CGI Inc (GIB) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the CGI third quarter 2010 results conference call.

I would now like to turn the meeting over to Mr.

Lorne Gorber, Vice President, Global Communications and Investor Relations.

Please go ahead, Mr.

Gorber.

Thank you Joe, and good morning.

With me to discuss CGI's third quarter fiscal 2010 results are Michael Roach, our President and CEO, and David Anderson, Executive Vice President and CFO.

This call is being broadcast on CGI.com and recorded live at 9 a.m.

on Tuesday, July 27, 2010.

Supplemental slides, as well as the press release we issued earlier this morning are available for download on CGI.com along with our Q3 MD&A, financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking.

Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The complete Safe Harbor statement is available in both our MD&A and press release, as well as on CGI.com.

We encourage our investors to read it in its entirety.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures which should be viewed as supplemental.

The MD&A contains definitions of each of these non-GAAP performance indicators used in our reporting.

All of the figures expressed on this call are from continuing operations and in Canadian dollars unless otherwise noted.

I will turn the call over to David first to review the financial results for the third quarter, and then he'll pass it over to Mike, who will discuss a few strategic highlights.

So with that, David?

Thank you Lorne, and good morning.

Once again I'm pleased to share the financial details of another good quarter.

Revenue was CAD 901.6 million.

Foreign exchange fluctuations negatively impacted revenue by CAD 55.3 million, or 5.8% compared with the same period last year.

When adjusted for ForEx, year-over-year growth on a constant currency basis was 0.7%.

EBIT of CAD 124.5 million is a 10% improvement versus Q3 of 2009.

While our EBIT margin strengthened this quarter to 13.8% from 11.9% in the third quarter of 2009.

Earnings from continuing operations in Q3 2010 were CAD 85.9 million, or 12% better than the CAD 76.7 million reported in Q3 of 2009.

Our earnings margin from continuing operations was 9.5%, up from 8.1% in Q3 of fiscal 2009.

Diluted earnings per share in the third quarter were CAD 0.30 cents.

This compares with CAD 0.25 cents in the same period last year or an increase of 20%.

Included in these results were CAD 4.2 million of professional service expenses related to our pending acquisition of Stanley.

As well, there was a partially offsetting positive net tax adjustment of CAD 3.6 million related to the final determination and expiration of limitation periods.

Excluding the effect of these items, our earnings from continuing operations were CAD 86.5 million, representing a margin of 9.6%, while the earnings per share on a diluted basis would have remained unchanged at CAD 0.30 cents per share.

We generated CAD 102.8 million in cash from operations in the third quarter, or CAD 0.35 cents a share.

This would have been CAD 124.3 million for the quarter had it not been for the early funding of the Canadian payroll that fell on the Canadian statutory holiday of July the 1st.

This CAD 21.5 million variance reverses in Q4.

Against a target of 45 days or less, our DSO at the end of Q3 was 36 days, an improvement of 5 days versus last year.

We have remained focused on improving our DSO and our efforts over the last year continue to be seen in our cash management performance.

In the quarter we acquired 7.1 million shares for CAD 111.8 million at an average price of CAD 15.78 per share.

Under the normal course issuer bid program renewed in February, 10 million shares or 40% of our allotted amount had been repurchased thus far, leaving us with 15.2 million shares which can be purchased over the remainder of the current program, which expires in February 2011.

As a reminder, we still have a CAD 1.5 billion dollar credit facility in place until August 2012.

At the end of June our net debt was CAD 6.4 million, largely due to our ongoing share repurchase activity.

And for the last 12 months, our return on invested capital was 16.8% and our return on equity was 16.1%.

Finally, as you model out the remainder of our fiscal year, I'd like to remind you that onetime additional expenses related to the Stanley deal will be forthcoming in Q4 and as in the case each year, on a sequential basis, remember to consider the typical seasonal impact of vacations on our Q4 results.

Now, I'll turn the call over to Mike.

Thank you David, and good morning everyone.

I am very pleased with our performance this quarter and year-to-date.

For the second consecutive quarter year-over-year and on a constant currency basis our global revenue stabilized and is growing in North America.

We continue to anticipate a gradual strengthening of our revenue in the coming quarters.

Our North American operations grew by nearly 2% at a constant currency basis during quarter three.

In the US, at constant currency we grew at 4%, demonstrating the ongoing strength of our federal, state and local government franchises, as well as our ability to create and seize growth opportunities while increasing our recurring revenue and backlog in this key market despite some uncertainty at the macro level.

In Canada we grew by 0.4% in quarter three.

As anticipated, each quarter gradual improvements continue to be seen as our long-term outsourcing clients begin to invest in IS&C projects.

In addition, our business development efforts are beginning to attract new clients such as our end-to-end seven-year CAD 125 million deal with Atlantic Lotto as well as our multiyear, multimillion dollar deal with The Beer Store.

With respect to Europe, the European economy continues to have a short-term marginal impact on our global operations.

To address these adverse market conditions we continue taking proactive measures which will better position us to take full advantage of the economic recovery as it occurs.

Globally, quarter three bookings came in at CAD 838 million or 93% of revenue.

Once again I want to remind you that bookings are lumpy in our business but we're off to a good start in quarter four, having booked and announced key deals with Rexel, Gesso and the State of California.

We believe bookings on a trailing 12 months are the best proxy of future revenue and by that measure our book-to-bill is 113% or CAD 4.1 billion in bookings over the last year.

We continue to maintain a healthy and stable backlog of more than CAD 11.4 billion in long-term contracts.

As well our consistent ability to execute the numerous levers necessary for margin improvement continues to be evident year-over-year.

EBIT at 13.8% in quarter three is up from 11.9%.

Net margin at 9.5% is up from 8.1% and earnings per share of CAD 0.30 cents per share is up from CAD 0.25 cents, representing an improvement of 20%.

While our margins remain the most consistent and the best amongst our North American and European peers, we remain committed to better executing against these levers and in the process gradually improving our margins and earnings per share over time.

As reported, we continue to generate very significant cash from our operating activities, in fact, over the last 12 months we have generated CAD 586.3 million in cash from operations, or CAD 1.96 a share.

We continue to prioritize the deployment of our cash with a commitment to making the most accretive investments for shareholders, including maintaining the flexibility to continue buying back shares as we have done this quarter and year-to-date.

We believe our consistent, best in class performance supports a higher valuation over time.

This commitment to creating shareholder value is further reinforced by our return on invested capital which over the last 12 months is running at 16.8%, a 300 basis point improvement over the same period last year.

Let me provide you with a brief update on our proposed acquisition of Stanley.

As most of you are probably aware, on July 12th we announced the extension of our tender offer until August 2nd.

At the time of that announcement, 84% of the Stanley shares had already been tendered.

With respect to meeting the closing conditions there are four major regulatory approvals required to get the deal done.

To date we have met the conditions relating both to Hart-Scott-Rodino and the International Traffic in Arms Regulations or ITAR.

Conditions relating to the Defense Security Service and CFIUS are still not met.

As these processes are confidential, I'm not able to comment further, but we will continue to make announcements at the appropriate time.

In summary, we delivered a very strong quarter in mixed market conditions and we remain confident that our adherence to fundamentals combined with the relevance of our solutions and offerings, both people and IP will continue to create new opportunities which will result in profitable revenue.

Let's go to the questions, Lorne.

Just a reminder that a replay of this call will be available either via our website or by dialing 1-800-408-3053 and using the pass code 2614647 until August 10th.

As well, a podcast of this call will be available for download at either CGI.com or through iTunes within a couple of hours.

Follow-up questions can be directed to me at 514-841-3355.

Joe, if we could poll for questions from the investment community, please?

(Operator instructions) Our first question is from Tom Liston with Versant Partners.

Just on the overall conditions and outsourcing them, you had a pretty good bookings quarter mainly in Canada, but some of your peers like IBM reported something like 19% down year-over-year.

What do you see out there globally in terms of size and what have you just for that market overall?

Tom, I kind of mentioned that there's mixed conditions out there.

Europe, as I said, continues to be severely challenged by the economic recession.

Canada seems to be coming along nicely.

US I would tell you in the last three months a little more uncertainty in the US market.

Having said that, as you mentioned, our bookings were a little light relative to the quarter but on a year-to-date basis, 12-month basis we're still well over 1.

I was pleased with the bookings in Canada and if you look at some of the bookings we made there, there were new clients and outsourcing deals.

I think my sense is that there's going to be continuing growth in outsourcing.

That middle-sized deal is a sweet spot for us.

Our local proximity model plays well to that market.

You saw that with the Atlantic Lottery, The Beer Store.

On the other hand, Rexel is North American wide, State of California opportunities.

So we still feel good about where we sit in the market.

We're very focused in areas that are continuing to invest and grow, so even though conditions may be a little more mixed than they were a quarter ago, we still feel good about where we are and the opportunities that we have in front of us.

And with that, obviously California you won that on the healthcare services side and you announced LA County going live with the HR payroll system and certainly they're fully baked, if you will, with your product.

Can you talk about the fiscal project, I guess if you will, there's three competitors and where your competitive positioning is there since it seems to us that you have a leg up in that situation, given that LA County is something like 27% of the state?

Can you comment on the conditions and what the project looks like and some of the timing elements?

Sure.

Again, just to give everyone the background, what's being referred to is that we were selected for Stage One contract for the State of California Financial Information Systems called FISCal and again what we're really bidding here is our full end-to-end AMS advantage which is our enterprise resource planning solution.

And as Tom mentioned, we do have LA County on this platform.

LA County is, if not the largest, one of the largest counties in the United States.

Our Advantage solution is a proven solution; it's functioning and working in over 40 states and we've been chosen for a seven-month fit gap project.

We believe that we obviously have the best solution.

This is a large multi hundred million dollar initiative and we like where we're positioned and I think the decision is probably into next year, August or so of 2011.

So again I think, Tom it shows a couple of things; one, as I mentioned earlier, there are still good opportunities out there and as I mentioned in my remarks, we have both the IP and the people here to win these type of deals.

Your next question is from Paul Lechem from CIBC.

Mike, on the Stanley acquisition I know you are limited in what you can say, but you previously stated that you hope to get this deal wrapped by the end of your fiscal year; are you still confident that that's achievable?

Yes, I haven't changed that position.

As I say, I'm really not in a position to say a lot.

The processes are sensitive and confidential, so again, we continue to work through the process and as we said, I think the original call that the fall was certainly a goal that we had to try and get the deal completed.

So there's an ongoing dialog then that you're having with the regulatory authorities on closing this?

Yes, as I said in my prepared remarks, there are two processes that are both confidential and we continue to work through those processes.

Is there anything unusual that might have - you don't have to give details on what it is, but from prior to the acquisition starting off here, is there anything that's unexpected in terms of the regulatory process that weren't aware of that's different than might have been expected?

I think if I comment on that Paul, I'd be stepping beyond what I said in my remarks.

I really don't think it's in the best interest of the customers, the Stanley employees or frankly investors to get into a public dialog around a confidential and very sensitive process and I think as I explained before, as you know, 75% of the revenue of Stanley is in the intel space and I think it's prudent for me to let that process continue.

In terms of the US, as you mentioned, in constant currency US revenue got 4% year-over-year but relative to fiscal Q2 US revenues were down CAD 30-odd million in constant currency; is there anything that we could be thinking of quarter to quarter sequentially that might have been different?

What leads to the variability there?

Just the market, time to close deals.

Again, I know you gentlemen look at quarters; I really look at trailing 12 months.

I think again, the way we operate our business is that we're focused on doing deals that we can live with and deliver value over long periods of time, so I really don't push to have something done in a quarter.

I don't think you should read anything into that.

As I said, it takes time to close these deals.

If you look at the State of California as a good example, you know, we're sitting here in July of 2010 and that deal, should we be successful, won't close until August 2011.

So I think one needs to take a look at duration, size of contracts and things we're working on.

So I don't read anything into a quarter-over-quarter.

I think what's important here is that we've continued to grow in constant currency our business in the United States, which against many of our peers is rather rare.

So I think it shows that the franchise we have there is strong and it continues to deliver significant value not only on the revenue side, but again, when you look at our margins, our operating margins in the United States and Canada in fact are exceptionally strong and I just again think that if you look at it in total, we continue to run a very strong operation in the US and in fact globally, top line, bottom line, cash, balance sheet, across the whole spectrum.

I agree.

I was just wondering if there was anything in particular that might have dropped off in fiscal Q2 that wasn't in Q3?

No.

No contract loss?

Or anything finishing, any major contracts which were finished?

No, not that would be material here.

Your next question is from Eric Boyer with Wells Fargo.

With some of the conditions starting to become more mixed as you discussed, do you expect organic revenue growth to stay positive going forward?

I think last quarter you indicated it was positive a quarter early but you wouldn't expect a linear progression higher in terms of organic growth.

I still think that, again, we're positioned; our Canadian operations now, as I mentioned, is also positive for the second quarter so summer quarter, as Dave mentioned, is a bit of an anomaly when you look at the vacations but I'm expecting that the October-December quarter as a lot of clients push through their final projects for the year, that we should see activity continuing to pick up, Eric.

So, yes, I still think that directionally the market is coming back but I would say it's a little more mixed and a little more tentative than I would have thought, given where we are on the recovery.

Okay.

Then just on the US commercial side, are you starting to see a slowdown again in System Integration consulting or a pause again in the larger outsourcing deals or is it just more of a timing issue?

You know, I looked at that, Eric.

Our funnels are still healthy there.

I think it's just time to get the deal over the line.

There seems to be a lot more diligence around crossing the Ts and dotting the I's so some of these deals are slipping over.

The other thing, as I mentioned before, Eric, if you look at us, we're doing more international business now and approvals across the Ocean and they add time to getting deals done and as a result some deals don't make the quarter, they make it 10 days after the quarter.

But no, our funnels are still healthy, we still have a good visibility on some great opportunities but it just seems that certainly last quarter, getting deals over the line took a little longer than I had anticipated.

Your next question is from Eyal Ofir from Canaccord Genuity.

Just a quick question again on the revenue looking forward.

The first and second quarter of the year you guys booked some really healthy signings; are you going to see some of the contracts that you booked come on stream in the fourth quarter or is that something we should expect more in Q1 or Q2 next year?

I think they're a slow ramp-up.

I would say more of it's going to be in our first quarter which is in most cases the final quarter of our clients' because they're on a calendar fiscal, so I think you'll see more of that in the October-December period.

But we are kind of ramping up on some of those, but again, going through the summer quarter, I don't think you'll see a lot of that.

Okay, so for our own modeling perspective we should think about revenue being slightly flat or slightly up from where it has been when we look at constant currency in this quarter compared to Q4?

I think Dave gave you some inputs to look at your modeling there, but again, this is going to be a gradual return.

As I said a year ago, I don't think you're going to see a big up-tick here.

If you look at the whole market and you look at the competitors as well, this thing is going to be gradually turning back up.

But again, I remain very optimistic.

As I have said numerous times, there's very little that can be done in government or business without technology.

Companies can slow down for a while but to meet their demands and competitive pressures, they have to invest in information technology.

We have a nice mix of solutions, IP, various offerings in terms of how people can buy and finance their technology investments and I think we're well positioned to take advantage of that up-tick as it continues.

One last question from me.

On your funnel that you talked about, are you seeing that still skewed towards the government side and the financial services segments or are you seeing some opportunities in other segments that are relatively sizeable there?

We're starting to see opportunities.

If you look at some of the bookings just two or three that draw your attention to, you know, Rexel, The Beer Store, Atlantic Lottery, Gesso, so we are seeing other opportunities in the more general business market starting to come back and again, they're nice deals in our sweet spot that play well to our proximity model and our global delivery model.

So yes, we are seeing more deals in those spaces and they are new customers for us, which is another positive indicator of activity in the market.

Your next question is from Mike Abramsky from RBC Capital Markets.

Just back on some of the growth, you do talk and I understand very much about the point of long-term bookings, but even on a trailing 12-month basis US constant currency growth is now 7%, past prior quarters before that it's 9%; US growth the weakest it's been in six quarters.

I understand the whole point about lumpiness and long-term bookings but past quarters do need to flow into revenue and I'm just wondering what visibility you now have to quarterly revenue over the next few quarters and how that plays with your comment on mixed market conditions?

Again, I think we do have good visibility.

What we can't control of course is the timing of these things, Michael and as we become a larger company and I use the State of California but you could look at other deals that are large long-term deals and one invests a lot of time, in some cases years before those business development activities actually turn into bookings and revenue.

So part of that is the nature of where we hunt, the size and scale of the deals that we're pursuing and of course part of our strategy is to always improve the mix of our revenue so the quality of the revenue.

A lot of those deals are IP based and you see the benefit of that.

I'm halfway through the call and I haven't got a question yet on our margins that are the best in North America and Europe, the most consistent.

So what we do is look at all the dynamics of the business and part of that is making what I consider astute long-term investments that pay significant benefits back to our shareholders and clients over time.

So you've got a bit of a mix here as we continue to improve the quality of our revenue and increase our backlog.

If you look at our United States operations when we acquired AMS our recurring revenue was probably less than 5%; today it's over 50% which makes us a very defensive play in choppy market conditions.

So I tend to look at it more holistic, but again, I still feel good about where we are in the United States.

As I say, if you look at our growth, we're certainly one of the few companies that are continuing to have positive growth in North America.

Okay.

If we turn to Canadian revenues for a minute, last quarter you said that you expected a gradual ramp throughout the balance of the year.

It seems a little surprising when Canadian revenue growth if flat quarter to quarter and also you've got Desjardin coming off which I guess is about 30 million a quarter, 120 million a year, which is about 5% in created Canadian revenue that's going to be absent mid 2011, so just wondered if you think we'll see Canadian growth stay above zero or could it potentially go negative going forward?

Well I don't give revenue guidance, Mike, you know that.

I'm not going to comment on Desjardin.

I said I would have more comments in April of 2011.

Okay, but what about your comments last quarter you did say about gradual ramp relative to how your Canadian revenue growth performed this quarter?

Do you still expect a gradual ramp?

Mike are you on a speaker phone, because we're getting an echo back here.

Can you pick up your handset?

I'm sorry, I can't but all I was asking is if you're still expecting a gradual ramp in Canadian revenue as you said last quarter?

What I said in answer to an earlier question, I expect stronger in the October-December period as a lot of my Canadian clients' fiscal year aligns to a calendar year and therefore the investments are heavier in that period.

I'm in the summer period right now and as you know, when the SINC Services with vacations you normally have an impact sequentially relating to that and Dave highlighted that in his comments.

Your next question is from Paul Steep from Scotia Capital.

Maybe you could talk just a little bit about the long-term here, go away from the quarterly.

You guys have been investing heavily over the last couple of years; maybe some of the initiatives in terms of diversifying out the business or how you're at least feeling about the mix between government and the other verticals and you know, a balanced portfolio is going to skew a little bit?

What else have you been doing in the business to sort of bring up those other verticals, given size wise the others will bump up pretty big with Stanley?

I think that's a good comment.

As we've seen and positioned ourselves to go through probably the last 12 to 24 months of rough seas, we focused heavily on government and financial services and obviously our strategy was we wanted to make sure that we were very focused on those verticals that were more recession proof than the other verticals.

And in those areas we've made investments both organically into our IP and the financial services space in particular where we are looking to push more of our revenue to be recurring, our software as a service.

In government, again we push heavily in positioning our ERP Advantage momentum and tried to move those and continue to do that, to move those into a managed service environment, hence further recession proofing us going forward and building up our backlog and recurring revenue in those spaces.

Now, to your point, what we've been doing in the interim, of course, are in parallel; we've been looking at the other verticals.

And again, some of the things that we're investing in is the healthcare area.

We believe that it is also recession proof and you will continue to see us announcing deals and opportunities in the healthcare space both in the United States and in Canada.

We've also been sharpening our strategy around the oil and gas industry.

We believe that there are opportunities there, as that sector picks up, and again, the general commercial areas in terms of focusing on healthy businesses that are in other sectors; good franchise businesses that are also recession proof.

The Atlantic Lottery is a good example, other deals where businesses and companies are looking to improve their competitive advantage.

We have competitive advantage which goes to our proximity model, the strength and really the balance in our global delivery model.

So we've been investing in IP in those areas.

We've been looking to work with companies in the insurance space as another example, to come up with solutions that will help them take advantage of the upturn.

So yes, we've been defensive in some areas to get by the rough times, but we've also, to your point, been investing in other areas; a lot of it IP based because we believe that the opportunity for profitable revenue growth is better there, it also is stickier and it adds to our backlog and recurring revenue.

So that's how we see it and again, healthcare is an area that we think there's a lot of opportunity going forward.

Great.

The last one then sort of ties to that.

I don't want to take Stanley as a given.

Let's set aside the amount of money you would spend for Stanley; if we look at your capital structure, going to what you just said, I guess the surprise in the quarter was the significant buyback and sustaining that.

Are you looking to bring the leverage back up to more normalized level and I guess push the investment needle on buyback, putting it into IP or organic investments as we come out the other side here?

Is that a way we should think about it?

Again, I don't feel we're constrained that way.

We have the financial capability.

As you mentioned, if you look at the quarter, we bought back 7 million shares.

We actually didn't buyback for about a two-week period around the Stanley announcement just to be prudent and as Dave mentioned, we're tracking well to the ability to pick up our full allotment.

We have enough time and we certainly have enough financial resources to do that.

We believe our stock is still not fully valued relative to the peer group and relative to our performance.

But on the other hand, we continue to invest in solutions.

We have an investment committee; we've looked at next year; there's a lot of good opportunities that have been brought forward by the operations in terms of investments to be made.

So, we have those investments covered.

We have the cash flow to continue to buyback our shares and we continue to look for other accretive acquisitions.

So we don't feel that we're constrained here.

Of course against that backdrop, we have our line of credit that's established to August 2012.

So we believe we're in a great position, we have a lot of operating flexibility supported by a very strong balance sheet and a very strong cash generation ability.

So we think we can continue to be very strategic but also very opportunistic; we can move fast if we see something that will add long-term value to our stakeholders.

Your next question is from Ralph Garcea from Northland Capital Partners.

Just quickly, on the Canadian side the revenues are holding in there, you've managed to bring the EBITDA margins back up to the high teens; what's keeping you from getting those EBITDA margins from the US business?

Are there leverage issues and as you grow that business you'll start seeing the higher EBIT margins or is there something structurally on the US side then?

No.

Just to remind you, the US operations are carrying the intangibles from the AMS acquisition and it's about - and IMR so I think when you add that in, Dave what do we consider about 1.5 points or 2?

About 1.5 points on margins, Ralph, that are in the intangibles.

So no, I think the US operations, when you look at it, the margins aren't that far off to the Canadian margins when you consider that.

And of course we have more scale in Canada and we still have more outsourcing opportunities here so on the utilization level we can continue to drive better margins here.

And then finally in Canada, I mentioned before, we continue to work through our transition to the 40-hour work week, which over time will continue to pick up some margin gain there relative to actually increasing our billing of our people in Canada.

So no, I think the two operations are very close and are really performing at best in class margins here.

Will you look for lower cost centers beyond Troy and Virginia?

Yes, we're going to continue to do that.

You know, Southwest Virginia hit the original capacity of the billing, in fact it's over capacity and we had to move to another location in Southwest Virginia.

Troy is ramping up and so we continue to look for other areas.

That model has worked very very well for us in terms of winning business, retaining business and also improving our margins.

Okay.

On the European side, I know you guys are continuing to restructure there, but are we six months away from seeing positive EBITDA again?

What are the delays there other than specific country issues, I guess?

We kind of got two or three headwinds there.

We're relatively small there so in a downturn of course we've got some fixed costs against a small top-line so we're taking the opportunity, as I mentioned, to actually restructure and put ourselves in a position to come up the other side of this thing a lot stronger.

And then of course we've got the currency headwind here, the strength of Canadian dollar to the Euro is what, an eight or nine-year high.

So we've got a couple of headwinds that way but on the other hand, what I like about that and you'll continue to see that as some of those large European clients consolidate their vendor list, CGI is showing up as one of five or one of seven global vendors to these large corporations.

So that, from a long-term perspective tells me that we're well positioned to grow our businesses in Europe and globally, because a lot of these firms have operations in North America and in Europe and in other areas in which we operate.

So no, on one hand we have a low exposure to Europe at a tough time, on the other hand we still believe Europe is a great place for us and we're actually, again, very much to our philosophy here.

As you know, you've followed for a long time, Ralph, we take opportunities like this to position ourselves better for the long haul.

Your next question is from Steven Li of Raymond James.

Mike, we discussed Canada a little bit but can you maybe comment and compare Canada and the US; are market conditions in Canada better or worse compared to the US?

Thanks.

It's a good question.

I guess up into this point I've been kind of lumping North America together but as I mentioned, I think in the US over the last quarter or so there's been a little more uncertainty at the macro level.

Canada seems to be more stable and more consistent over the last six months.

We are seeing more deal flow in Canada relative to the last six months and as you've seen we've been able to close a number of those deals last quarter and this quarter.

I haven't said that.

I don't want to leave the impression that I'm not confident or optimistic in the US.

I absolutely am.

We've got a great franchise, a great team, they've been performing well, they fought their way right through the biggest downturn in 60 or 70 years and been posting positive organic growth there right through it and some excellent margins, building backlog.

So it's really a point of reference, more of a macro view.

On the ground we like where we are and we're confident that we can continue to grow our business.

Just one question; on the margins in Canada, the margin jumped to almost 20% and given your response earlier, so you can see value improving further, Mike?

Again, I believe and again I congratulate the operations leaders that they continue to work very very hard on improving productivity, efficiency and effectiveness.

Just to reiterate, these margins are not moving up on price; they're moving up on our ability to be more productive, more focused, delivering our projects on time, on budget, working utilization rates hard, increasing hours of work.

So again, our people and our leaders are all contributing here to increasing our strength and our ability to compete on a global basis.

Having said that, as I mentioned before, I don't see us having a ceiling on margins, even the work that we've been doing now for years to improve the quality and mix of our revenue by driving more business to being IP based, outsourcing deals, picking back up; all this thing contributes to continuing improvement, a gradual improvement over time of our margins.

We're not looking to deteriorate our margins over time.

Okay.

The loss of Desjardins, will that improve margins or was that corporate average?

I don't want to comment on Desjardins other than to say that that work is in the infrastructure business which as I've said numerous times is a very capital intensive business and that the kind of margins in that business are certainly more challenging than what you would see in the professional services high end business.

Your next question is from Chris Fidyk from Findlay Park.

Not to beat this to death, but one more question on the margins.

If we sort of go back to an environment of sort of five, six, seven or hopefully higher top-line growth, does it become more difficult for you to increase your margins in that sort of top line scenario?

No, my view is it's actually better for us because remember, I've got fixed costs and if I'm growing revenue, I'm not going to add a lot to those fixed costs.

So over time, if it's the right kind of revenue, Chris, in terms of not talking about pass-through revenue, real revenue where we can apply our best practices and leverage our processes and tools, it should actually help drive margins.

I think on the flipside of this thing is when you drive the kind of margins we are and have been in a macro environment that's challenging, I think it bodes well for our ability to continue to drive margins when we get good profitable revenue opportunities coming back on the top line.

The second one, I guess for David.

Knowing that this deal may close sort of any day now you still bought back CAD 100 million of stock in the quarter.

Can you give us any sort of sense, presumably you're going to spend sort of US 900 million, you'll pay for that with your credit facility.

If you do, would you want to pay that debt down or do you want to keep that sort of level of debt on the balance sheet?

Well, when we pick up that level of debt, it's still not going to be something that from a leverage perspective is going to put us in any range of discomfort.

If you take our history you will see that if we went back to 2001 with the acquisition of IMR and we go through the Cognicase acquisition, the buyback of the shares from BCE as well as AMS, whenever we pick up debt we very conservatively look at trying to pay it down.

We will continue to pay it down, but if there are opportunities for us to pick up more shares through the normal course issuer bid and if it makes sense for us to do so, we will do so.

The latitude gives us lots of opportunities.

And do you have any sort of estimate for what the amortization level might be if the deal were to close per quarter or per year and would that line item be tax deductible?

We have not provided any guidance or any direction on that in the past and I don't think this is the appropriate time to do so.

Your next question is from Mayer Yaghi with Desjardins Securities.

I may just want to turn back to some of the earlier comments you made about your share buyback.

You mentioned that you believe the stock is trading at a discount to a peer group; can you tell us what you're looking at in terms of metrics to define the trading at a discount and what is the peer group you're using?

I think that's best you take that off with Lorne in terms of the peer group.

I think candidly there aren't that many peers left out there but it's the normal players including Accenture and these guys.

I think certainly on PE and on a cash basis, just to name two; I believe that we still have room to increase our valuation.

Okay and maybe just on the margins in Canada were very strong in the quarter, but a lot of questions were asked about that.

If you had to pick one area where you saw the most efficiencies come out from in the Canadian operation, where would you take it at in terms of services offered and if you think it's sustainable, could you do similar targeted cost efficiencies out in the US business?

I know that you continue to look at driving down cost in the US, but is there something in Canada particularly that you could take and apply in the US or it's more Canadian centric and the margins you can't translate that into lower cost in the US?

Maybe a couple of comments just to reinforce.

Remember, I'm saying the margins between Canada and the US are not that far off when you adjust for the intangibles that are being carried uniquely in the United States.

That's number one.

You have to add 1.5 points to those margins you're seeing in the US.

The second thing is, there is no silver bullet here in driving margins in a professional services company; it's a combination of levers and the ability of the operations to work against all those levers over time and that's going on right across our company.

It's not only going on in Canada; it's going on in the United States; it's even going on in Europe, just in Europe we have a little more headwind driven by macro conditions there.

The only thing I would point out that's different at this point relative to the levers, our United States operations are already at 40 hours a week and continue to be at 40 hours a week; the only change that I would say that's different here is in Canada we're moving through the process of a 40-hour work week and adjusting our operations to that.

Other than that, it's just strong, fundamental approach to ensuring that the business we bring on is profitable business, that we're delivering our projects on time and on budget, that we continue to look at our mix of our revenue to ensure that our revenue is of high quality that will hold up over time, it's the use of our global delivery model, it's our utilization rates, it's productivity, it's areas of looking at fixed costs in the operations; things like real estate, other areas.

And it's also a commitment to having an ongoing restructuring mentality.

So again, virtually every quarter if we see an opportunity here to restructure the operations, we take it and as a result, over time that restructuring that happens daily and quarterly and annually begins to show up in the margins.

And if you look at our margins, they've been operating at a very good level, very consistently now for four or five years, so it's not a one-off one quarter phenomena and there is no silver bullet.

If there was, I would have found it by now and have implemented it a lot sooner.

Your next question is from Michael Urlacher from GMP Securities.

I'll be brief.

We can look at the trend the company's had on buying back shares; you've spent I think 387 million in the past nine months buying back shares and we can also see a little bit of an increase in total debt during that period.

So I wonder maybe as an executive team if you could just describe your priority and ambitions on those two accounts with regard to buying back equity or paying down debt?

First on the debt side, I don't think the debt is related to the share buyback.

As Dave will explain, we've taken some hedges here against currency, Michael for the most part so it's not really related to the share buyback.

I think our view here is really quite simple; we tend to look at the cash that we have and what is the best way to deploy that cash to bring the most value to our shareholders.

And as I mentioned a number of times, we run the financial model and what we found obviously investing in organic growth in things like IP or solutions or new global delivery centers that will grow the franchise and deliver more margins over time, is the best use of our cash.

So that's our number one priority.

We don't starve that priority to buy shares; we fully fund that against some hurdle rates in terms of returns and commitments and strategic positioning.

The next thing is we look at accretive acquisitions; ones that will help us again increase our capability, our footprint, our IP, our whole go-to-market strategy and again, against hurdle rates there including a commitment that the acquisition will be accretive to capital earnings in the first 12 months.

After that we look at paying down debt or buying back shares.

The cost to capital these days plus the fact that we've got a line of credit at a very favorable rate until August 2012, our view has been to continue to buy back our shares.

I think when we started this journey in 2005 we had about 443 million shares.

I think today we stand at about 279-280 and it's been very accretive for shareholders and it's also I think positioned us to really kind of rebalance our capital structure here.

In the early days we used our shares to acquire businesses, I think frankly because we didn't have the cash to do it.

That's not the situation we're in today and we think that the strategy to return that money to the shareholders through buyback is a good strategy and the right thing to do in the short-term and in the long-term.

So that's kind of how we look at it.

I think on the debt case, Dave, you want to make any other comments on that?

One very small comment is in regards to when we look at investments that we make on projects, we actually build the financing that we require for those projects, so if there's capital that's required there's a cost of capital that is actually built into the project, it's included in the pricing; that is one of the ways that we can make sure that when we're looking at doing the longer term projects that we're getting the fair return on all of the assets that are being employed for that.

And just to maybe comment on an earlier question here around trying to pinpoint where we have opportunities; part of the structure that we have here is that from a project accounting perspective we have very detailed P&Ls by project, by customer so that from a performance perspective we are evaluating on a monthly basis the performance at a very granular level and if there is anything that's coming off the track, we're able to identify it early, the business units focus in on what is called profit leakage, we look at not only projects that are in trouble, we're looking at projects that are not performing against the target when we approved the deal, so if they're off by one or two points it ends up catching attention and people are starting to take a look at it.

So we try to catch this stuff very early on in the process.

Again, a lot of project focus, making sure we have the right information to be able to not only have the data but have actionable information so the business unit leaders and teams can move forward and do what's the right thing.

Thanks Michael and thanks everyone for joining us today.

Look forward to chatting with you in November when we'll discuss our fourth quarter and full year fiscal 2010 results.

Have a nice day.

Thank you.

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