CGI Inc (GIB) 2013 Q4 法說會逐字稿

Welcome to the CGI fourth-quarter 2013 and year-end results conference call. I would now like to the turn the meeting over to Mr Lorne Gorber, Senior Vice President, Global Communications and Investor Relations. Please, go ahead.

Thank you, Wayne, and good morning.

With me to discuss CGI's fourth-quarter and fiscal 2013 results are Michael Roach, President and CEO, as well as David Anderson, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9.00AM on November 14, 2013. Supplemental sides, as well as the press release we issue earlier this morning, are available for download on CGI.com, along with our fiscal 2013 MD&A, financial statements and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward looking. Actual events or results may differ materially from those expressed or implied. CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor is available in both our MD&A and our press release, as well as on CGI.com. We do encourage our investors to read it in its entirety.

We report our financial results in accordance with IFRS. We do, however, discuss non-GAAP performance measures, which should be considered supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian and unless otherwise noted, rounded to the nearest million.

I will turn it over to David first, to review our financial results for the fourth quarter. Then Mike 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 of another good quarter. In the fourth quarter, revenue was CAD2.5 billion representing year-over-year growth of 53% or 48% on a constant currency basis. Revenue was lower by CAD109 million on a sequential basis, due to the expected summer vacation period, essentially in Europe, which impacted revenue by CAD146 million in the quarter. Adjusted EBIT was CAD313 million, up almost CAD200 million from last year and up CAD22 million sequentially. The adjusted EBIT margin of 12.7% was up 140 basis points from Q3.

Net earnings on a GAAP basis were CAD141 million. Diluted earnings per share were CAD0.44. We incurred two previously noted items, which negatively impacted our Q4 results -- integration expenses of CAD50 million and unfavorable tax adjustments of CAD26 million, related to a reduction in the UK tax rate, as well as the repatriation of cash from our Indian operation. Excluding these items, net earnings were CAD214 million compared to CAD100 million for the year-ago period, while our diluted earnings per share of CAD0.67 is an 81% improvement from CAD0.37 reported in Q4 2012.

Now, let me take a minute to provide an update on the progress relative to the CAD525 million integration budget. We have incurred CAD448 million in integration expenses to date, with CAD77 million left to be expensed in fiscal 2014. A provision of CAD136 million remains on the balance sheet. We expect to disperse the related cash in fiscal 2014. With respect to the allocation of the Logica purchase price, the values remain as they were reported at the end of June and are now final. The conversion of the legacy financial systems into a single ERP will be completed next month. This common platform will give our business units better visibility and transparency into their operation, helping to drive actionable information and more timely decision making.

Turning to the balance sheet, our DSO was 49 days in the quarter, unchanged from Q3. Our operations generated CAD166.4 million in cash during Q4. For the upcoming quarter, I would like to remind you, that in addition to the cash flow as related to the payment of the restructuring charges, we will also have our performance based compensation related payment for the 2013 year.

Net debt at the end of September was CAD2.7 billion, representing a net debt to capitalization ratio of 39.6%. At the end of October, we extended our unsecured credit facility of CAD1.5 billion by an additional year to December of 2017. We have in excess of CAD1.3 billion of liquidity available to prosperously grow our business.

I'll now turn the call over to Mike.

Thank you, David, and good morning, everyone.

Fiscal 2013 was clearly a transformational year for CGI. Our merger with Logica has provided us with the global platform we required to better serve clients at home and abroad. The overarching goal of our integration plan was centered on creating incremental value for our customers, our members and our shareholders. Against this standard, I am pleased to report that we have had a very successful year and have met or exceeded the key elements of the initial phase of our two year integration plan.

Our customer interaction has been very positive. We have been able to maintain and strengthen our client relationships, which continue to qualify us for larger growth opportunities. This positive response from clients has enabled us to book CAD10.3 billion in contracts for a book-to-bill ratio of 102% in fiscal 2013. Our backlog at the end of quarter four was CAD18.7 billion representing a year-over-year increase of more than CAD1 billion. Revenue was CAD10.1 billion for the year, up 110% and very stable on a quarterly basis, as we continue to run off and replace lower quality revenue with more profitable higher value revenue across our operating segments. This is an ongoing process, which will continue to contribute to margin expansion throughout fiscal 2014.

Our members have been very open and engaging throughout the integration. Their commitment has allowed us to reduce the total integration timeframe from three years to two. In addition, our attrition rates are running at a three year low, while over 12,000 additional members have enrolled in our share purchase plan, bringing the total participants to approximately 38,000 to date, while the roll out continues.

These are important proof points, which clearly demonstrate our members' ongoing commitment to success. To achieve our integration related financial goals, we are investing CAD525 million to deliver CAD375 million in annual cost savings. Our rapid and disciplined approach to integration has enabled our team to deliver significant EPS accretion throughout the year, approximately 53%, well ahead of our 25% to 30% commitment. Our business plan incorporates further EPS accretion as we continue to leverage our fiscal 2013 integration investment and the remaining CAD77 million earmarked for fiscal 2014.

Our integration plan includes two key elements, restructuring and transforming the former Logica operations to align with the CGI operating model. This includes clear lines of accountability and a client proximity organization model under pinned by our best in class operating ratios. As part of our restructuring phase, we also identified and continued to address unprofitable revenue, including revenue that was non-core to our client proposition or to our corporate growth strategy.

The overall goal of the restructuring phase was to increase the quality of our revenue, while reducing both fixed and variable costs in line with CGI standards. Against this phase of our integration plan, I am very pleased with the performance our team delivered in fiscal 2013 and would draw your attention to the following highlights. Our EBIT essentially doubled to CAD1.1 billion, representing a margin of 11%. The ramp-up and the effectiveness of our integration was evident throughout the year as the portion of EBIT generated from our acquired Europe and Asia operations increased from 31% in quarter one to 48% in quarter four. This shift was very significant, especially in the light of EBIT growth in North America of CAD68 million year over year.

As we move closer to our operating ratios, we have reduced our cost structure and moved our total headcount to be more in line with our revenue stream. In doing so, we reduced the cost of services sequentially from 91.6% of revenue in quarter one to 87.4% in quarter four, further demonstrating the effectiveness of our integration plan. EBIT margin was 8% in Europe and Asia, significantly improving throughout fiscal 2013. In fact in quarter four, our margin outside of North America reached 10.9%. As is our tradition, we remain focused on delivering consistent and gradually improving profitability, placing CGI as one of the best performers amongst our peers in North America and Europe.

Net earnings were CAD728 million before integration costs and unfavorable tax adjustments, representing diluted EPS of CAD2.30. Before integration related disbursements, our operations generated cash in excess of CAD1 billion in fiscal 2013. After integration outlays, we prioritized debt replacement, as a result, our net debt is down more than CAD600 million since its peak. In summary, the restructuring is essentially complete. Our attention is now focused on accelerating the final transformational phase of our integration plan.

Now, I would like to take a moment to comment on our work for the US Department of Health and Human Services with respect to the Affordable Care Act or the Healthcare.gov federal exchange. As is our practice, we honor our confidentiality agreements with customers and accordingly we do not discuss individual contracts or customers on our analyst calls or any public forum. To be clear, we are continuing to work in close partnership with the Center for Medicare and Medicaid Services or CMS, the newly appointed general contractor QSSI and other partners to improve the online user experience. Our partnership is collaborative and we are focused on a successful outcome.

This is not a simple website, but rather a very complex integrated technology platform that for the first time combines the process of selecting, enrolling in insurance and determining insurance eligibility for government subsidies all in one place and in real time. With this in mind, I encourage investors to focus on the volume of testimony and documents making up the public record through various congressional hearings underway, with whom we are cooperating in a fully transparent manner, rather than relying on media reports. In the fullness of time, our role and responsibility in this initiative will become clearer.

Over 37 years, we have built our reputation on client service and by embracing challenges and opportunities. On projects as complex and as visible as this one, we choose to be in the action and not on the sidelines. This is how great companies are built. I am incredibly proud of how our US colleagues have risen to the challenge. I want to take this opportunity to encourage and thank them publicly for their ongoing commitment.

We have heard from many clients who remain very supportive of our Company and our professionals and clearly understand the complex and uniqueness of this engagement. Accordingly, our pipeline of new business opportunities continue to expand and remains active. CGI is a very strong company. We have earned this position of strength by delivering 95% of our projects on time and on budget and with a commitment to support our clients through critical periods. This commitment stands.

Let me wind up with a brief recap of our fourth quarter performance. Our bookings were solid at 102% of revenue in the summer quarter. Notably in our European operations, our book-to-bill in quarter four was 108%. Our bookings in Europe were comprised of 50% new business and 50% extensions and renewals. As we go deeper on the transformational phase of the integration, the European economic sentiment is beginning to turn. There appears to be a consensus building that the bottom is behind us.

In North America, we continue to be confident in our ability to grow organically, while incrementally improving profitability over time. Bookings in the US were strong at 115% despite the ongoing impact of sequestration and the 17 day federal government shut down. Across the important US federal market we are continuing to see things move to the right, more extensions and ceiling increases on existing work. The pipeline of bids submitted but pending award stood at approximately CAD1.7 billion at the end of September.

We are seeing continuing demand for emerging solutions like cloud, cyber security and data analytics, where our pipeline for these emerging areas doubled over last year. As expected, revenue of CAD2.5 billion was impacted by the seasonal effect of vacation. EBIT of CAD313 million improved sequentially and more than doubled year over year. EBIT margin of almost 13% was well distributed as six of seven strategic business units delivered double-digit margins, clearly reflecting our restructuring efforts.

Looking ahead, the performance of the past year has left us in a position of strength, financially and operationally, as we move to complete the integration this year. We have improved our cost structure, which has increased our competitiveness and enabled us to bring additional value to our clients. Consistent with past integrations, with the restructuring behind us, we are intensifying our business development efforts in fiscal 2014 to capture additional revenue synergies and generate profitable growth.

Thank you for your continued interest and confidence in CGI. Let's go to the questions, Lorne.

Just a reminder, a replay of the call will be available either by our website or by dialing 1-800-408-3053 and using the passcode 1482648 until November 23. As well and as usual, a podcast of this call is available for download either on CGI.com or by iTunes within a few hours. Follow-up questions as usual, directed to me, 514-841-3355.

So, Wayne, perhaps we can poll for questions from the investment community, please?

(Operator Instructions)

Scott Penner, TD Securities.

Just two topic areas for me, Mike. That is, first of all, just to put a period on your comments around healthcare.gov because it is a blip on the radar of your overall business. Has the publicity around the goings on there, has it had really impact at all on the cadence of new bookings either elsewhere in your health franchise or in the federal business?

I think I addressed that in my statement to say that we're continuing to see our pipelines expand and that we're getting very strong support from our clients around the world.

Okay. On the restructuring phase of the Logica integration, you laid out last year some goal posts around margin expectations on the upcoming year. As you move more into the transformational part of the integration, what are some of the elements upcoming in the upcoming quarters around that? Is there anything really that we from the outside looking in can think of as milestones for the progress?

I think that's a good question. I think, again, what I pointed out before really in the transformational phase, we focused very much in ensuring that our management frameworks, our operating model, our interaction with customers, members, our focus on profitable top line growth moved to the front of the priority list. I think what you will see here is, we'll continue to deliver the follow-on accretion from the investments that we made in 2013. As I pointed out, we still have an additional CAD77 million to be invested in 2014.

A lot of that will be very targeted at closing the remaining gap on our management ratios in the areas of SG&A, some of the fixed costs, getting benefits of our systems consolidation. But what I think you will really see again as we move now closer to the adherence of our operating model, our performance in the area of customer satisfaction and attracting retaining and training our members and in the execution piece of our business in terms of projects and these areas that really drive sustainable value is what comes out of the transformational phase.

Okay. Appreciate it. I'll pass it on.

Thanks Scott.

Richard Tse, Cormark Securities.

Mike, you talked a little bit about the European conditions. Can you maybe us give us a bit more color in terms of maybe which verticals are strongest? What some of your European clients are saying about the market these days?

That's a good question. As we said, our bookings have been fairly solid in Europe. Last quarter, 108% book-to-bill, 50% new business. I clearly see that we've passed by the bottom. The economies are starting to show some signs. I will remind you we are primarily focused on Northern Europe here, including the Nordic countries. We see activity in the financial vertical. We've won a number of long-term deals in the Nordic areas that are in the financial related vertical. Just generally, the tone seems better. The customer interaction is much more positive. Customers appear to be starting to trigger more longer term investments and getting back to using information technology to drive not only cost benefits but also top line benefits, growth benefits in their own business.

So I think we're kind of hitting at the right time here. As I mentioned through an integration, we normally hit the cost structure very, very hard in the first year, focus on improving the quality of revenue in the second year that we're entering now. We shift that more to the top line opportunities working with our clients while continuing to leverage the benefit that we got from the restructuring in terms of our pricing, our ability to deliver and the combination of which, as I was mentioning to Scott, kind of puts us back into the CGI rhythm of profitably growing the top line and delivering strong earnings, cash and EPS accretion for the shareholders.

Okay. Thank you. In regards to M&A, you guys obviously had a successful record with the latest acquisition. Do you think that you're in a position to do something again in 2014? Maybe if so, what areas do you think you need to beef up on?

Yes. Certainly, financially, we are in a strong position. Dave mentioned that we've extended our credit line, that we have about CAD1.3 billion available. We're generating, excluding the integration expenses, CAD1 billion in cash. So financially, I think clearly we're able do that. Operationally, of course, we want to finish our integration in Europe. The second phase is, as I say, well underway. So we'd like to ensure that we get that achieved.

Having said that, we continue to look. We're probably, in the near term, going to look to go deeper in some areas rather than wider. So we're looking at individual geographies. We're looking at individual verticals where we could add capability that would strengthen our customer proposition. So those would be the areas. We're still active. We still talk to people and look at opportunities.

So on that side -- on the other side, we continue to look at areas of the business that may not be core to us, that we may want to move out of over time here. So we kind of look at both. But clearly financially, we're able to continue to look at acquisitions. But again, it wouldn't be, in my view, a transformational type of deal. It would be more of a point-to-point, addressing a specific gap or going deeper in a vertical.

Great. Just one last question for David. What should we be using for a tax rate for our modeling purposes, going into next year?

It's about 24% to 26%. Again, that fluctuates depending on where the -- and the mix of the profits are coming from, some geographies as you know, a little bit higher tax rates, some lower. So, that's why we give you that range.

Okay. Great. Thank you.

Thanks, Richard.

Thanos Moschopoulos, BMO Capital Markets.

I have just a couple for David. You gave a number regarding revenue seasonality in the quarter. Was that almost entirely from Europe? Or was there some revenue seasonality in Canada and US as well?

If you're able to reflect back a year ago or even before, the pattern that we saw in -- before Logica was about CAD25 million to CAD30 million that we were having. So the incremental would then be, really, coming from the European piece.

Okay. Then as far as margins, on a percentage basis is there any seasonality in margins? Or because of vacation accruals, it kind of evens out.

Well, in regards to margins, especially in the fourth quarter because it's a heavy vacation period, a lot of individuals who are somewhat, let's say, fixed costs, non-billable type folks when they leave their salary is already -- it gets accrued for. So you can actually see a little bit of the uptick there. We also see that in the infrastructure management piece too, because we continue to bill out to the clients because we are providing services and underneath that though, some of the folks are on vacation. So the actual cost of services come down a little bit. So, there is a little bit of a seasonality uptick that we have in the fourth quarter, just because of that vacation piece.

Okay. Would there be a way to quantify that for us?

It's not very easy to quantify, but if you were to back fire out from the CAD146 million, you may be able to come up with some reasonable numbers.

Okay. Then a question for Mike. I know that a key element of your strategy is to drive up outsourcing mix at Logica. So we obviously saw good bookings from Logica this quarter. Can you talk about whether that backlog and the revenue mix is starting to skew a little bit more towards outsourcing? Or was the strong bookings performance this quarter helped more by a cyclical uptick in SI&C work?

No. We've had a couple good strong bookings in the Nordics that are managed servings bookings, five year in duration. So that's very positive, very much in line with our strategy. I think again it will take some time as it did with our earlier acquisitions to really increase the recurring revenue base across the individual countries in Europe. But that's clearly our focus.

That's clearly our operating model. It's clearly our strategy. So it will get there. It will take some time. But as I say in the Nordics, we've been able to start that wheel rolling and have secured what I believe are very high caliber customers in one of our best strongest verticals in the financial vertical and insurance vertical areas where we have a lot of experience. So it's starting, but it will be gradual.

Okay. Great. Thanks. I'll pass the line.

Okay, thanks, Thanos.

Kris Thompson, National Bank Financial.

Mike, just on the bookings in Europe, how did you guys do such a great job there? All the other vendors had a book-to-bill, the lowest that we've tracked in a few years. I am just curious, how you achieved such great numbers?

Well, again, Kris, thank you for that compliment. Essentially what we have rolled-out in Europe is our business development visibility system, which is a highly automated system that gives us visibility into every business developer around the world. We set a threshold of the number of customer face-to-face engagements that have to happen every week in advance. So we have an advanced schedule, who they're meeting with, what the topic is, so that we increase the face time with our clients.

We've been supplementing that with our corporate marketing group, where we have an abundance of SMEs that are specialists in the various sectors in which we operate. So they've been working closely there in training and updating our sales force on the expanded capabilities that we have. So we're bringing a more fuller capability package to the customers. Then on top of that, we're also focusing -- it's an even larger focus for next year is really on improving our account management. So we have a lot of very large accounts. Our share in those accounts are not up to where they could be.

Again, we have now introduced some added visibility and discipline around account management, including me reviewing the top ten customers globally and the same thing at the operating entity. So on a given quarter, there's probably 80 top clients that will be reviewed. In there, we see the opportunity to increase our presence and wallet share. Some of that is starting to kick in. It's not universal yet, but we're clearly focusing, as I say, on the second leg here of our integration plan on the business development and sales aspect of our plan.

Okay. That's really helpful. Just on your margin, they're also very high. I am just wondering, how sustainable those margins are? Do you see room for actually increasing those? Maybe could you combine that with an update on your progress in selling more IP into your customer deployments?

Yes. Clearly, changing the mix of our revenue in Europe is certainly a key element of our medium-term/long-term strategy to improve our margins on a sustainable business over there. I think if you look at the margin improvements that we've seen in 2013 in Europe, it's very much related to our ability to take out overhead, SG&A, streamline our go to market approach, reduce fixed costs. So really, as I mentioned, change the mix of our cost -- the variable fixed cost, so you're seeing that in those margins.

On top of that, our ability to continue to run off low margin business and replace it with higher quality revenue will also improve the margins. So, when I look at margins, the first goal is to have consistency -- more consistency. Across Europe in terms of the margins, we did as I mentioned, in the fourth quarter have six out of seven of our operating entities have double-digit. That's a good place to be. Now we've got to make sure that we're there consistently in quarter after quarter. So there is still opportunity here to improve.

We've built opportunity into our 2014 plan, as I mentioned. We're paid and hired by the shareholders to bring more value each year. Our plan 2014 incorporates that. We'll continue to pull those levers, focus on better quality mix of revenue, long-term revenue, revenue with more IP based services and solutions embedded in it, work on our utilization rates, continue to capture the remaining opportunity around our management ratios and SG&A and then leverage more, our global delivery capabilities.

I think this is another area we have ended up now with about 22 or so global delivery centers. We believe that by leveraging those more, we can in fact increase the value of our proposition, win more business and contribute to our earnings commitments. So we have more to do. That's the good news. We haven't run out of opportunities. So we've got to continue to focus in the second year, the same way we did in fiscal 2013.

Okay. Thanks for taking my questions. Congratulations on a stellar year.

Thank you very much.

Thanks, Kris.

Jason Kupferberg, Jefferies.

I know you don't give formal financial guidance, but just as we start to think about the top line for fiscal 2014, anything you might care to share in terms of kind of relative growth rates for your various geographies versus each other? Where you think there is prospects for acceleration? Or the potential for some deceleration? Now that you've fully anniversaried Logica? For example, I knew US grew about 17% in fiscal 2013 which was an outstanding result, but perhaps not sustainable just relative to overall market growth. So, any color there would be great.

Okay. Thank you, Jason. Welcome to the call.

Thank you.

Good to have you covering the stock. First, I would say that, again, what we've always done is focus on quality growth. I think, as you know, in our industry there is a lot of revenue that is not profitable. Our philosophy has been to ensure that the revenue that we're adding here is quality revenue and to the extent possible, recurring long-term revenue. That's the focus that we have. I think if we look at the geographies, we do believe we can continue to grow our North American operations. We've got an excellent platform. We've got a good mix of revenue in North America, especially in Canada.

In the US, again, we've got an excellent team. We've really grown our US capabilities; therefore, I think as that market picks up we're growing with it. We do look for more opportunities in the commercial sector as well, next year. We still have our follow-on work relative to the various health initiatives going on in the US. So we do see opportunities there. In Europe, as I mentioned, we are seeing the early signs of some positive economic rebound.

So right across Europe, we have focused in our plan to see a growth in the various entities. We're going do it gradually. So you'll see some movement as we go through the various quarters. Again in parallel, we're also targeting transformational deals where we're attempting to engage with clients outside the RFP process to talk to them about the benefits of transformational outsourcing deal that will help them beat their goals. As you know from following us over the years, an outsourcing deal can -- in one or two quarters, significantly ramp up your organic growth.

That's kind of how we see it. Then as I mentioned earlier, Jason, we have to accelerate the use of all the levers that we picked up through the Logica acquisition, bringing capabilities that we have in Europe to North America and vice versa. We are doing quite a bit of that in the manufacturing utility side, cross selling. So the combination of that -- again, our sense is that we will start to move the needle gradually on the top line, while continuing to drive a healthy accretion rate on the bottom line by picking up the investment -- return on the investment we had made last year, the CAD77 million more we have to invest this year and a better adherence across the Company, a more consistent adherence to our operating methods embedded now as a result of the integration.

Okay. Just a follow-up question on that. I know you mentioned that there should be some additional EPS accretion from Logica in fiscal 2014. That's obviously a metric you had given some guidance on in fiscal 2013. You well exceeded that as we saw here. What should we be thinking of in terms of order of magnitude for that incremental EPS accretion in fiscal 2014?

Well, I haven't released that. I really -- I think we were in a different situation in 2013. I mean, we had the bulk of our restructuring targeted in that year. So it was much easier for us to get a handle on what that accretion rate would be. But having said that, as I mentioned earlier, we do build in EPS growth into our annual plans. We have done that in 2014. I think if you look back at the history of this Company, you'll probably get a pretty good idea of the type of goal setting we do around that. Again, I would remind investors that our individual bonus plans and stock options are all performance based.

So if we don't -- if we're starting to stray from our targets, we reverse the accruals on the options, which drops to the bottom line, brings down expense, improves earnings per share. If we're not meeting our targets, we reverse our profit sharing, which then also reduces our expense and protects EPS and retains cash in the corporation. So the way we're organized, the way we're built, the way we're structured, it's very linked to performance and outcomes. I think this should give investors continued confidence that we're very focused on creating value here.

Just one last quick one from me, maybe for David. Just on the free cash flow side of things. After CapEx, is there any perimeters you would encourage us to think about there? For example, as a percent of your adjusted net income or anything, as we clear through some of the acquisition related numbers that were impacting fiscal 2013? It looks like fiscal 2014, I would think, will be a cleaner year, if you will, just in terms of lack of reclasses and so forth.

Yes. 2014 will be a lot cleaner. I just want to reiterate a couple points. One is that there is still CAD135 million of restructuring charges that are on that balance sheet. So from a quarterly profiling, that's got to flow through into the numbers. I also mentioned the performance related compensation payment that we have to make in this quarter. That's going to be a little bit on the higher side. So, again, from a profile perspective that's going to be flowing through.

But overall, for the full year, when we take a look at the cash that's being generated from the operations, I think if you take a look at the financials, you are able to come up with the run rates that we have for the investments, where that money is going. So I think you've got some pretty good numbers to use as a base for going forward there to come up with your predictions for the upcoming year. At this particular stage, I don't really see too much more that is on the horizon. Again, our focus is to pay down debt, but we still have the normal course issuer bid. That is still out there as an option or as a tool that we can lever at some point going forward.

Okay. Thank you for the comments guys.

Good. Thanks Jason.

Paul Treiber, RBC Capital Markets.

In regards to the mix of Logica revenue, did Logica have a mix of high quality, higher margin business that was largely overshadowed by lower quality revenue and that the run off of lower quality revenue now is raising the transparency to that higher quality business? At the same time, would you agree that the opportunities for transformation is still very early?

I think to the first question, Logica clearly did not have the mix of IP based services and solutions, as we do going into the acquisition. Much like some of the earlier companies that we acquired, where they did have IP, they were primarily using it for licensing purposes and not necessarily embedded as part of a recurring service. So that's a big differentiator in terms of a strategy and also from a quality of revenue and recurring revenue type strategy.

I think the second thing is that their overhead -- their SG&As were significantly higher than ours. So even if you assume that the pricing stayed exactly the same in 2013 as it did before we acquired Logica, when you hit the overheads and the fixed costs as hard as we did, you will of course see margin expansion. That's clearly visible in quarter four. If you look at last year, we had six weeks of Logica revenue in our results. It essentially earned no margin, in fact, it had a loss.

So when I look at the fourth quarter this year, you can clearly see the impact of the restructuring. Because we have been able to take down significantly the cost structure. As I mentioned, it's one of the reasons I pointed it out. If you look at our Company-wide basis, our cost of services in the first quarter was 91.6%. So, essentially if you look at first quarter 2013, we were just starting to kick in the restructuring program. As we ended the year here, we are at 87.4%. Also if you look at our net headcount, it's gone down an additional 1,000 this quarter over last quarter.

If you look at -- from when we started this journey to today, the net headcount was down by 4,000. So, one has to consider in there that we've grown in North America in particular the US. So having said that, the third point I would make is that, there were a lot of projects in there that were in distress that we've worked extremely hard with our customers and our people to address. As we address them, of course to your question, the mix of profitable business versus unprofitable business is shifting. As it shifts, of course, the margins are reflecting it. So I hope that's helpful, Paul. But that's essentially what's going on there.

That's very helpful. Then thinking about it from a structural comparison with your peers in Europe. I think you've previously called out that you'd like to have best in class margins in Europe. You're already there. So do you think as you further transform the European business, it's probably less relevant to compare your mix of business in margins versus European peers?

Well I had to start somewhere, Paul. (laughter) I started by setting a target, going after the top performer in Europe. Again as I say, I wouldn't -- what I'm really looking for is now consistency of that performance up to that -- and sustainability up to the 8.5% to 9%. We certainly hit it in the fourth quarter. I like what I see there. But again, the real goal is to see that as the normal course of business in terms of an output. But having said that, of course, we don't stand still here.

We continue to pull the levers that I mentioned, to continue to improve our profitability and more important is our competitiveness over there. We are winning business over there. We're winning business in new areas. As I mentioned, 50% of our bookings was new business in the quarter. So we'll continue to focus on increasing our margin growth over there. But again, it will be gradual. But it will also be consistent here. That's what I'm looking for in the very, very near term.

Okay. That's good to hear. One last one for David. Could you provide or just restate on the remaining integration charges and disbursements? How much do you disburse this quarter? Then what's the total amount of disbursements remaining?

The amount that we disbursed this quarter was about CAD50 million. That brought total spend on the program up to CAD448 million. There is CAD77 million that is yet to go. Most of that CAD77 million should all occur in this coming year.

That's referring to the cash outflows as opposed to expense, right?

Okay. So for the cash outflows, of that CAD448 million, that had already been expensed. There is CAD135 million that is still sitting on the balance sheet. So that is scheduled -- over the next couple of quarters will be getting paid down. Just to remind you though that, with only CAD77 million left to charge, what's going to happen and we'll start to see it, is that the cash going out is going to be greater than the accrual going in. So it's going to be net draw down on the change in the working capital number. So you will see some erosion coming from that element. That's just because the timing of the cash flow is being greater than the accruals.

Okay, thank you. That's helpful. I'll pass the line.

Thank you.

Ralph Garcea, Global Maxfin.

Congratulations on a great quarter. Thanks for sneaking me in here. If you look to Europe, still amazing on that book-to-bill of 108%. You mentioned that 50% was new business. Was that complete new logos? Or new business within that -- how much was split between new logos and new business within that Logica customer base?

It was primarily new logos and very linked to an outsourcing deal that we closed in the Nordics. So it hit two or three of the proof points that we're looking for. One that, our references and experience in the financial sector are very relevant to Europe. Two, that customers are willing to do multi-year managed services deals. Three, our operations can compete with anybody in Europe when it comes to this type of thing. So it was a good proof point all along those lines. We're looking for more of that, Ralph, as we go deeper here with our clients, including, as I say, doing a -- frankly a better job of account management on these new accounts that we have.

These were full competitive bids against [Tieto] and IBM -- I mean all local guys up there?

Yes.

Okay. Then, again, given the unbelievable margins exiting Europe, that was without really Central Europe and Germany hitting on all strides. What do you have do in that segment to get that north of double-digits on the EBIT margin side?

I think again what we need to do there is -- that's a good link into the transformational part of this, is the transformational part is, we've got to get to the point where we're living and breathing the way we think about the business and how we do the business. Part of that is really accepting our role and responsibilities and accountabilities as owners. One of the reasons I mentioned that -- on the members' side, we have added nearly 12,000 additional Logica, former Logica professionals as GCI owners now.

That's ramping-up because we're rolling it around the new entities. So as that starts to take hold, I think the model and the outcome philosophy that we live by here will actually help us improve our performance in those areas. Germany is a big economy. We believe there is good opportunities there for growth. We've also done a lot of work in the Netherlands, which is turning very, very positive. We've had a very strong year there as well. So I think those represent areas of opportunities and clearly areas that I'm focusing on.

Okay. Then just lastly, you guys have a great history in the telecom industry. I mean just hypothetically speaking, both AT&T and Vodafone are great customers of yours. What happens in the event that AT&T takes a run at Vodafone? Or there is a merger -- a large merger like that with two of your great customers from an IT perspective? Do you get involved in any of the early discussions? What's the outcome if something like that does get the approval to go through?

Well, speaking more generally, when we have customers who merge and that's going to happen as our customers look to go more and more global and add their own capabilities and address their customer needs. There is a lot of integration work, Ralph, that normally goes on there. Customers have to choose between two platforms in some cases. They also look at reducing costs as part of their integration plan and their accretion promises to their shareholders.

These are all areas that open us up to an opportunity, so we're very mindful of those type of opportunities. We do try to intervene as early as we can, so that our value proposition can actually be considered as they attempt to finalize their post-integration view. So we do watch these. Even if they aren't customers, if we see a merger or hear of a merger in any industry in which we're in, we tend to proactively show up and try to outline how we could help them meet the goals that they've outlined in their merger plan.

Excellent. Thank you very much.

Okay. Thanks again.

Thanks Ralph.

Thank you, everybody.

Thank you, everyone. We'll be back at the 1st of February, Q1 results and our AGM as well. Thank you. Have a nice day.

Thank you. That concludes today's conference call. Please disconnect your lines at this time. We thank you for your participation.