CGI Inc (GIB) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen, welcome to the CGI first quarter 2013 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 Melanie. Good morning everyone. With me to discuss CGI's first quarter fiscal 2013 results are Michael Roach, our President and CEO, and David Anderson, EVP and CFO. This call is being broadcast on CGI.com, and recorded live at 9.00 AM on Wednesday, January 30, 2013. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q1 MD&A, financial statements, and accompanying notes, all of which are being filed with both CEDAR 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 statement, whether as a result of future information, future events, or otherwise.

The complete Safe Harbor statement is available in both our MD&A, as well as our press release, and on CGI.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS.

As before, 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 report. All of the dollar figures expressed on this call are Canadian, unless otherwise noted.

As you know, we are hosting our AGM this morning, so we will keep our scripted comments brief in order to take as many comments as we can within the hour. I will turn it over to David first to review our Q1 results, and then Mike will comment on our strategic highlights including an update on the Logica integration. With that, David.

Thank you Lorne, and good morning. I am pleased to share the financial details of another good quarter, which is the first full quarter of results on a consolidated basis.

Q1 revenue was C$2.53 billion, representing a year-over-year increase of C$1.5 billion, or 148% on a constant currency basis. Foreign exchange fluctuation negatively impacted our revenue by C$22.0 million. Our adjusted EBIT was C$209.5 million, up 50% versus last year, while our EBIT margin was 8.3%. Our net earnings before the impact of integration costs was C$137.8 million, or C$0.44 per diluted share, compared with C$106.5 million or C$0.40 in the year ago period. This represents an increase of C$31.3 million, or 29.4% when compared to Q1 of 2012.

In the quarter, we recorded C$153.4 million of integration costs. These are the costs related to the transformation of Logica's operation to the CGI operating model. Since the acquisition of Logica, we have incurred integration costs totalling C$263.1 million against our estimated costs of C$400 million over three years. Our effective tax rate for the quarter was 26.5%, relatively unchanged from the 26.4% when compared with the rate for the previous year. As we have highlighted in the past, the tax rate varies depending on the mix of the profit in each of the various countries, and our ability to utilize past tax losses. We expect that our tax rate for these subsequent periods will be in the range of 24% to 27%.

Net earnings including this quarter's integration costs of C$153.4 million were C$22.4 million, or C$0.07 in diluted earnings per share. I would like to remind you that in addition to taking on an incremental C$2.5 billion of debt to finance the acquisition of Logica, we issued from Treasury nearly 47 million shares of CGI. Accordingly, this quarter's earnings per share were based on the weighed average diluted share count of 315 million shares where, Q1 2012 earnings per share were based on 269 million shares.

Looking the balance sheet, our DSO was 49 days, compared to 51 days we posted for the year ago quarter. The sequential improvement of 28 days from the 77 days we posted at the end of the September is primarily the result of two items. The first is that we had a full quarter of revenue from our ex-Logica operations. The second is that our cash collections benefited from the end-of-year effect, where some former Logica clients made a special effort to clean up overdue accounts. As we move into the upcoming quarters, we will see a tendency for the DSOs to creep up, but with the cash management practices that we have been implementing, we are optimistic that we will be able to mitigate a deterioration in our collections over time. We have maintained our longer term DSO target of 45 days.

We generated C$224.5 million of cash from our operating activity compared to C$147.8 million in the same period last year. Over the last 12 months, we have generated C$689.1 million, or C$2.42 in cash per diluted share.

I want to highlight the impacts that our integration expenses can and likely will have on our cash flow from operations. Due to the nature of these expenses, there is a delay between the period in which the expense is recorded, and when the disbursement of cash is made. At the end of December, we had C$252.5 million of accrued and unpaid integration costs. This amount will be dispersed over time as severance payments become due, as well as when the payments related to the provision of excess real estate space will be made. Over the next few quarters, we expect most of this provision to be dispersed. In order to mitigate the negative impact of these pressures, we have maintained our focus and diligence on training our new European colleagues on our cash flow management practices.

Net debt at the end of Q1 stood at C$2.96 billion, down from a peak of C$3.3 billion following of the close of the acquisition. We have reduced our net debt by C$340 million since the close of the acquisition, leaving us with a net debt to capitalization ratio of 44.7% at the end of December. At the end of the quarter, we had approximately C$1.1 billion in cash and available credit facilities.

Now I will turn the call over to Mike.

Thank you David, and good morning everyone. I am very pleased with our overall performance in the quarter, and the progress we have achieved with respect to integrating and transforming Logica operations into our performance-based operating model. As this is the first full quarter of consolidated results, and the first time we have segmented our results for our new operating entities, direct comparisons to other result periods are limited for five of our seven entities. Accordingly, I will focus my comments on the Company results, referring to individual SBU performance where pertinent.

As David did a good job of explaining our strong first quarter performance, I will keep my comments very brief ahead of our AGM this morning. At C$2.5 billion, revenue was 2.5 times greater than first quarter last year. This includes a full quarter of consolidated Logica revenue, and was further powered by a 20% year-over-year revenue increase in our US operations. The strong US growth rate reflects previously booked revenue coming online, and a pick-up in our commercial and state business.

We continue to aggressively meet with existing and prospective clients, making them aware of our added scale and scope, pinpointing those areas where we can help them realize their business objectives. Response from clients continues to be very positive, as we booked C$2.8 billion in contracts for a book to bill ratio of 112% on the quarter, and 106% on a trailing 12-month basis. Bookings were relatively balanced across all strategic business units and segments. Our sales funnels have been fully integrated, and we now have very good visibility on billions of dollars of opportunities across our key offerings, and the expanded markets we now cover.

Our backlog at the end of the quarter was C$18.3 billion, up from C$13.6 billion in the year ago period. As we did with previous acquisitions, while executing the cost side of our strategic plan, we have begun intensifying our focus on increasing our recurring revenue with a special emphasis on our managed services offering. As a point of reference, when we acquired AMS in 2004, our recurring revenue in the US market was approximately 5%. Today it is in excess of 50%. To lead this global initiative Doug McCuaig, President Canada, has been appointed Executive Vice President Global Client Transformation Services reporting to me. In his new role, Doug will work with the SBU leaders to identify, shape, and close managed services opportunities, leveraging the many new and collective client relationships arising from our merger.

George Schindler currently President of the US will assume full responsibility for the US and Canada operations. I am confident that these leadership adjustments will have a positive impact on our business going forward. EBIT was up 50% to C$210 million, reflecting the initial impact of Logica, and margin expansion in both our Canadian and US operations. Our North American operations contributed C$144 million, representing a margin of 14.3%, reflecting our ongoing attention to utilization rates, and continues can tight management of other expenses. I am pleased that all SBU operating units were profitable, as we have now established a base against which we can demonstrate the gradual and positive impacts of our integration activities in subsequent quarters.

Cash from operations of C$225 million was up more than C$75 million year-over-year. We will continue using our cash to drive the highest possible return for shareholders. Profitable organic growth remains the best use of our cash, followed by an accretive acquisition, and finally depending on the cost of capital, either share buybacks and/or debt repayment. Consistent with the ongoing belief that CGI remains a very good investment, this morning the Board of Directors approved the extension of the normal course issuer bid through to February 2014. With the extension of our buyback, we have the flexibility to purchase and cancel 20.7 million shares over the next 12 months.

Finally, we reported C$0.44 in diluted EPS, inline with our business and integration plan. With respect to our Logica integration plan, we are in fact running ahead of our aggressive schedule, we have established and embedded in our budget the restructuring and transformation necessary to put us on a solid, competitive footing, and deliver 25% to 30% EPS accretion this fiscal year, excluding acquisition-related and integration costs. To-date, we have incurred C$263 million, or 66% of the anticipated C$400 million integration budget required to achieve our synergy target of C$300 million in annual benefits, as we exit the 3-year integration period.

Our teams continue in earnest to implement our operating model, including realigning cost structure and utilization rates to our targets. Our integration plan calls for approximately 75% of the savings being people-related, progress is well underway evidenced by the net reduction of 1,000 professionals in our headcount at the end of December. Other cost reduction initiatives relating to real estate and systems consolidation continue, and are on schedule. The full bottom line impact of all of these actions will become gradually visible in future quarters and throughout the 3-year integration period.

As I mentioned on the last call, we continue to have the financial flexibility to go deeper, as we uncover additional synergy opportunities, or market conditions require us do so. We will provide you with a quarterly update. Through the implementation of our 3-year integration plan, we expect to move the EBIT of our new operations to the top of our European peer group. Over the past quarter, I continued to have the opportunity to meet with many clients, members, and investors, and I remain very encouraged by the positive feedback relative to our transaction.

In summary, we are executing to our plan, and remain confident in our ability to meet our business and integration objectives. I hope you will be able to join us at our AGM this morning, where we will discuss can the new CGI in greater depth. Thank you for your continued interest and confidence. 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 passcode 5472463 until February 13th. As well, a podcast of this call will be available for download at either CGI.com or through iTunes within a few hours. Follow-up questions as usual can be directed to me at 514-841-3355. Melanie, if we can poll for questions, please.

Certainly. Thank you. (Operator Instructions). The first question is from Thanos Moschopoulos of BMO Capital Markets.

Good morning. Mike, it looks like the book to bill at Logica was greater than 1-to-1 in the quarter, which is certainly positive to see. Can you talk about what is driving the bookings at Logica, in terms of how much of that is contract extensions versus new business, also if there are any other discernible trends you would point to in terms of where those bookings are coming from?

Thank you for the question. I think the first thing to say is that I was very pleased with the overall bookings. I was also pleased that they were so balanced across the geographies. Virtually all of the SBUs had a book to bill greater than 1. We also saw very good balance across the vertical markets, 24% came from government, 23% from financial services, 31% from manufacturing, retail, distribution, so a much better balance across the various verticals that we now operate.

In terms of the contract type, about 41% was new business, 59% extensions and renewals. I think when it pertains to our new operating SBUs what we are seeing is the customers are embracing the value that is created by the new Company. We are rolling over existing deals, but we are also winning new ones, hence when I look at it, the relationships that Logica had built with the customers are very deep, and it really does position us to now accelerate the visit the conversation around managed services that I mentioned earlier, on driving up the recurring revenue. Again a very positive outcome on the bookings, and I think it does demonstrate that customers are in fact, seeing, embracing the benefits of the merger.

And how would you describe the business environment in Europe? Are you seeing any signs of improvement there, or is it more a situation where you are confident about being able to grow, despite what might be a tough environment in the coming months?

Again, I think it is very uneven. As I said before, Europe is really a series of countries. I did a trip through the Nordics right after Christmas, I had an opportunity just to speak to 800 clients in Finland, and spoke to many of the CEOs on a one-to-one basis. Again, when I go around the world, companies are really looking to get access to growth outside of their domestic markets. In some cases, they are using technology like the Internet to reach out and sell their services to other markets, in many cases they are actually expanding through M&A, and what I am hearing from them is they are looking for somebody to help them both locally and globally, and it is very much case by case, so again, I worry less about the macro economy, and our strategy has always been to focus client by client, and at that level we see some good opportunities here to continue to win new business.

I should say though and I have before, remember we are also focused on the quality of the revenue, so as we are selling new engagements, we are selling them on what we consider much more balanced business terms for us and the customer, but we are also running off low margin, no margin business, and we are also working very diligently to complete projects where the financials are not favorable to CGI, so that kind of churn in the revenue line should continue here for a number of quarters.

That is great, Mike, it is good to see Logica on track. I will pass the line.

Thanks Thanos.

Thank you. The following question is from Tom Liston of Cantor Fitzgerald. Please go ahead.

Thank you, good morning. Good segue, Michael. The adjusted EBIT for Logica, it is probably hard to tease out, but it seems like it is maybe low-4, maybe up to mid-4 as a percentage. You hinted at some of the opportunities, but where do you think that number eventually trends? Is it more of just letting the contracts run off, is it more about bringing IP to the contracts, or is it more of a revenue synergy gain which you hinted as well? What do you think drives that margin drive higher, and where do you think that ultimately ends up at?

Ultimately the goal that I set and shared with the stakeholders, is that I think when we are done, our transformation here at the end of the 3-year period, our EBIT margin should be in the leadership position in Europe, which I think can range between 8% and 9% EBIT. Going beyond that will mean us really changing the mix dramatically, with much more IP into our European operations. If you look at the levers that will drive up the margins as we go forward coming out of the integration investment, the first thing as I have said before, we are less about restructuring the business and more about transforming it. So the first thing that will drive this we now have clear accountability.

We have seen that in the first global ops meeting where every business unit around the world presents. They now have a very clear understanding and accountability for the total operation within their geography, including bottom line financial performance, so I think that is the first thing, the accountability is now clear, that handoff has been completed. We are obviously trying to find a better balance in terms of utilization, so we are addressing cases where we have access bench or low utilization.

We are also moving the SG&A levels to our CGI management ratios. We are also addressing those projects that are challenged in terms of financial performance, either renegotiating, or running them down, or opening a dialogue with the customer to come up with a more balanced business arrangement, and we continue to look at streamlining overheads to make sure that we have the right levels of management and layers of management relative to the operations as they now exist. I think all of those things are part of the transformation. It is underway. As I say, we have now got a baseline by the new SBUs, at which we can see gradual improvement here, as the impact of the restructuring and transformation takes place over the future quarters.

And just a quick one on the US. Your print was quite strong, somewhere around 50% organic, if you look at constant currency, and obviously Logica on top of that. The US GDP print just this morning talked about government outlays being down 6.6% in the same quarter. Obviously, there is healthcare and such in there that is driving some of that. But can you talk about specifically the government spending, talk about the defense being cut, the current quarter, and a bit of an outlook on that side?

I had a review with my federal team just last week on the outlook, and again, we are seeing a bit of a similar pattern than we saw probably a year and a half or two years ago, where some procurements are sliding to the right. As you know, at that time, our strategy was to continue to aggressively bid, get on as many vehicles as we can, bid as many CAS orders as we can, and wait it out in terms of seeing whether those awards are eventually going to be made. Again, it is hard to see whether this is a pattern that is going to play out this time, so from our strategy it is somewhat the same. We are going to continue to bid. We are going continue to get more vehicles, so we have more opportunities to expand our services to other customers.

We also are focused heavily on areas where government is implementing new programs like healthcare. HIX, we announced again today, either our sixth or seventh state, Hawaii, where we are working with the state to implement the HIX exchange. We are also doing the federal government as you know. We think we are in relative to the competitors, we are in good shape. We still are carrying a book to bill of 119% in our federal business, and as I say, we are on some vehicles that the government is committed on proceeding with. So we are prepared for virtually any outcome there. We won't be able to control what the government does, but we are nimble, we are flexible, and we are focused and so far that has put us in good stead, and that is the strategy that we are taking to go forward. On the other side as I mentioned, we are seeing an uptick in the commercial stateside. We had a very strong quarter there, well over 20% in terms of organic growth on the commercial side, so we are seeing a pickup there in the US, which I think is very promising, especially if we were to see any softening in the government side.

Great, thank you.

Thank you. The following question is from Maher Yaghi of Dejardins. Please go ahead.

Yes, thank you for taking my question. Mike, you mentioned in your prepared comments that your plan and restructuring or the integration of Logica, can you elaborate a little bit on that? When you look at your organization as it stands right now, don't you think, I mean, it is big enough now that we should start to see maybe you guys bidding on some of those large contracts out there that come for renewal from time to time, billion dollar contracts? Are you guys big enough? Do you feel we could see some of these contracts maybe booked in some time in the future?

I think it is a good question. It is exactly why I restructured the organization to put Doug McCuaig in front of that, so that we could be in a better position to shape, and actually be at the table for those deals. I do believe we have enough scale and scope to bid for the right types of those deals, because not everyone that is big is necessarily good from a shareholder's standpoint. Again, we have always been very selective there, in terms of what we bid on to ensure that we are creating maximum value for the customer, and also for our shareholders. I think that is exactly why the organization adjustment and we are clearly accelerating from our normal course in an integration, more to the large outsourcing opportunities while continuing to execute on the cost side, so I think that is exactly where we are focused, but again we are very particular in terms of where we bid, to make sure that we find that right balance between the stakeholders. Your second question?

Yes, the question was, you mentioned in your prepared remarks that you are ahead of plan on the Logica integration. Can you maybe elaborate on what is ahead of plan, and does that mean a quicker runaround in terms of accretion than we should expect?

Again what i think I was really highlighting, I think our teams have done an excellent job, and I want to thank them and I want to also thank our members across Europe for being so engaged and cooperative as we work through what is a very difficult time, when you are transforming and restructuring a people-based business. What I was saying is I think we are further along in identifying and exiting those members who aren't going forward with us. I think we are further along in identifying and exiting those members who aren't going forward with us.

As far as the financial impact, as Dave mentioned and I reinforced, you will only see that gradually. A lot of this happened in December, and will carry on into January here, and although we bookedthe expense, in many cases they continue on payroll until two, or in some cases longer three months, where we continue to pay them, I believe prior to exiting. There will be a lag between the two, but I am pleased that the fact that we have got the organization model, the design. We have identified those functions that are not aligned to our model, and we have spoken to, identified, or exited a number of people that are inline with our ultimate model here. So I think that is what I was referring to. I think the other thing that I am pointing out is it is an enormous amount of effort and coordination after essentially for four or five months of operation that we are so far along in our first integrated quarter.

Thank you very much, and good job.

Thank you.

Thank you. The following question is from Julio Quinteros of Goldman Sachs. Please go ahead.

Hey, guys, can you give us the Logica revenues on a standalone basis to be able to back into the organic revenue growth rate?

No. We have intermingled our existing operations into Logica. We have also adjusted some interco transfers between their various operating units. Give you just one example, Julio, their offshore sites were actually being subsidized by their domestic business units. We have changed that so that there are now profit centers, so we have made a number of changes. I don't know if there are any others, Dave, that you want to highlight, but we have made other changes that wouldn't give a good apples-to-apples comparison across there, that is why I am saying I think that frankly this quarter we have established a base in terms of the key metrics, revenue, EBIT, cash by these units, and we will have a better comparable look going forward.

I guess the point for us as we look at the sources of some of the puts and takes and the sources of the model, obviously much stronger revenues but offset by lower EBIT in terms of what we were expecting. I know you said you are on your plan, but it would be helpful to understand at least from a revenue prospective where that source of strength was this quarter. Did Logica come in better relative to where we were, the stub value last quarter, or was the US and Canadian part of your business better than expected? Just trying to get a handle on what actually drove the upside, or was it even something like more product sales or license sales that would helped, because the revenue source was definitely a little bit of a surprise in terms of getting better overall results there?

Again, the first comment is I was very clear after the [Barrow] report, and the last quarter issued that the report six weeks of revenue was not typical of what we ought to expect from Logica. As I pointed out at the time,it was the summer period, and did not typify the revenue pattern, nor did it typify what I saw in the month of October. So I think what you see here, is a more steady state at a macro level of the revenue. Now the pluses and minuses, as I said earlier Julio, we are continuing to sign and sell deals there that are more accretive to us on a go forward basis, so that is an upward tick.

On the other side, we are going through that revenue base, and actually as I say, focusing on improving the quality, in some cases that means reducing the revenue in certain geographies and in certain customers, in order to put it on better financial terms, so there are a lot of moving pieces in there, and I think we will be in a better position when we get a second quarter to start giving you better visibility into what is impacting the revenue movement quarter-to-quarter.

Okay. Let me hand over from there. We will follow-up late.

Thanks, Julio.

Thank you. The following question is from Doug Taylor of TD Securities. Please go ahead.

Good morning, Doug Taylor on for Scott Penner. Building on some earlier questions, I wonder if you would be able to provide what your target is for total headcount reductions? Are you most of the way through headcount reductions at this point, or do you still expect to see a bunch in the remainder of the year?

Doug, first off, I don't normally release a headcount target. I think in the services business frankly it is very damaging, in terms of people's morale, and people tend to focus on that number, and not on the actual customers and other important items, so we are not done. Our restructuring as I mentioned, there are more reductions to come. I did say and I emphasize again, it is net headcount down to 1,000, because again with the growth we are having in the US, for example, we are adding heads there, so the actual reduction relating to the restructuring was greater than 1,000, but we still have more to do, and you will see more of that on a go-forward basis here.

Fair enough. Another question just to perhaps help us be able to make your results here more comparable with historical. Could you provide for us, or remind us at least what GIS revenue, how that was allocated geographically?

Most of that was in Canada, about 80%, and the balance is split between the US and Europe, and again, it is more heavily in Canada, US, and then Europe.

Okay, thanks. I will pass the line.

Thanks, Doug.

Thank you. The following question is from Michael Urlocker from GMP Securities.

Good morning, I have two questions. Michael, the first one is going to look at let's call it qualitative assessment of management in place at Logica, and then the second one is a more standard cash question. When you look at the Logica team as you have inherited it, and have started to influence it in terms of how to operate, what is your observation in terms of the effectiveness of the management team in place in Logica across the various units, and their ability to be fully accountable to the standards that CGI would want to see? If you want to maybe offer a couple of antidotes or observations to help us understand that, it would be helpful.

Sure. On that one again, just to remind you, we actually interviewed those people that would run our SBUs, I did that personally, and we also interviewed a number of the BU leaders that are operating very large entities in Europe. And again, what we were looking for to your point, Michael, is people who like to be accountable, and like to win, and I would say that we are at this point very pleased with the team that we have out there. I think if you look at the first quarter's results, you can see that they have been working extremely hard to actually implement the model, making tough decisions, standing up in front of their customers, and talking about achieving a better balance in terms of the business arrangement, talking to their members in terms of the need, why we need to transform the business to be more competitive, and then finally, I think the way our model works is that every quarter we get a very clear score card, much like I get mine from investor calls like this. We have a global ops meeting where every SBU and BU leader presents to their peer group their performance against the very same metrics that I am reporting out here today. I think my early assessment is we got have extremely strong leaders, they are embracing the model, and they all want to win, so I am very pleased with the team that we have.

So you think you have got the right material in place to shape them and groom them to your standards?

Yes. I think again, they have all been trained now in the model, and again, they clearly understand what they are responsible and accountable for, and we have the accountability loop closed, because we now report the results by SBU and by BU.

Okay, perfect. Then my second question, a more standard cash generation question. Certainly, the cash from operations in this quarter was very high, in fact, it is a record for the Company, but it is early days of integrating Logica. So I wonder what your expectation is in terms of whether there is going to be some substantial cash outflows over the next little while, or whether we are actually now in a phase where we can expect steady, improving cash from operations from the whole Company?

Michael, that is a good observation around our ability to be able to generate the cash. In my comments, I had tried to provide a little bit of color around how much in the way of integration provisions that we have actually built up over the last quarter and a half in respect to the Logica acquisition. There are about C$252 million of provisions that are sitting out there right now. That is where we booked the expense, but we haven't paid out the cash yet, a big portion of that is related to severance, and as Mike had said, as we have notified some of these individuals, they are on garden leave, they have different exit dates, et cetera, and some of them may go through this quarter and maybe even into the next quarter, so there is some timing of when that C$250 million is going to flow out of a company.

There are also some compensation payments that we have seen within our own Company in the past that get paid out in this quarter, and there is also compensation, some bonus payments, et cetera, for the Logica folks that would also have been earned by the end of December, which will then get paid out in this coming quarter. I think we have tried to be fairly transparent in both my comments, as well as in the MD&A to provide some backdrop that we see this as being a fairly high quarter. We would like this to be a regular quarter as we go forward, but we have to get through all of this integration activity first, before we get to a steady state, and there are a couple of quarters that we are going to see where I think we will be almost net cash out, as opposed to cash coming in.

In terms of the working capital accounts, I don't think you are signaling, if I am hearing it correctly, that there are going to be any dramatic swings there, in terms of cash requirements?

Other than that I might notice from a trending prospective, DSO may trend up a little bit just because I think we had a little bit and maybe it is C$30 million to C$40 million extra that came in at the end of the year, more of a year-end effect, but outside of that, we hopefully will be able to maintain the position that we have in the DSO.

Thank you. If you want to boast a little bit, I think the performance in the US seems to be very strong. How much of that would you associate with the Stanley acquisition from a few years ago, and improvements that you have brought to Stanley?

I think the Stanley acquisition is already embedded in the history there. Clearly, it gives us a lot more critical mass, opened up a lot of opportunity on the defense intel side, but I think the driver on this quarter was actually on our commercial stateside, which Stanley was not a part of.

Okay. Still a good performance. Thank you.

Thanks, Michael.

Thank you. The following question is from Stephanie Price of CIBC. Go ahead.

Good morning. You said in the past that revenue synergies aren't included in your synergy targets. Can you talk a bit about the potential timelines for these synergies, revenue synergies, and whether the pipelines have any early signs of them?

Normally, first off as I say, I normally don't build in, and haven't built in revenues in the calculation of the accretion rate, and the reason for that as I said earlier, that there are pluses and minuses on the revenue as we go through it, attempting to improve the overall quality of the revenue, which is first and foremost the goal that we are pursuing here, and the revenue synergies normally follow in the second, in some cases third year. I think you have seen some of that in the Stanley acquisition, that it takes a year or so to really get through the first part of that exercise, and certainly on one as big as Logica, it is going to take time. It will be over a 3-year period, likely more in the back end of the 3-year period than in the front end.

Okay. In terms of the US, can you talk a bit about the pricing environment that you are seeing in that region? Margins were a bit lower than they have been in the last couple of quarters this quarter?

I think the margins are actually up year-over-year, and again, I just remind you in the US, you have got to tack on about another 2% for intangibles, so the US operation itself is actually generating closer to 12% EBIT, as opposed to 10% and a bit. I am very pleased. I think we are not only growing the top line, but we are growing the bottom line, and the one thing that we have got to keep our eye on our utilization rates are running red hot in the US, as we staff up for the revenue growth, so there is always a balance there between the two, but the team down there is doing an excellent job, and I am very pleased with the top line, bottom line, and bookings in the US.

Great so you are not seeing any sort of impact in the pricing environment then?

I haven't seen a lot. I think again, we are very competitive, and much more nimble than our competitors. Again, we are financially stronger, so I think we have had good bidding criteria in our organization where some of our peers may actually be relooking at their bidding processes, given the situation they find themselves in, but we are not in that case.

Great, thank you.

Thanks, Stephanie.

Thank you. The following question is from Bryan Keane of Deutsche Bank. Please go ahead.

Hi, good morning, guys. Wanted to ask just about Europe in general. We still get a lot of questions about Europe, and now that you guys have a big stake in Europe, can you just talk about the fundamentals there? Are things improving yet, or have we yet to see bottom in the European IT market?

Thanks for the question, Bryan. As I said, I really see Europe as a series of countries. If I take the Nordics, as I say I just did a swing through there, and frankly, I found the environment, the business environment to be very positive. The businesses up there are expanding, I met with Statoil, they are expanding around the world, there are other companies there that fall into that criteria that I said are really using technology to gain market share beyond their domestic markets. So I thought the Nordic companies were healthy.

The UK is a bit of the wild card here. I think again from our standpoint, we are executing very well to our model in the UK, but again, there is still uncertainty in that market. We would like to see it come back a little stronger. In Germany, a good market. Netherlands is firming up for us, probably had the best performance that Logica has had in Netherlands in the last four years in the quarter.

France is a very steady market. There is a lot of government influence in the French market, so the spending and investment rates there continue to be fairly stable. We do not have a big exposure to Portugal and Spain, but again, our organization, our new combined organization are actually doing quite well there, especially in the Portuguese part of the business, so it is very uneven, Bryan, but my sense is that we have come off of the bottom there, and that most of the indicators are positive, and when I talk to the individual customers, a number of them are actually increasing their investment in Information Technology in 2013.

Okay, that is helpful. Just had a question on the push for recurring revenue. I think the SI consulting business is now 44% of the mix. Is that a business that can go more recurring, because you usually, that tends to be more spotty time and materials?

Yes. Our experience, that is why I cited the AMS example, Bryan, because AMS was very similar. They were essentially a consulting-based company. But what you find in behind those is a lot of those SI&C projects are part of a 15, 20, 25-year relationship with the client, and therefore, the door is open in terms of meeting with the client, and having a more broader discussion on how managed services can help bring down the costs of those SI&C projects, and the maintenance and total costs of ownership.

One of the observations, and it is not a scientific Sam, sample, it is a sample that I have conducted speaking to clients across Europe. My sense is that a lot of the European IT organizations have a higher percent of their budget spend on application maintenance and the run side of their business, so they are a higher percent on the run and operate versus what I see in North America, and part of that reason is I believe that they haven't fully embraced to the same extent the managed service offerings, so this opens up an opportunity for us I think in terms of introducing it, and actually changing that mix a little bit over time, and moving up the recurring revenue percent of our business, which is a goal for us. It has been very effective for CGI over the years, because in the downturn it gives us a floor in terms of revenue, and helps us continue to do things right over the long haul, because we have got that recurring revenue stream.

Great. Last question for me. Any thoughts about giving us the quarterly break out of the new segments going back, only to make it easier for modeling purposes, how to model the Company going forward? Thanks so much.

I think I have addressed that, they are not the same company I guess is another way of saying that. There is no more Logica. There is a CGI organization now in Europe, Asia PAC, that is being transformed into our model. and it is very difficult to get any reasonable, meaningful comparisons, and again, we are trying to, and are transforming how we look upon that business right through the metrics from top line, to cash management, to headcount. So, understand why folks are asking for that, but again, I think given the things that we have got underway in terms of consolidating this organization and transforming the financials into our operating model, that is where we are spending our attention.

Okay, thanks.

Thanks, Bryan. Melanie, we have time for one last question. Certainly, thank you. The following question is from Julio Quinteros from Goldman Sachs.

I had a brain freeze on the subsequent question. I think you already answered it, so I won't belabor the issue around revenue synergies and expectations. I just wanted to go back to the point on US strength, because clearly the performance there well ahead of a lot of expectations. Can you just go back and frame where that commercial strength was? Was it health-related or was it financial vertical? Where was the surprise there in terms of the US on the commercial side?

I think a big continuing, big boost on the health care side is the implementation of Obamacare, these HIX exchanges, changes that are required for the Medicare, Medicaid are also very important. We are also, the IP mix in the US is increasing, so this is helping us not only drive up the top line but the bottom line, so I think health is a big piece of that, and the work we are doing on the IP side is having a double impact top and bottom line.

How about your performance on the rack work that you guys are doing?

On the rack work?

Yes.

We do pretty well on the rack work in terms of not only meeting the clients' requirements on the recoveries, Julio, but it has been a good business, very good business for us.

Anything there in terms of the recompete or renegotiation there? It sounded like they had moved up their decision making cycle there, in terms of the rack structure. Have you guys got any color on what they plan on doing there?

Don't have a lot, but if we look at our own benchmarks, we see ourselves as actually amongst the best performers in the rack, and we continue to win contracts in that business, so I think we are very well-positioned in the healthcare business, especially in the US to continue to capture double-digit growth in that vertical. Just a reminder, we are also doing the federal HIX as well, health exchange, and I think with the Hawaii announcement this morning, Julio, that is either our sixth or seventh state that we are implementing HIX.

Got it. Great, thanks.

Good share there. I think we have got actually the best share amongst the competitors, in terms of standing up these exchanges.

Great, thank you.

Thanks very much, Julio. And thank you everyone for joining us this morning. Hopefully you will be able to tune into our AGM at 11.00 AM, and we will be back with our Q2 results at the end of April. Thanks very much.

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