Capgemini SE (OTCPK:CAPMF) Q2 2022 Earnings Conference Call July 28, 2022 12:30 PM ET
Company Participants
Aiman Ezzat – CEO
Carole Ferrand – CFO
Olivier Sevillia – COO
Conference Call Participants
Mohammed Moawalla – Goldman Sachs
Varun Rajwanshi – JPMorgan
Laurent Daure – Kepler Cheuvreux
Stefan Slowinski – BNP Paribas
Adam Wood – Morgan Stanley
Amit Harchandani – Citi
Charles Brennan – Jefferies
Frederic Boulan – Bank of America
Michael Briest – UBS
Operator
Aiman Ezzat
Thank you. Good afternoon, good evening everyone. Thank you for joining us for this call. And I am joined today by Carole Ferrand, our CFO; and Olivier Sevillia, our COO. Our strong H1 results really illustrate the relevance of our strategy and market positioning. H1 revenues cross €10 billion growing at constant currency by 18.5%, as you can see an acceleration in Q2 at 19.3.
Our bookings are robust, growing at 22% at constant exchange rate with the record H1 book-to-bill of 1.09. And after very strong Q1, Q2 is again very healthy with the book-to-bill 1.11 reflecting strong sales dynamics and positioning us for sustained top line growth. I can see the momentum is definitely there.
The operating margin at 12.2% is improving by 20 bps in spite of the high salary inflation, sustained investment in talents and offerings and the resurgence of some pre-COVID costs. These were more than compensated by the pricing and higher value-added offering mix that we have in the market.
The normalized EPS increased by 36% year-on-year, that’s supported by 50% increase in net profits. And finally free cash flow is positive in spite of significant working capital increase that was of course anticipated, driven notably by strong top line acceleration and a high bonus outflow in the first half.
We are clearly well-positioned around the strategic needs of our clients and continue to gain market share globally. Now, if you look a bit at the performance by region, it is strong across the board. We have solid double digit growth in all geographies, businesses and sectors.
In Q2, all geographies have either maintained or accelerated their growth rates in spite of a more demanding baseline and minimal impact from acquisitions. This impressive H1 landscape, UK reports a remarkable 23% constant currency growth, while France pose the strongest acceleration.
We also continue to reap the benefits of our expansion plan in Asia-Pacific and Latin America, with more than 40% increase in H1 supported by both strong organic growth and targeted acquisitions.
All business lines posted double digit constant currency growth rate and I have to say, the 30% growth in strategy and transformation is a clear indication of our positioning at clients on their most critical priority. Growth is also broad-based in terms of sectors with Q2 acceleration notably in financial services, energy activities and services.
Now the performance results from the combination of three items. First, our clients. They are increasingly relying on technology across the value chain of the company to drive most innovation operation, but also client relationship.
This is not any more cost play, but growth and profit play, putting it simply our services represent an increasing share of clients investments. And we are capturing through that more large end-to-end transformation deals.
We also have a world-class innovative portfolio that’s really positioned around our clients need, our leadership position in intelligent industry, our advanced value proposition in customer first and our strong positioning enterprise management with an industry focus, meet our clients expectation.
Cloud, data, AI irrigate everything. These technologies are today at the heart of every business transformation. And this is supported as well by very solid technology partnership notably with the hyper scalars.
Last but not least, our talents, we continue to broaden our talent based, adding an additional 12,000 people in Q2 to cross the 350,000 mark. This is up 22% year-on-year and illustrates our ability to attract, grow and retain the best talent in a skill challenging market.
We are continuously investing in building and upskilling our people, as well as adapting our approach talent management. The share of women in our employees has continued to increase in H1 and I’m proud to say that we have been awarded several times in recent week for our efforts in the area of LGBTQ+ inclusion.
Now this combination of strengths, meaning strong demand, world-class portfolio and great talents, is driving strong top line growth as illustrated by the 15% organic growth in the last 12 months and clearly positioned just as a strategic partner of our clients CXO.
Now, this underlines our confidence for sustained growth in the coming years. Of course, we are closely watching the environment. We do not see any evolution in demand or decision making at this stage, which means demand remains strong and decision cycles are continued to be pretty fast.
However, we have the agility to react. Our portfolio is broad and agile, we expect growth to accelerate in sustainability, in energy and utilities, as well as in cybersecurity and sovereignty, where we increased our investments.
In addition, we have strong and upgraded defensive offering around cost reduction, both in outsourcing and consolidation. On the margin side, our GDP continues to increase. We can count on higher level of industrialization. We also develop a value oriented portfolio as opposed to pure capability driven one. And we will increasingly benefit from the savings and the efficiency of our new normal operating model.
We remain convinced that the structural demand for digital transformation with weather potential downturn. However, would the environment significantly change, we are committed to demonstrate the ever increasing resilience of the group and we certainly aim at overperforming again.
As I mentioned, sustainability is a strong growth platform for the group. These being further amplified by the increasing market demand we experience these days in terms of energy efficiency, circular economy and renewable energy.
The portfolio expansion is happening at full speed with strong recognition from analysts. We have today seven sustainability offerings live. This will double by the end of the year and we see an appetite for our industry specific, plug and play offerings.
The business acceleration in H1 was very good with a lot of fraction coming from Europe. Clients in energy, manufacturing and consumer products and retail are leading the way. The digital size [ph] remain still models, but proliferating like digital five years ago. And in this nascent market, we signed several multimillion Euro deals in the first half, including a fairly larger one.
We are fully committed to sustainability. All our 350,000 employees will be upscale by mid 2023 through our virtual sustainability campus. And we are proud of becoming one of the first companies in the world to have its net zero targets validated against the new and more demanding SBTi standards.
This is an elevation of our ambitions. And it’s supported by initiatives such as our new energy command center in India, which uses digitalization and data to reduce by 20% our energy consumption across all our campuses. And that’s a good showcase actually for our clients. We are fully committed to fighting climate change while making a significant business opportunity.
Now, the strong performance in H1 and the excellent dynamic in Q2 demonstrate the relevance of our strategy and our execution discipline. Based on the strong results and perspectives supported by our bookings pipeline, but also the discussion with clients, we are positive about 2022.
We are raising our constant revenue growth guidance to 14% to 15% versus 8% to 10% previously, including around 1.5% contribution from acquisition. The low end of the guidance allow for some softness in the environment in Q4. We confirm our operating margin targets between €12.9 and €13.1 and our organic features to target about €1.7 billion.
Thank you very much for your attention. And I now leave the floor to Olivier, our COO for an update about clients and market.
Olivier Sevillia
Thank you, Aiman. I am also very proud of our excellent H1 sales and revenue growth, and also of our promising pipeline. We are definitively reaping the benefits of our clear go-to-market strategy, which is now delivering at full speed.
We presented to you this focus go-to-market strategy during the Capital Markets Day last year. What are we doing? Within each of the sectors listed here, we selected industries in which we build distinctive capabilities and offerings.
For each of those industries, we have also selected priority iconic clients with the ambition to become their strategic partner. Not only in volume although we track that as well, but also in relevance and intimacy across with CXO level.
With these clients, we are proactively shaping large end-to-end transformation deals to deliver impactful business value supporting their growth cost takeout or innovation agendas.
Both landmark references there fuel our expansion throughout each selected industry. For the group these results in an increasing number of large clients. In higher win rates, in greater resilience and further industry relevance.
We see strong results on a promising pipeline across all of our priorities, which confirms the relevance of our positioning as Aiman said. More specifically, I would like to call out expected good news.
We clearly see that when we combine our digital and engineering capabilities to deliver our unique intelligent industry value proposition, it’s a real hit. In Europe, of course, and even more so in the U.S. Our momentum is visible in all our sectors with double digit growth in nearly all of them. Let me call out a couple.
In manufacturing would it be the automotive industry aerospace and defense industry, a life sciences industry, clearly its a largest contributor to our top line acceleration in H1. Financial services also accelerated throughout H1, notably led by North America. And consumer goods and retail proved to be very dynamic across all regions.
I would like also to comment a few examples of these, which demonstrate how we deliver strong business value to our clients across all of our priorities. I would like to call out three of them to illustrate the relevance of our strategy.
First, Fresenius. We have signed the multiyear cloud transformation and outsourcing deal with this leading life sciences company. This one is a multi 100 million Euros. Second, for U.K Bank at the crossroads of that sustainability offerings. We were selected, participate in the development and management of an ESG data store, measure and track financed Co2 emissions.
This is of course, a strategic project with high visibility at the C Suite. Finally, an intelligent industry emblematic example for tier 1 automotive supplier in North America. Its large multiyear view is focused on the development and testing of a digital cockpit system, which is a strategic priority for these clients.
Here again, our engineering capabilities coupled with a strong expertise in automotive and digital were instrumental to winning this deal. In summary, our focus go-to-market strategy is delivering strongly. And looking at our sales pipeline, this virtuous cycle should go on.
Thank you very much for your attention. And now, I leave the floor Carole Ferrand to go through our detailed financial results.
Carole Ferrand
Thank you Olivier. Good evening or good afternoon, everyone. Let me now walk you through the financial highlights of our H1 results. Group revenues reach €10,688 million in H1, a reported growth of 22.7% and 18.5% at constant current currency.
Our operating margin stands at €1,301 million or 12.2% of revenues, up by 20 basis points year-on-year. After the other operating expenses, financial and tax expenses, which I will further comment in a moment.
The net profit for H1 reached €667 million, up 50% year-on-year. The normalized EPS as adjusted for transitional tax impact, which is €5.03, up 29% year-on-year. Finally, we delivered in H1 a solid organic free cash flow of €193 million in line with our roadmap for the full year.
Let’s have a look now at our quarterly revenues. Organic growth reach 18.1% in Q2, the further acceleration on the Q1 which was already strong. This brings our H1 organic growth to 17.2%.
Taking into account the group’s scope impact, the constant currency growth reached 19.3% in Q2 and 18.5% in the first half. FX remained a strong tailwind this quarter, leading to a 4.2 points positive impact overall in H1, due to the strengthening of most currencies against the Euro.
Finally, our reported growth in Q2 and H1 reached 24.4% and 22.7% respectively. For the full year 2022, the M&A should contribute to around 1.5 points to our growth, while we expect FX to represent a tailwind possibly approaching 4 points.
Moving on to revenue by regions. All group regions reported strong double digit constant currency growth rates in H1, 2022 confirming the acceleration already observed in the first quarter. This growth was fueled by strong momentum in almost all the group sectors as already explained by Olivier.
More specifically, at constant currencies, the United Kingdom and Ireland region posted remarkable growth of 22.7% at constant exchange rates boosted by a strong public sector, but also by this consumer goods and retail and energy and utility sectors, which were very dynamic.
The North America and rest of Europe regions grew by 16.8% and 16.9% respectively. Here again, sector traction was broad based notably to the manufacturing sector better, so financial services in North America and consumer goods and retail in rest of Europe.
France reported revenue growth of 12.8%, thanks notably to a robust momentum in the manufacturing and consumer goods and retail sectors. Lastly, revenue in the Asia-Pacific and Latin America region increased sharply by 41.5%.
The contribution of group acquisition in 2021 came on top of a strong organic momentum, notably in the manufacturing and financial services sector. Considering now revenues by business line. All group business lines as the reported robust double digit constant currency growth rate in H1, 2022.
Both strategy and transformation and application and technology services continue to benefit from proven based demand for digital transformation, posting growth in total revenue of 29.7% and 21.1%, respectively. Operation and engineering services 29% of group revenues grew at 13.4%, reflecting strong growth in engineering services, as well as in cloud infrastructure services.
Moving now to the headcount evolution. Our total headcount reach 352,100 employees at the end of H1, up 22% year-on-year. The offshore leverage reached 59% at the end of June, up by three points year-on-year, with visible progress in continental Europe.
Finally, the last 12 months attrition reached 27% in H1. However, quarterly attrition rates have now stabilized over the last three quarters, so it should become visible into the reported last 12 months figures sometime in H2.
Now moving to our operating margin by regions. In North America, our operating margin is slightly down by 20 basis points year-on-year, but still very above group average. The operating margin of UK and Ireland reached a record level of 18.4% in H1 compared to 17.6% year-over-year.
The rest of Europe region reported a lower operating margin compared to the same period last year at 9.8% and 11.5% on the back of some non recurring items. The Latin America and Asia Pacific region is also experiencing a lower operating margin than in H1 last year, down to 9.7% versus 12.5%.
Lastly, I’m pleased to report that France delivered a marked improvement of its operating margin, which rose by 3.2 points year-on-year to reach 10.7. Moving on to the analysis of our operating margin. As anticipated our price and mix strategy is more than offsetting the higher costs of growing and talents in this environment.
After taking into account the return of some costs avoiding during the COVID, the gross margin is down by only 10 basis points. Our additional investments in sales and marketing are more than compensated by the operating leverage on the G&A.
Overall, the operating margin increased by 20 basis points in H1, which is consistent with 0 to 20 basis point improvement targeted for the full year. Moving on to the next slide. Net financial expenses are noticeably down to €71 million in H1, 2022 compared to €85 million for the same period last year.
Income tax expenses increased from €382 million in H1 last year to €327 million in H1, 2022, this amount include exceptional tax expenses for €29 million compared to €56 million last year.
Sitting beside the transitional item, Our effective tax rate is down to 29.9% in line with which would be our normal ETI in the medium term. Let’s now turn to the recap of our P&L from the operating margin to the net income.
The other operating income and expenses almost stable year-on-year at €333 million. Our operating profit is up by 32% to €1,68 million or 10% of our revenues. After financial expenses in taxes our net profit amounted to €667 million, up 50% from the same period last year.
Consequently, the basic EPS stands at €3.91 at 49% year-on-year. The normalized EPS is up 29% to €5.03 excluding the exceptional tax expenses previously discussed. Finally, a word on the evolution of our organic free cash flow and net debt.
In H1 this year, we have two specific working capital items at play. First, as discussed in last February, the reverse effect of the liquidity impact we had in fiscal year 2021. Second, we had additional working capital required by our record 2023 reported gross.
Therefore, H1 underlying free cash flow which stands at around €50 million excluding our factoring program is a strong achievements, which supports our full year outlook of €1.7 billion.
We close a limited number of M&A transaction in H1 leading to a net cash outflow of €34 million. Return to shareholders reach €926 million in H1 of which €409 million for 2021 dividend and €517 million for share buybacks.
Given the seasonality of our cash flow generation, our net debt stands at €4.1 billion at the end of H1 compared to €4.8 billion and €3.2 billion at the end of 2021. Aiman back to you for some closing words.
Aiman Ezzat
Thank you, Carole. So this strong H1 results really illustrate the relevance of our strategy and market positioning supported by strong structural demand for digital transformation. Thanks to our unique combination of trends, discipline in execution and agility, we are resilient and confident for the future.
We are raising our growth target while confirming our operating margin and free cash flow. So thank you very much for your attention. And now I’m happy to answer some of your question. I would ask that you keep it to one question please. And then one follow up to allow as many participants as possible to ask question. Operator, would you please provide instruction for the Q&A?
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Mohammed Moawalla from Goldman Sachs. Please go ahead.
Mohammed Moawalla
Good afternoon. Good evening, Aiman and Olivier and congrats on the strong results. I’ll stick to your question asked one question. When I look at this organic growth in this quarter, it is now very close to what Accenture was doing. I think it’s around about 20%. This is obviously multiples of where the industry is growing. So, when you think forward and obviously you’re still investing to grow, how should we think of sort of Capgemini in the sort of economic slowdown that people are talking about? You’ve talked about the kind of resiliency. But in the past, organic growth is sort of turned negative, but the trend line, you’re growing is far above the trend line. How should we think about the resilience of this growth? And more importantly, the sustainability? If you could walk us through some of the factors, that would be great? Thank you.
Aiman Ezzat
Sure. Listen, I think the growth is much more resilient. It is important to remember. If I go 10 years ago, 90% was probably driven by the CIO. Today, we work across the value chain. This year, you will see more as potentially a cost center sometimes. So yes, in the case of a downturn, there might be more of a squeeze, but a lot of our revenues generated outside of that.
And I do believe there will be a lot more resilience, and I do believe we will continue to grow positively in a downturn. If it’s very pronounced for many years, it’s a different story. But for me, downtown, like I would expect for the moment, we expect to continue to grow from a top line. Why? Because its broad-based demand in terms of technology services. The fact that we have an increasing percentage of investment of company, which is going to technology, and we are well positioned to take a big market share of that, as you see today. So that gives us a lot more confident. And I think we are part of the answer. We starting from much higher top line. So when we slow down, I think we’ll remain positive.
Mohammed Moawalla
And if I could follow-up in positive, you obviously have your kind of midterm growth guidance. I mean, would it be fair to say that it would be meaningful, not meaningfully off that sort of midterm objective?
Aiman Ezzat
Again, sorry. Can you repeat.
Mohammed Moawalla
You have this sort of seven to nine midterm guidance. Do you think and its five to seven, I think on an organic basis. Do you think that that’s sort of a reasonable proxy in terms of being able to kind of deliver within that even absorbing kind of economic slowdown?
Olivier Sevillia
No. I mean, first, I just clarify. 7% to 9% as we put that mid term guidance is in constant currency. It was not — it was an asset as organic, but I understand the fact that we tried to push to organic now. Now, listen, I would not give a number at this stage. I think in a downturn, yes, we could probably be at the bottom end of that, depending of how high the downturn is.
Mohammed Moawalla
Thank you.
Olivier Sevillia
Thank you.
Operator
Thank you. The next question comes from Varun Rajwanshi from JPMorgan.
Varun Rajwanshi
Hi, good evening. Thanks for letting me on. You talked about increasing your market share. Can you comment on which areas you’re getting shared and who are you winning against?
Aiman Ezzat
Simply winning against competition, I cannot tell you, which is all the competition. We compete with everybody. So if you’re gaining market share overall, we’re growing fast, we’re not the only one to grow fast. But if you look compared to the overall market, we are growing much faster than the market. We have to be gaining market share. Why we are winning? I think we’re winning with our value proposition. We’re winning in intelligent industry. We’re winning on the customer front end with our offering driven by fog-round innovation. We’re winning enterprise management. We have very advanced and global offering around saying like, the SCPS for core management. We are very good at it. And I think we are today deploying very large programs globally.
We are gaining market share on data. Our data business is growing at 40% in the first half, cloud and cloud driven transformation is also growing extremely fast. So, we have the positioning from a technology and business offerings to really help our clients drive the digital transformation. And that’s — so a lot of it is new. Is not just about traditional offerings is lot of new areas in which we are working.
Varun Rajwanshi
Thanks for that. And if I can just follow up on the overall demand environment. Even previously, you talked about tracking leading indicators as a gauge for the overall demand environment. Can you provide us an update on where we are today with these leading indicators such as decision cycles, development of sales pipeline, etc.
Aiman Ezzat
Yes. I will let Olivier answer this one.
Olivier Sevillia
Yes. That’s of course, we are scrutinizing tightly was site decision cycles, elements and frankly, on we’ve been doing that since the COVID every quarter. And frankly, we don’t see any difference at this point. Meaning, the decision cycles look at up to Q2 closing. Q2 closing was extremely strong. And fortunately clients decided on time. So we don’t see a change there. If I compared to the last quarters, we don’t see a change at this point.
Yes. No change in demand. You can see the traction on our strategy and transformation, which is one of the leading indicator. And to frame the forecast, we look at it at Q3 and the rest of the year looks extremely strong still. And the pipeline is good. Pipeline is very good. We see a lot of these, which will be on the decision in Q3.
Varun Rajwanshi
Thanks for the color.
Operator
Thank you. The next question comes from Laurent Daure from Kepler Cheuvreux. Please go ahead.
Laurent Daure
Yes. Thank you. Good evening. Aiman, Olivier and Carole. Congratulation on my end as well. My question is also on the visibility you have for the rest of the year. And your guidance is implying a roughly 10% organic growth I think for the second part of the year. Another way to look at it is would be the ongoing contract and bookings you already have, how much of this target is already covered? And how is it comparing to last year? And then I have a follow-up.
Aiman Ezzat
Listen, I mean, we feel comfortable about the thing our forecasting, and our anticipation is pretty good. So we have pretty good visibility for me on the second half of the year. I think our teams are acquired confident, and as I said, the guidance overall, does allow for some softness in Q4. As you imagine we have a pretty good handle on our Q3 and we have room for some softness in Q4. But right now we are extremely comfortable.
Laurent Daure
Okay. And the follow up is on the cross matching ambition I think on the longer term. The idea is to increase it further. It was pretty stable in the first half. Do you think you will start to see some improvement in second part of the year? Or do we have to wait a little bit more longer?
Aiman Ezzat
Okay, well, I mean, first we’ll stick we stick to the yearly guidance on the overall operating margin. Of course, we will continue to try to attempt to improve the gross margin. As you know, this is going to be our biggest pocket in terms of improvement over the coming years and we’re quite confident that the gross margin will continue to increase. Today, we have to absorb some of the additional costs from a talent, from recruitment and the very fast ramp up. So, I’m quite confident about the potential for improvement of the gross margin over time.
Laurent Daure
Right. Thank you.
Carole Ferrand
I’d like to add. Maybe on that, Laurent as well. As you can see our price and mix strategies more than offsetting significant higher compensation costs. So as just Aiman mentioned, after taking into account the return of some costs like to travel, the gross margin is only down by 10 basis points.
Laurent Daure
Yes. Thank you.
Operator
Thank you. The next question comes from Stefan Slowinski from BNP Paribas. Please go ahead.
Stefan Slowinski
Great. Thank you. And good evening. Olivier, congrats as well on another strong quarter. But as you know, we’re always looking for more. So just wondering on the margin front, considering in the past, you’ve said, the biggest driver of margin really is the top line. I’m just wondering why you haven’t been able to see more operating leverage to increase the full year margin guidance considering the big step up in the full year revenue growth guidance.
Aiman Ezzat
First, I would like to correct myself. If I ever say that, I don’t think I said, that the biggest drivers of margin is the top line. Top line health, because by operating leverage, but at the same time, you have to take into account the fact that we have pretty high salary inflation that we have to deal with in the current environment. And I think if you look at a number of our large competitors, the number of them have seen pretty big erosion year-on-year in the operating margin. So I think our performance is pretty good on that front
And the fact that we have been able to resist in the current environment with some of the COVID costs coming back and some of the high salary inflation shows we actually able to increase prices and we able to go further up in terms of value. If not, we’d have seen an erosion in margin. So I remain pretty confident around the trajectory on the margin. And the fact that bit by bit as some of these factors that have been kind of preventing EBITDA acceleration of the margin, start to fade away. The margin acceleration will come back.
Stefan Slowinski
Understood. And just a follow up there around that kind of hiring, market and wage inflation. Obviously, some others have seen that pressure. Just wondering if that’s starting to cool. We’ve seen a lot of tech companies slowing hiring or even announcing layoffs. And I know that’s maybe not the direct competition for you in terms of hiring, but are you already starting to see that the hiring is getting easier, and there’s not as much pressure on wages as there was, let’s say, three months ago?
Aiman Ezzat
Listen, we are able to see the people, we have to hire the people that we want. There is this higher level of attrition than we would like. Starting to come down, it will take few quarters for it to be really cool off. But we are confident that the trajectory is in the right direction from that perspective. The high level of demand in the market overall is still there. So we still a challenging market on the talent for probably for the foreseeable future. But we have a very strong brand. Our ability to attract extremely good. We really able to attract very top talent. And as I say, we expect things to cool off bit by bit.
Stefan Slowinski
Got it. Thank you, Aiman
Operator
Thank you. The next question comes from Adam Wood from Morgan Stanley. Please go ahead.
Adam Wood
Hi, good evening. Thanks for taking the question. And also congratulations on such a strong quarter. My question is just around this cycle, because it feels an unusual one that. You’re obviously seeing this incredibly strong demand in the market and hiring very aggressively to manage the attrition and to manage the demand that you have. And at the same time, we’re all talking about slowdown next year. One of the ways I think you’ve managed margins in the past is to try to preempt those slowdowns and calm that things down ahead of time. Could you just talk a little bit about how you think about that, as we look into the second half of the year balancing that need for investment versus trying to manage and preempt what could happen next year and how quickly you can respond to it, please? Thank you.
Aiman Ezzat
Listen, I think we have a pretty high level of agility as I try to explain a bit earlier. We have a lot of levers to work on today. First, our level of industrialization is extremely high with a high leverage. So it gives us a lot of flexibility around the resources. Remember, as well, with the attrition that we embark, is still pretty high. We can flex quite a bit our resource pool, as we see slowdown coming, if we see it coming for the month, we don’t. And we have levers in terms of optimization of utilization. When you’re growing very fast, you investing a lot around talent, around recruitment, around training, around shadowing on contract. So, I think we have quite a few levers, that makes me quite comfortable about the resilience of the margin in the downturn.
So, we are not going to over anticipate. I’m not going to kill the growth. If we see growth, see growth by basically stopping recruitment, I don’t think it would be wise. But on the other side, we are — we have very detailed basically information coming up to see if there is a slowdown coming and when we need to start putting the tap on recruitment. But I have to say for the moment, we don’t see signs, but we know how to react quickly if it start to come.
Adam Wood
Thank you. That’s helpful. Maybe just a quick follow up. You mentioned utilization rates have come down a little bit, I guess that’s just a combination of the high attrition and the pace of hiring. Is there anything else I’m missing on utilization there?
Aiman Ezzat
No, no. I mean, this is it. Of course when you have little bit — if things are a little bit slower, you’re able to optimize more utilization. But right now, if you want to fuel the growth that we have, you have to hire a lot, and you have to train a lot and you have. And that takes transition time and shadowing on contracts, et cetera, that, of course, will drop utilization. But that’s what’s helping you fuel such high growth.
Adam Wood
That’s it. Thank you very much.
Operator
Thank you. The next question comes from Amit Harchandani from Citi. Please go ahead.
Amit Harchandani
Thank you. Good afternoon. Good evening. Amit Harchandani from Citi. And a question and then a follow up, if I may. My question goes to the pace of headcount addition that we have seen from your side and how that correlates with the level of organic growth? You’ve done 20% year-on-year headcount growth last year, that’s accelerated to 22% in the first half of this year. And against that, of course, you have now telling us around 12.5% to 13.5% organic growth for this year. Is it fair for us to assume that as we look at the pace of headcount growth in hedge fund, we could expect a similar-ish pace, and maybe a smaller slowdown going into H2, which then bodes very positively in terms of how we think about organic growth potentially, again, double digit ballpark going into next year? So if we could talk about the correlation between headcount and organic growth? And I have a follow up.
Aiman Ezzat
Yes. There’s one thing that we shouldn’t miss in the headcount, headcount is volume We also have to look at what the growth is. So we have higher growth in offshore. So you see the leverage continues to increase. And, of course the mix of revenue changes as you increase the offshore mix in terms of revenue per headcount. So that definitely makes it EBITDA correlation between headcount growth and revenue growth. As you know I did state when we did the full year results that expect headcount growth to grow by 10% this year. I definitely was wrong.
So I’m not going to go into that route again, to try to predict what would be kind of pace of headcount growth, but right now, we continue to recruit, because we continue to show the growth right now. Of course, what we have embarked with us is to help us deliver our H2. And we will continue to basically grow headcount at the base where we see the demand coming and the potential growth, that will fine tune that mean, to be frank it. So it’s almost a weekly or monthly fine tuning, depending on which operation it is, in terms of the plan of headcount. And that’s really linked to what we see in terms of growth.
Amit Harchandani
Thank you, Aiman.
Aiman Ezzat
Difficult to give a forecast on that.
Amit Harchandani
Thank you. And as a follow up, if I may, you’ve placed your revenue guidance, kept the margin guidance unchanged, which implies greater EBIT or operating profit and currencies turning to be a bit of a tailwind. So, what stops you then from raising the free cash flow guidance? Because mathematically, it does seem that you should probably be trending above 1800 instead of 1700? Thank you.
Carole Ferrand
On that point, Amit, it’s really the funding of the growth. So as you have seen already in H1, it’s a good problem to have, of course, but we’re having some working capital needs because of the 23% increase of our reported growth is a nice problem to have.
Aiman Ezzat
Yes. I think add to that on, and Olivier maybe can testify to as well. They start to be a little bit more tension on the cash with clients and then it was while months ago, when the rates were negative. So, we cannot ignore that and we are careful on that front. It’s nothing dramatic, but definitely there’s a bit more tension.
Amit Harchandani
Thank you for the insight.
Operator
Thank you. The next question comes from Charles Brennan from Jefferies. Please go ahead.
Charles Brennan
Thanks. Good evening, everyone. And congratulations from me. It’s obviously a great set of numbers. There have been a number of high level questions. So I’ll try a couple of detailed financial ones if I can. Firstly, I don’t think I can ever remember cap calling out receivables, factoring on a results call before. Can you just size the magnitude of your factoring program in H1 relative to last year? And how you expect that to evolve in the second half? And given the strength of your balance sheet why did you feel the need to do factoring? And then secondly, if I look at the detail of the cost breakdown, it looks like higher travel costs have broadly been paid for by flat depreciation. Can you just explain why depreciation is flat given the growth in the business? Thank you.
Carole Ferrand
So, on the first point, factoring is a relatively low level of among given the size and the materiality at group level. So it’s really a very low level of factoring. And we have always disclosed the amount of factoring in our financial situation. So that’s not an exception. And anyway, I mean, it’s not going to increase any hour when we don’t do any improvement midterm of our cash flow, conversion with factoring. That’s not what we intend to do. And €150 million is really good dealing in this context. It’s something quite natural and very insignificant with the level and the size.
So on higher travel costs, indeed travel costs, I’ve moved up to 1% of revenues, which is up 0.5% compared to the same period last year, and prior to pre-COVID level it was 4%. And we don’t expect any further impact of travel on our operating margin in 2023. But that’s true, does the return on travel costs this year, as expected, and we disclose that at the beginning of the year the return.
Aiman Ezzat
And on appreciation, we don’t have a lot of things. I mean, we not currently, with limited return to office, we’re not expanding office space. We’re not in. So that’s one of the reasons that you don’t see an increase around the some of the depreciation items.
Charles Brennan
Perfect. That makes sense. Thank you.
Operator
Thank you. The next question comes from Frederic Boulan from Bank of America. Please go ahead.
Frederic Boulan
Hi, good evening Aiman, Carole and Olivier. Thanks for taking the question. Just trying to see whether overall it’s hard to pick any holes in terms of demand per sector. But do you see any change in demand from companies, any type of projects that are required versus what was on the roadmap 12 months ago? And any particular industries where you do anticipate a bit more pressure than others? And then I’ve got a quick follow up?
Aiman Ezzat
Listen. I mean, be honest, we ask ourselves the same question you ask, right? We try to read through the least to try to see if we find something that — and we don’t see it, I mean, look at the consumer packaged goods, retail and distribution is growing to both 20%. Consumer sensitive, you could expect that they will start to slow down. We don’t see. Look at the manufacturing sector. I mean, we have a huge recovering aerospace. Automotive is growing above double digit where you could say no with production. Why? Because you have to remember, there’s an increasing amount of investment going into technology.
So even if some companies are slowing down, the spend on technology is an increasing part of their cost base in certain ways. They spend more on technology than on other things. So this is growing, at the same time, that other thing might be slowing down. But it’s not in technology, the spend is being cut. So that’s why I believe we don’t see any movement for the moment. And Fred, I’ve read a number of CEOs surveys, which talk more about how to invest more on digital and technology, not how they’re going to cut it. Because today, it’s a huge driver for the top line for the relationship with clients for developing new products. And we get involved more and more with our clients on how we’re going to enable them, actually create more value and sell more to their clients and improve their value proposition. So we had the front end of how they’re going to increase profit and growth. And that way I see continues increasing the demand and debts across sectors.
Frederic Boulan
Great, thank you. And then, very quick one for Carole. After the 800 million working cap, negative in H1 what should we assume going for? What did you embedded in your $1.7 billion for the year, cash guidance?
Carole Ferrand
We have indeed €800 million negative impact of working capital in H1. But this compares to €500 million for the H1 the prior pre-COVID years. And if you recall, well, with only €133 million in H1 last year 2021 was a clear outliers, as we discussed back in February this year. So and this is linked to two elements that we described. One is the reverse impact relative to the employee bonuses. And the second is the additional working capital required by our groups, our great groups.
Frederic Boulan
Right. Thank you.
Operator
Thank you.
Aiman Ezzat
Definitely. The seasonality of cash flow will play again here, because the working cap tends to improve in H2. Okay?
Frederic Boulan
Thanks.
Operator
Thank you. The next question comes from Michael Briest from UBS, Please go ahead.
Michael Briest
Yes. Thanks. Good evening and my congratulations. Just in terms of the margin profile I can’t recall such a wide variance and trends by region for some time. And Aiman, I think you said offshore adoptions growing in Europe, but the sort of rest of Europe margins down nearly 200 basis points and France is up 300 odd. So can you talk a bit about what’s driving that divergence of margin tends?
Carole Ferrand
So if you, indeed if you take the uplift of the margin in France, it’s satisfactory more than three points on the back of several elements, notably the recovery of some sectors that were mostly affected during the COVID crisis. So it’s the pace of recovery is doing very well. On the rest of Europe front, it’s only due to some non recurring items, so no specific underlying trends there. So, I think its negative to say underlying trends in the rest of Europe regions.
Michael Briest
Okay. I’m not going to waste my follow up on that, what were those underlying non-recurring items? But can you say something then, Aiman, most of your peers, they’ve either raised their revenue guidance and missed on margins, or they’ve missed on revenues and rates. In the cap margins, you’ve managed to keep margin guidance and raise the top line. So what’s different about cap? And maybe this is something about the history of the company more European, less offshore, mix of business, I don’t know. But can you say why you think you’re seeing executing, frankly better than the competition?
Aiman Ezzat
I think it’s — I think we have been anticipating some of that, and we have been able to manage them, probably the mix of what the cost basis might be playing into that, definitely. And we have a number of levers [ph]. We did expose a number of levers at the CMD and we are applying them. So, we work very hard on — I’ve been working many years on the margin very hard. And it’s bit after bit after bit after bit. And that’s really what is increasing more and more our resilience. We know very well our economic model where the levers are, how to act on them. And we have, I think, very high execution discipline in the firm, and that has created a culture of really fighting for every penny of margin.
I told you we pushed on prices, we pushed on the value of the offerings to get out of the commodity space, and it’s paying off. It’s paying off in better pricing. And we’re able to maintain our sole client margin, or even increase them a little bit, which show that the quality of the portfolio is very good, even in an environment like that.
Michael Briest
Okay. Thank you.
Aiman Ezzat
Thank you, Michael. And that was the last question. Thank you very much all and we probably talk to you in the coming days, week. So, thank you very much, and have a great afternoon or great evening.
Carole Ferrand
Bye bye.
Olivier Sevillia
Bye. Thank you.
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