CGI Inc (GIB) 2013 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the CGI second 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 Valerie and good morning. With me to discuss CGI's second quarter fiscal 2013 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 Tuesday, April 30, 2013. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q2 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 and press release, as well as on CGI.com. We encourage our investors to read it in its entirety. We are reporting our 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 reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted.

I'll turn it over to David first to review our Q2 financials and then Mike will comment on our performance highlights and provide an update on the Logica integration. So with that, David?

Thank you Lorne, and good morning. I am pleased to share the financial details of another good quarter. Second quarter revenue was CAD2.53 billion, representing a year-over-year increase of CAD1.5 billion, which is stable on a sequential basis and up 137% compared with the year-ago period. Currency impact was negligible.

Adjusted EBIT was CAD262 million in Q2, up 67% year-over-year, representing an operating margin of 10.4%. Sequentially, adjusted EBIT increased by CAD52 million, while our margin increased by 210 basis points, as integration benefits began to materialize. Our net earnings before the impact of integration costs were CAD176 million, up 66% from Q2 last year. Diluted earnings per share in the quarter were CAD0.56, up 40% from the same period last year.

We recorded CAD81 million of integration costs related to the ongoing transformation of our European and Asia Pacific operations in the second quarter. Total integration expenses at the end of March amounted to CAD345 million, of which CAD235 million has been incurred in the first six months of fiscal 2013. Net earnings in Q2 on a GAAP basis, including integration costs were CAD114 million or CAD0.36 in diluted earnings per share. I would like to remind you that this quarter's earnings per share were based on the weighted average diluted share count of 316 million shares, whereas the Q2 2012 weighted share count was 267 million shares.

Our DSO at 46 days in Q2, improved across all business segments compared to the 53 days we posted last year. We generated CAD147 million of cash from our operating activities compared with CAD104 million last year. Over the last 12 months we have generated CAD732 million or CAD2.46 in cash per diluted share. The impact of the integration expense on cash flow will vary due to the like from the period as recorded and when the cash is paid out. Primarily related to severances, disbursements will be made throughout the second half of the year and real estate payments associated with multiyear lease arrangements will be paid out over the longer term.

Net debt at the end of the second quarter stood at CAD2.9 billion, down from a peak of CAD3.3 billion following of the close of the acquisition. We have reduced our net debt by CAD51 million during the quarter and by CAD380 million since August, leaving us with a net debt to capitalization ratio of 43%. At the end of the quarter, we had approximately CAD1.1 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's operations into our performance-based operating model. As David has done his usual thorough job of walking through the financials, I will focus my comments on two areas; the highlights of our quarterly performance and an update on next steps with respect to the implementation of our integration plan.

Starting with our second quarter results, at CAD2.5 billion our revenue was almost 2.5 times greater than quarter two last year and remained stable sequentially at an annualized run rate above CAD10 billion. In North America, our revenue growth continues to be powered by the ongoing strength of our US operations, up 18% year-over-year. In Europe and Asia Pacific we continue to focus on improving the quality of our revenue base and on expanding our recurring revenue over time. We are beginning to see the benefits of this strategy on the bottom line as we continue to proactively run off, shutdown or divest money-losing or low margin engagements.

Although we are moving rapidly, it will take a number of quarters to fully address and stabilize the revenue base. At the same time, our renewal rate remains strong as we continue to extend and expand profitable business with existing clients. Our funnel of new opportunities is expanding and all are now being qualified against CGI's profitable growth targets. Our proposals are being enhanced as well to reflect the deeper capabilities of the merged business and we have identified a number of new managed service opportunities where we are proactively shaping transformational propositions. Our interaction with clients continues to be very positive and they remain open to the value propositions we are advancing.

While our book-to-bill was under 1 for the quarter, it remains above 100% on a trailing 12-month basis. As well, new contract bookings of CAD8.1 billion over the last four quarters have built our backlog to more than CAD18 billion. As was the case this quarter, CGI standalone business has historically experienced softer quarter two bookings, due in part to our US federal government business, where deals have tended to shift to the right in recent years.

On the other hand, our Canadian book-to-bill was 105% in the quarter and an early and encouraging indicator of future growth. With respect to revenue and bookings in Europe and Asia Pac, we continue to improve our understanding of both country and sector seasonal patterns. We are nonetheless gaining traction with existing and perspective clients as we increase market awareness of our deep domain experience on both business and technology.

Adjusted EBIT was up 67% year-over-year to CAD262 million, reflecting the increased effectiveness and acceleration of our integration plan. Of the CAD262 million in quarter two EBIT, Europe and Asia Pac contributed 48%, while North America represents 52%. All SBUs are profitable and the underlying business fundamentals are showing solid improvement as we continue to address key margin levers, including increased utilization rates, reducing SG&A and mitigating Red project margin leakage. Having reduced our financial exposure by 35% in the first half of this fiscal year.

All of these actions are designed to further strengthen the bottom line. Before the impact of integration costs, we delivered CAD176 million in net earnings or CAD0.56 in diluted earnings per share. Cash from operations of CAD147 million was up CAD43 million year-over-year.

Given the market dynamics in the US, I will make a few comments on the ongoing strength of our operations in this important market. On the commercial side we continue to see business demand increase as reflected in our 30% year-over-year growth. Despite current challenges and budget constraints on the US federal government side, our book-to-bill remains above 1 on a trailing 12-month basis. We continue to focus on positioning ourselves for the future by earning prime positions on contract vehicles such as the recently announced $11 billion Department of Homeland Security vehicle. Amidst this continued uncertainty, we have CAD1.1 billion in outstanding federal bids that remain unawarded, providing revenue acquisition opportunities for the remainder of this fiscal year.

Across US, state and local markets, we continue to see demand for financial systems modernization as evidenced by our wins in Arizona and California during the quarter, as well as continued strength in healthcare reform such as our recent mandates we've won in Vermont and Hawaii. And we continue to see more clients shifting to onshore global delivery centers as they rebalance their global delivery portfolio. Last month we opened a delivery center in Belton, Texas, where more than half of our employees are US military veterans, supporting AT&T with the delivery of their managed network services. We expect to growth the Belton center to approximately 400 members.

We believe that our balanced approach to a blended global delivery model continues to meet the needs of our clients and is aligned to the evolving immigration policy discussions underway in North America.

I would now like to update you on the status of our integration plan and share our next steps. As a reminder, our integration plan has two major components; the restructuring of the operations in line with our business management ratios and transformation of the operations to the CGI operating model. With respect to restructuring, we are running ahead of plan, having invested CAD345 million or 86% of our previously announced CAD 400 million target investment. The majority of this investment was people-related and as a result, we've managed down our net headcount by 3,000 to date, the benefits of which are being reflected in the bottom line.

As we continue to manage the operations we have identified new and addressable cost synergy opportunities that we will now action in our integration plan. In addition to continuing to focus on SG&A and bench reduction, we've expanded our scope to address such structural cost savings opportunities as eliminating more than 80 legal entities, auctioning further real estate optimization initiatives, implementing additional technology enhancements and standardizations to yield further metrics and the timely information necessarily to fully realize our commitment to operational excellence and finally increase our investment required to globalize our IP based services and solutions.

On the transformation front, we have made significant progress in training and implementing our management foundation and associated outcome based model, the benefits of which will become more and more impactful as we transition from implementation to operation. Specifically to mention a few, we have realigned our organizational structure, increased accountability based performance, implemented our sales visibility system, started to consolidate our financial systems, collected more than 1,100 signed client assessments in Europe and Asia Pac throughout the first six months of fiscal 2013, and we are in the process of rolling out our share purchase plan across Europe and Asia, beginning with the UK, where half of the members have already enrolled in less than four weeks.

In reviewing our strong progress in all of these areas, we have revised our integration plan as follows. We will expand our synergy goal, increasing the annualized savings target from CAD 300 million to CAD 375 million by the end of fiscal 2014. We will increase our investment from CAD 400 million to CAD 525 million over the integration period, allocating the necessarily funds required to address a broader scope and deeper scope of opportunities while providing additional benefits and incremental earnings per share accretion over time. And finally, we will reduce the time required to successfully complete our integration plan from three years to two.

I am very pleased that all CGI members are engaged to ensure a successful integration, and in doing so, increase our collective ability to assist clients, create additional career opportunities and deliver superior results to our shareholders.

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 7565039 until the 9th of May. 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 can poll for questions from the investment community, please.

(Operator Instructions) Thanos Moschopoulos, BMO Capital Markets.

Mike, you highlighted that it'll be a multi-quarter process in terms of improving revenues and improving the revenue mix at Logica, but at this point are there any specific regions that you'd highlight as being further along in that process than others? And also generally speaking, how is the opportunity set and pipeline evolving in terms of driving a higher outsourcing IP mix across Logica business?

I think on the first question, it's more a case of a number of geographies being further ahead on the integration, others being more on schedule, so the Nordics, the UK, France is on schedule. So it's more of a balanced mix. Everybody is doing much better than originally planned, hence the reason why we're making the adjustment to the overall timeframe. But as far as the outsourcing funnel goes, I say we're really taking two approaches there. We've focused on really the organic identification by the business units of outsourcing opportunities and we've created a second funnel that we've built together with the business units where we'll focus on eight or 10 global opportunities that we can proactively go in and offer a transformational deal. So we're really hitting the outsourcing hard at two levels to really help accelerate the mix change of some of those geographies.

If you take France for example is a very high systems integration consulting mix there and over time we would like, as an example, to get a higher level of recurring revenue and clearly the outsourcing strategy will deliver that over time.

Great. And I'll just ask the macro question; how have you seen the spending environment evolve since last quarter? Has it been pretty consistent or have there been any areas specifically that have picked up or slowed down in recent weeks?

Clearly, the US commercial business continues to be strong and state and local appears to be picking up. In Europe I would say I haven't really seen a big shift. The Nordics is very active. I spent some more time up there. We've got a very active funnel with some near-term opportunities there, so that's kind of how I see it. But I certainly haven't seen the markets deteriorate.

One for David. You provided revised tax guidance for the quarter. How should we be thinking about cash taxes going forward; should that be pretty similar to the reported rate?

It should be. I would think so, yes.

Richard Tse, Cormark Securities.

Mike, over time it doesn't look like you're talking about revenue synergies for Logica just yet, but given the progress you made on the EBIT margins thus far, do you think in the next two years you'll be able to get those EBIT margins back to CGI proper levels prior to the acquisition?

No, I don't think so. As I said before, in order to do that, I have considerably change the mix to do that, but I have said that we will move the EBIT margins in Europe up to the top level, which I think are running in between 8.5 and 9. To get them up to North American levels, we're going to need to change the mix and have a lot more IP based services and solutions and also increase the amount of recurring revenue driven by long-term outsourcing deals. This is very similar to what we saw in the US with AMS and it took a number of years to do that, but the outcome was certain and the benefits were real. But it does take time.

And the impact of the sequestration right now in the US, to be clear, basically it's causing a delay in terms of the bookings was my guess and a slight impact here in your revenue. Is that the way to look at it here? You're not losing anything here at the margin are you?

No. I think if you look at it again, just to put it in perspective, even the latest budget proposal by the president increased the IT budget proposed increase by $2 billion. It's an $80 billion market. We've got about 1.3 billion. Our team is extremely focused there. We've got a book-to-bill well over 100 there. We've got a nice recurring revenue stream. Our focus is to continue to focus on leveraging our position as a trusted advisor with our current clients.

We want to capitalize on the fed RAMCloud and cyber market position. We want to continue to drive the funnels of GWACs and ID/IQs. We announced the Homeland Security one. These are necessarily for long-term growth. We'll continue to generate opportunities with smaller and larger business partners. I think net net for us to be transparent, we're clearly outperforming our peer group in that federal market and we've got an outstanding team there that's really really focused on customer satisfaction and we're operating in those areas where we believe the projects will be protected or in fact increased, things like helping drive spending reductions, helping the government increase productivity, strengthening cyber security. And our current outlook is that we will actually see year-over-year growth, top line and bottom line in our federal government business which I think makes us somewhat unique.

One last question on Canada, you had some challenges there within the past few years and I noticed (inaudible). Are you doing anything different to address that going forward here? It's a smaller relative percentage but still I think a pretty important part of it now.

In Canada, first off, I'm not happy with the growth rate in Canada, obviously. We've made some changes with having George focus both on Canada and the US. We're trying to ensure that we've got full implementation of best practices there and business development. On the other hand, we have a very high recurring revenue base in Canada. We've been able to extend those long-term contracts and when you do that, you're also very susceptible to the business pattern of your clients. If they happen to be in a cycle where they've just completed some investments, their volumes can run down in the short-term. On the long-term of course our experience has been those volumes return and the growth comes with it.

So we've got a good team here focused on Canada. They know what they've got to do and to say with the book-to-bill of 105, that's a good first sign that we've started to turn the corner there. But it'll take some time to get where we need to get to. I would remind you again that this year is the first year we blended back in the infrastructure business so you will see some fluctuations in the margins, reflecting the seasonality of that business and also some of the investments required in that part of our operation.

Julio Quinteros, Goldman Sachs.

Mike, to go back to that question a second ago about organic revenue targets as we think about the longer-term. So we're getting ready obviously to anniversary the Logica acquisition and clearly the expense part of the story is playing out really nicely. But at what point can we nail you down on some revenue growth expectations and some targets around the combined business as we think about it going forward?

I think the best time is probably when we finish this fiscal year and put together our 2014 budgets, we'll have a better baseline of the European operations, we'll have the seasonality impact that we still haven't gone through yet and hopefully by then we will have continued to address the exposure we've got on red projects.

As I mentioned, we reduced our financial exposure by 35% in the first half of the year, but we still have to work through the balance of those red projects and they can have an impact, depending how we resolve them, on the top line and the bottom line. So I would say probably when we launch the fiscal 2014 we'll have a better view of the baseline and therefore, what the opportunities are for profitable organic growth in 2014 and beyond.

Just to dig into where it shows up as a tangible example in terms of red projects reduction, so if we look at, for example, the UK, we had a slip in revenues but a pretty significant improvement in the margins; is that essentially where those types of efforts are, where you have red projects that are improving impact in revenues to the downside but improving margins pretty meaningfully? Is that how you think about some of those movements?

Yes, you'll see some of that too in some of the other geographies. Some of it is being shifted but there are areas that we're running down fairly aggressively, some of it being offset by other opportunities. What's key here to me is beyond addressing those, we're looking very carefully at the renewals to ensure that they're profitable and the new propositions and proposals that we're making are actually now being run through our gate process so that we have a good look at how those deals are structured and what kind of margins are built into them. So we're trying to do a number of things here, which is to address the current mix but also ensure that the future mix is much stronger. But the UK is a good example of that but there are others in there.

Can you address immigration reform, especially as it relates to H1B visa usage for you guys? Any thoughts around that and what that can mean for you from a competitive perspective?

As I said in my remarks because I'm not sure it's as visible, but Canada is also having a somewhat similar discussion, although it seems to be a very volatile discussion here in terms of which direction they're going to go. I think the point I was trying to make is that with our local proximity based model, we're very much in line with the direction of these policies, which is really to ensure that there is a good mix between local employees and folks that are coming in using these visas. We do not have any kind of a material exposure in that regard.

In fact, as I say, I think our model has always believed that you have to have proximity to your client and that this work needs to be done in a blended rate. I think a lot of this is driven by the economic situation but also heightened concerns on things like cyber security and data protection, which is gaining more and more visibility in the type of world that we live in. So, we're well positioned for any changes there. I think virtually anything that's done in that direction is helpful to us, given our operating model.

Scott Penner, TD Securities.

David, first of all, the 345 million of integration charges so far, how much in cash has been paid out and what can you say about the cash payments just over the next couple of quarters?

Maybe I'll answer it the other way. There's about 186 million that is yet to be paid out in regards to some of the integration costs that have already been booked. Those costs, some of those are going to be severance, the majority is severance, so that's going to be paid out over the next couple of quarters. There are some real estate charges there and they will end up being amortized or paid out over the length of whatever those lease agreements were. Some of them were multiyear, up to four or five years.

The 375 million of annual cost synergy target, should we think about that as being the exit rate exiting next year?

Yes, exiting fiscal 2014.

I wanted to get your comments and address this head on; the negative spin to the higher cost saving targets at Logica being there's something incrementally negative on the revenue picture given that you still target the same EBIT margins of 8.5% to 9% being the high end. Just hoping you can add some color around that to make people a little bit more comfortable. Maybe talk about the timeline of the remaining exposure to those red projects or what the revenue exposure could be?

Again, I'm trying to be always very transparent and realistic. We've only been operating the business for six months, so in terms of goal setting, I think the first step, and I've always said, was to ensure that we have a steady operation of quality revenue that's throwing off the levels of EBIT for Europe and Asia Pac that I spoke about. Clearly our direction as it is in North America is over time to continue to find ways to improve our earnings per share and our EBIT numbers.

But again, I'm taking it one step at a time. I'm trying to find the right balance between ensuring that we have that quality revenue and that the restructuring and transformation that we're doing is permanent. I think restructuring is one thing. The transformation on how we think about the business, how we acquire revenue, how we manage costs, how we drive productivity, how we take accountability for outcomes with client service member satisfaction and financial performance takes some time to take hold.

So on the second leg of improving earnings per share and EBIT, that will probably extend beyond 2014, because on the transformation side we're shifting from training and education into operations and our operating model is built on continuous improvement, even in in established geographies where we've been there for years and we continue to have a restructuring mentality, auctioning areas today that will help benefit our earnings per share and financial strength in the future. So that's kind of how I look at it.

Okay. If you've addressed 35% of the financial exposure of the red projects, what do you think that percentage will be let's say by the end of this fiscal year?

It will certainly be at 50% or higher. We're making really good progress there. And again, I'd point out that we're being able to resolve these red projects with our customers on a business front and not on a litigation basis. So we've actually reduced our provisions and exposures around litigation than we originally thought and this bodes well that customers are really engaged with us trying to find a business outcome that benefits them and also improves our position as a long-term partner.

Edward Caso, Wells Fargo Securities.

I just wanted to revisit your global delivery approach, particularly the India component of it, which remains relatively small compared to some of the larger players like IBM and Accenture. Are you dialing back that effort now and being more near shore and if you're doing that, does that have implications for your ability to improve margins, particularly in Europe?

Thank you for the question. Again, we're not dialing back anything. We're staying on our global delivery model, which as you may know, four or five years ago we were called contrarians because we weren't shipping every last body over to India. Our strategy has always been to give our clients a menu of choice, which drives a value based outcome. And to us, value has three components; it's got the price or the cost, it's got the service levels and it's got the risk managed. And again, as a result, we have built out and continue to extend near shore centers in the United States, Canada, Europe. We've got offshore sites in Morocco, Philippines, India.

So we have a blended balance and we would continue to build that out based on the demand of our clients. So we think that is the right strategy and I think the example of AT&T awarding a contract that's in Belton, Texas is a good example of how customers are thinking about where they do the work.

I want to make sure I got the US federal business you seem pretty optimistic on that front. Can you talk if there have been any reduction in run rates, any delay of taking option periods; what are you seeing on that front? I assume you're not booking any backlog for ID/IQ type work.

No, we don't book any contract until it's a signed book of business. Essentially on the option years, these option years are actually being taken up, so customers are extending existing contracts which is good for us, given our high level of recurring business. On the other side, it does reduce somewhat the opportunity to take market share. Clearly, what we're seeing in the back end of the year is we've got well over a billion dollars in bids awaiting approval.

We've seen this phenomena before. A couple of years ago we had a very similar situation and the point of view I took at the time was at some point the government is going to have to award this business, particularly if it's in areas of business that are actually driving the outcomes that the government are looking for. For example, bring down the spend rate or increase productivity or driving a managed service BPO outcome, increasing cyber security. So we could well see - I'm not predicting it. I'm just saying I've seen the pattern before where some of this backlog of bids has actually been cleared out as the government moves through their fiscal year.

Having said that, if it doesn't happen, I walked through our strategy is to continue to focus hard on our existing clients, leverage the GWACs and ID/IQs I have to go after more TAS orders, partner with more smaller and large business partners to share in future wins. So I would say our growth rate is coming down within the year based on what we're seeing but in the end our outlook is that we will still grow year-over-year organically, our US federal government but thanks to the leadership of the team that we've got.

Share repurchase, you didn't do any in the quarter. What's the trigger that would get you to be a buyer of your stock?

Again, we think our stock is very good value. What we're managing right now from a cash perspective is addressing the integration costs that we mentioned and we're also gradually working down our debt, Ed. Having said that, that lever is still on the table and we consider it here on an active basis of whether to go back into the market but for this quarter and likely the next quarter, our focus is to get those integration cash charges behind us and continue to work down the debt.

Maher Yaghi, Desjardins.

Just wanted to dive a little bit into your increased potential cost savings from your integration adjustments in Logica. I was wondering if there's any increased cost savings coming from the lower adjustments you made on your intangible assets? Can you discuss a bit more what drove those adjustments down in intangible assets from the Logica acquisition?

In regards to the intangibles, as you know, we have made sure everybody understands that when it comes to the purchase price allocation that was done in August that that number can fluctuate within the next 12 months, so we have until August to have everything nailed down.

What we have done is we've gone back through, we've looked at the customer relationships and this is where the bulk of that adjustment was coming from and it was really just nothing more than a tweaking, looking at what the estimated cash flows are coming from the clients within the various regions and updating the assumptions that we had made back in the August-September timeframe for what we're starting to see coming through with a couple of quarters of actuals now behind us. And what that did was it actually shifted some of the cash flows from one geography a little bit to another geography, thus changing some of the valuations of the client intangibles in those regions. And at the end of the period, what we're seeing here is that there's been a net reduction of some of the amortization that we have on the intangibles.

What we also did in the MD&A, if you were to look within the adjusted EBIT section, was to give you the sequential view as to what that impact was. So as the dollars move from one geography to another geography because there was some net winners and some losers when it came to that, we wanted to give you a view as to what the revised Q1 number would look like in the way of adjusted as well as the revised Q2 number, so you could actually see what those run rates are.

When we take a look at all the net adjustments up and down, it wasn't really that significant. If you were to look at note number seven in the financial statements, it did look like there were some other changes that were taking place. A number of those changes were nothing more than just reclassifications, items that were in the short term that have been reclassified to long-term and vice versa. So as we just work our way through the 12 months, we're looking at those assumptions and we just continue to refine those as better information comes forward. To date, there's only been about a 3.8% adjustment to the goodwill, so it hasn't really been significant or material. It hasn't really driven any significant impact to the P&L. Again, just slight refinements within some of the regions and we're trying to make sure that you get visibility to that. We will continue to monitor some of the projects, etc.

As Mike has said earlier, we have really focused on where are some of the assumptions that we have, things like litigation, client disputes, etc. We have really focused hard on trying to get those things resolved, working with the operational teams. We've been relatively successful so far and to the extent that we can get those taken off the table; we can get those things cleared up and make the appropriate adjustments again in these calculations. And we've made some very good progress.

I'd just like to highlight though, any of the good news that we get from resolving these issues, none of that is being pushed through the P&L; it's all being pushed back through the balance sheet back to the goodwill, so we're not taking any of that upside into the results that we have provided to you. Those results are coming straight from the operations and from the hard work and the sweat from the individuals that are involved to deliver against the clients' commitments.

Last question on integration cost cutting initiative you're doing. Of the 375 million of improved efficiencies, how much are those cash related and are there any accounting costs included in that 375 million?

We're talking about driving the outcome on earnings per share.

The benefits are on the 375, so those are the savings. The incremental 125, that will flow through the P&L when we have actually actioned the steps. So things like real estate, if we're continuing to do further optimization, once we've cleared the floor of the individuals so that property then becomes available to be sublet with somebody else, that is the time that we can then take that charge through the P&L.

I'm just wondering, the 375, are these all cash savings or some of that is accounting?

No, that's all cash. We took cost out of the operations.

Bryan Keane, Deutsche Bank.

This is Matt Diamond on for Bryan, by the way. The 25% to 30% EPS accretion from Logica this year, I just want to make sure we're all clear; what is the base EPS that you're referring to for the 25% to 30% accretion? There's still a little bit of vagueness on that. If you could just enlighten us to that number, that would be helpful.

A lot depends on what you have in your own models, but if you take it off last year's EPS of 150, if you use that number I think on a six-month basis, we're running at about 25% accretion in the second quarter; it accelerated in the quarter to 40. So I think if you use that measure. There's also a measure that you could look at the base business for 2013, excluding the Logica integration puts some EPS growth in the base and then compare. And I think various folks are using various models, but I think against both methods we're certainly seeing the accretion rate drift to the high end of our range.

That's helpful. The Q2 revenues, it's a little counterintuitive that they would stay stable year-over-year, at least from the summer quarter to the March quarter, just given the absence of the holiday season in this calendar Q1. What was the reason for revenues staying stable? I would think that they'd see a little bit of a seasonal uptick there.

Again, as I say, what we're doing Matt is we're purposely winding down low margin to no margin business which is taking the revenue run rate down in Asia Pac. On the other hand, we're improving the quality of the earnings and the earnings per share. So it's a strategy that we've always executed in this company. If we look at our business, earnings per share growth and cash drive the valuation.

There's lots of revenue in the marketplace. We're after the revenue that actually has margin and we're after long-term recurring revenue and every time we do an acquisition of course we see a situation where there's been revenue pass through that moves the top line but not the bottom line. We have projects that are red in the sense that we're losing money on those projects, which again, need to be resolved. So, this is what I mentioned earlier. It will take a number of quarters for us to work through that, but the goal at the end is to have a solid base of high quality revenue driving industry leading margins and high cash generation.

Just to add to that, the way that we get at that operationally we really look at trying to drive the segmentation of the revenue by each of the businesses. So driving down to understand where the profitability is by various practices, looking at it by project, looking at it by contracts or by accounts, looking at it by lines of business, looking at it by IP. So really to get down into a fairly low level of detail and make sure that the operating managers are able to describe their business in that fashion. And from that type of analysis, then you're able to identify where some of these opportunities are, then that bubbles up to the top and then we make some of the choices as to how do we wish to execute on those.

Just to build on that, that's one of the reasons why I said earlier this will take some time, because we made great progress in starting to consolidate their financial systems into ours but we still have a number of quarters to go there. We need that so we can drive the kind of metrics and analysis that Dave just mentioned, so that our business unit leaders can better segment their businesses and understand those areas of higher margin where we should invest more time and more resources and the lower margin or no margin business where we have to develop a plan or exit it.

Kris Thompson, National Bank.

Just on the synergy, you've increased them a couple of times now. Do you think they've been stretched as much as possible or could we expect you could even find some more cost savings over the next 12 months?

I think we probably have gotten to what we'll get from the restructuring part. As I mentioned, Kris, on the transformational piece, which is really as the management team gets access to better tools and better information, they will continue on a business as usual basis to look at improving our overall performance, including our customer service and member satisfaction and financials. But that will be more embedded into the business as usual. I think the program here at an investment of 525 million for 375 is what we'll conclude on as far as the restructuring part of the integration.

Okay. And your headcount was at 69 at the end of March, where are you now? Are you done? Have you telegraphed all of your people? How's the culture?

The headcount continues to move here. I always speak in terms of net headcount because, as you know, we're growing our headcount in the U.S, obviously, with that organic growth rate. But, I would think that as the program nears its completion, we'll see a further drift down of the headcount.

Do you have a targeted level in mind?

I don't give targeted headcount numbers. I think again, we've got a number of moving pieces here. And I want to leave that to the discussions between the business and their members on the individual basis. I think what you can see here is that there's alignment between the increased margins and the headcount reductions and that process is closer to the end than the beginning. And so we should see a slight drop going forward, and then it'll start to stabilize.

Okay. And I'll just switch to revenue. When I look at your system integration and consulting line, which I'm doing my own math here because you don't really break that anymore, it looks like it's around 300 million versus 380 million last year; can you just give us the overview on what's happening in that business? And I know some other vendors provide bench utilization. You don't, but can you just provide some statistics to get us comfortable that that business is rebounding and reflects a good pipeline?

Well I don't recognize your numbers. As you say, they're your numbers; they're not mine, so it's hard to comment on them, other than to say that the systems integration business, the mix of it has certainly increased with the acquisition of Logica. As I mentioned, a number of the geographies there have a high component of that. But we're not seeing any marked slow down there.

We are obviously trying to find the right balance between the resource and the demand, but again, it's very hard to comment on some of the stuff, Kris, because we really don't have a 12-month view. So to some extent, we're going to school on the actuals and the marketplace as we operate there. And there are a lot of factors that are moving some of the underlying operations, including, as I say, how we look at new proposals and how we bid on new proposals.

So there's a lot of dynamics there, but it's a little early to have enough of a track record to distinguish a pattern and a trend in some of those areas of the business. But we'll try to pick that up as we go on here and I'll be able to give a little more color around that.

Fair enough. I was just trying to get a handle on your Canadian and U.S. SI&C business, if you have any data points there? It's a little bit slower than it was year-over-year.

Not in the U.S. I would tell you, the U.S. is flat out there. Utilization rates continue to run very hot. We're hiring in a number of areas to meet that load. And in Canada, it's a little more stable.

Okay. And just last for me, on U.S. federal IT spending, I know you have a lot of contract vehicles and you're doing really well, but just wanted to get a handle on your Department of Defense exposure. I think it's 45% of total U.S. IT spending down there, federal IT. What's your percentage of Federal exposure in the DoD?

Well again, we have a very balanced portfolio. I'm just trying to see if I've got my hands on that split, but I don't seem to have it in front of me.

We do have about 13% for the total federal government in the U.S., and that is Defense as well as all of the other civilian agencies.

Yes, but I think he's looking for the defense split. It's pretty close to 50-50, although the growth rate, I would tell you, is probably higher now on the civilian side than on the defense side.

Michael Urlocker, GMP Securities.

Michael, it certainly looks like Logica is delivering and working well. Congratulations to everyone on the improvements here. And my questions are really on, let's say, smaller questions, just to help have a better understanding of the business. One of them is with regard to cash generation. So you've had a good consistent track record of cash generation, cash from operations. There is some substantial amount of severances and accrued compensation that's going to start to be paid out. So I'm curious, if we include those severances, whether we should expect the company to be cash-from-ops positive in Q3 or whether, in fact, the severances would make that a net negative?

But when you think about the normal level of profitability that we should be generating before any of the integration charges, you add back the amount of noncash items and within a quarter, we're probably dealing with about CAD100 million just of those items. And so that gives you kind of the base of the cash that's coming out of the operations. Then you've got the investment in the working capital.

While we've continued to really press hard to ensure that we're on top of the billings, so we can get the invoices out to the clients, as well as making sure that we can get the collections of those invoices on the due terms. So, I think over the last two quarters, you've seen that we've been relatively successful in making sure that we're keeping on top of the receivables, so that's really good news for this.

I mentioned earlier there's about CAD186 million of provisions that are out there. Like this last quarter, we have paid down some of that, even though we added another CAD80 million to the pot. I think that at this particular stage, I don't really want to go out on a limb here, but I would expect that we should be cash flow positive on the cash being generated from operating activities, trying to balance these different items that you just mentioned.

In regards to some of the compensation, we paid out compensation in December; we paid out compensation in the March quarter. There's a little bit of accrued from one of the regions that we'll pay out this next quarter. But we don't have a big bow wave of compensation-related items.

Okay, that's helpful because for whatever modeling reasons, I had expected a bigger payout in the current quarter and it's just really a budgeting exercise in terms of my model and that's positive feedback. I appreciate it.

Just on that Michael, it's a good opportunity. So I think, again, this is an area where our team in Europe have really focused on receivables and DSO. And I think that's one of the reasons why we haven't tilted over, even on a quarterly basis here throughout the integration. We're disbursing a lot of cash related to the integration, but again, the teams have really focused on this item. And as a result, we remained cash flow positive quarter by quarter here. So, I think that's another highlight of the strength of the integration here.

Indeed, sir. It's well appreciated. My second question, and this goes maybe a little bit into the nature of some of your customers in telecom and especially among the telcos in Europe. I have a theory that there's an opportunity for some upgrades of billing systems for major carriers or some rethinks on how they undertake their billing and that may create some good opportunities for a company like CGI. I wonder what your observations would be in terms of, especially the European carriers, what they're thinking about in terms of next generation for their BSS or billing systems and whether you see opportunities there for your company?

Well again, I think, on the telecoms, as you know, they've been very focused on driving down operating costs as they shift from land line to mobility and other content businesses. And again, we're certainly helpful in that area. As far as investing in new BSSes and OSSes that support that new part of business, we haven't seen a lot of that yet. But I do think, Michael, that your sense is right, that there will be a tick-up in investment in those companies as they look to apply more information technology to the emerging part of their business, over time.

So you're probably sharpening your tools to address exactly that.

Every day.

Excellent. And lastly, if I could encourage you, I know systems integration and IT consulting is a sort of a non-tangible business in some ways for us outsiders. But if you ever wanted to organize visits to meet the Logica executives or operation executives, I think investors and analysts would be very supportive of attending those sorts of visiting meetings in Europe and elsewhere.

Thank you for that, Michael.

Paul Treiber, RBC Capital Markets.

I just wanted to look at the margins in the U.K. business. They're quite standout this quarter at about 10% and it's well above the rest of the European business. Can you just elaborate on why your U.K. profitability is so much ahead of other regions? And should we look to the U.K. as a leading indicator of perhaps what other regions in Europe could reach over time?

Well again, the answer to your second question first, is that these are different countries with different operating models, different work regulations and rules, so they're not comparable on an apple-to-apple basis. Having said that of course, our goal is to show continuous improvement within each in of our operating areas.

I think in the U.K. it's a combination of things, including running ahead of the restructuring part of our plan. Also, we had a lot of corporate people that were in the U.K. and you have infrastructure and support costs that resided, in part, in that P&L, that have also been addressed. And we also signed, as you may know or recall, a nice managed services deal there just at the time of the merger, which is also very helpful to the business there.

So again, I think it's primarily a lot of focus on the fundamentals. The leader of that group, as you may recall, is a longtime CGI leader. He used to operate our European operation. So he's much more familiar with the operating model and as a result, has been able to advance our position in the U.K. a little more rapidly. And we're obviously very pleased with that.

I think this quarter it's kind of quite readily apparent the amount of profitability that you can drive out of Logica. And you touched upon this. How important is having those right operating metrics from a modern ERP system, both in your hands from managing the local management, but then also local management better understanding their business?

I think they're absolutely essential, but they're only half the equation, because a lot of people have information which is essential, but the ability to act on the information, to take action, to seize opportunities, to go against your human nature, which is to sit and wait, that's the second piece. And that's why I explained in our integration model, we have two things; we've got the restructuring and we've got the transformation.

Over time, my belief is the transformation will actually yield more balanced benefits for us as a company, as it has over our 37 years in business, but in the short term, you're seeing the impact of restructuring. But we do need that information. Our people need it to continuously improve, to seize and create opportunities, so we're making good progress on that. Dave, I don't know if you want to just give a high level of where we are on the systems integration with respect to the financial system.

Well, it's a little tough to believe, but within the first six months, we have almost moved half of the population of Logica onto our own ERP system. We have made the migrations with Germany, Spain, Switzerland. We just recently moved across the U.K., Netherlands and India. In the next 30 days, we've got two more countries that are scheduled to be migrating across, and 30 days after that, a couple of more. So our objective is to, by the end of our fiscal year, as much as possible, again respecting some of the regulations we have within various countries, etc. to try to be at the end of the consolidation program by October the 1st or very close to having everybody converted over on that date.

So that's actually about 10 months or so sooner than our first look at the integration plan and another reason why we've reduced it from three years to two years.

Steven Li, Raymond James.

Just a clarification for me, Mike. On the Canadian business, on the Canadian margins, you talked a little bit about the GIS seasonality. Given that seasonality, would you expect the margins to snap back next quarter or does it take a couple of quarters to get back to 20%?

Well again, I like 20%, obviously. And we will continue to manage the business, all our businesses, to realize the right balance between revenue and profitable growth. I'm confident that the Canadian team will continue to gradually improve those margins throughout 2013 and in 2014. I'm not sure about a snapback in a quarter. These things obviously take some time, but we're clearly committed, Steven, to maintain and grow our margins in Canada and the other geographies.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Gorber.

Really nothing else to add, Valerie. Thank you all for joining us today. Again, available for follow-ups; (514) 841-3355. Thank you and see you in July for Q3.

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