that in the context of the hiring that's continuing to accelerate.

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Thank you, Adam. Very simple questions. Listen, the first one on attrition, definitely it's going up because, I mean, it's clear that there is an imbalance between demand and supply in the market, and of course, this is driving attrition up for almost everybody. I mean the resources are sometimes difficult to find for players in our industry, but also for many clients. We're also basically looking for technology resources. I think the strengths come from the ability to attract people. I mean people are looking for interesting projects to work on and also our ability to attract young graduates, to train people and to deploy them. And I think this is really the scale effect that we have is probably the most important thing. And with that, we are able to continue to fuel our growth. In terms of the cost, yes, of course, we'll have some cost pressure in the more salary increases going into 2022 than what we had in previous year. But on the other side, you also have to see the positive shift of the portfolio that we have towards the higher end because all this acceleration is about -- not about growing legacy. It's about growing basically the digital and cloud offering, which tend to have better margin and better pricing overall. And of course, the underlying pricing is going up. As we look at new projects and look at new opportunities, we are in a market where the demand is higher than the supply and we're able to find ways to be able to leverage pricing in a reasonable way in a number of cases. How does it flow in the top line, to be frank, it's not going to -- I don't think it will have a significant impact on the top line. But as we look at the coming years, if our revenue per head count increases, of course, it will have a less than positive impact, but it will not create more operating leverage from what I see. But overall, I mean, the sign that we raised that -- again, our guidance on operating margin to stay above 12.7% show that we are able today to absorb some of additional cost pressures that exist in the market. And at the same time, we're able to significantly continue to increase basically our talent pool. So continue to remain quite confident. Speculating of what would have happened if there was not a collapse last year, I'm not sure I want to go into that. It's clear that we have an acceleration and we have a structural acceleration compared to pre-COVID, although we're still in COVID so -- but we really see an acceleration compared to the trend that we saw in 2019 because the demand of technology is across the value chain, is across sectors and across basically all companies so -- and across the world. So that's quite positive. We see it when you look at our numbers across geographies, across business lines, across sectors. Of course, you have to be well positioned on the right thing with the right capability and the right offering, which we are today. So I'm quite confident in terms of the future. And it reinforces our confidence about our ability to achieve our mid-term guidance of 7% to 9% constant currency.

[Operator]

The next question comes from Amit Harchandani from Citi.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

Amit Harchandani from Citi, and congratulations from my side as well on a very robust performance. Two questions, if I may. My first question is with regards to the increase in the free cash flow outlook. You definitely increased revenues and EBIT, but the increase on free cash flow seems even stronger. So could I ask you to kindly give us some more insights into what's driven this particularly strong increase in the free cash flow guidance, probably even greater than that for the EBIT? And secondly, from my side, in terms of your own performance, how would you assess your competitiveness today versus your peers? I mean the demand environment is strong, but do you think you're actually gaining share versus peers? And if so, where would you highlight as the areas of strength or beat in terms of regions or verticals or anything else?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Carole, cash?

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

So thank you, Amit, for your questions. So first, no change. As you know, Amit, on the fact that we have full mobilization and discipline around cash, that remains very high and we have expanded this to the former Altran scope, of course. So the target that we have set on the updated target is in line with the increase in earnings growth and margin. But of course, as you mentioned, it also encompasses a good evolution on our working capital in light of the global environment with a strong level of liquidity. But you know, on that, regardless of short-term targets, I'm very much more interested in long-term ability to have a constant discipline along the year. And as you know, it starts end-to-end with the good contract structure up to the cash collection. So no change on our discipline there.

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Okay. On competitiveness, listen, I'll give it to you a bit differently, Amit. What I look is where we are today compared to we were 3 or 4 years ago. I do believe we're gaining market share, but I think we're gaining the right market share as well, which I think is important. Not just a question of volume, there's definitely volume demand in the market. In the nature of discussions we have with clients, they are much more strategic. I have a number of discussions now with clients who say this is about digital transformation, this is about the future of our company. This is not about IT and how we run the firm more efficiently. We cannot manage that through RFPs and RFQs. We're really looking for strategic partners with whom we can work on the long term on the digital transformation of the company. And I think this is really what's important is the positioning. The positioning has evolved. I think what we have done around Customer First and Intelligent Industry, the importance of technology across the value chain of company is changing the nature of discussion and the positioning overall of the group in terms of strategic importance to a number of our clients.

[Operator]

The next question comes from Stacy Pollard from JPMorgan.

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

Also congratulations on a good quarter. And then, of course, I'm going to ask about one area of weakness. Maybe just a quick elaboration on Energy & Utilities. Was that a market-wide weaker demand or something more particular to your situation with customers? And then maybe what could we expect going forward as you move towards 2022? And second question. Looking at the strong margins of over 12.7%, is this something that is sustainable into 2022 as an -- and I guess -- or is there some portion of it that's still T&E savings that might not repeat in 2022? So just a sense of what might need to be offset going forward. And while we're on that topic, just your thoughts on travel for 2022, say, as a percentage of 2019, how do you expect that to evolve? And then maybe longer term, how much of that is a permanent savings for you?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Okay. So 3 very good questions. On Energy & Utilities, for us, we see that globally. So I cannot say that we are down in -- significantly down in 1 region and up in another region, and this is where we are there. I mean we have a global weakness for the moment. Now I'm quite positive about the trend because here we're also going to have a big pickup around the work around energy transition, around sustainability. So although I think there have been some weakness in the short term, I really see a lot of opportunities moving forward around Energy & Utilities. And we start to see some positive sign in terms of what this could look like. I'm not saying that next quarter it will significantly improve, but I'm quite confident around the recovery in E&U in the next 12 to 18 months because of the increased demand around energy transition and sustainability in this industry. Regarding the margin, I mean, we're still benefiting in a little bit, of course, from the reduced travel. So that's one of the elements that, of course, that is playing there. And maybe even in some pockets, still a bit tight utilization that's also benefiting there. But you know that we'll continue as well to work on improvement of deployment. So I think utilization is something we'll be able to sustain over the longer term because of the other changes we are making to the operating model through the new normal. On the -- coming back on the travel, travel will, of course, increase next year. Part of it is actually going as pass-through to clients and that will not have much impact on our profitability, but we will increase the travel. Compared to 2019, it's going to be down. I mean we have set some internal objectives that we have to finalize for 2022. But definitely, part of our sustainability drive, we see that the travel will be less -- our internal travel will be much less than it was in 2022 and we have proven that we can work remotely. I don’t think people will get back to jumping in planes, and we manage that very tightly by countries. In terms of sustainability of margin, listen, I think, today we have really moved in terms of the positioning. We have moved in terms of the portfolio. We really continue to see the growth being in high-value areas moving forward. I'm not going to start guiding for 2022, but I think we have a positive traction on margin that I would like to maintain. Yes. And I remind you that it's still 14% -- to reach 14% by 2025. And that remains basically what we have in line to be able to achieve.

[Operator]

The next question comes from Michael Briest from UBS.

[Michael Briest]

And I'll add my congratulations as well. Just a question on the business model evolution, Aiman. I mean in terms of hiring year-to-date, I think pre-COVID it would have been unimaginable that you could bring on 40,000 people. You'd have to equip them with a desk. Having a range of facilities available would be a challenge. Is this a structural shift? If you think about Q4 and next year, is it possible that you can keep on at this hiring rate given the ability to deploy resources remotely?And then I guess a little related to Stacy's question, I mean, you set the midterm target for 2025, an average of 40 basis points a year of margin expansion. Clearly, we're ahead of that. The market doesn't like to have ups and downs. It likes to have nice, steady progression stories. Do you sort of anticipate that we should continue to see margin progression year in, year out? Or does the sort of variability of the environment mean that, that's not necessarily implicit in your 2025 plan?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

So I mean let's answer the second one. Yes, we do expect to see margin progression year-on-year. I mean this is what we'll inform. So again, not going to guide for next year, but we'll aim to continue to see how we can improve the margin year-on-year. As you know, that's what we have been doing for many years now. We had the year of COVID where we dropped 40 basis points. But besides that, we have continuously improved margin. And you know that one of our aims is to sustainable and profitable growth, which means we need to increase both at the same time. But it's true that today we have to take advantage of the traction that we see in the market in terms of growth, but aim is to continue to improve margin year-on-year. Around the growth in terms of head count. I mean for me here we will do the right thing in terms of basically growing our talent to address the needs of our clients. So -- the question about feasibility, we have been basically growing significantly our head count since the beginning of the year. We have the capacity to continue to do it, but we have to do it based exactly on what the needs are in terms of our clients. What we need to anticipate in terms of building up capacity for the future, which is part of what we do, of course, because we cannot hire as many experienced people as before proportionally and we have to build more of our own talent because there is a shortage in the market. So one, I'm quite confident in our ability to continue to sustain growth in terms of employees over the coming quarter to address -- to be able to support our growth needs and also to be able to more and more address some of the new capabilities required by our clients because one of the advantage of the fast growth in a certain way of talent is that a lot of talent we're bringing in is basically on new technologies, right? So it accelerates in a certain way the shift in terms of capabilities towards the new and to have also, which I like as we hire a lot more young people, a lot more energy in the firm and that's, of course, very good for the future of Capgemini. So yes, confident in terms of our ability to continue to recruit and increase over the coming years. And yes, definitely, in the short term, the ability to be able to deploy a lot remotely helps in terms of scalability. But I mean I don't think that as we bring people back to offices at 40%, 60% next year, it will basically slow down or prevent us from continuing to grow at the same pace if we need to.

[Michael Briest]

Will you hire as many in Q4, do you think? Is there an intention to keep it double-digit thousands?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

I'm not going to go forward-looking statement about how many people we'll end up hiring. We have plans, but they vary depending on the demand. But we'll continue to add definitely head count in Q4.

[Operator]

The next question comes from Laurent Daure from Kepler Cheuvreux.

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

Yes. Congratulations from my side as well for the great quarter. Three questions on my side. The first one is on the profitability and the slight hike in margin. I was wondering if your confidence is based on basically the additional volumes having margin leverage? Or do you start to see even more traction on the gross margin, thanks to the change in the business mix? The second question is on M&A. Basically, it's a very hot market. Everybody is looking for talent and acquisitions. So do you feel confident that you can add about EUR 400 million of sales every year? How does your pipeline looks in M&A? And the final question is back to the employee addition, it's really impressive to see this kind of growth rate. I was wondering, how do you onboard all these employees because the utilization rate is as well not moving much? So does it mean that basically everybody that you recruit gets back -- gets immediately to client's new project? Or are you being a bit aggressive and hire thinking about the coming orders of the following months?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Carole, on profitability.

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

So on your first question, Laurent, on the split between volume and gross margin, I would say that both are contributing, of course. So we have, of course, some volume impact in our profitability step up. But of course, qualitatively, our gross margin is evolving favorably as well. So it's -- I would answer positively to your 2 comments.

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Laurent, on M&A, yes, it's a hot market. I said 7% to 9% constant currency doesn't mean that we'll add 2% of organic growth every year. So overall, we continue to have a pretty good pipeline to be frank on the M&A front. We have done a number of acquisitions this year. We're still looking at some acquisition. We have become quite active. And we're also quite attractive for -- especially on the bolt-on market because people want to join us because of what we can -- our positioning to them what we can deliver to clients, which is an attractive factor that you shouldn't forget in terms of at least the bolt-ons in the M&A market. So can we fuel the 7% to 9% even if you buy a bit less, yes. I mean, this is basically what we have committed to and we haven't committed to 2% of M&A addition every year. On the onboarding of people, I think we have become very good at that in terms of the digital onboarding of our talent and we have gained a lot in terms of efficiency. And no, when we hire young graduates, Laurent, we train them. We train them for 3 months, sometimes 6 months before we start shadowing them on clients and deploying them on projects. So the question here is basically some of the hiring, of course, is to anticipate future growth. So it's not people that will be billed necessarily in the quarter, unlikely actually because most people will go through training before they get onboarded or even shadowed on the project before they get billable, if you want, from a client perspective. But again, we have mastered that with the volume that we're able to hire today to be able to digitally onboard, to train people and to shadow them and then deploy them at clients. And it's part of the core skill that we have acquired, and we have perfected that during the last 18 months to be able to do that even more efficiently on a global basis because a lot of the training is digital and you don't have to bring people in a classroom, in a physical place to make it happen. So yes, we have gained a lot in efficiency there.

[Operator]

The next question comes from Nicolas David, ODDO BHF.

[Nicolas David, Analyst]

Congrats from my side as well for this very strong performance. I have 2 questions actually. The first one is which aspects of this Q3 performance and also Q4 ongoing performance surprising you the most compared to the vision you had before summer? Is it demand or your ability to hire or even your ability to gain market share? So any color here would be helpful. And also regarding this acceleration, I mean, in Q2, you were lagging a bit your main -- your largest competitor in term of growth and now you catch up most of it or even you are now outpacing most of your largest competitors. So what according to you -- maybe what was holding your growth in Q2 and what helped you to accelerate so much compared to them? And my second question is regarding the U.S., I mean, you entered recently in the federal U.S. market, which is interesting, thanks to a nice contract and a small acquisition. So what is your strategy here? How big could be this sector for you in the U.S. in the midterm? And do you expect it to materially fuel your growth in the region?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Okay. So on the first question, I think our growth in Q2 of 12.9% organic was already pretty good even if we're growing a little bit more this quarter. So I mean I was already quite satisfied with what we have achieved in Q2. But if you think about compared to where we guided you in H1 and why some of this upside, the positive things are, from me, in terms of sectors is Manufacturing and Consumer Goods. I mean I'd also have to mention Public Sector, which quarter-after-quarter continues to be good, that has been for the last 7 quarters. So now I'm getting used to it. But 28% growth in Consumer Packaged Goods and Retail is -- that was a bit of a surprise to see the strength. And this is really around the Customer First. It really shows the strength of our positioning there and our ability to gain market share around a sector, which is really consumer focused and most demanding in terms of the customer experience side. And Manufacturing is strong. I mean, here, we have -- this is really playing to our global strength in Intelligent Industry and really see strength across the world. So that were 2 positive compared to what we expected. On the business lines, the strength in Application & Technology, of course, is important because that's still 60% of our business. But also the regain in Engineering -- the continued acceleration in Engineering, that's also driven quite a bit about the Intelligent Industry. On U.S. federal government, again, I hear it's taking advantage a bit of what I consider being some of the trends in the market. When we see our growth overall in Public Sector, we see that the fact that the digital transformation of government is also significant. We have core strengths across the world. So we have made a small acquisition in the U.S. in the federal government to continue to increase a bit our positioning there. And it also opens us new contracts and new possibilities in terms of what we can work on with the federal government. I think it's just a good investment with good pragmatic sense in terms of the fact that there is an opportunity to market that we probably can tap on. I cannot speculate in terms of how big it can be, but definitely there's an opportunity to help support our growth in the market in the U.S. in an area where we were not necessarily very present today.

[Operator]

The next question comes from Stefan Slowinski from Exane BNP Paribas.

[Stefan Julien Henri Slowinski, Research Analyst]

Just 2 quick ones, I guess. Just first, any update quantitatively on Altran synergies or backlog for joint projects? And then, secondly, Aiman, on the strategy and consulting portion growing at 27%, quite impressive, but still just 7% of sales. So just wondering with that acceleration, is that just demand driven or is that a strategic focus for you to try to accelerate that business and eventually grow it beyond 7% of sales to something more important?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

So listen, update on Altran synergies, as I said, especially on the revenue side, said we'll give you an update. So I'm not going to anticipate that. Listen, demand remains strong on synergies. And when you see the growth that we have and you see the growth we have in the Intelligent industry, it's definitely coming from the synergies between the physical world coming from Altran and digital world coming from Capgemini. So for me, it has been one of the key strategic aspects of this acquisition and we are delivering on it, and to be honest, much faster than what I thought initially. On strategy and consulting on [Invent], it's absolutely crucial to our -- to what we're trying to do. I mean the growth is both demand-driven and also the strategic focus. We talked about launching of new frog. Again, it's really taking all our strengths that we have acquired over the coming years from the different bolt-ons, including the last one coming from the -- from frog which was part of Aricent, which was acquired by Altran. When you put all of that together, today, we have been able to reposition in a very strong way around how we help companies in terms of creating really new businesses and then scaling them. So it's not just the creation, but also the scaling. You have to know that we work with start-ups that have potentially coming up with [indiscernible] [status] in the coming years. And so we start with them at very early stages, but we also work with very large corporations around completely redesigning the transformation of their business. You take Invent today, Invent works a lot with engineering and R&D. So there’s a lot of joint go-to-market there in terms of the -- how we leverage our technology, knowledge and engineering in terms of how to help clients transform, for example, redesign completely new product. You have this example about wearable, wearable apparel, connected apparel as part of the things that we have been working on. We are actually working on electrification of trucks. All this has Invent component as part of it because we design business plan, we redesigned how the model should work and then there's a technology that comes with it. So for me, over time, it would be natural to see Invent become a bigger part of the business overall.

[Stefan Julien Henri Slowinski, Research Analyst]

Great. Do you have a target percent of sales maybe to come from Strategy & Consulting?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Not to speculate on that, but you will see it grow. It has to grow. If you're doing the right thing, it will grow over time.

[Operator]

The next question comes from Frederic Boulan from Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

Congratulations as well from my side. Just to come back on the strong performance in Operation & Engineering in particular, on, I guess, on the Cloud Service, if you can spend a bit more time in terms of what type of contracts you're signing there? Are you called in more to deploy native software deployment -- native software in the cloud or helping more your customers to migrate from on-prem to cloud. Just trying to understand a little bit the dynamic here. And any comment on what the trend is in terms of moving workloads directly to public cloud environment versus more private or hybrid environments?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

So I'm going to -- the point is all of the above. To be frank, the traction on cloud is everywhere. Everybody is moving to cloud and the people who are on the cloud are developing in native cloud and enhancing in native cloud and really trying to leverage now all the data aspects when they are in cloud to be able to completely transform their business. I think the common agreement that we have seen now in the market across all our clients is that they have to move to cloud. Now depending on the client, depending on the industry in which they are, depending on the country, you're going to have different mix between private and public cloud. But the fact that everybody agrees that everybody will end, to a large extent, in the hybrid cloud environment that find the right equilibrium, but that equilibrium is quite different depending on the company, the sector, I would say, and the geography as well. You’ll see a higher proportion of public cloud in the U.S. than you will see in Europe. But Europe is gaining fast. But I still believe the proportion of private cloud will remain higher in Europe than it is in the U.S. and probably be higher in financial service than it is in retail, for example, right, just to give you some example. In terms of the work we do, we do a lot of work, of course, accompanying clients in terms of the migration. When we sign on some large deals, it's really around how to help them transform their current environment and move them to the cloud. But if you -- I'd say 2 years ago, the movement to cloud was about cost and how they were going to do cost savings. Today, it's really about modernization of IT and transformation because the realization is that you have to transform your environment as you move to cloud because what you're looking for is the agility to be able to deploy your digital transformation. And it's absolutely paramount that you modernize as you move to cloud. It's not pure lift and shift. It's not sufficient. And this is why also we see now that a larger proportion of what we do with clients is not about migration, it's really cloud native. It's really that modernization aspect, the development of new services, it basically starts really leveraging now that there are parts of the business is in the cloud to see how to accelerate the innovation, how to take advantage of launching new offerings, increasing the efficiency of their operation, et cetera.

[Frederic Emile Alfred Boulan, Senior Analyst]

Great. And if I may follow up on that. Any industry where you see the process is extremely immature, and therefore, there will be a longer runway of growth in helping clients on the cloud. So the industry which have been very reluctant to adapt so far in the portfolio?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

No. I mean, listen, we see there's still slowness in some, for example, in some areas, for example, Public Sectors in some countries in Europe because of the data issues. But I believe that will accelerate in the next couple of years. We have seen that, again, if I talk to some very senior executives in banks 3 or 4 years ago about moving to public cloud, it was over my dead body, it will never happen. We don't need it. Security and the confidentiality is paramount. The attitude has changed a lot also from the regulators. So it's true that an industry like financial services, which was over 20%, up to 25% of IT spend in the past, when we start to see an acceleration, it would be quite big because they are quite big in terms of basically users of IT services and the demand in terms of moving to cloud and data that follows are quite high. So that's definitely boosting a bit -- quite a bit as well now the growth in terms of cloud.

[Operator]

The next question comes from Gautam Pillai from Goldman Sachs.

[Gautam Pillai, Equity Analyst]

I have one on offshoring actually. Aiman, from your standpoint, given the solid inflation levels in India, does it require a change in offshore strategy, i.e., moving to other locations from the global IT services players? That's my first question. Second question on free cash flow. You did comment the upside in free cash flow is coming from obviously the higher margins and better cash management. Is there further to go from a working CapEx standpoint? Or are you kind of maxed out there?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Okay. I will answer on the cash flow question. Listen, in terms of demand, even in India, we all know the shortage and increased attrition. And of course, everybody says, okay, so where else can we go? I mean we have a number of other centers that we continue to scale: in Poland, in Morocco, in Portugal. We have nearshore centers in Spain. We are in Romania. We have capacity in the Philippines, et cetera. So we try to fulfill demand from different locations. And it's quite interesting as some clients have become location-agnostic who will say, you find me wherever you can because in some cases they have some urgency in terms of the need for resources. But we have to be realistic that even in the medium term, India will -- in terms of capacity will remain by far our biggest capacity. The net growth in any year will be a lot coming from India. I don't see any way to be able to compensate some of the growth we have in India today with other locations. So although we are continuing to look and we have done a recent strategic study around sourcing, although we continue to look at potential other opportunities in terms of looking at where we can further scale, India will remain the primary platform for the forthcoming future. Carole, on cash flow?

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

On the cash flow, as we mentioned, a portion of the step-up is linked to the environment and the working capital positive trends with the liquidity everywhere on the market. So this trend will not last forever, for sure. But what we are really committed to do is to improve our organic free cash flow with the growth of our both revenues and margins. So it's in line with what we have said in our midterm ambitions and Capital Markets Day. So our discipline will remain.

[Operator]

The next question comes from Neil Steer from Redburn.

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

Most of my questions have been asked. But Aiman, in your opening remarks, you mentioned that you're launching some new service offerings, particularly surrounding ESG and helping your customers achieve their own ESG and environmental ambitions. Very early days yet. But would you hazard a guess as to how meaningful and significant those revenues could become for Capgemini over the medium term?

[Aiman Ezzat, CEO, Member of Group Executive Board & Director]

Listen, it's a very good question. We really see that being a growth area. So it's what I call the triple win: it's good for the planet, it's good for business, it's also great for our attractiveness in terms of talent because, as you imagine, our young tenants love to work on these kind of projects. It's a bit early stages, Neil, to be able to say how big that can become. I think it will be visible really over time. It will probably, from my perspective, take a couple of years to really scale. But today, what I'm impressed about is the diversity of projects in which we are being involved. And it's a bit like digital at the beginning. It's small projects, it's concept, it's trying to work. So I think it's still early stages, but it has a very good potential. And it's really an area where we're going to invest a lot again in 2022 because we think we can really -- technology can really have a big leverage in terms of helping on the sustainability subject and it's part of our duty to try to make that happen. So it's a win-win-win, as I say, as we go forward in terms of sustainability. That was the last question. We thank you very much. We look forward for the interactions over the coming weeks. And our next big announcement will be the February -- the full year results on February 14 next year. Thank you.

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

Thank you.

[Operator]

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