CGI Inc (GIB) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI fourth quarter 2012 results conference call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President Global Communications and Investor relations. Please go ahead, Mr. Gorber

Thank you, Valerie, and good morning.

With me to discuss CGI's fourth quarter and fiscal 2012 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 9.00 AM on Wednesday, November 28, 2012.

The press release we issued earlier this morning is available for download along with our fiscal 2012 MD&A, audited 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 are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As usual, we will also discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted.

I will turn the call over to David first to review the results both with and without the impact of Logica. Then he will pass it over to Mike who will discuss the strategic and operational highlights of both the quarter and the full year. Our scripted portion will be a little longer than usual in order to provide maximum visibility on our operational performance, as well as the various moving pieces related to the Q4 acquisition of Logica. We'll still leave ample time for Q&A.

With that, David.

Thank you, Lorne, and good morning.

Before we get into the specific results, I would like to review two quick but important items. First, a reminder that this is our first fiscal year reporting under IFRS. CGI transitioned from Canadian GAAP to IFRS at the beginning of fiscal 2012, adjusting the financial results of the previous year to reflect this adoption.

Although the change resulted in several adjustments or reclassification to our consolidated financial statements, such as the way we accounted for joint ventures or the way we disclosed amortization on the P&L, it did not materially impact the underlying cash flow or profitability trends, our revenue recognition practices, our debt covenants or our compensation arrangements.

Note 33 to the financial statements contains a detailed description and a reconciliation of the key accounts involved in the migration from Canadian GAAP to IFRS. As a note, our financials prior to 2011 are reported under Canadian GAAP.

I also wanted to take a minute on the BAR, or Business Acquisition Report, filed on November 5. Our preference would have been to release this report at the same time as our financial results in order to provide a little more context. However, we needed to comply with the 75-day reporting deadline which resulted in the November 5 filing required by Canadian securities regulators.

This filing consisted of three parts. The first was the audited financial statement of Logica dated December 2011 as reported by them last spring with no changes. The second were Logica's interim financial statements for the six months ended June 30, 2012, before our transaction was finalized. And the third were CGI's pro forma statement giving effect to the transaction for the period ending June 30, 2012.

The intended purpose is to describe the acquired business and to provide insight into the financial impact of the acquisition. The information was compiled according to a set of prescribed rules that simply took the historical information, adjusted it for the harmonization of accounting policies and practices between the two firms and adjusting as appropriate the values of the opening balance sheets to reflect fair value.

It did not take into account any savings of bringing the two companies together or any synergies of applying CGI's management approach to the operations of Logica. In the interest of time I will address two points that generated most of the questions coming from this filing. The first was the reduction in the revenue run rate for the six months ending June 30.

Clearly the general market conditions within Europe resulted in some softness, as evidenced by peer results for the same period. And of course there's the sideways drift that always occurs or almost always occurs in a targeted Company between the announcement date and the closing date. As we did not own the Company during this period we were not in a position to communicate with the employees or with the clients, so we focused on a rapid closing in an effort to address this uncertainty.

The second area of interest was the accruals and provisions that were recognized during the six months ending June 30. Let's run through them. An amount of CAD92 million was recorded for the settlement of a VAT claim, as well as one for Social Security taxes. The court returned its verdict on the VAT claim last spring, while the tax authorities delivered its assessment on the Social Security taxes. These were one-time items and are now behind us. There was also a provision taken for other claims in the amount of CAD34 million.

Most were project delivery issues having surfaced during this period for which we are actively engaged to rectify. Then there was the CAD139 million provision taken for expected future losses and write-offs on in-flight contracts. Simply put, we reviewed the cost to complete Logica's fixed price contracts using the same screen that we used for CGI. We then decided it was necessary to recognize forecasted cost overruns and penalties across a number of projects.

Now on to the results. First for Q4, excluding the six-week impact of Logica. We generated revenue of CAD1.04 billion representing year-over-year growth of 3.6% or 3% on constant currency. Adjusted EBIT in Q4 2012 was CAD133 million or 12.8% of revenue compared with CAD88.6 million or 8.8% of revenue in the same period last year. The improvement was largely driven by actions taken throughout the year to improve profitability.

Excluding the restructuring charges taken in both periods, the net earnings were CAD100 million and diluted earnings per share were CAD0.37 for a net earnings margin of 9.6% compared with CAD0.39 per share in the year-ago period. The tax rate for the latest quarter was 29.1% compared with 25.9% for the year-ago period, reflecting the higher level of adjusted EBIT coming from our US operations with its higher tax rate.

Bookings totaled CAD1.1 billion on a standalone basis or 106% of revenue, composed primarily of new bookings in the government and financial services sector. While we cannot segregate the cash flow generated from operations just for this part of the business, DSO was 47 days compared to 53 days in the year-ago period.

Now quickly recapping the results of the acquired Logica operations from August 20 to September 30. Revenue was CAD567.9 million with an adjusted loss before income taxes of CAD18.8 million for the six-week period, which included CAD10.6 million in amortization of their intangibles. In Europe, this happened to be in the peak vacation period where a significant number of employees and clients were on leave. The resulting revenue and margin is not indicative of their performance capability on either a quarterly or annual basis.

The DSO for this part of the business for the end of the quarter was 112 days. This reflects all of the trade accounts receivable, the work in progress, as well as the prepayments received from clients. However, the revenue is only for six weeks, thus causing a one-time aberration in this metric. Next quarter this measure will reflect a full quarter of revenue and will be a useful comparison of performance.

While we are still working through some unfavorable payment terms, we believe over time that we should be able to achieve a result in line with our 45-day DSO target. Including the six-week impact, when layering Logica into the result, we generated revenue of CAD1.6 billion, which was up from CAD1.0 billion last year, representing year-over-year growth of 60.1% or 59.6% on a constant currency basis. Adjusted EBIT was CAD114.1 million, represents a margin of 7.1% and is up from CAD88.6 million or 8.8% last year.

In addition, acquisition related and integration charges totaled CAD248.3 million were recorded in the quarter. This comprised of CAD29.7 million of acquisition-related costs; CAD108.9 million of costs related to putting the financing in place, as well as the hedging costs; CAD98 million for severances; and CAD11.7 million for integration costs.

Including finance related charges, the net loss on a GAAP basis was CAD168 million or CAD0.58 per diluted share. Operating cash flow generated for three months was CAD109.3 million or CAD0.38 per share. The effective tax rate for the fourth quarter and for the upcoming periods will not be indicative of our future tax rates. This past quarter and for the next couple we will see some aberrations caused by the quantum and the tax treatment of the components of the acquisition-related and integration costs.

Once they have worked their way through the quarterly financial statements we will then see the benefits of the tax planning kick in. Accordingly, it may be best to look at the tax rate excluding the impact of the acquisition-related and integration costs. Based on enacted rates and our current business mix, we expect our effective tax rate before integration costs and any significant adjustments to be in the range of 24% to 27%.

Now turning to the annual results for fiscal 2012, first excluding Logica, revenue was CAD4.2 billion essential unchanged year-over-year. Adjusted EBIT was CAD565.6 million for a margin of 13.5%. This compares with adjusted EBIT of CAD536.4 million in fiscal 2011 or 12.7% of revenue. Net earnings were CAD401.3 million compared with CAD396.7 million before favorable tax adjustments in fiscal 2011. The margin was 9.5% in fiscal 2012 compared with 9.4% in the previous year. Diluted earnings per share were CAD1.50 compared with CAD1.44 in fiscal 2011. Bookings for the full year totaled CAD4.8 billion or 113% of revenue.

Now including Logica, for the full year and as reported we generated revenue of CAD4.8 billion compared with CAD4.2 billion in fiscal 2011, representing an increase of 13% or 12.1% at constant currency. Adjusted EBIT was CAD546.7 million for a margin of 11.5%. For the full year, we incurred acquisition-related and integration charges totaling CAD255 million. Including the finance-related charges the net earnings were CAD131.5 million, or CAD0.48 per diluted share. Cash generated from operations in fiscal 2012 amounted to CAD613.3 million, or 12.9% of revenue, representing CAD2.24 per diluted share. Bookings reached the CAD5.2 billion or 109% of revenue, bringing the total backlog at year-end to CAD17.6 billion.

Our DSO at the end of the year was 70 days. The year-over-year -- sorry, year-over-year increase was attributable to the mid quarter closing of our Logica transaction, as we already mentioned. Excluding this transaction-related anomaly, we continue to work towards our target level of 45 days. Net debt at the end of Q4 stood at CAD3.1 billion, down from a peak of CAD3.3 billion following the close of the transaction. We repaid CAD180 million in debt in Q4 for a net debt to capitalization ratio at September 30 of 46.6%.

Now I will turn the call over to Mike.

Thank you, David, and good morning, everyone.

As David has done a thorough job of walking through the financials, both with and without the impact of Logica, I will focus my comments this morning on three areas, highlights of our fiscal 2012 results; our US operations; and finally an update on our integration activities with respect to Logica.

I'm very pleased with our team's solid and balanced performance in fiscal 2012, financially and operationally. Excluding Logica, annual revenue was CAD4.2 billion with momentum accelerating in the back half of the year, including organic growth of 3.6% recorded in Quarter Four. Adjusted EBIT was CAD565.6 million representing a margin of 13.5%. Net earnings were CAD401.3 million for a 9.5% net margin.

We earned CAD1.50 per share in EPS and we booked CAD4.8 billion in new business, contract extensions and renewals. This represents 113% of revenue. From an operations perspective, we continue generating industry leading profitability in our Canadian operations, with EBIT margins reaching 21% in 2012. Following restructuring and investments made in our GIS segment to improve productivity and stand up our cloud offering, we expect this business to continue improving throughout fiscal 2013. And finally, we delivered significant bottom line recovery in our legacy European operations with adjusted EBIT up 43% in fiscal 2012.

Given the size and dynamics of the US market, I want to add a little more color to our profitable growth strategy in this key market, where both organic revenue growth and margin expansion are significant contributors to the Company's overall performance. We are now in full execution mode on US deals booked in previous quarters, particularly in the state and local space.

The pipeline of opportunities and activities across our Commercial business continues to gain momentum, especially with respect to our IP offerings. Overall our US operations reached a new revenue milestone in fiscal 2012, generating CAD2.1 billion, up 10% compared with fiscal 2011.

In quarter four alone, organic revenue growth was 15% year-over-year, while margins in the US hit 12%, double from the same period last year. Total US bookings in fiscal 2012 were CAD3 billion or 138% of revenue and in quarter four reached 160% of revenue with bookings of CAD900 million. The health sector continues to be a strong growth area for the US and is expected to accelerate throughout 2013.

We are also seeing more commercial opportunity, as the entire industry prepares for the new phase of the Affordable Care Act implementation. The US health business posted growth of nearly 50% in fiscal 2012, well ahead of our other industry verticals.

On the CGI Federal side, our strategy has always been to focus on mission critical IT and business process services functions required for the day-to-day operations of the government, as well as to support the implementation of mandatory programs, such as the shift to the cloud, and benefit funding projects, such as the Medicare recovery audit program.

We believe that our approach has and will continue to better position us to weather any political or economic uncertainty. For example, our Federal business continues to buck the trend, realizing a book to bill of 140% in fiscal 2012, while increasing recurring revenue and backlog in this area.

We are very well-positioned on our existing contract vehicles, with a significant portion of our new business coming through associated task orders. And we continue to focus on new strategic procurement vehicles, winning a spot on six new ones during the last year with a combined ceiling value of CAD69 billion in new opportunities.

In summary, we enter fiscal 2013 in a position of strength, operationally and financially, enabling us to focus on the year's number one operational priority, which is the successful integration of Logica. With respect to Logica, let me begin by reinforcing our commitment to realize significant shareholder value arising from our merger, which was effective 20 August 2012. After 100 days of operations we can confirm that the strategic, operational, and financial fit anticipated in the transaction.

We can also confirm that we are aggressively adjusting the cost base to reduce overhead and increase our competitiveness while transforming the business into the CGI performance based operation model. Against this standard we have made significant progress and are on track to realize our commitment to deliver an EPS accretion rate in the range of 25% to 30% in fiscal 2013 before acquisition related and integration costs.

We have also adjusted our cost synergy target up from CAD200 million to CAD300 million in annual savings. The cost to achieve these synergies is also revised from CAD265 million to approximately CAD400 million over the three-year integration period. During the quarter we provisioned CAD98 million in severances, the benefits of which will be gradually visible throughout the year.

Our integration plan envisions approximately 75% of these cost synergies being people-related with the remaining 25% associated with real estate and other cost management initiatives. This adjustment reflects not only our current view of synergy operations, our opportunities, but also market conditions and planned runoffs of low or no margin contracts as we continue to focus on generating high-quality recurring revenue.

We continue to have the financial flexibility to go deeper as we uncover additional synergy opportunities or if market conditions require us to do so. From an operational perspective and in line with our business model, we have organized into seven strategic business units, led by seven strong experienced leaders who have the full accountability for the success of their operations. This includes business development, service delivery, client and member satisfaction, and, of course, bottom line financial results.

Together we have built a fiscal 2013 business plan which incorporates our integration milestones and our EPS accretion goals. In fiscal 2013 we'll begin reporting our financial results against these seven strategic business units.

We've also taken our case for the need of change directly to the leaders and the employees, having trained over 1,000 former Logica leaders on the CGI model, while interacting with some 29,000 employees through our European and Asia Pac annual tour, which was held in November. In addition, I have had direct, open, and productive communication with the work council leaders. Employee feedback is positive and engagements towards our operation model is high. Everyone wants to win.

As with every acquisition, the overarching principle guiding the integration is that our client needs comes first. We are moving quickly and decisively to reassure existing clients and potential clients by rapidly scheduling VIP meetings to ensure that they're fully exposed to the expanded breadth and depth of our new global capabilities. The response from clients continues to be very positive.

Looking ahead to fiscal 2013. Including our line of credit, we continue to have ample liquidity, more than CAD929 million available to continue prioritizing the most accretive investments for shareholders. These include prioritizing investments in profitable organic growth initiatives and the debt repayment for this fiscal year.

Finally, we've been operating under the same basic fundamental beliefs and quality focused model since 1976. I want to reiterate that we continue to believe that our consistent ability to execute to this model delivers superior returns to shareholders over time, including through the most challenging market conditions.

Our stock price increased by approximately 30%, adding almost CAD3 billion to our market capitalization during the last 12 months. We remain committed to the fully realization of our strategic goals and are confident in our teams' ability to execute against our business plan in fiscal 2013 and beyond.

Thank you for your continued interest and confidence in CGI. Now, Lorne, back to you for the questions.

Thanks, Mike.

Just a reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 9121092 until December 12. As well, a podcast of this call will be available for download at either CGI.com or via iTunes within a few hours. Follow-up questions, as usual, can be directed to me at 514-841-3355.

Valerie, if we could poll for questions.

Thank you, Mr. Gorber.

(Operator Instructions)

Tom Liston of Cantor Fitzgerald.

Mike, I think we all get that the CGI core is obviously on track and doing well, especially in the US, but can you key in on Logica and where those elements that take you to more CAD300 million on the synergy side. What type of -- I guess there may be potentially a few positive surprises, but can you roughly break it down in between whether it's more of the duplication of service savings, whether it's more on the contract discipline, which certainly probably lowers revenue and hopefully increases EBITDA?

And then some revenue synergies perhaps, if you've sort of built in that? What we notionally will need to see is that negative 3.3%-ish EBITDA in the stub quarter grow to sort of 6% and beyond to make this acquisition look good. So, can you give us those pieces, and then the confidence in each of those pieces that you are going to deliver on towards the CAD300 million?

First, maybe I'll take the comment on revenue synergies just to remind the street that we do not build revenue synergies into our accretion rate. From experience, we found that the revenue synergies normally come in the end of the year or in the following year after an acquisition. In the first year, what we're focusing on beyond, of course, gaining additional share of existing clients and getting our story out to new clients, we're also very focused on the quality. Improving the quality of the existing revenue, which in this case, as in other cases, we have found a number of contracts that are underperforming, below our standards, or not generating margin. And our plan is to actually run those off or renegotiate them over the next 12 months.

I think on the additional synergies, they are really coming from our ability now to overlay our management ratios on to the seven strategic business units -- the five, of course, that are focused on Asia Pac. We've been able to reconfigure, for the most part, their financial performance in our -- into our operating model. When we overlay our management ratios, we find that there's additional opportunities in the SG&A line, which we need to capture not only the increased margins but frankly to increase the competitiveness of our position in Europe to generate that profitable growth that we talked about.

And the cost side is up as well. Of course, this type of transformation and restructuring in Europe costs more, takes longer than what we're normally used to here in North America, so the costs are actually reflecting that fact.

Just real quick on the US. Obviously, the government spending is going well, given some applications you're doing there, but the fiscal cliff is also, in some cases, affecting corporate plans. What do you see on the corporate side in the US, especially with the uncertainty around it?

Well, again, we're not really seeing much, and again, I know we sound very contrarian there, but again, I'm just operating on the facts and on the ground in terms of what we're seeing in the operations. On the government side, as you saw, our bookings were extremely strong. We're still signing multi-year deals, which, of course, transcend the next year. We're still signing three-, five-, seven-year deals on the government side. We continue to focus heavily on those areas where it's essential to operate the government, and on new programs going forward, and we can get into those perhaps during the call. But we haven't seen any pull-back of commercial customers yet in response to the political or economic uncertainty in the US.

Very good. Thanks. I'll pass the line.

Thanks, Tom.

Scott Penner of TD Securities.

Mike, I think you actually started to allude to this in the last question, but when do you feel like the runoff of lower-margin contracts is complete, and the book of business is really on the CGI model? Is that a year or two?

I would think that we'll -- we've identified what I would say at the corporate level now, Scott, the ones that we can see. I think there will be another round as the business units now start to execute to their budgets. But it's underway, and it will probably continue very much into the year. There could be a couple that were multi-year contracts that will spill into next year, but my sense is we'll get most of it addressed within the first 12 months here.

Then, just on the Canadian unit overall, looked like a slight decline on a normalized basis, but the book to bill actually looks positive for the year. Just curious as to your commentary overall of the dynamics in Canada, and whether we should expect next year to be back to a growth year?

I think if you look at 2012, we really focused on actually extending a lot of our foundation contracts that we had in Canada -- National Bank, Laurentian Bank. There were a number of deals that are really our anchor accounts. We've extended those deals now out for five years or so. So, we've solidified our recurring revenue base. We've targeted new logos. We're seeing good growth opportunities in the west. Quebec has been strong.

And we've been able to hold our margins. In fact, we did a little more restructuring in Canada in the fourth quarter, both there in the GIS unit to even position ourselves better for fiscal 2013. So, we're expecting a solid year in Canada and in the GIS unit in 2013.

And just quickly, David, just to make sure I've got this clear on the tax rate, you said 24% to 27% on a normalized basis. But what should it be for the next couple of quarters?

Well, your guess is almost as good as mine. I don't mean to be sly on this one. It depends on how quickly we're able to affect some of the reductions of the staff, get the work council plans in place here. Those are all done country by country, so once those roll through, then we can get the notifications out, then we can actually book the provisions. Depending on which quarter those provisions get booked, it will then have an impact on the tax rate.

So, I think the best I can give to you right now is an average rate over the full year. And then as we -- as you work through your assumption as to how much integration we're going to have in the first quarter versus second, it's just really going to shift those dollars from one bucket to the other.

Is that 24% to 27%, is that the average rate for the year?

Before the impact of the integration, that's correct.

Okay, thank you.

Thanks.

Richard Tse of Cormark Securities.

In regards to the provisions you guys took related to some of these contracts you inherited, sounds like you guys are quite comfortable in that provision number. Can you give us a sense of the process you went through to vet this, just so we get some comfort that all that has kind of already been provided for here?

Well, it was a fairly -- very detailed process we went through. Very simply, every older accounts receivable account, all of the large WIP accounts, we dissected all of those accounts, we went through to investigate to understand why the WIP was there, why the aged receivables were there. We also took a look at the revenue recognition.

Again, you have to remember that we had a couple of things that were combined here. One was, we had to take the Logica unit, migrate them, harmonize them on our accounting policies, and our accounting policies also were being harmonized on to IFRS during the period of time. So, there was a lot of time that we went through to really make sure that we had identified what could be problematic accounts. We brought in an outside accounting firm to help us go through the process to make sure that we had good objective assessments that were being done. And then all of that was then reviewed again with our auditors when it was all said and done.

So, I think we have pretty much turned over every stone that we could. That's not to say that we're not going to find a few smaller items as we proceed here. But again, just to remind everybody that when we issued the VaR report, we still have a year up until August 20 of next year, if there are any changes in the facts that were existing as at the closing date, we still can make changes to the goodwill or to some of those provision numbers.

And just to add to that, Richard, so these projects are now on what are under our EAS system. They're all coded red, yellow, and green. Of course, the ones we took the provisions on are red. I review them personally with the SBU leaders and the business unit leaders involved every month. And as we've done in CGI over the years, we're already starting to problem-solve those and address them and try and bring them back up to our standards.

And then, I guess another question, sort of related to the VaR report, if you kind of go through that filing, I noticed on the purchase price allocation that there was effectively, and correct me if I'm wrong, no write-up in terms of goodwill here, that you sort of took it on at book. Does that mean that you kind of pretty much bought this business at net asset value here?

I'm not quite sure what you mean by net asset value.

You, obviously, had to fair market value your balance sheet when you buy this thing, but I didn't notice it was a big write-up in terms of goodwill here.

In fact, what ended up happening was that we zero out their goodwill. We go through all of the assets, we go through the client relationships, we go through trademark, trade names, we go through all of the IP that they have. It all gets fair valued, all the receivables, the work in process, everything is all translated again. We even go through the liabilities like pension fund liabilities, et cetera. And at the end of the day, it is the goodwill that gets plugged to the difference of what is between the total of all of those other assets and the purchase price. It is more coincidental it came out to a number that was closer to what you had seen before.

Right, okay, that was my question. And finally, for Mike, you guys have obviously had a template for acquisitions that you've executed on in the past. Obviously, with Europe being a bit different here. What are the differences to applying that template? And I guess related to that, have there been any sort of surprises here post-transaction that would have you sort of changing that approach?

No, I think the template work -- we tend to strengthen it and reinforce it after every acquisition that we do. Again, I think one of the big deviations amongst many relative to our operating model, they were very focused on incenting their people on top-line revenue growth without, in my view, sufficient consideration for the need to focus on profit building at the same rate. Hence, I think you see some of the areas that we're addressing here. We expected that, and we priced it into our deal. But we're correcting that through implementing our model. That's why I referred in the note that this is more than a restructuring. It's a transformation on how to do business the CGI way in that market of Europe and Asia Pac.

Great. Thank you.

Thanos Moschopoulos, BMO Capital Markets.

Mike, when you first announced the Logica acquisition, I believe your commentary was that it would be immediately accretive by 25% to 30%, and the language now seems to be over the next year. And so, has there been a shift in timeframe, or am I reading too much into that language?

I think you're reading a little too much into it. What I thought would be more apples to apples for the street following as you build your forecast for the Company on a fiscal year, so I have just aligned that statement up with the fiscal year for the accretion rate still stands of 25% to 30%.

So, no change relative to your initial expectations then?

No.

Okay. And can you provide some color in terms of how the Logica pipeline is shaping up, as you talk to customers and convey to them some of your new capabilities and CGI's areas of strength and focus? Or are you much more focused at this point in terms of restructuring the current business as it stands?

That's a good question. Again, it gives me a chance to reinforce that while we're doing the restructuring, we're obviously really firing up the marketing business development side of our business. We've began to train and rolled out our visibility system where we tracking, by sales person and business development person, the number of sales calls they make per week.

We've also targeted the top 10 existing clients by business unit and the top five targeted customers, which for VIP meetings. So, that's over 500-and-some meetings where we actually go out and sit with the client, walk through our existing capability, our new capability, how we can help them address their goals. So, those are underway.

The reaction from clients has been very positive. I think there's a number of different categories. There's clients where there are operational issues. What they wanted to hear from us is that we're going to work through those with them, and we are, and hence the provisions that you've seen. That's important to us because it protects our reputation in the marketplace, as a Company that keeps its promises. It also allows us to be around for the next project, so we're not burning any bridges there. The customers seem to be very positive to the approach that we're taking.

We also and continue to bid, of course, on new opportunities. So, just the other day, a large international financial institution consolidated their global vendors down from 10 to 5, and we made the cut that's one of the five. We've also been reinstated on a number of customers where Logica was not in a position to bid. They reinstated the operation now that it's CGI.

And customers have been very helpful. We've had a very large customer actually sit down and preview his 2013 plans because he wants us to hit the ground running in terms of being able to help him meet his goals. So, I would say the response has been very, very positive.

The Logica people are very well thought of at the working level with the customer. They're very talented, very committed people, and we're getting some very positive feedback from the customers on that side.

We've also started our customer satisfaction appraisal program. We've done over 60 of these already in the first 100 days, where we sit down with the customer face to face, we ask them to rate us on 10 items including -- would they recommend or use CGI again? And, of course, we're getting some very good feedback on areas where we could do better, but we're also getting a pat on the back on areas where we're doing things right. This is all part of our CGI model. It's being implemented as rapidly as we can. I think we've made a significant amount of progress in 100 days.

Okay, and just a quick one for David. How should we think about cash taxes? Would that be consistent with the 24% to 27% rate, or would that be lower?

No, that should be relatively consistent.

Thanks, guys. I will pass the line.

Stephanie Price of CIBC.

Mike, you mentioned the healthcare as obviously a big area of growth in the US. Can you talk a bit more about the opportunities there with the Affordable Care Act coming on in 2014?

I think generally what I was wanting to reinforce there, Stephanie, was that, as you know, we pulled healthcare out as a separate vertical last year because we could really see the building momentum driven by demographics and also legislation, especially in the US market, to invest more money to try and bring health costs under control. So, we've really staffed up for that. We got some of the best people in the industry in that area.

And the healthcare reform act will require states to continue to set up these health exchanges. I think the clock has restarted on those after the election. We're very actively bidding those. We also have our RAC contracts that are very much a part of that. And so, we see opportunities both at the federal level and also at the state level here to really continue to gain share in what is a growing market.

Okay. And on Logica, in terms of the planned contract runoff, can you give us a bit more of an idea of the percentage that we are talking about here, and how we should think about revenue going forward while these contracts are run off?

It's a little difficult at this point, because, as I say, when we identify these low-margin businesses, we do attempt to sit down and renegotiate the contracts. So, we haven't worked through all of them to see what the outcome will be. But we've already began to run off low-margin businesses, or in most cases we started with no-margin business or businesses with losses, and those impacts will start to be seen throughout the fiscal year.

We should have a better update of that at the next quarter, as we see how those one-to-one discussions go on with the clients, in terms of whether we're able to reconfigure the contract, make it longer, or change where the work is being done in order to improve the profitability of those clients. It's a little early yet, other than to say that we're laser focused on identifying them and addressing them.

Okay, great. And just one for David. In terms of the DSOs at Logica, can you talk a bit about how long you think it's going to take to get to that 45 days, and what sort of DSOs we should expect in the short term?

I would certainly like to get there a lot more quickly than what the reality will be. I would expect it's going to be about two years before we can actually get down to about that 45-day amount. We have to work through new contracts, or as we go through contract extensions, or expansions, then to be able to bring some of the various techniques and different ideas to the table. But I'm feeling good about the fact that in some of the contract reviews that I've had even earlier this week where in some of the conversations the teams have had with the clients, that we're starting to see that become much more of a focus point. They're having some good conversations with the clients, and the clients are actually amenable to making the modifications to the cash plan payments, so that we can move align -- or become more aligned with that target.

There's going to be a few bumps along that road, but right now we've actually goaled everybody to try to get to the 45-day target in the next year. We know we're not going to get there, but if you don't set the target high, you'll never get there.

Thank you very much, guys.

Steven Li of Raymond James.

Just two quick questions from me. The first one is on the EBIT margin in Canada. So, there were a couple of factors that hurt the margin this quarter. Have they started to improve for December, or should we expect similar to September? Thanks.

On the EBIT in Canada, as I say, we did some restructuring in Canada in the quarter four, and that would be behind us, so we would expect to see the EBIT improving from that level.

Can you quantify the restructuring, like how much was it?

About CAD13 million across all of the units.

Okay, sounds good, thanks. And then my next question is on the accretion. Is it going to be 25% to 30% accretive to what my core CGI 2013 numbers would be? So, that number already assumes some growth for core CGI. Or was this -- are we just talking about 25% to 30% of the just-reported 2012 numbers of CAD1.50?

That's a good question, Steven. I think it could be either/or in the sense that one way of calculating the accretion is to take our actual EPS for 2012 and build an accretion rate on that in our modeling, which I think many of you have done the same. We made an assumption at the time of where we would finish fiscal '12, and we made an assumption of where fiscal 2013 would be in the CGI legacy business, and then overlaid the impact of Logica. So, I gave a range of 25% to 30%, which gives some flexibility depending on which calculation you're using here. We've used, in our model, an assumption where we would finish 2012, and what the core business would look like in 2013 if CGI stand alone.

And then add 25% to 30% to that?

EPS accretion after the accounting for the acquisition and integration costs.

Okay, great. Thanks.

Paul Treiber of RBC Capital Markets.

You're two months into Q1. Could you comment on the linearity of the Logica business in Europe? Are you seeing any pick up from the seasonally softness this quarter, and any pick up in utilization?

I don't normally comment because I've got one month's results, really, which is four weeks, but I did use it, Paul, to your point, to validate our feeling about the six-week stub period. And our sense would be that the October numbers brings the Logica run rate back to the kind of level that we were expecting when we looked at their operations over the trailing 12 months.

Okay. Now that you have had control of Logica for the last 100 days, you have firsthand visibility of the environment in Europe. From what you are seeing in Europe, how do you see the CGI model adapting to that situation? And more specifically, is the environment in Europe structurally softer, and it may be tougher to imply the CGI model?

We don't think so. I think, again, frankly, we've spoken to clients, we've spoken to employees, we've spoken to leadership over there. Again, as I started off, everybody wants to win. Everybody wants to be a success. They want to work for a Company that's financially strong. The clients want to do business with a Company that's financially strong, so I think the model itself will work there.

I think we will seize more and more of that, now that we've actually segmented the business into seven clear P&Ls, and then P&Ls within that. So, I firmly believe in talking to the people and talking to the clients; essentially we're doing the same business in Europe that we're doing in North America. I think how we do the business, that's why I use the word transform, starting from the acquisition of revenue, how we look at deals, price deals, the hurdle rates we're looking in terms of deals and returns on investments. The additional fundamental control we would have in the business in terms of expense management, and operational excellence in terms of delivering projects on time and on budget. And I think when those things happen, good things also happen to the business, both top line and bottom line, and with customer and member satisfaction. That's the essence of the model.

And, as I say, we have trained 1,000 managers in a 2.5-day session, both Dave, Serge, and I, and the other senior people have spent these 2.5 days with the 1,000 members, walking through exactly how the model works. We've now got a budget in place for fiscal 2013 that has built those management ratios in that we operate in, put the sales visibility system in, we're getting customer satisfaction, so we've got a pulse of customers. So, I think when it's all said and done that as we get that model fully executed and fully implemented, we're going to see a very different operating performance in Europe.

And then lastly, one more question. On Logica and the transformation, it's your largest acquisition yet, and it more than doubles your employee base. And so, while you're working to transform these employees, it does seem like it's a big cultural change for them. How quickly -- at least from your initial feedback, how quickly does it seem like they're able to adapt to that model? And then related to that, how do you ensure that you don't lose some of Logica's best employees during the transition?

In terms of not losing the best employees, I think the biggest thing that we've done is actually spend a lot of time directly with these people. We've also, as you know, of the -- retained a number of senior Logica people in the key leadership positions to help with the transition here in terms of the magnitude of the change and ensuring we had the institutional knowledge.

But again, as I said in my opening remarks, that everybody wants to win. When you fundamentally talk to the people, they want to work for a company that's strong. And they see the operating results that we've posted in this Company for the last 35 years, and they see the customer satisfaction, the employee satisfaction level, and the employees have been very supportive. They've been helpful. The worker council themselves are trying to be helpful in terms of making suggestions on how to improve the operations. So, I think everybody is motivated here towards the right direction.

I think, again, there is a bit of a leap of faith required here that will -- that the model will generate those kind of benefits for the people and the customers and the shareholders in Europe. But, again, as time passes on and we start to post results, and we start to address these issues and they see how we're stepping up, making investments in new areas, bringing new tools to the table, addressing roadblocks, removing duplication and multiplication of back room systems, automating manual processes. All these things are a very positive sign that there's real value-added change underway here with the merger of CGI and Logica.

If I could maybe just add to that. When Mike had described that the senior management team had spent time training all the senior managers around the CGI way, that was actually done six times, at six different sessions, so we were dealing with about 200 people each. We had the opportunity to have a lot of personal exchanges with a lot of those individual leaders.

And the messages that we had heard back, because a number of them had been with Logica and had been acquired by Logica from other acquisitions. So, whether it would be coming from WM Data, coming from CMG, coming from Unilog, after we had rolled through the details of the model, I know a lot of them had even come up to myself and just said it felt like coming back home. They came back, they saw a lot of the principles, a lot of the way that we were looking to try to change the organization was in ways that they were already trained in and felt very comfortable with going forward themselves.

So, we walked away with the impression that, with a lot of that leadership team, with a lot of the older, or the employees with some tenure, that we didn't really have a lot to change there. It was now just giving them tools that would allow them to now be able to embrace, and to go forward and leverage their business for the future.

I think just to add that -- to David's point, there were multiple companies acquired by Logica. I think for many of them, this is the first time, though, that they have been fully integrated; that they were not integrated in the back room and in some of their operating practices across the Company. And with our model, of course, we integrate rapidly, and we integrate thoroughly across all the operations into a single operating unit called CGI. And that alone is bringing value and is one of the factors that we're seeing the increased synergies of actually combining some of those back rooms that were left there from previous legacy Logica acquisitions.

Thanks, guys. I'll pass the line.

Julio Quinteros of Goldman Sachs.

Can you guys reconcile, just wanted to make sure I understood, the EPS accretion rate of 25% to 30% is still on track for fiscal '13. However, it sounded like you said that the cost synergy target was actually bumped up from CAD200 million to CAD300 million, but there was no change in the EPS accretion rate. I just want to make sure I understand the puts and takes there.

That's the three-year cost synergies. So, you have to look at that as a three-year and not a first-year number. So, a good apportion of that will come in the back end of the three-year period. These are things like combining the back room of finance where we have multiple financial systems. It is going to take us time to combine those systems back into a single system, and that will trigger additional restructuring opportunities at that time.

Understood. Okay, great. And then, just looking at the capital allocation efforts in the past, and thinking about when you guys would be back in the marketplace in terms of buyback efforts, what should we be thinking about there in terms of buyback efforts?

Again, I think, first to reinforce that the normal course issuer bid is still in effect until February. Obviously, in the first quarter here we've -- or the last quarter, we've been very busy on the integration, really focusing on that and paying down debt. But we still have that as an option, and we are still prepared to pull that trigger at the right time. I think for the first couple of quarters here, we'll probably focus on debt repayment, and actually financing or expensing the integration costs.

Okay, and then just one last mechanical question. On the quarterly amortization level, can you break out the D&A, if you will, for the quarter, so that we can see the amortization separate from the depreciation component for the quarter?

I don't have the actual note number, but in the financial statements we normally -- or we do have a note that will identify how much of the amortization goes against the revenue, how much goes against the cost of services, et cetera. So, maybe what we can do is just off-line get that information to Lorne, and he can get it back to you.

Okay. And just lastly, on the balance sheet side, it sounded like you had said that the goodwill -- that there was a bump-up in goodwill associated with the acquisition, but I thought I heard you say that you guys had zeroed out their previous goodwill. Just want to make sure I understand what that comment referred to.

Just means that when we do the evaluation, you don't take into account what they had acquired in the way of goodwill. You basically take all of the tangible assets that you have, or identifiable assets, and then you do the fair value equation against that. And then whatever the difference is, now becomes the new goodwill. It could be the same, it could be more, it could be less than what they had on their books.

So, the zeroing out comment was related to the old goodwill on the Logica balance sheet?

Yes, it was, because it does not carry forward.

Got it.

Kris Thompson of National Bank Financial.

Mike, I'd just like to circle back to your accretion comments. You said you expected 25% to 30% on top of where you expected CGI to end up for the year, plus some organic growth for next year. The CAD1.50 diluted EPS that you reported in the adjustments, is that kind of the baseline that we should be thinking about to add that accretion rate on top of?

Yes, I think that's -- as I say, I think that's one measure that you can use, and you will be able to have a apple-to-apple comparison. Again, what I was saying in our modeling, though, what we did was we, because we had to build a model, obviously before the trigger on the acquisition, we made some assumptions of where we finished 2012. We put in some adjustment for 2013 of the CGI legacy business, and then we added on the accretion we expected from Logica.

And just, if I can get a better understanding on the restructuring puts and takes. So, this quarter, maybe this is for David, you reported about CAD250 million of one-time costs, of which CAD110 million were related to severance and integration. Do you increase your expected costs to CAD400 million from CAD265 million? So, I'm trying to figure out, is that CAD400 million total cost, or is that just severance and integration? And then, maybe the better way to answer the question is -- how many millions of dollars is remaining after the CAD250 million this quarter in restructurings and one-time costs related to Logica?

Yes, there's about CAD300 million that is left.

So, that CAD265 million is really more like CAD550 million.

Well, you've got to separate it out into two different components. One is the acquisition related, and that is where we have to pay off the bankers. That's -- there were make-whole payments that were on the Logica debt that had to get reimbursed, et cetera, when we went through all those refinancing. There was some hedging that had to be included. That's all part of the CAD255 million that we reported, but that's not part of the integration cost that we're talking about. So, as you looked at the severances and the integration costs themselves, that CAD110 million that you talked about, that is part of the CAD400 million.

So, initially, when you reported CAD265 million of one-time costs to achieve CAD200 million in cost synergies over three years, did you have all the one-time financial costs?

No, we did not. No.

I see.

No, no, because those are assumed to be charges that go directly to the P&L, and those get flushed out basically on day one, because as soon as we close the transaction, those amounts are due.

That's very helpful. And maybe, do you have an idea, I know it's tough overseas, but do you have an idea of the timing of the remaining CAD300 million?

No, we're still working through that. The issue that we have on there is that we're actively identifying the people that will exit the business, but we have to go through the consultations country by country, and so we're not firm yet on the timing of those exits. That's why we said, even on the money that was booked here for severances of about CAD98 million in the quarter, the timing, the value of that will be seen in the P&L throughout the year as the people exit the business.

Just on the Logica run rate, I know it was a seasonally slow period when you closed that deal due to summer holidays. Can you give us an idea of what kind of annual run rate we should be expecting for Logica?

I really can't. I think I would be really getting into an area where I'm not comfortable, in the sense that I only have a month really of what I would call valid revenue there, that being October. I think the six-week stub period, as I say, as David quite said, was an anomaly. And, of course, now, Kris, we're reorganized by seven different SBUs. So, we've reconfigured and integrated our operations in Europe and Asia Pac into Logica, so we have a different starting point than they had. But suffice to say that October, as another reference point, really helped us validate that the six-week period was an anomaly.

Okay, I understand that. And just last for me, you have a very large seven-year contract coming up for renewal at the end of December. Can you give us an idea of when we should expect to hear some news flow on that deal being renewed or not?

Well, I guess, you'll know when we get it over the line. Again, it's not our tradition to get into specific contracts, especially those under renewal.

Thanks for taking my questions, guys. All the best on the integration.

Thanks, Kris.

Ralph Garcea of Northland Capital Partners.

Just one quick question. On the procurement side, can you leverage some of your hardware and software licensing agreements that you have with your bigger partners into Europe, into that Logica customer base, and get any cost synergies or leverage through that? Then, some of the expertise that you've developed in IP on the procurement side, can you use that in Europe to further the synergies?

I'll just make a general comment, then maybe Dave would want to get into it. When I said that about 75% of the synergies were people related, the other 25% were real estate and other expense controlled items, that's exactly where that procurement opportunity resides, Ralph.

So, we've already compared our master agreements with vendors in North America with the equivalents in Europe, and we've found opportunities where, if we move to the single lowest price, we will and have begun to realize some of those savings as we procure more goods. So, that's an early one that Dave and his team have jumped on, and we see some real benefits there. We're also, obviously, looking at some of the services that we're buying from other providers that we could end up with better prices if we integrate the full scale of CGI into a more competitive position with those vendors for those services.

Okay. Thank you.

All right, Ralph.

Mayer Yaghi from Desjardins.

Just wanted to ask you -- first question on intangible amortization. At closure, you had CAD10.6 million in the six weeks. Can you give us maybe what would be a good run rate to use going forward on a quarterly basis?

And the second question is on the Logica revenue run rate. I know, Mike, you just said you're not comfortable talking about what to expect for 2013, but we did see significant revenue shrinkage in the first half based on your acquisition report. Can you talk a little bit about how the current revenue run rate compares to the minus 7% we saw in the first half of 2012?

Well, again, just briefly again to reinforce, we weren't operating the company in the first six months of the year, and I can't really comment on the operating results for that period. We have not managed the company for a full year, so we're still gone to school on what kind of seasonal patterns one should expect there.

Then the third comment I would make, as I say, we intend to focus on growing new profitable business there, but there will be an offset with running off revenue that has little or no margin. So, I think the run rate, while it's interesting, is not necessarily typical of what the balance of the year is going to be. And again, as we start to post quarterly results, you will get a better sense of what that looks like.

Dave, on the --?

In regards to the intangible amortization, if you were to use a number about CAD20 million to CAD21 million, that would get you in the right ballpark. The only thing I would just caution you about is that as we continue to work through the next few months here, if there are some differences that we come across as part of the valuation of the fair value of those opening assets, we could see that number move up and down just a little bit. But it should be pretty close to the CAD21 million.

And just on the backlog of Logica as it stands right now, if you were to look at it and compare to CGI's base business in terms of backlog, what would be the big differences? Because it seems like they have a smaller backlog compared to what CGI has. And the bookings also -- when you look at bookings in the quarter that you booked in the September quarter at Logica, can you talk a little bit about the profitability of those bookings compared to the current business that is running off?

Well, again, CGI's backlog is -- backlog-to-revenue ratio is one of the best in the industry, so again, when you compare virtually anybody, they're going to be lower. We have more long-term recurring contracts in comparison to Logica. They have a good significant of outsourcing, primarily in the application maintenance side. These are shorter duration contracts where we will attempt to intervene here going forward to make those more long-term recurring backlog-generating contracts. So, they're quite different.

I would remind you again, when we acquired AMS that they had less than 5% recurring revenue, and the backlog was very, very short, and six years later backlog is very significant now in the US, and the recurring revenue is well north of 50%. So, it does take some time to transform that, but we've done it before, and we're certainly focused on that going forward.

And your second question?

It was on the margins in terms of the new bookings that you're seeing going into the Logica business fold right now.

A lot of those bookings would have also been in flight before we actually put all the CGI procedures in place, so I haven't analyzed those bookings for margin. Our expectation would be, over time, new bookings coming on will draw higher, more accretive margins to our business than what has been done in the past.

Okay. Thank you. That's helpful.

Thanks, Mayer. Valerie, perhaps we will have time for one last question.

Michael Urlocker of GMP Securities.

Thank you. Always happy to get in before the bell. I have two questions. One is, Michael, you seem to be highlighting the experience of the US business being especially strong here. We're all aware that a large part of that, especially the federal business, comes from the Stanley acquisition. In my opinion, it was a little bit slow off the start, and it seems to have improved quite a bit. Are there any lessons there, and is there any commonality of the integration team that will be applying that knowledge or those people to the integration of Logica?

I think it's a good question, Michael, and I think the only take-away you should take from that is the point I made earlier that our experience would tell us on an acquisition that the top line integration benefits of a merger are normally seen 12 to 24 months out. And that's what you're seeing in Stanley. We saw the same thing in AMS, and I suspect the same will be true of Logica.

And how about the people involved in integrating, is there some commonality of the people or no?

What we've done is actually put, in each of the major SBUs in Europe and Asia, integration leaders that are very experienced in the CGI model. A number of them have run and assisted in integrations in the past, and they're dedicated to help the SBUs and business unit leaders through this integration. So, we kind of pull that from our best practices and put it into this one. Seems to work well. It gives them a reference, a context point, and they also provide training on the model right in country, so that it cuts down on the travel and the lost unproductive time.

And if I can interpret, a lot of investors I think at times are a little bit nervous about European labor laws. It's a little bit of a scary voodoo thing that we're not so familiar with. You're the CEO here, how do you put that into a context of the various operational issues you're dealing with at Logica?

Well, again, I think if I look at North America state by state in the US, then I look at Canada, we have different regulations and different working regulations. So, I think Europe, if you look at it, is a series of countries. We have competitors operating in each of those countries following those rules. I think the big differentiator here is really the working relationship you have with your people. And I think we have got off on the right foot. We've been very open and transparent with our people over there. They have, in turn, been very open and transparent with us.

And as I mentioned in our comments, in the final analysis, they want to win, we want to win. They want to be part of a global champion, and they've seen that our operating model does deliver superior results over time. I think that we can work within the regulatory frameworks, and achieve the goals that we've set out for our customers, our employees, and our investors.

Thank you very much. I appreciate your comments.

Thank you, Michael. And thank you, everyone, for joining us today. We will see you on February 1, tentatively, for Q1 results and our AGM. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.