© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Capgemini Full-Year 2022 Results Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Aiman Ezzat, CEO. Sir, please go ahead.
Thank you. Good morning, and thank you for joining us for this full-year 2022 results call. I am joined today by Carole Ferrand, our CFO; and Olivier Sevillia, our COO.
So we achieved a great performance in 2022. The results are either above or in line with our targets. With 16.6% constant currency growth and 15.3% organically, we delivered another record year. This comes after 15.1% in 2021 and this is largely ahead of market growth and our mid-term CAGR of 7% to 9% constant currency. So, we are clearly gaining market share and we are well positioned to address the strategic needs of our clients.
I'm also very proud of our team, and we'd like to thank the 360,000 group talents, who delivered this remarkable performance. Our bookings are robust with growth of 16.8% at constant exchange rates and this represents a book-to-bill of 1.08.
The operating margin increased by 22% in value. At 13%, the operating margin rate is improving by 10 basis points year-on-year. This strong performance demonstrates the resilience of the group, considering inflation, talent scarcity and the post-pandemic return of some operating costs. This results, of course, from our mix shift towards more innovative and value created offering.
The normalized EPS increased by 25% year-on-year. Based on this performance, the Board of Directors is proposing a dividend of EUR3.25 per share, of course to be approved at the Annual Shareholder Meeting. Finally, our organic free cash flow at EUR1.85 billion is above the EUR1.7 billion as targeted for 2022. So, we exit 2022 with a strong momentum and in 2022 we demonstrated our agility, delivering a strong performance, while investing in our people and portfolio.
Now, when you look at the performance in 2022, it's strong across the board. We report solid double-digit growth across all regions businesses and almost every sector. All geographies report double-digit growth at constant exchange rates, the strongest being in Asia Pacific and Latin America at 31%, fueled by our acquisition, but also the strong underlying momentum. All group businesses delivered double-digit topline progression, strategy and transformation, services reporting an impressive 28.2% revenue growth, confirming the Group's strategic positioning and our clients' continued appetite for digital transformation.
And, finally, on the sector side, growth was also broad-based. Of course, it's worth highlighting the 21% growth in manufacturing, where we are reaping the benefits of our leadership and investment in Intelligent Industry. In a more demanding economic environment, the Q4 growth, as anticipated, is lower than in previous quarter, but with constant currency growth rate ranging from 12% to 20% across region and an exit rate is stronger and expected at 12.8% organic.
Bookings grew at 11.4% at constant exchange rates in Q4, corresponding to a book-to-bill ratio of 1.16. This strong sales dynamic also reflects the continued willingness of clients to invest in the technology-driven transformation.
Now, these results of course illustrate the relevance of our strategy and market positioning. We have a clear plan. We are executing well and it's paying off. This is outcomes of years of investment, but let's highlight the few items. First, it's about our journey to fully centric client organization. We've repositioned Capgemini as a strategic partner of CXOs, enabling us to shape transformational deals. It's also about the business and technology solution that match our clients’ needs in this transition to a digital economy, driven by digital and cloud. We deliver end-to-end industry specific solution from consulting to engineering for IT and digital. The latest being our investment in sustainability to address our clients challenges in the transition to net zero.
On talent, we drove significant growth in a tight skilled labor market, thanks to our ability to attract, train and upscale our people. And, of course, providing them with an exciting growth path. We also play an increasing role in building the new talent for the digital economy. Finally, a word on our operation, our delivery is recognized for its excellence, and we strive to build an agile organization, able to fully leverage our global footprint and continuously adapt to rapid changes in the environment.
We are ultimately driven by one thing; it's creating substantial value for our clients. And the success goes beyond financial performance, we achieved significant progress as well in the year -- during the year in terms of ESG, so some highlights. Regarding environmental sustainability, we were one of the first companies globally to have its net zero emission targets validated, according to the new SBTi tighter standards published at the end of 2021. We are on the right trajectory. At the end of 2022, our carbon emission fell by 46% per employee and 29% in absolute value against the 2019 baseline set by the SBTi.
That's the result of many initiatives, of course. Let me highlight one. Thanks to an IoT-based architecture and results driven approach, our Energy Command Center has enabled a 29% reduction in energy consumption across our Indian campuses versus the 2019 baseline. This is an example that shows the digital transition and environmental transition go hand-in-hand. An increasing number of clients are interested by some of the solutions that we implement.
On the other pillars, we have some good -- made good progress as well. I highlighted a few minutes ago our capacity to invest in human capital development. With 51.4 hours per employee, we increased the average number of training hours by 12% in 2022, well above our commitment of annual increase of 5%.
And regarding gender diversity, the proportion of women in the total workforce stood at 37.8% at the end of 2022. With 2 points improvement again this year, we are one of the fastest moving companies in our industry. Progress is also visible on diversity among executive leaders, where we stand at 24.4%. This represents an 8-point increase, compared to 2019 and we are aiming to reach 30% by 2025.
So, overall, let's now move and see a bit what's ahead of us. So, as we enter 2023, on one side, the economic environment is, of course -- is obviously less supportive than in 2022 and we recognize that it might still evolve in the coming quarters. On the other side, the trajectory towards a more digital and sustainable economic cannot be reversed, so the world is transitioning to a digital economy, digital and technology are reshaping businesses within and across industries at lightning speed. The rules of the games are changing around how value is created and hence the business of our client, the way they innovate, the way they produce, the way they operate and the way they engage with their customers.
Also, sustainability is a challenge of our generation. The topic is at the top of all leaders’ agenda, being able to do business in a sustainable way is becoming more and more a question of survival for one's company. Now, these two transitions are intertwined. We are well positioned as a business and technology transformation partner of CXOs. We enable our clients to accelerate the twin transition towards a digital and sustainable world. This twin transition will result in a strong structural demand for years to come and hence the strong growth potential for the group.
Now, of course, in the context of the economic environment for 2023, we target a revenue growth of 4% to 7% at constant currency, with 0.5 points scope impact at the bottom end and 1 point at the top end, an operating margin of 13% to 13.2%, so a 0 to 20 basis point improvement year-on-year, and an organic free cash flow around EUR1.8 billion.
Thank you for your attention. I now leave the floor to Olivier Sevillia, our COO.
Thank you, Aiman; and good morning, everyone. First of all, like Aiman, I am very proud of what Capgemini teams achieved in 2022. Capgemini’s 2022 results and our Q4 bookings and revenues have been excellent, despite the weakening global economic conditions. This illustrates once again our strength; the strength of our portfolio of offers; the strength of our partners' relationship; and the strength of our relationships with large clients in the global Fortune 500.
I would like to highlight the traction that our offerings in Customer First and in Intelligent Industry created in ‘22. This impact in visible manner many of our sectors, but I would like to call out our growth in manufacturing in particular, where our Intelligent Industry offers after the very big on visible impact. In 2022, we enjoyed double-digit growth in almost all our sectors, illustrating our growing industry relevance. This success is also linked, as discussed before. We will focus on higher growth and selected large clients in each sector, though we deployed consistently our plans to become their business and technology strategic partner at CXO level.
As anticipated, Q4 came a bit lower than the high-level growth enjoyed in the previous quarters. As previously discussed, it reflects a certain level of cautiousness of some of our clients regarding discretionary spend of transformation projects with longer ROI. However, it also came above our expectation as we see that our clients are not slowing down their strategic digital transformation initiatives, which is our focused market and position.
Looking a bit at bookings, Q4 was a record high for bookings. And in Q3, we experienced some slippage of deals at some clients, but as you can see from our results it was not material. With close to EUR6.7 billion of bookings, the year-on-year constant currency growth stands at 11.4% and the book-to-bill, which is a very solid 1.16. This brings the full-year bookings growth to almost 17% and our book-to-bill to a high of 1.08, which indicates a positive momentum as we enter 2023.
Looking backwards a minute, both last eight quarters of sales and book-to-bill really illustrate both the relevance of our strategy and also our execution capabilities in transforming our go-to-market accordingly. Looking forward, our sales funnel remains strong. We've seen particular, that the demand for intelligent industry data and cloud remains high on that. Sustainability is really growing in importance.
Let's talk a bit about complementing wins over recent norms. Q4 was again a strong quarter for implementing a landmark wins that give a concrete illustration of our strategic journey. Our main wins are very well aligned with the various dimensions of our strategic framework, which proves again that the execution of our strategy is well underway.
I would like to call out two examples to put forth in context of our overall strategy, starting with Baker Hughes. Capgemini closed this strategic multi-year partnership with Baker Hughes. The purpose is to enable Baker Hughes's oil and gas business to accelerate their software products' business, but offers a set of specialized software products complementing our manufactured products and solutions. For these, Capgemini brings a combination of industry, software product engineering and digital capabilities. Such a partnership deals at CEO and Chief Digital Officer level, a very good example of our individual industry value proposition.
And a good example is Credit Agricole. We signed mid-2022 a very large multi-year partnership to support and accelerate their IT transformation. The partnership is built around the co-creation of three main assets, the platform, and automation in factory to increase efficiency of existing digital platforms, while reinforcing security and resilience, a big carbonation platform using multi-lateral sources to help their clients internally to track carbon consumption by services, by IT application and reduce it. And the creation in several locations of centers of expertise supported by Capgemini novel experts to develop skills and stimulate innovation. This industry landmark partnership will deliver tangible and measurable business outcomes and this deal is again at top executive level.
So, thank you, and over now to Carole.
Thank you, Olivier; and good morning, everyone. I am pleased to share with you now the financial highlights of our 2022 results. Capgemini delivered another record performance in 2022 in spite of a very demanding baseline and a much more challenging context during the year.
Group revenues reached EUR21,995 million for the full-year, this represents a reported growth of 21.1%. At constant rates, the growth reached 16.6% above the upper end of the 14% to 15% targeted range. Our operating margin amounting to EUR2,867 million and up 10 basis points to 13% of our group revenues. This is in line with the targeted range of 12.9% to 13.1%.
After the operating expenses, financial and tax expenses, which I will further comment in a moment. The net profit for 2022 reached EUR1,547 million, up 34% year-on-year. The normalized EPS as adjusted for the transitional tax expenses climbed to EUR11.52, up 25% year-on-year. Finally, we generated a strong organic free cash flow of EUR1,852 million, largely exceeding the EUR1.7 billion targeted for 2022.
Our quarterly revenue growth clearly reflects our strong tractions throughout the year. Notably, despite the weakening macro, we posted another quarter of strong organic growth plus 12.8% in Q4. As anticipated, this is lower than what we had recorded in Q3, but this Q4 clearly came in above our expectations. This brings the full-year organic growth to 15.3%. Taking into account the Scope impact of 1.3 points for the full-year, our growth at constant currency reached 16.6% in 2022.
FX remained a visible tailwind in Q4 with a positive impact of 3.5 points, despite the strengthening of the euro in the last month of the year. This brings the cumulative impact from currency variations to 4.5 points for the full-year. As a result, Capgemini's reported growth reached 17.5% in Q4 and 21.1% for the full-year. With recent currency movements essentially now turning into headwinds, this impact should not be material in Q1, but could reach around minus 2 points for the full-year 2023.
Let's now look at our revenues by region. All group regions posted another year of double-digit growth at constant exchange rates. And my previous comment on Q4, very dynamic and better than anticipated, is also pretty much applicable to each of our regions. Growth was fueled by continued tractions in almost all sectors, as already exposed by Olivier. More specifically, for the full-year, at constant currency.
Revenues in North America increased by 15%, supported notably by a robust momentum in financial services, as well as in the TMT and manufacturing sectors. The U.K. and Ireland region reported another very strong year with revenue growth of 19.4%. The public sector remained buoyant in 2022, followed by the consumer goods and retail and energy and utilities sectors.
France reported revenue growth of 12.5%, mainly driven by strong dynamics in the manufacturing sectors, as well as in the consumer goods and retail sector to a lesser degree. The rest of Europe region grew 16.1%. Manufacturing and consumer goods and retail sectors contributing the most to this performance. Finally, revenues in the Asia-Pacific and Latin America region increased sharply by 30.6%. The strong underlying organic momentum, most notably in the financial services and the manufacturing sector was supplemented by group acquisitions, which had been completed in the course of 2021.
Continuing now our revenues by business lines. All group business lines also maintained a solid momentum in Q4 2022. Consequently, they all reported double-digit growth for the full-year at constant exchange rates. This broad-based traction is driven by digital transformation projects that are progressively expanding across the value chain of our clients.
Both strategy and transformation, our consulting services, and applications and technology services continued to benefit from a broad-based demand. The reported a record growth of 28.2% and 18% in 2022, respectively. Operations and engineering total revenue grew 13.4%, primarily driven by a strong demand for engineering services in addition to a solid growth in infrastructure and cloud services.
Moving now to the headcount evolution. Our total headcount reached almost 360,000 employees at the end of 2022, which represents a net additions of 35,000 employees year-on-year. In the talents market that remained tight throughout the year, this 11% increase demonstrates Capgemini ability to attract skilled resources to fuel its growth. The offshore leverage is up by 0.5 point to 58.5% after the strong progression recorded in last year, 4 points additions.
Lastly, as anticipated, attrition pooled further down in the last three months of the year, quite visibly on a year-on-year basis. As a consequence, on the last 12 months, the attrition is now up by only 2 points.
Let's turn to the operating margin by regions for 2022. First all, I'm pleased to report a strong improvement of our operating margin in France by 190 basis points year-on-year. In North America, our operating margin is relatively stable, down by 30 basis points year-on-year, but still well above the group average. The operating margin in U.K. and Ireland remains at a record level of 18%, similar to 2021, on the back of a favorable mix in this region.
The rest of Europe region margin is down by 70 basis points to 11.6%. After the one-off item record in H1, the operating margin was back up year-on-year in H2, as anticipated. Finally, the operating margin of the Latin America and Asia Pacific region stands at 10.6% versus 11.5% in 2021.
Moving on to the analysis of our operating margin. Our gross margin improved by 10 basis points in 2022, while the increase in sales marketing was compensated by the operating leverage on G&A costs. Overall, this means that the evolution of our project means in favor of more in region and value creating offerings has more than offset notably the two following items, not only the I/O costs of growing unscreened talents, but also the returns of some costs, notably the travel costs across our P&L.
Moving on to the next slide. Net financial expenses are visibly down to EUR129 million in 2022 versus EUR159 million in ‘21, reflecting mainly the high interest -- the higher interest income. Conversely, interest -- income tax expenses increased from EUR526 million in 2021 to EUR710 million in 2022. This amount includes exceptional tax expenses of EUR73 million compared to EUR36 million last year coming from the transitional impact of 2017 tax reform in the U.S. Setting aside this item, the underlying effective tax rate stands at 28.1% versus 29.2% in 2021.
Now, a quick recap of our P&L from the operating margin to net income. The other operating income and expenses representing the net expense of EUR474 million, down EUR27 million year-on-year. The mechanical increase of share-based compensation costs over the years due to Capgemini's share price increase was more than offset by a substantial decrease in the restructuring and acquisition related costs. As a consequence, the operating profit for 2022 climbs EUR2,393 million or 10.9% of group revenues, up by 80 basis points year-on-year.
After financial expenses and taxes, the net profit amounts to EUR1,547 million, up 34%, compared to 2021. It represents 7% of our revenues. This translates into a 32% increase of the reported basic EPS, which stands at EUR9.09. Excluding the exceptional tax expenses previously discussed, the normalized EPS is up 25% to EUR11.52.
Finally, looking now at the evolution of our organic free cash flow and net debt. We managed to generate in 2022 an organic free cash flow of EUR1,852 million, almost similar to 2021 record level and well above the EUR1.7 billion we're targeting for the year. This is truly outstanding achievement considering that in 2022 we had a much higher working capital requirements to fund the ‘21 categories in huge broad terms under liquidity environment was much tighter than in 2021.
The net cash outflow for acquisitions amounted to EUR204 million, while we returned to shareholders more than EUR1,200 million in dividends and buybacks. On the other hand, our 2022 employee share ownership plan led to a net share capital increase of EUR507 million. Overall, our net debt further decreased to reach EUR2.6 billion at the end of ’22, compared to EUR3.2 billion one year before.
Aiman, back to you for closing remarks.
Thank you, Carole. So let me wrap up. So 2022, we delivered a record financial performance. Let's illustrate the relevance of our strategy and market positioning. We also made substantial progress towards the 11 objective of our ESG policy.
For 2023, the comparison basis is therefore more demanding. The economic environment is also obviously less supportive than in 2022 and recognize it might still evolve in the coming quarter. Therefore, our growth outlook embeds at the bottom end at 4% constant currency, some potential further deterioration in the environment versus our scenario, and at the top end, 7% constant currency returned to a positive momentum in Q4.
With this in mind, I'm confident about 2023 and what lies beyond. We closed the year with a stronger momentum than anticipated and, therefore, enter 2023 on a solid footing. It's also about the secular trends, the trajectory towards a more digital and sustainable economy cannot reverse.
And finally, I'm convinced that the group's transformation over the past few years enabled us to be recognized by our clients as a strategic business and technology partner. Therefore, we maintain an ambitious trajectory and continue our investment to further strengthen our position.
Let's now open the Q&A. And to allow maximum number of people in the queue to ask question, that I kindly ask you to restrict yourself to one question and one single follow-up. Operator, could you please share the instructions?
[Operator Instructions] We will now take the first question. It comes from the line of Amit Harchandani from Citi. Please go ahead. Your line is open.
Thank you. Good morning, all. Amit Harchandani from Citi. One other question…
Hi, Amit.
Thank you, Aiman. I'll limit myself to one question. So if I could kindly ask my one question, which is around the free cash flow evolution in 2023. You've clearly delivered better-than-expected outcome for 2022. So if you could talk about the moving parts that allowed you to get to that number in 2022 in terms of liquidity elements factoring, any other puts and takes? And then whether that has influenced potentially the way you're thinking about 2023 in terms of working capital moves and other parts? Thank you.
Okay, Amit, thank you for your questions. Indeed, as you mentioned, the 2022 almost is quite similar to the 2021, but the makeup is very different. As you can see, we have an operating margin that is much higher in ‘22 by EUR0.5 billion as a result of the strong growth, as well as the increased margin expansion, so that's a positive element. But as expected and as we reported last year, we have a huge swing in working capital.
As you recall, last year, we had a positive one-off impact, positive impact of EUR529 million on our working cap. And this year, it's minus EUR193 million. So the cumulative is a negative impact of EUR0.7 billion. And as anticipated as well, we have some one-off this year, we benefit from a lower cash tax rate at 20%, which leads to a stable tax cash out in 2022, compared to 2021. And the rest of the balance, the EUR0.2 billion balance is offset primarily by elements like the other income and expenses, which are lower and the net interest expenses that is also lower.
And it is indeed, as you mentioned, a tremendous result. It's above our expectations. As we discussed further in Q3 results, we anticipated that we had some tailwinds in ‘21. So that was disclosed and well expected. What was not anticipated is, of course, the 21% reported growth and the impact on the working capital, because it puts some pressure globally in terms of volume, it's around EUR300 million volume impact. So it’s a demanding growth environment. And also the change in liquidity because, as you know, with higher interest rates come in a different environment from our clients with less desire to keep their cash on their balance sheet. So all in all, very strong performances.
So what we have done for 2023 is indeed an objective that is a very strong conversion of free cash flow, one of the best in the industry, and free cash flow to net income over 1 times. So our free cash flow for 2023 is linked to the fact that we will continue to benefit from higher operating margin but to a less positive impact on the one-off cash tax rate that we benefit in 2022 and some pressure on the working capital, so it's demanding and very good objective.
Noted, Carole. Thank you.
Thank you. We will now take the next question. It comes from the line of Laurent Daure from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thank you. Good morning, all. One question as a follow-up. The main question is if you could share with us comments about the start of the first two months of 2023. And if you have areas of worries for the coming months. And in particular, I know you are not very big in digital marketing, but if you could give us some highlight on that?
And my second question is regarding head count, the fourth quarter, you had a shy increase in head count. What do you expect for the months to come? And what's behind this relatively softness in the fourth quarter? Thank you.
Okay. Thank you, Laurent. So I'm not going to guide for Q1. I think we have a good momentum coming from last year. But definitely, our guidance show the cautiousness we have around 2023. Considering the economic environment and the economic outlook and the fact that the one things might still deteriorate compared to our scenario in the second half, right? So, that's really what I can tell you.
But in digital marketing, specifically, Laurent, I don't have anything really to say. We still had good growth on what we call customer for that embeds a part in -- at the end of last year, we did not see something sensitively moving in that direction. I don't really have a prediction for the moment on 2023. But again, it depends on which sector, for example, in the retail sector, which is a bit more impacted, there might be a bit more digital marketing, and that could have some impact on the digital marketing forecast, just to give you some highlights.
And then regarding head count, as many people we have slowed down, of course, the head count intake, and we are optimizing utilization. We have in front of us a much lower attrition and, of course, lower growth expected for 2023. And with that, we are optimizing our operation, taking advantage of the lower attrition and also factoring the fact that we have lower growth in front of us. In terms of prediction, we're not going to do prediction regarding head count growth, but to sustain our growth in 2023, we'll have to increase head count.
Thank you.
Yes.
Thank you. We will now take the next question. It comes from the line of Frederic Boulan from Bank of America. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking the questions. Fred at Bank of America. If we can come back a little bit on the comments you made around the assumptions you've taken in your revenue growth rate target for '23. If you can clarify a little bit your assumptions you've taken at the high and low end and how we should think about phasing considering kind of 12% exit rate, how do you see that shaping up through the year? And in particular, is there any specific regional segment where you expect things to taper a bit more aggressively than others? Thank you very much.
Again, here, I mean, again, I think phasing is always -- I mean, definitely, if you look at the low end, it's further slowdown in -- if you look at the low end, the guidance is further slowdown in H2, okay? And if you look on the other side, at the high end of the guidance is momentum coming back in Q4, right? That gives you kind of the Q4 here. But of course, we entered the year with a bit stronger footing coming out of Q4, right?
And then you're around basically lines and geos, et cetera. I mean geos I don't have many comments to be frank on that at this stage. I think on the line of business, we already highlighted, and you probably heard it as well from some of our peers. Definitely, there is one sector that has been under pressure is the tech sector. We are less exposed than some of our peers, but we are still exposed, of course, to that sector. Retail has also been slowing down. And in Financial Services, we start to see some consolidation.
On the other side, as you can see, sectors like manufacturing, with auto, aero, life sciences, sectors like consumer-packaged goods for us are still doing pretty well, and we expect the public sector to remain resilient. So you have a balancing view in terms of what we see happening currently in the market. But some of these things can change in the next couple of quarters, depending on the economic environment.
Okay, thanks, Aiman. Thank you very much.
Thank you. We will now take the next question. It comes from the line of Michael Briest from UBS. Please go ahead. Your line is open.
Yes, good morning. Congratulations on the strong finish. I guess a little bit of a follow-up to Frederic. I mean, Olivier, I think you talked about some slippage but Aiman you said the quarter was better-than-expected, and obviously, the book-to-bill was very strong. Do you feel better about the outlook today than maybe if you've been standing here three months ago? Has things improved do you think?
And then just in terms of the margin progression, obviously, clear guidance for this year, I'm thinking about the 2025 ambition of 14%. It does require a ramp-up. Do you have particular sort of line items that are going to drive that? Is it utilization? Is it -- what will get you to the 14%? Thanks.
Sure. Yes, so listen, on the Q4, yes, there is some slippage. And if keep, would even have a bigger bookings number. But as you can see, even with some slippage, we still performed pretty well in terms of bookings. So it shows a traction in terms of our clients' willingness to spend continues to be that. Of course, the question is going to be the start of the year and basically clients appetite? Are we going to see further slippage or clients are going to make decisions? And as everybody, clients are looking at the economic environment, the volatility. From one day to the other, interest rates will stop increasing or they will continue increasing, and this is not helping to be frank, in terms of client decisions. So that we -- that's what we have to live with for the moment.
In terms of the margin, I'm quite comfortable because in a year like 2021, we did 90 bps. Last year, we didn't do much. This year, we're planning 0 and 20 bps, but also you have the environment of this year. The environment of this year is that we have inflation, salary inflation. We have clients who are going to be a bit more conservative although we continue to push for price increases. We’ll also see probably some client consolidation, et cetera, which can be pressure right and left in some areas.
So we consider continuing to show some progress this year and then the quality of our portfolio and the continued value creation and strategic position give us ample room over the next couple of years to be able to do the 80 bps that would be missing if we get to 13.2%. So I'm still quite comfortable, because there's still some operating leverage, an environment which would become a bit more supportive as well going in ‘24 and ‘25 and the continued evolution of our portfolio towards higher value, which basically drive a better margin.
Okay, thank you.
Thank you. We will now take the next question. It comes from the line of Sven Merkt from Barclays. Please go ahead. Your line is open.
Yes, good morning. Thank you for taking my question. Maybe a first question on wage inflation. Could you quantify broadly how much of the seller increases you can pass on to your customers at the moment? And how this impacts growth in the margin in 2023?
And then the second question is related to the head count of employees under 25 years old, which increased significantly in 2021. Can you speak about the development in 2022? And how this is impacting your utilization average pricing going forward? Thank you.
So listen, on the wage inflation, as always, we try to pass as much as possible to our clients, and we have to do that at the same time as we're looking at how to increase the value of our offerings. So the two play in terms of helping to sustain and improve the margin.
We have, of course, wage inflation this year, which remains high because of the inflation that our employees and our talent basically incurring across the world then of course that's part of what we take into account in terms of fixing the salary increases. So there is still some pressure coming from there. There's still some pricing traction in the market. And between efficiencies we expect to do and continued evolution of our offerings towards more high value added, we feel quite comfortable in terms of being able to sustain good margin and increases a bit.
On the head count, it was expected with a shortage of labor in the market in the last couple of years that the pyramid will become a bit more junior. But this is welcome because for me, it's a way to put a lot more energy in our workforce. And as these people gain more experience in the next couple of years, we have a very high energy, very digital and buoyant workforce. So for me, it's positive.
Again, of course, the -- depending on the project, et cetera, you can see that some of it is linked to experience of people in terms of pricing. But the reality more and more is based on skills. So I can have somebody with two years or three years of experience, having, from my perspective, higher valued skill than somebody who has 10-years of experience. What we look at more and more is the skills of people and what they're able to deliver versus just the number of years of experience. And I think this new more young workforce has potentially capacity to evolve much faster with the right skills to address some of the needs of our clients.
Great. Thank you very much.
Thank you. We will now take the next question. It comes from the line of Nicolas David from ODDO BHF. Please go ahead. Your line is open.
Yes, good morning, Aiman, Carole and Olivier. And congrats also from my side for this strong finish. My questions are the following. The first one is regarding North America. The region showed kind of a sequential contraction beyond the traditional seasonality. Is it linked to the slowdown we see at group level in the retail or the BFSI sectors? And what do you see for the region in early ’23?
And my follow-up is regarding M&A. What is leading you to reach a lower M&A contribution in ‘22 and also expect a lower contribution to this reason as your mid-term ambition? Is it mainly due to market condition or maybe some cautiousness or execution issue from your side?
Listen, on North America, there's not much to say. I mean, going into 2023, what I would look at in North America is this is where we'll have the biggest tech exposure, right, and that's a bit under pressure. So that might put a bit of pressure on North America, but at this stage, I would not say something significant is visible on that front. So this is just trying to estimate the potential impact based on the sector exposure.
On the M&A front, M&A is something speculative. I mean whether we make this or not make this on the size of the deals, depends. So we have done a number of last year that basically give us a bit more than 1% overall in terms of inorganic growth. This year, we said between 0.5% and 1%. It might go up to 2%, depending as well on what we closed during the year. So for me it's not -- as you know, it's not our objective to automatically do plenty of acquisitions every year. We have the capacity. We have some needs. We have to ensure that what we find matches our needs is also at a price where we consider we can create value. And if you find the right target, then we'll trigger. But we have an active pipeline on which we continue to work that will continue to drive some of the M&A activity for this year.
Thank you.
Thank you. We will now take the next question. It comes from the line of Stefan Slowinski from BNP Paribas Exane. Please go ahead. Your line is open.
Great. Yes. Thank you and good morning, Aiman, Carole and Olivier, and congrats as well on a strong 2022. I guess my first question is just a follow-up on the margins and the outlook for 2023. You talked about some of the potential headwinds, I guess, you may have in terms of consolidation and customer discussions. Just wondering what the tailwinds are there. The slowdown in hiring lower your trading costs and hiring costs and what other things can be tailwinds to the margin this year?
And then my follow-up, my second question is more of a big picture one, just around the emergence of these large language models we've been seeing in the artificial intelligence space with Microsoft, with OpenAI, with their GitHub Copilot offering and which kind of allows for the automation of code writing. I'm just wondering if you're using these technologies already. And as you look forward, do you see these technologies as an opportunity in terms of helping you lower costs? Or is there a risk in terms of potentially creating deflationary pressures for you? Thank you.
Carole, on the margin, tailwinds.
On the margin side, so on 2020 -- 20 basis points increase is remarkable, as you mentioned, because the environment is underlined by higher inflation and we have tailwind. I mean the tailwind. the first tailwind that we have is linked to the quality of our revenues. As you know, the mix and price of our revenue is very important. And all the more that we are increasing year after year, the cutting-edge capacity in digital in the playing field of customer first and Intelligent Industry where we are leaders, so it's the first one. And of course, with respect to 2023, we have some tailwind in the utilization rates as well. So all in all, we are confident in our capacity to meet the target.
Okay. On generative AI, as they're more broadly called, which includes some of the latest hypes that we hear. Just know that we have been working on this for a number of years, it's not something new for us. Just the fact that it's emerging more in the market from a technology perspective and especially that is getting put as free use in a certain way for people to touch and feel the impact, I think this is what kind of creating a lot of the hype. We are looking at some of these. We're embedding some of this in terms of co-generation. It's also creating opportunities for work we do with clients, but, as I said, we have been working on generative AI already for a number of years. It is interesting.
Again, as like with everything, like the metaverse, like with all what you hear, there's a difference between the hype we have at the beginning and the actual applicability in terms of having an impact. And some of what people talk about, yes, some of it will happen, it will take longer, has to be more careful, because you have to ensure some of the impact. You saw the backlash on Google on something very simple what happened. So, if you embed that in some of your critical processes you better make sure that it's absolutely reliable. So, there is difference between what you can see appearing through some trial or experiences and what we can really embed behind as being something reliable, 100% bullet proof into processors or co-generation, et cetera, right.
And, here, like everybody, we have people working on that. We have a point of view. We're progressing bit by bit, but I do not think it can have the impact that people expect at the speed that people expect. I think, again, there is a bit of a hype that will come down on this.
Understood. Thank you.
Thank you. We will now take the next question. It comes from the line of Toby Ogg from JPMorgan. Please go ahead. Your line is open.
Yes. Hi. Thanks. Thanks for taking the question. And just on the offshoring side, obviously, you ticked up a little bit there year-over-year in 2022 and it's been sort of stable over the last sort of four to five years. Should we expect that offshoring rate to start decline now sort of over the next few years? And are you seeing sort of any change in appetite from some of those European, Continental European, customers that have perhaps been less receptive to an offshoring model historically? Thank you.
Yes. So, listen, good question. First, just to put things in perspective, actually, offshoring has increased quite a bit. You have to look at it with the Altran. When we acquired Altran with a much low offshoring rate, it went down, then it went up quite a bit after that coming out of COVID, so actually it has been a strong progression over the last couple of years.
Again, yes, there is more appetite from European clients, because notably the shortage of talent that we have seen appearing has even opened appetite for clients in countries like Italy and Spain. We continue to do good progress in countries like France bit by bit. It's been over many years, but every year it increases a bit. So, we are getting there. As you know, I'm not obsessed by the offshoring leverage, because you have two things happening. On one side, we continue to move more work towards global delivery center, but we also automate more and more. We just had the discussion about generative AI on some of the automation we are bringing in the operation, so this too kind of play against each other.
But the shortage of talent even if we have a better market, I think, over the coming quarters, the shortage of talent will continue to push towards global delivery center. Here, we are moving to the optimization phase like everybody with a talent offshore, but it will restart probably in the coming quarters because of the need to be able to find talents in -- to be able to support the delivery.
Great. Thank you.
Thank you. We will now take the next question. It comes from the line of Charles Brennan from Jefferies. Please go ahead. Your line is open.
Great. Good morning. Thanks for taking my question. I'm going to go with two quick ones, if I can. Firstly, can you just say a few words on the competitive environment? You are obviously outperforming at the moment, but some of your peers are starting to do less well. I'm starting to hear suggestions of people facing utilization problems and I'm starting to hear some pricing pressure coming through in the market, is that something that you're seeing at all?
And then, secondly, just on a small financial point. If I go to the cost breakdown at the back, it looks like your subcontracting costs are going up. Does that reflect the challenge of trying to get good people or is that you trying to build some flexibility into the cost base ahead of a more uncertain economic environment? Thank you.
Okay. I'll ask Olivier to answer your --
Yes. On the competitive environment, I would say, what we see -- what I see is that most of our clients our clients, Capgemini's clients are continuing to invest in their digital strategic initiatives. So, some of them, but it's a minority, are shifting towards more cost cutting, vendor consolidation, so -- and there I would like to make two comments on this one, because it's – first, it's far from being the cost demand we see. That's my first observation. So maybe some of our competitors have different client portfolio, which I cannot comment.
The second point is, even for those of our clients, who may go vendor consolidation and all, cost take outs of their IT budgets, most of the time we are in a good position to consolidate. So, I think, the takeaway for that is that, our positioning at the clients we have, remains mainly geared towards strategic digital transformation, which helps.
And maybe on the point of subcontracting, in fact, if you look at 2022, it decreased slightly as a percentage of revenues. And if you look at our headcount, it increased -- 11% increased basically mainly of our good capacity to attract talent at the right pace.
Yes. We have not over-leveraged over -- our subcontractors. We have been able to continue to attract talent actually to be able to drive quite a bit of the gross, Charles. So, we're not -- we haven't been as dependent on subcontracts.
Absolutely, it has increased, but in percentage of course it actually has come down.
Perfect. Thank you.
Thank you.
Thank you.
So, thank you. This will be the last question and -- okay, so one more question then.
No problem.
This will be the last.
We will now take the last question. It comes from the line of Amit Harchandani from Citi. Please go ahead. Your line is open.
So that's your follow-up, Amit.
Yes. Just wanted to ensure that the others came in. The follow-up is, I guess, I'll ask a more broad-based one, please. You have probably reported to the best of my understanding the best organic revenue growth quarter -- revenue growth year, sorry, for Capgemini last year, at least in the past two decades, which comes on top of a double-digit organic growth year in 2021, even in 2023 you're targeting 6% organic growth at the high end, despite some uncertain macro.
So, what do you think is the sustainable organic growth rate for this business given the positioning you have today? And I say this particularly in the context of what you had shared with us at the CMD in 2021. I'm not looking for a formal guidance, I get that. But what do you think is the underlying growth rate for the business going forward longer term?
You are a bit early for that discussion. Definitely, I think -- I mean, what we see in terms of perspective is that the potential in the market is there, right, that -- what I call, that transition towards digital and sustainable economies is definitely happening. So, the growth potential is there for Capgemini. The question is all about the positioning we take in terms of creating value for our client. That's why our big focus around that positioning in terms of business and technology partner to CXOs, we are beyond -- way beyond the CIO and to help them drive that there's been transition. The more we able to move our offering there, the more we able -- to be able to drive pretty good growth potential over the coming years. But a bit too early to talk about underlying growth rate for the coming years, but the confidence is definitely there, and the positioning is there, so it's for us now to execute well to be able to take advantage of the growth potential that will happen over the coming years.
All right. Fair enough. Thank you.
Thank you, Amit. So that was the last question. So -- and we see some of you over the coming weeks, if not our Q1 revenue and bookings will be on 4th of May. Have a great day.
Bye.
Bye.
This concludes today's conference call. Thank you for participating. You may now disconnect.