CGI Inc (GIB) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI third quarter 2013 results conference call. I would now like to turn your 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 third 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 9AM on Wednesday July 31st,2013. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q-3 MD&A financial statements and accompanying notes all of which are being filed with both D-DAR 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 new information, future, events , or otherwise. The complete Safe Harbour statement is available in both our MD&A Press Release as well as on cgi.com.

We encourage our investors to read it in its entirety. We are reporting in accordance with 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 in this call are Canadian, and unless otherwise noted rounded to the nearest million. I will turn it over to David first to review our Q3 financials, and then Michael will comment on our performance 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 and other good quarter. Third quarter revenue was CAD216 billion representing a year-over-year increase of 141% and up 1.6% on a sequential basis. Adjusted EBIT was CAD291 million up 114% year-over-year and up CAD30 million sequentially. Adjusted EBIT margin improved to 11.3% up from 10.4% last quarter.

The improvement is due primarily to the realization of accelerated integration benefits as well as improved performance in our North American operation. Integration costs for the quarter were CAD53 million while the tax benefits of CAD15 million came from the expiration of a statute of limitation period. Looking at the operational performance, and thus excluding both the integration costs and tax benefit, net earnings were CAD200 million up 115% from Q3 last year.

Diluted earnings per share were CAD0.63 up 80% from the same period last year, and up 12.5% from the previous quarter. Net earnings in Q3 on a GAAP basis which include the integration costs and the tax benefit from CAD178 million or CAD0.56 in diluted earnings per share. This compares with last quarter net earnings of CAD114 million or CAD0.36 per share.

If the effective tax rate excluding the impact of the integration costs and the tax benefits were 24.4% for the quarter, and when compared sequentially on the same basis it was relatively stable. It should be noted that on July 2nd the UK government passed the bill to lower the corporate income tax rate, from 23% to 20% by 2015. As a result in Q4, we will record a tax expense of approximately CAD19 million from the re-evaluation of our deferred tax asset.

That is in Q4. Our effective income tax rate will be in the range of 23% to 25% excluding the impact of recent changes in the UK tax rate. As you know, under (inaudible) companies have 12 months from the date of an acquisition to complete the allocation of the purchase price. After nine months, a cumulative impact of all of theadjustments to the purchase price allocation on our EPS was negligible representing 0.6%.

I want to take a moment now to detail where we stand relative to our CAD525 million integration budget. The total integration expenses to date have amounted to CAD398 million and the remaining CAD127 million as expected to be expensed over the next five quarters. With respect to the cash disbursement against the CAD525 million integration budget, at the end of June, we have dispersed CAD272 million and have a provision of CAD126 million remaining on the balance sheet,and we expect that this provision and the remaining CAD127 million to the expense will be dispersed in large part by the end of fiscal year 2014.

In the quarter, we generated CAD133 million of cash from our operating activities. Over the last 12 months, cash from operations was CAD614 million or CAD1.98 per diluted share.

Our DSO at 49 days was flat when compared to the year ago period, and I am particularly pleased with the ongoing focus and attention by our European and Asian operations on cash management. Net debt at the end of June was CAD2.87 billion down from a peak of CAD3.3 billion.

During the quarter, we repaid CAD97 million for currency fluctuation increased the Canadian dollar of the debt resulting in a net debt reduction of CAD41 million on the balance sheet. We finished the quarter with a net debt to capitalization ratio of 41% down from 47% at the beginning of fiscal 2013. In the quarter, we invested almost CAD11 million to acquire 353,000 shares of CGI, and at the end of the quarter, we had approximately CAD1.2 billion in cash in the available credit facility.

Finally, with the integration activity, we are migrating 22 different financial systems on a single CGI platform. We continue accelerating the implementation, and have more then half of the former Logica population using the same system. This is giving the new business units on the common platform better visibility and transparency into their operations helping to drive actual information and more timely decision making.

We are expecting the full migration to be completed by the end of the calendar year. Now, I will turn the call over to Mike.

Thank you, David, and good morning, everyone. As we approach the one-year anniversary of the Logica acquisition, I am very pleased with our overall business performance and the progress we have made in integrating and transforming our Europe and Asian operation.

I will begin my review with some comments on our third quarter results. Our top line continues to hold. In fact, revenue increased 2% sequentially to CAD2.6 billion as six of our seven strategic business units grew at constant currency from quarter 2. This is significant as we continue to focus on improving revenue quality, insuringour business development investments are in those areas which create incremental value for our clients and for our shareholders.

As expected, our strategy is putting some pressure on revenue growth in Europe, but this is more than offset by the strength of our US operations up 18% year-over-year. With respect to our US operations, we continue seeing significant growth in both the commercial as well as the state and local markets. Globally, our Healthcare sector grew 90% year-over-year largely driven by the impact of US Healthcare reform.

We expect this trend to continue as additional states stand up new health exchanges while others expand the capabilities of those already in place are under development. A good indication of this forward movement is the recent announcement by the state of Illinois that they have awarded us the CAD66.5 million mandate to build its health exchange. Including this award, we are currently involved with nine states building platforms for consumers to shop for, review, and select an appropriate healthcare plan.

In addition, we are building the federal facilitated marketplace, the platform to be used by consumers in the 26 states currently without their own exchanges. Our US commercial pipeline has expanded by nearly 50% reflecting signs of affirming economy as companies begin to focus investments beyond cost control towards growth initiatives.

In the federal government business, we continue to see more extensions and ceiling increases on our existing work while we further leverage our position on contract vehicles. We added three new vehicles in quarter 3 with a combine ceiling value of CAD2.5 billion bringing the total value of our contract vehicles to CAD200 billion.

Accordingly, we continue to view US federal government as a significant growth opportunity. Our pipeline of future task orders alone exceeds CAD1 billion,and additionally, federal bids submitted, but not yet awarded amount to nearly CAD2 billion at the end of June. 73% of these bids are for new business.

Over the last 12 months, our federal businesses has grown top line, bottom line, and achieved a book-to-bill of over 100%. In Canada, our book-to-bill was greater than 100% with year-to-date bookings up nearly 20%setting a good foundation for future growth.

We saw strength in our banking sector where the book-to-bill was 158% in the quarter. We are seeing strong interests in our IP, specifically in the areas of trade, collections, wealth management and payments. The increased interest in our payment platform relates to a solution called BEST developed by Logica currently used by four of Canada's largest banks where we are seeing opportunity to renew and expand our business as we upgrade and modernize this platform.

We are also focused on increasing awareness of our capabilities in emerging solutions such as CLOUD. As an example. we won in partnership with Bell, the first large initiative launch by shared services Canada. In this transformation, w will design, build, and operate a secure CLOUD e-mail solution for 43 federal departments.

In Europe and Asia, we continue to focus on revenue quality and on expanding our continuing revenue over time. We see clear signs of improving and expanding pipeline, of value creating opportunities as we engage clients making them aware of CGI's full portfolio of solutions and services. As we continue to capture the cost synergies embedded in the EPS accretion rate, we have already begun to intensify our focus on business development in order to identify and capture revenue synergies. This included insuring we grow wallet share with existing clients while targeting new logos where we believe we have a competitive differentiator in terms of IT, blended global delivery, and sector-specific business and technology knowledge.

Our book-to-bill globally remains above 100% on a trailing 12 month basis while our backlog is at CAD18.7 billion, a new company record and encouraging indicator of future growth and stability. Adjusted EBIT over the last three-quarters has improved by nearly 40% from CAD210 billion( $1 million) in quarter to CAD291million in quarter three demonstrating the effectiveness of our integration plan as well as the strength in our North American operations.

The corresponding EBIT margin had improved from 8.3% in quarter one to 11.3% in quarter three. As a further point of reference, the proportion of EBIT generated outside of North America has grown from 31% in quarter one to 45% in quarter three highlighting the growing positive impact of our Europe and Asia operations on overall company performance.

After nine months, excluding acquisition-related and integration costs as well as the one-time tax benefit EPS accretion running at 43% against our commitment of delivering 25% to 30% EPS accretion this fiscal year. We expect the EPS accretion to continue gradually expanding throughout fiscal 2014 as we successfully complete the integration period. Another good reference of the effectiveness of our plan is the ability of our operations to generate cash.

On the last 12-month basis, excluding acquisition-related and integration disbursement, we have generated in excess CAD1 billion cash from operations or more then CAD3.30 per diluted share. On the transformation portion of our integration plan, we continue embedding both our management foundation as well as our outcome-based model. The benefits of which are becoming more and more impactful as we transition further from implementation to business as usual. Our goal is to instill our ownership culture across the organizationthereby engaging and empowering our members to continuously improve our business performance.

We want to insure that our promises to clients, investors, and ourselves, are viewed as personal commitments to be kept. In line with this, I am very pleased that all CGI members continue to be engaged towards insuring a successful integration, and in doing so, increase our collective ability to assist clients, create additional opportunities for our members, and deliver superior results to our shareholders. Thank you for your continued interest and competence. Let us go to the question, Lorne.

Just as a reminder, the replay of the call will be available either by our website, or by dialing 1-800-408-3053 and using the pass code 2831186 until August 9th. As well, a pod cast 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 514-841-8355. Valerie, if we could poll for questions from the investment community.

Thank you, Mr. Gorber. (Operator Instructions). Our first question is from Richard Tse with Cormark Securities.

Yes, thank you. Mike, you guys have made some incredible inroads on the margin side. Can you maybe give us a bit of color to the extent that you can on what that could be over the next 12 months? Just from a cost perspective. And then, maybe talk about when you would see some of those revenue synergies from Logica surface.

Thank you, Richard, If you look ahead here, in Europe in particular, over time as we improve the mix of our revenue it affords us an opportunity to gradually improve our margins. As we run off the low margin business as well, the churn factor will provide us an opportunity. We also need to increase our utilization rates as Dave mentioned. As we bring on the CGI financial system, we able to give much higher visibility to our operators in the field to jump on the utilization rates much faster.

While we have brought down the SG&A rates, we are not down to the levels that we are targeting, and we see further opportunity to reduce SG&A. There are other parts of our integration plan that are still ahead of us in terms of consolidating our data centers and continue to drive down our real estate costs. So all of those, again, are things that we continue to target, and we will focus heavily in our 2014 plan which should continue to allow us to gradually expand the margins.

In the US the EBIT, as you can see is continuing to expand. We are working on very good mix of business. We are executing on time and on budget. So we have very little margin leakage on those contracts, and we are operating at a very high utilization rates. And we continue to hire there against the growth that we see in the US. So on the EBIT and earnings per share, we continue to see opportunities to expand our margins and our EPS.

On the revenue synergies, as I mentioned, and just to remind everybody, we do not build revenue synergies into our accretion rate, but clearly we see opportunities on the revenue side. Again, what we are focusing immediately here is in terms of assuring that as we renew contracts and extend contracts that we are doing them on a term that are much more balanced in terms of delivering benefit to the client and also benefits for our shareholders. We are also focusing heavily and will continue as part of our 2014 plan is to increase our effectiveness of our account management of our very large clients.

I will be reviewing the top ten global accounts and each SBU leader will be reviewing their top ten accounts where it will be over 80 large accounts where we will looking to increase the effectiveness of our marketing and business development with a goal of increasing our share of wallet in some very, very large. As well, we target a number of new logos where we believe we have competitive advantage in terms of knowledge in the sector IP or/ and some differentiator in terms of global delivery capabilities. You will see that materialize in 2014 as we begin to begin to see the outcomes of those efforts that we have been applying here over the last quarter or so.

Okay, and thanks. Just one other question. In regards to the booking strength this quarter. I see the segmentation in your filing. Can you give us color in terms of the source of the strength overall whether it is a product area, vertical, and what you are seeing on that side?

Well, I would not say that it is product at this time. It is a future opportunity on the mixed side. We are clearly investing in reviewing the Logica IP, and also looking at our own IP that we can take more globally. Again this is focused on us getting in front of more customers, and in a number of cases, actually expanding the early signs of us expanding our market share with existing clients, and also focusing on emerging opportunities.

As you know last year, we made investments on the CLOUD side. We also made investments on the healthcare side , and again, both those investments we are seeing the benefits of those in the growth and healthcare sector, in the Hicks as one significant example and also on the CLOUD side. It is fairly broad-based. Obviously, we are seeing a nice recovery in the US economy which is opening up higher demand for the type of services that we sell.

That is great. Thank you very much.

Thank you. Our next question is comes Scott Penner with TD securities. Please go ahead.

Thank you, Mike. Just a further to Richard's question on the - - just you looking at the CAD375 million of annualized cost synergy target. Is there any way to describe quantitatively or qualitatively how far along you are in terms of getting that CAD375 million?

Again it is difficult because also we are moving through various seasonal impacts of the revenue. Clearly if you look at the accretion rate, we have captured a significant amount of that, butthe reason we increased it is that we clearly saw that we had at least an additional CAD75 million from original target still ahead of us. And as I mentioned, we have a number of areas that we will require 2014 timeliness to address.

We have got a good part of it, but again, we still see significant opportunities to increase our earnings ability here. Even as you know, Scott, in our normal course of business, we have a mindset of constantly restructuring to ensure that we are doing the job differently in terms of creating value here. I would say that we have got a good piece of it, but we have not got it all.

Thanks for that. If you can give an update on the progress of what you term the red level contracts both the exposure? And then when I look at the book-to-bill in essentially the Logica regions of being pretty close to on-to-one, it would appear that a lot of those customers of the red level contracts are simply either renewing or extending existing deals.

Just to give some context. As you know, we have the customer satisfaction appraisal process. In Europe what we are really pushing is to get out and do that appraisal with as many clients as we can to be transparent. I am less concerned about the score. I am more interested in how customers view the level of service and the level of engagement from the former Logica team, and whether they see a difference with CGI now operating under our model.

And we are getting some very good obviously constructive feedback on areas where we need to improve. One of them, as you mentioned is clearly our ability to keep our promises with respect to delivering projects on time and on budget. Hence, the red-yellow focus. The number of red-yellows are continuing to decrease, and we continue to address many legacy issues that were there at the time of purchase.

So we are working through those. Again, we have built into our 2014 plan a significant reduction in red-yellow calls on a go-forward basis which will again help our ability to generate profitable growth. Customers in Europe have been very good about having a very open and frank discussion.

If you look at the litigation provisions, we have brought those down over time because most customers want to engage. They want to work with us. They are intrigued and very supportive of the CGI model. Our issue is we need to continue to explain it, and secondly we need to demonstrate the effectiveness. That has gone on, and as a result we are renewing. As I mentioned in rolling over contracts, again putting them in a more balanced state, and in some cases that means expanding the scope. It means how we distribute the labor, and how we manage those projects all are opportunities for us to increase the traditional logic of margins and bring them back to a level that we are more used to in terms of doing business.

All right. So the 38 - - you said last quarter through 35% of the exposure to red level deals. What is the number now?

I do not have that, but on those things, what you see is the gradual decrease. They do not flip overnight because in some cases we have to run the contracts out. We continue to work through those, but we are certainly beyond the 35% level, probably pushing closer to 50% now.

Okay, thanks, Michael. I will pass it on.

Thank you. Our next question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Hello, good morning. Mike, I was a little surprised to see the sequential revenue uptick in Logica since I thought you guys were still in revenue pruning mode. Should the take away be that we are now at the point where new business wins can more than offset the impact of ongoing pruning, or is it maybe a little too early to make that call?

I think it is a little too early. We got our foot on the brake and on the gas. Quarters you do not necessarily see the full impact as I mentioned to the previous question. Some of the roll-off is timing based.

In other cases, it is also whether in some cases we can actually find someone who wants to acquire some of this business that is not core to us. So there would still be some time here before we cross over totally. I think the message I wanted to give this morning is that we are doing both. We are focusing on the quality of revenue, pruning where we can, and also focusing on increasing share of wallet of existing clients and targeting new logos. That will continue to transition throughout the integration period, but again over time, we are tilting now more and more focusing on the revenue synergies as we continue to capture the cost synergies associated with the merger.

Great. Now I saw you bought back from stock in the quarter. Can you provide some color in terms of how you are thinking about capital allocation as far as debt repayment versus buy backs, and what the rate capture structure might be for the company in current environments?

We love our stock. I wish we bought back more given that we bought it under CAD30. But again, we have not changed our view of capital allocation.

Clearly, if you look at our return-invested capital, it is over 12%. Investing back into our business is still the most accretive use of our cash. We have been working down the debt.

I think we paid off about CAD500 million from the peak. The net debt to capitalization continues to drop. It is at 41.

At peak, we were close to 46. And then again, our shares - - buying back our shares are very accretive. We continue to look at all of those avenues.

We do have the buy back program. We continue to look for opportunities to utilize it, and we will continue to do that for the balance of the year and into 2014.

Is it fair to say that you would like to get the leverage ratio a little bit more down from where it is currently, is that correct?

Well, again we are working it downward certainly well within our covenants there. We keep an eye on that. We keep an eye on the share price, but again we are looking at the long term capital structure of the company.

We do not currently take on a lot of long-term debt. That is something that we are looking at relative to our 2014 budget.

Great, Mike. I will pass it along, thanks.

Thank you.

Thank you, our next question is from Maher Yaghi with Desjardins Securities Inc. Please go ahead.

Thank you for taking my question. I wanted to ask about - - we are recently seeing competitors in Europe, such as (inaudible) mentioning you as being more active in the space. Can you talk a little bit about what opportunities you have right now in front of you in Europe. (inaudible) mentioned the revenue line in Europe seems to have stabilized. Also it seems in Europe - - can you talk a little bit about the seasonality going into Q4? How we should look at that in terms of modeling, and because we do not really have comparables to look at.

Okay, well, if I take the first one, clearly our competitors will start to see us more in Europe. Again, in the first part of an integration that you are very much heads down on working through your current book of business, as I say, to try and segregate the high margin business from the low margin business, address the issues around utilization rates, overheads, SG & A and total.

We have been very busy doing that since last August. We started to be noticed more now . It is an indication of the second wave where we are starting to focus on the revenue synergies more. the first thing we have to do there is get out and explain to people who we are. How we are differentiated from local competitors, and how we really think about the business, and our commitment to being in the business for the long haul.

You will see and hear more of that of our presence in those markets as that second wave here focused of the revenue synergies continues to take hold. On your second question. The seasonality, again we have not gone through a full fourth quarter with Logica. But again I can tell you that obviously there is much heavier vacation period in the European operations in quarter four. So again that clearly will put some seasonality pressure on the top line.

On the other hand, if we look at the difference from this fourth quarter to last year where we had six weeks of Logica. We have taken considerable amount of costs out of the fixed cost over there. So that the ratios between the revenue and fixed costs are going to be much more favorable in terms of the impact on the P&L than they were when we only had six months of revenue in our quarter four. The other thing I just point out is when you are looking at quarter four, Dave, I talk about the tax adjustment, negative tax adjustment that we are going to have in quarter four. We will clearly pull that out so that you will be able to see an apples to apples comparison. But when we look at quarter four those are two things that you should take note of.

And just one question on the future growth mode, the activities. When you look at Logica, you seem to have your hands around it fairly well right now. If we look down the road still very competitive market, but still fragmented markets in areas where you might be looking at maybe Australia or the US even. Can you talk a little bit about the potential for additional M&A transactions, and what you are looking for in your next opportunities there.

Investors that follow our company is that we are clearly a consolidator. We do believe the market will continue to consolidate at a faster clip. Our strategy is to be at the table so we can have these discussions.

Our strategy also encompasses constant dialogue with companies we might have an interest with. So we build up relationships. I remind you in Logica we started our conversation in 2007. So it does take some time to talk through that. Clearly the US is an area where we believe in acquisition would be very accretive.

It is a big, big market, and while we are doing exceptionally well, we could do even better with a larger platform in go-to-market capability. And again, this is what I talked about earlier about how we construct the long term capital structure of the company. We want to do that in a way that obviously allows us not only to look at the menu, but actually continue to be an active player here if the right opportunity comes up. Having said that, our immediate focus is to continue to drive out and realize the full top line, bottom line benefits of our merger with Logica. And so in the near term, while we continue to look, continue to talk, continue to be open, the management team here is very much focused on execution.

Great, thank you very much.

Thank you. Our next question is from Justin Kew with Versant PartnersPlease go ahead.

Goof morning. Thank you. So Mike, just on the European EBITDA. You talked in the past about a goal of 8% to 9% with upside on IP, selling into that geography. Can you give more granularity now that we are coming up to year anniversary what kind of traction you are having selling IP into the European markets?

It is a little early, Justin on that, To be honest because if you look at what we have to do, we got to get out to our existing clients. We have to secure our position with existing clients. We got to renew the contracts, and then we have got to start with them looking at bringing forward our full capabilities which include the IP. In some cases, we have to make some investment in that IP to make it useful in Europe.

On the new clients, again, we are really starting from introducing again who we are. Why we're different and including our capabilities in the IP area. So that is clearly something that we'll see more traction in 2014. That is clearly something that we have seen more traction in 2014. It is clearly a part of our strategy, and we clearly see the demand for that.

Again if you look at the margins in Canada, you see what can happen if you have a very good mix between intellectual property, long term outsourcing contracts, and we are seeing some of that in the US market now as our margins continue to strengthen there. So we think it is obviously the right strategy, but it does take time to execute, and in the case of Europe, it will also take some time for us to make investments to insure that the IP there is adjustment to that market.

We also got the situation coming the other way. Where we picked up some very strong IP coming out of Europe, and we do need to make investment there is. I mentioned Best, as an example, the payment platform that is embedded in four of the largest banks in Canada. That is an example. We are able now to have different conversations, make investments to modernize those platforms and put ourselves in a position to actually take on a maintenance role of those platforms on a go-forward basis.

Okay, good. This has been discussed before, buton the immigration reform side. So we have seen some of your Indian-based competitors talking about very minimal impact. What are you seeing on the ground, and how are you taking advantage--and it may not necessarily be the reform, but maybe optics around it, how are you working with that? What are you seeing, and how are you working with that?

Again, the first thing we have seen is much more awareness of the issue itself. Not just integration, but the work that is done, and what type of work is done in various locations. I think customers are starting to understand the better between outcasting and outsourcing.

Many of the Indian pure plays are primarily out taskers where actually they are selling bodies. In that model, the customer continues to bear the risk of the delivery, and also any geographic or political risk associated where the work is done. So what you are seeing is really different reactions across the spectrum. Some companies are kind of rebalancing, not necessarily bringing work back, but looking at more of the future work to be done in near shore sites in in-country, and others are looking at the mix of the work have in these various geographies, and insuring they are getting value for money.

The value equation includes price, it includes quality in terms of service levels and on-time delivery, and it includes risk. So my sense is there is a continuing rebalancing across that spectrum. Our view is this is absolutely in line with our strategy from the get-go.

As you know, we have never bet our business on moving everything to an offshore site. With the Logica transaction we have a very deep and one of the most balanced global delivery models in the sector. We have home shore sites in many countries including Canada and the US.

We continue to add sites there. We continue to see demand in Canada and the US to have core of these sites. We also have them in countries like France. we have home shore sites there and in other geographic areas. Now we have complimented that with much broader offering in the offshore including the Philippines for things like VPO and IT. Our Indian compliment now is pushing close to 10,000.

We have also secured branch capability in Morocco. Again, it is going to be a gradual move, but we are very well positioned. We are into many more dialogues with clients now who want to understand better. We are also in dialogues with customers who are looking at what is the best way for them to diversify their work whether they should try to do it within their own operating model, or use a company like ours. Of course, we strongly believe that leveraging our existing footprint and investments is much more beneficial to our clients. So we see that as a positive trend for us when we look ahead on both sides.

In some geographies, we are not clearly using enough global delivery. We now have that capability to do that and bid on a much broader basis to clients. And on the other side of the spectrum where clients are looking to rebalance and have more in-country, we also have the ability to do that. We like where we are positioned there. I think the market is coming back to our operating strategy that basically says that information technology is more about delivering on time and on budget than purely labor arbitrage.

Absolutely. Thank you very much, Michael.

Thanks, Justin.

Thank you. Our next question is from Kris Thompson with National Bank. Please go ahead.

Great, thank you. Dave, maybe a quick one for you on the short-term debt. It looks like you re-categorized term loan A which is a pound sterling about CAD310 million due next year. Can you give us an update on your plans for refinancing that chunk of the loan?

We have not finalized any particular plan. Like we have more then enough credibility that we can just roll it over into that in the short term if we wish to do so. As Mike had mentioned, we are looking at some of the longer term financing alternatives. There is no rush for that, and we are just continuing to have the dialogue internally as to what is the right direction that we would like to go there.

Okay. That makes sense. And Mike, for you. Just looking at the European culture and now that you have Logica for almost a year, and you have got a bit of a consulting practice, and we are hearing some rumblings about (inaudible) Is that an area where CGI wants to potentially expand in the future from your experience so far, or are you really still more focused on adding more pure at IT and BPO services and software to your portfolio of solutions?

We are probably more heavily focused on the latter, but I would tell you that we are extremely pleased with the strength and the capability of the business consulting piece that we acquired Logica. Some very talented people that understand their domains and are appreciated by the customers. This is a key part of our strategy in the sense that over time we want to continue focusing, of course, on the CIO part of a company, but we also want to engage more with the business side of a company. This is where a lot of our IP is actually sold, is to the business side of any company, and not purely on an IT, CIO role.

So the business consulting afford us to do that. It also gets us into many more companies where over time we can pull through a discussion on what more CGI can do. So if we look at it right now, and we look at the number of customers where we are doing an ongoing amount of business. It is still only a proportion of the total number of customers that we are engaged with.

Because in many cases we are engaged only on the consulting side. And this affords us an opportunity over time through the consulting business, not necessarily to automatically pull through business, but to certainly get in front of a customer, and leverage the relationships that the business consulting team have developed. Again, we are not somebody that is likely to buy a high-end strategic firm, but more to be focused on that intersection point between business and technology consulting.

Okay. That sounds promising. Thank you for taking my question, as always.

Thank you, Kris.

Thank you. Our next question is from Paul Treiber with RBC Capital Markets. Please go ahead

Thank you very much, I just want to dig a little bit more into European margins this quarter. Your Nordics and France regions grew revenues sequentially, but it looks like margins slightly declined. What was the reason for the sequential decline in some of those European regions?

On the revenue side?

On the margin side.

Well again, part of that is as we churn the revenue in some cases we are obviously running off contracts which is going to add to the bench which is going to put pressure on the utilization rate, which is going to put pressure on the cost which is going to drive down the EBIT. This is why you need to look at many of these indicators especially going through an integration and merger over a period of time and not necessarily quarter by quarter because there are a lot of things that are going on in there in those entities that you would not see in the normal course of business. As we are restructuring the cost-base and churning the revenue. So that would certainly be a factor there.

If I could, Paul, I would just like to also add whenever we are getting involved in some of this restructuring activity, and we are looking at the margin impact sometimes it goes through spurts. Where with the initiatives that we are putting in place, then we are able to jump ahead. We are able to realize some good savings, but then it takes us a little bit of time and it incurs cost as we are getting set-up for the next one. If you are lowering the microscope a little bit too much, you are going to see a little bit of waffling back and forth between quarters if you are trying to cut it down a little bit too finely. What we try to do here is look over the longer term, because it is that longer term direction where we want to have that improved, sustaining improvement to the operation.

I think -- like I mean it sounds like there's a lot -- a number of moving parts. When you look at it at a very high level you mentioned gradually a number of times about gradual improvements. Now it looks like this quarter the European margins were effectively in line with that 8.5% to 9% target that you mentioned in the past. But in the MD&A, you mentioned that there's room as cost synergies are realized for further margin expansion. So should we expect, like that 8.5% to 9%, is there a potential upside to that target over time as you realize those savings and transform the business?

Yes. I mean, our goal, as you know, is obviously to operate our business in the most effective manner. We continue to see opportunities here to execute better against our operating model. And as we increase visibility through implementation, not only of our management model but through the work that David and his team are doing on the financial system, is going to give our managers and leaders much more visibility and things that they can action quicker which we believe will help improve the performance of the company over time.

Including, as I mentioned, it's been a challenge here on a year-to-date basis because we don't have a single financial system, is to get a better segmentation of the business. This is something as we look at our 2014 plan, we'll be in a better position to segment the business so we will know those areas of the business to where the value to the customers are high, and where the value to the shareholders is high, and in those areas we want to invest more to drive growth in those areas.

We'll also get a better idea, as I say, of the segment revenue where the return is low to the shareholder and the value that we provide the client is also low because it's not our core business. And as I say we are going to continue to target those. In some cases we're looking to divest pieces of that which will help change the mix in a favorable way going forward. So this is an ongoing process.

It is a CAD10 billion company, so it does take some time to work through this and make sure that we understand clearly what the implication of that segmentation is, and we're learning a lot about that over the first nine months when we see opportunities going ahead, and as we action those opportunities it does afford us to continue to deliver more value in terms of earnings and profitable revenue to our shareholders. And that is the attempt. We understand that we're paid to improve the business on an ongoing basis and to create more value. We're also significant shareholders ourselves, so we're very aligned to the shareholders in terms of getting a good return on their investment.

Thanks. Just one more question. You changed your head of France this past quarter. Do you think you have the right team now in place in Europe to drive the long-term transformation of that business? And also, can you just describe at a high level, how the former or the European management team and the employee base are adapting to the CGI model?

Well, again, I'll take the second one. As I mentioned in my comments I'm very pleased how they're adapting. Our turnover rates on a company basis are approaching a 3-year low, so we're not getting hit by heavy attrition here. I think people, clearly, are beginning to see the value that's embedded in our model. Again, our model isn't designed for clients and shareholders alone.

The execution of our model actually creates increased career opportunities for our people. It also provides much more stability in terms of their livelihood, and we're a very strong financial company. Employees want to join and stay with a company that is strong financially. So from that standpoint I'm happy with the engagement. We're having good healthy dialogues.

We're communicating on why we have to operate the way we do, and how we think about the business. And that's all very, very positive. I don't comment on specific leadership but changes other than to say that if you look at in the final analysis of what we're looking for in our leaderships are people who understand how business operates, who are committed to creating value for the three stakeholders, and who embrace the accountability that comes with our model.

And it's not unusual in an integration as you go through quarter after quarter, and as our model generates much more visibility on performance by BU, is that some people decide that this is not the model that they want to operate in. Or we decide that it's not the leader that we require in the model. And there are ongoing changes there. Having said that I'm very, very pleased with the people that we have.

As you can see they have produced very strong results in a very short period of time. So our sense is we're not expecting any radical changes in leadership here. It's more of an evolution than a revolution. And so again just to reinforce, we've got a very good team on the field. They're putting up what I consider outstanding results, nine months into a massive integration, which means that they're embracing the model, they understood it, and more importantly they're taking action here to improve the results.

Thanks for taking my question.

Thanks, Paul.

Thank you. Our next question is from Edward Caso with Wells Fargo Securities.

Hi, thanks. In the US federal business can you comment on any impact you might see from the furloughs which are now just starting to kick in on award activity and the key September quarter on the ability to get on to clients site. And so forth. Thanks.

I have a federal board meeting, Ed, after this call, but again, as I mentioned in my remarks that we've got to put this all into perspective. It's a massive market. As I said, we're on vehicles, hunting licenses that total CAD200 billion. We've got bids in there that are worth CAD2 billion awaiting on approval. 70% of that is new work. So you can tell that we're leveraging those vehicles.

So there will be an impact here. Again, I think the key for us is to stay on our game plan, focus on where those services the government need to stay in business, and operate the business, which will continue regardless of the furloughs. The US will continue to issue visas, and they'll continue to issue passports. They continue to have to have their monthly financial results published, the Healthcare Reform Act continues to be implemented.

So we're shifting and making sure that we're very sensitive. When we talk to the customers they're obviously very interested in cost control, but they're also interested in security of their applications, and they're very interested in companies that can help them transform. So again, I don't think any player has been through the kind of thing that we're going through. Our approach is to stick to our strategy, double down on execution, streamline our overheads and make sure that we're best value there. And as I mentioned I'm extremely pleased with our team.

We have a book-to-bill over 100 on a trailing basis and we will have grown our top line and bottom line this year, which is I think, probably quite unique amongst the pure plays. But will it be bumpy? Absolutely. But we expect that and we're being proactive to make sure that we can manage through that and help the customers through a difficult time. It is a big market though. And a big market means big opportunities for those that are focused and for those that are hungry, and we're both.

I read an article where you're Head of the UK had some issues with efforts by the UK government to try to drive business to smaller companies. Could you sort of give us a sense about how big an impact that might be.

I think first off, while our leader, who is an excellent leader, was making comments on how the government procures, I would tell you those are not remarks that are exclusive to CGI. That's an industry view that Tim was expressing over there. I'm not sure that there was anything there that the government themselves weren't aware of or as I say, other competitors.

I think what we're trying to do is put a spotlight on there, which we do with all of our customers, whether they're commercial customers or government customers. We obviously, as part of our role as a trusted advisor is to give advice on how they procure their services to ensure that they get maximum value for their dollar. I took it as in that vein, and I believe our customer has as well. We haven't gotten any blow back, we don't expect any.

We expect that in a country like the UK these types of dialogues are encouraged. And as you can tell by the article they are always very frank and to the point. Which is very British. But again, the British government is a very important client to us, and will continue to be. But we're merely exercising what we believe is part of our role to dialogue with our customers in terms of how we view the procurement process and opportunities to improve it.

Great. Thank you.

Your welcome.

Our next question is from Brian Keane with Deutsche Bank. Please go ahead.

Hi. This is Ashish Sabadra calling on behalf of Bryan Keane. I had a quick question regarding your free cash flow. I was wondering if you have the number, the free cash flow number for the quarter after you exclude the integration expenses? And just to follow up on that, what's the expectation for annualized free cash flows going forward once you have, excluding -- once you have excluded all the integration expenses for the Logica acquisition?

Well, in regards to the free cash flow for the quarter, right, its a CAD133 million plus the CAD92 million of integration related payments that we had made. So you're looking at about CAD225 million there. We haven't provided any guidance as to what the future outlook is, but what we have provided is that we know there is a CAD126 million sitting in the accounts payable right now related to this provision. And there's CAD127 million of expenses that we have yet to incur over the next five quarters.

So -- and we've also put a focus on trying to get through as much of the integration activity before the end of this fiscal year. So I think with that, then you can draw your own model as to where you think the -- how the cash is going to move forward on those items.

Okay, thanks for that color. So just, and I understand you don't give guidance, but just in terms of looking forward or for looking at this particular quarter, free cash flow, would you consider the free cash flow in the quarter to be, excluding obviously, the restructuring expenses, to be representative of the free cash flow going forward?

I think so. I think we'll continue, though, to push a little bit more on some of the work in process that we have to see if we can just maybe trim a couple more days off that, but it going to be pretty close to being representative.

Okay, thanks. And the second question was about just the accounting for the project. Have you, if you could provide any color on what percentage of the revenues based on the percentage of completion method for your products. And with the Logica acquisition, did you move any of your projects to percentage of completion? And how much was it before or after the acquisition?

Those questions may be best to --

Call me, We'll take it off-line. We'll gather those figures and talk to you separately.

Okay. Thanks for the color.

Thank you. Our next question is from Paul Steep with Scotia Capital.

Great. Thanks. Mike, maybe talk a little bit about the bookings trend in Canada and bounce back there? And then secondly, I guess for David, if you could talk to the contract costs trend? Has it sort of trended down? We've seen an uptick in outsourcing. Should we expect that that's going to sort of rebound towards the back end of the year? Thanks guys.

Well, on the booking trends in Canada, as I've said numerous times, I don't see Canada as a mature market here. We have a nice market share in Canada, but I can assure you that there's a lot of room here to grow market share in Canada. So I think our team there have been focusing on creating opportunities. The bookings are starting to come through, which as you know is a good indicator of future growth. The margins are strong and have grown in Canada.

So I think the outlook is good here going into 2014. And so, again, we certainly see opportunities for organic growth in Canada, not only on the SI&C business, but again, we're very focused on creating additional outsourcing opportunities in Canada. And we have a good track record of managing those, and that's a significant competitive advantage in talking to customers about outsourcing.

In regards to the contract cost, again, with the acquisition of Logica, there was some cleanup that had to be done at the very start to reset or rebound the contract cost for the differences in accounting policy that we had, which we pushed through back in the September time frame. But also going forward, we do expect to see the contract cost rebound or bounce back up again. But, again, that's going be driven from the acquisition of the winning of those contracts.

And as Mike has mentioned in the past, it does take a little bit of time to be able to get those positioned, then to be able to win those. So at the moment, we're seeing that the contract costs are floating down, but I wouldn't get too excited about that because as we look to continue to win and grow in our business space, we'll see more outsourcing contracts come in and then they'll -- we'll see some additions coming into that line.

Great, that helps.

Thanks Paul. Valerie, we are going to have time for one last question.

Certainly. Our last question is from Julio Quinteros with Goldman Sachs.

Hi. This is Jac Charles on behalf Julio Quinteros. I was wondering if you guys could give us a little color around the incremental margins you're seeing in Europe, specifically if the new ones from Logica are in the range you're expecting? And what the trend might be going forward?

Yes. Again, they're running obviously ahead of where we saw them in our original integration plan, Jac, that's why we cut the period from three years to two years. And again, our strategy has always been to operate either at the top or in the very top of the margin ranges of the competitors in Europe. Against that measure, we're progressing very well. And as I say, we see continued opportunities to execute against the levers that I spoke about earlier to gradually improve our margins over time.

Okay, great. And as a follow up on that, can you maybe just give us a little incremental color around the revenue growth you're expecting out of these.

Well again, I think as I mentioned earlier we've got both a headwind and tailwind on the revenue. The headwind is we will continue to address low-margin business so you've got that run off that will put some pressure on the top line. On the other side we are renewing and extending with existing customers. And we are beginning to be much more visible in the markets as we move through the restructuring part we begin to free up more of the time of our people, frankly, to get out and meet new customers, and explain the full depth and breadth that we have to offer. And over time, likely as I say in 2014, we'll start seeing some of that impact.

Okay. Great. Thank you for taking the questions.

My pleasure.

Thank you and thank you everyone for joining us this morning. We'll see you back in November for our year end results. Thank you.

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