CGI Inc (GIB) 2014 Q1 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the CGI first quarter 2014 results conference call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications, and Investor Relations. Please go ahead, sir.

Thank you Audrey, and good morning. With me to discuss CGI's first quarter fiscal 2014 results are Michael Roach, our 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 9.00 AM on Wednesday, January 29, 2014. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD&A, financial statements, and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

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

We are reporting our financial results in accordance with the International Financial Reporting Standards, or IFRS. As before we will also discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. Unless otherwise noted all of the dollar figures expressed on this call this morning are in Canadian dollars.

As many of you know we are also hosting our Annual General Meeting of Shareholders this morning, so we will keep our scripted comes brief, in order to take as many questions as we can within the next 45 minutes or so. I will turn it over to David first to review our Q1 financials, and then Mike will comment on our strategic and operational highlights. So with that, David.

Thank you Lorne, and good morning. I am pleased to share the financial details of another good quarter. First quarter revenue was CAD2.64 billion, up 4.4% compared with CAD2.53 billion in the year ago period. Foreign exchange fluctuations favorably impacted revenue by CAD160 million, or 6.3% compared with the same period last year. Sequentially revenue increased by 7.6%, or 5.1% on a constant currency basis.

Over the last 12 months, we have been exiting low margin business and offsetting it with higher-quality revenue as part of our integration activities. Although this puts near-term pressure on our topline, it contributes to ongoing margin expansion. As such, adjusted EBIT was CAD303 million, up 45% versus last year, while our EBIT margin of 11.5% increased by 320 basis points. Net earnings were CAD208 million, or CAD0.65 per diluted share when excluding integration costs. This compares with CAD138 million, or CAD0.44 in the year-ago period representing an increase of 51%.

On a GAAP basis net earnings were CAD190 million, or CAD0.60 per diluted share, compared with CAD22 million, or CAD0.07 in diluted earnings per share in the year ago period.

Now let me take a minute to walk through where we stood at the end of December relative to the CAD525 million Logica integration project. CAD471 million has been expensed and CAD368 million in cash payments have been made including CAD53 million in Q1. All remaining integration expenses will be incurred, and the majority of the cash dispersed by the end of this fiscal year. More details can be found in the MD&A.

Cash generated by operating activities was CAD66 million in the first quarter. Two important factors impacted cash in Q1. The CAD53 million of integration-related payments I just described, and the increase in DSO related primarily to the timing of milestone billings and collections, had a cash impact of CAD220 million sequentially, and CAD310 million year-over-year. A detailed bridging schedule showing the impact of all of the moving pieces of our cash from operations can be found in the MD&A, as well as the slide deck we posted earlier this morning. As we wind down our integration efforts in the coming quarters, we expect cash from operations will more closely align with our adjusted EBIT.

Given normal fluctuations in working capital elements from one quarter to another, we have always suggested that investors analyze cash generation on a trailing 12-month basis. With that in mind excluding the integration-related cash disbursements, our trailing 12-month cash from operations is CAD819 million, or CAD2.58 per diluted share.

Turning to the balance sheet, net debt stood at CAD2.9 billion at the end of December, representing a net debt to capitalization ratio of 39%, down from 45% in Q1 of last year. Finally, we will continue to have in excess of CAD1.2 billion of liquidity available to continue properly growing our business.

Now I will turn the call over to Mike.

Thank you David, and good morning everyone. We delivered very solid performance in the quarter, as we continued to leverage and build on our expanded global scale and scope for the benefit of our clients and shareholders. As this is the first reporting period in which year-over-year European comparisons are meaningful, the significant positive impact of our integration plan is now more visible at the operating level.

Global bookings of CAD2.8 billion in the quarter, or 107% of revenue were well distributed across all major markets. In fact, six of our seven strategic business units were at 100% book-to-bill or greater. Of these awards, 45% were new business reflecting our increased focus on business development following a year of major restructuring. It also reflects signs of an improving market conditions across parts of Europe and in the United States. Our sales funnels have increased significantly quarter-over-quarter and year-over-year, with a healthy mix of SI&C and outsourcing opportunities.

Revenue of CAD2.6 billion in the first quarter is up sequentially and year-over-year. On a cost and currency basis revenue is up in North America and slightly lower in Europe, reflecting the planned run off of underperforming business. With the majority of these revenue reductions behind us, we are intensifying our efforts to replace this business with higher quality recurring revenue. On a year-over-year basis our adjusted EBIT grew 45% to over CAD300 million, representing a strong margin of 11.5%, and driving EPS improvement to nearly 50%.

In North America we reported growth of 6%, fueled by the ongoing strength of our US operations. Adjusted EBIT improved by CAD13 million year-over-year, and the associated margin remained healthy at 14.2% in North America. Our US business grew 12% organically as all segments, federal, state, local and commercial, delivered year-over-year revenue growth. In the US adjusted EBIT increased by CAD7 million to CAD67 million, while the margin of 10% was slightly impacted by the assignment of additional resources necessary to meet year-end project milestones. Our business development focus, our expanding pipeline, and the associated book-to-bill of 102% for the quarter, and 108% over the last 12 months, continue to position us for future growth in the US market. US commercial and state bookings grew by more than 25% year-over-year, while bookings in our federal business were impacted by an industry-wide ongoing delays in contract awards.

On the US federal side we continued delivering year-over-year improvements to both the top and bottom lines, despite ongoing government-wide contract delays. Currently we have approximately CAD1.3 billion in bids submitted but not yet awarded at the federal level. Going forward with the US federal budget in place, we are more optimistic that contract and task order awards will return to a more normal pace over time. As a reminder CGI Federal continues to be well-positioned to grow by leveraging its 51 contract vehicles, including 45 prime positions utilized government-wide and across agencies.

I am also very pleased to note the appointment of Lieutenant General James Peake, US Army Retired MD, as the new President of CGI Federal, following the planned retirement of Donna Ryan. Dr. Peake joined CGI Federal in 2009 after a decorated career serving in the US Army, which included his appointment as US Army Surgeon General from 2000 to 2004. In 2007 he was nominated and confirmed as Secretary of Veteran Affairs, serving in that post until 2009. Dr. Peake is a proven committed leader, with an impeccable reputation, and we are proud to have him as a key member of our leadership team.

I would now like to provide you a brief update on our work pertaining to the US Affordable Care Act, both at the federal and state levels. As I outlined on our call in November, we have been working with our federal client CMS and other technology partners to improve the user experience on Healthcare.gov. Tremendous progress has been made in the past months, and we are proud of the key role CGI played in the text search. Enrollments across the federal and state exchanges have now surpassed 3 million. The system's performance has been significantly improved, enabling the year-over-year enrollment spike to be successfully processed. In short the system we were contracted to build, specifically the federal facilitated marketplace works.

Unfortunately, despite these significant accomplishments we recognize that our client will proceed to the next phase with another provider, and accordingly, we are working on a professional transition. To be clear CGI's contract was not terminated. Our current base contract is ending as scheduled on February 28th, 2014. We value our ongoing business relationship with HHS and CMS, and look forward to working closely with them on existing and future initiatives.

At the state level we continue to play a role in the building of six state health exchanges. With all of the state based exchange projects that CGI supports are live. Some of them are performing better than others. We remain deeply committed to all of our state clients, and are working every day to meet key service delivery releases.

With respect to our experience and involvement in the creation of the healthcare exchanges, we continue to believe our commitment to support our clients through critical times is the right strategy for the long-term success. We remain confident, and in the fullness of time our role and responsibility in these initiatives will become clearer. We appreciate the strong support we have received from our many clients around the world, and have not seen any impact on our ability to conduct and grow our business.

Turning to Canada, recent [technical difficulty].

All participants please continue to stand by. Your meeting will resume momentarily. Thank you. All participants please continue to stand by. Your meeting will resume momentarily, thank you for your patience.

It seems we had some technical difficulty there. We apologize for that. I am going to turn it back to Mike, and hopefully we didn't miss much of the message, we will try and pick it up right where we left off.

Okay. I think I will ensure that I cover all of our state involvement in this health exchange, so if I repeat something I apologize.

At the state level we continue to play a role in the building of six state health exchanges, while all of these state based staged projects that CGI supports are live, some of them are performing better than others. We remain deeply committed to all of our state clients, and are working every day to meet key service delivery releases. With respect to our experience and involvement in the creation of the healthcare exchanges, we continue to believe our commitment to support our clients through critical times is the right strategy for our long-term success. We remain confident that in the fullness of time our role, contribution and responsibility in these initiatives will become clearer. We appreciate the strong support we have received from our many clients around the world, and have not seen any impact on our ability to conduct or grow our business.

Turning to Canada, recent momentum and opportunities arising from our expanded solutions and capabilities have led to sequential growth of 3%. Book-to-bill was at 100% this quarter, and the outlook continues to improve. Adjusted EBIT is up by CAD6 million year-over-year, and the Canadian operations recorded an industry-leading margin of 21.4%.

In Europe our quarter 1 book-to-bill was 112%, comprised of 36% new business and continues to trend upwards for the fourth consecutive quarter. In the meantime our goal to transform this business towards higher quality recurring revenue is well underway. We can now point to early examples where we have either reshaped or assigned clients to longer-term contracts, examples include the Swedish Transportation Authority, the UK Government Smart Meter Initiative, and two leading financial services companies in the UK. All chose CGI as their partner following a competitive procurement process. These commitments are five to seven years in length, and represent almost CAD1 billion in high-quality backlog.

Adjusted EBIT in Europe and Asia was CAD145.5 million, up CAD80 million year-over-year, and represents a margin of 9.5%. In fact, Europe and Asia now make up 48% of our global EBIT, up from 31% a year ago. We are very pleased with the execution of our integration plan, and the value creation realized to-date.

Looking ahead our optimism around future growth in margin expansion is growing based on a number of key factors. Evidence of and improving business climate in our key markets, an increasing funnel of opportunities, and consistent book-to-bill exceeding 100%, increased allocation of resources, the business development and account management, tangible examples of European clients committing to long-term engagements, increased utilization of our expanded global delivery network to increase revenue productivity and margins. And finally, a favorable foreign exchange tailwind.

All of these factors are consistent with our firm belief that CGI remains a very good investment. As a result the Board of Directors approved this morning the extension of our normal issuer course bid until February 10th, 2015. This will give us the flexibility to purchase approximately 22 million shares over the next 12 months. At today's price this would represent an investment of approximately CAD750 million. As we wind down our cash disbursements associated with the integration, we will increase our focus on debt reduction and on share repurchases, with a bias towards the latter, given the current valuation, and the positive outlook for our stock.

In closing I want to reinforce our commitment to remain a well-managed and financially strong company, delivering superior results over time. Our business strategy, leadership approach and performance-based ownership philosophy are all focused on achieving this commitment.

Thank you for your continued interest and support. Let's go to the questions Lorne.

Just a reminder there will be a replay of the call available within our a few hours on our website, or by dialing 1-800-408-3053, and using the passcode 1482648 until February 7th. Follow-up questions can be directed to me 514-841-3355, so let's go to the questions, Audrey, please.

Thank you. We will now take questions from the telephone lines. (Operator Instructions). Our first question is from Scott Penner from TD Securities. Please go ahead.

Oh, thanks. Just two questions. First of all, Mike, on the government, the US Government it looks like the bookings were very strong there. In the past back in 2011 there was definitely some pent-up demand that was released after the government situation was cleared up. Just wondering as you look in the pipeline right now whether there is a similar potential?

Well, thanks, Scott. A couple quick things I would just like to reinforce. Unlike a lot of our competitors who are operating in the federal space, I am extremely proud that our team has been able to grow the topline and bottom-line year-over-year in the federal business. I think it goes a lot to our strategy and ability to execute to it.

We do believe as I mentioned in the script from the past, that as the budget starts to work its way down to the departments, that in fact these bids that are on hold will be released. As I mentioned before, this is work that the government needs to do to run their operation and implement changes to their existing programs, so we think it will be gradual. I don't think you will see the tap open rapidly next quarter. I think it will be gradually seeing an uptick over the next three quarters.

I also wanted to ask David, just on the deferred revenue in particular, if you look at the year-end numbers, both the long-term and short-term, it looked like about CAD734 million. That is up quite a bit from pre-Logica. I was just wondering if you could flush out what you think sort of the structural level of deferred revenue is right now, given the level of IP and the larger business size, and then what is the profile of sort of getting back to whatever level that is?

Okay. Scott, I would think that over time, I haven't really spent a lot of time thinking about it, but just understanding some of the basics or fundamentals underneath that, we will see that number over time, and it will probably take about two, maybe three years for it to drift down. It will drift down probably about CAD125 million, but it will be offset as we do more and more, especially within the European environment, in introducing IP, being able to sell more maintenance contracts, and then being able to get revenue from those, because as you know that then is a great source of deferred revenue for us, and it also helps our cash position because it brings in cash a little bit earlier in the process. So I guess about all I can really tell you at this particular point, I would expect to see it coming down a little bit over time, but then it should also continue to, some of that will be backfilled as we continue to expand the business into some of those other areas.

Great thank you very much.

Thanks, Scott.

Thank you. Our next question is from Richard Tse from Cormark Securities. Please go ahead, sir.

Yes, thank you. Mike, on your filing here you talk about the run off of low margin business in Europe. Are we coming in an end there, or should we expect that to continue for next couple of quarters still?

As I mentioned in my remarks, I think the bulk of it is behind us. We can see the impact on the margins as we address that low margin business, of course, Richard, the margins continue to strengthen, so I would say the vast majority of it is behind us. We still kind of look at some areas that aren't core that we may divest if we verify that they are not useful to our customer proposition, so we continue to look at that.

I think the other factor as mentioned, is now that we have our financial system in across all of the European operations, their ability to really segment and analyze their revenue at a more micro level, may in fact surface other revenue streams, or business that isn't core or low margin, but as I said I think the topline is primarily behind us now, and we are really focusing on replacing that with higher quality recurring revenue, which is in line with our transformation strategy.

Okay. And just one last question here. As you look forward to the next 12 months, can you kind of talk about some examples of where the bigger revenue opportunities would be? I know the broad markets like government are a big opportunity, but what type of engagements are people sort of looking for, in terms of what you guys are providing?

I think there are a number of things. Clearly, they are looking at our IP. As you can see, we continue to sell IP to customers, wrapped more as a long-term service which adds to our backlog, our margins, our utilization. I think the outsourcing business especially in Europe, where our ability to be the local company and leverage our global presence is really meaningful. If I look at some of the deals I mentioned, I think the fact that we were local in Sweden, that we are local in Finland, we were able to win those deals by really bringing to the customer the best of both worlds, local accountability with access to global and network. So I think if you look at it, outsourcing, IP, we will get a lift I think on the SI&C business as the economies continue to improve, and helping customers really increase their own topline and control their costs. So a combination of those things.

That is great. Thanks, Mike.

Thanks, Richard.

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

Thanks very much. In regards to the US, you called out that you are making some investments for some state related projects. Do you see that those investments, the headwind on diminishing later in 2014, and also in regards to Europe with the new bookings that you are signing, the new contracts, are you taking some up-front costs on those new contracts that may be weighing on margins in the near-term?

So on the US margins, Paul, I called that out because I wanted to make sure that you have seen that first off it is a very small delta from where we are operating, and remind you again that we continue to pare our intangible there, so when you look at a 10% margin in the US it is probably closer to 11.5%, which is a very strong margin, and we increased EBIT, which is key here, because the goal is to increase our earnings, and so the US operation has accomplished that, and continues to accomplish that. I think on these, what I am saying is that at the 31st of December there was a number of milestones that needed to be met.

We had to put more people on those to ensure that we met those milestones, and you can see that in a number of the state contracts that are milestones, our whip and payments are tied to those, so it is very important that we focus on those, so there may be a little bit more of that as we push through the various milestones, but I am not telegraphing that we have any kind of a major issue in the US margins, and that is why I called it out. I think it is very much localized, and targeted to these type of milestone opportunities.

In Europe normally on an outsourcing deal we do have stand up costs. Dave, I don't know if you want to comment any further on that?

Well, I think we need to separate out what Paul was maybe getting at here. Any of the business development expenses around chasing after the engagement and coming up until the time that we actually have a signed contract, all of that stuff gets flushed into the P&L so there isn't anything that is going on in the balance sheet at that point in time. Only once we have a contract that is signed, then any of the costs to stand that contract up, those will be looked at. Some items are not capitalizable so those will be expensed, but the items that are capitalizable we will put them into contract costs in the balance sheet, and then we will amortize those against the contract over the period of that contract. So hopefully that is clear, and it is consistent with what and how we have done it in the past.

Okay. Thank you. That is helpful. And also on Europe in regards to the improving market conditions, I think you sound more confident than you did last quarter. I think last quarter the comment you used was passing the bottom. So could you elaborate on what gives you improved confidence in Europe at this point?

I think it is a number of things, Paul. First off the book-to-bill continues to be strong there, and continues to increase which means we are bringing on more revenue, which helps us increase our utilization rate, which falls to the bottom line. I think the second thing is that the number of projects that were troubled this year, this quarter versus same quarter last year has come down significantly, so that is also, of course, increasing margin. As I mentioned, most of the low margin business has been addressed or run off, which again gives us more capability to grow our margins. And I think the fourth thing is that as we replace that margin, or that revenue with higher quality as I cited, those four deals alone added CAD1 billion to our backlog, all four of those factors will contribute to margin expansion. And just to remind you we still have the tail of our restructuring program of about 50.

54.

CAD54 million that we should see some benefits of in the P&L, as those charges are worked against the operations. We are still hammering away on some SG&A in some countries, and I think when we address that and we will that should drop to the bottom line as well.

Okay. Thank you. I will pass it on.

Thanks, Paul.

Thank you. Our next question is from Kris Thompson from National Bank Financial. Please go ahead, sir.

Great, thank you. When I look at your revenue segmentation doing my best to back out Logica, it looks leak the system integration and consulting is very strong. Look like a record high in North America, and the BPO looks a little bit weak, maybe just talk a little bit about the dynamic there, and if that is what is impacting your margins in this quarter?

Relative to the US?

Yes.

Yes. Well, the SIC business is strong, and certainly is a major factor driving that growth that you are seeing there. A lot of the work we are doing for our customers are focused in that area. I think on the BPO I wouldn't read a lot into that. There are certainly areas of the BPO business that are lower margin for us, and again, we are watching that business very carefully. Obviously, we are not trying to expand low margin business in that area. We are more apt to let it run off or lapse, but I don't think you are really seeing any kind of major shift in mix here, other than the US economy picking up, which is driving a more SI&C.

Okay. That is helpful. And maybe, David, just on the cash flow you mentioned Accounts Receivable, and some collection issues. There has been a lot of accounting releases going around in the news as you are aware. Could you maybe just address this head on? Do you think your cash flow forecast is back up to the CAD150 million range?

No. Actually, and if you go back, if you take a look at the chart that Lorne had provided as part of the backup to Mike's script here. There was a chart around the cash flow from operations where it takes a look at net earnings that are coming in, it is looking at the noncash items. So the amortizations, et cetera, so coming down to a subtotal, and then beyond that then I get into the working capital adjustments.

Well over a period of time those working capital adjustments should balance out to close to zero. If you are growing the business, there is going to be a little bit more in the way of investment that you have to put into working capital, so it is going to actually grow, so you have a little bit of a deterioration coming from that, but it is relatively small, maybe 10% of the revenue that would be tucked away for an increase in working capital. So when we take a look at the result of that number, and then compare that back to the adjusted EBITDA right now, you are going to find that those are over the number of quarters there has been a strong correlation, and again, if you look at the schedules, that number that we should be looking at is going to be closer to CAD300 million than the CAD150 that you are describing.

That is very helpful. I will have a look at the schedule. Thanks for taking my questions, and good luck.

Thanks, Kris.

Thanks, Kris.

Thank you. Our next question is from Steven Li from Raymond James. Please go ahead.

Yes. Hi. Thanks very much. A question for Mike. You touched on earlier, the runoff of the low margin business in Europe. Can you quantify that, like how much these contracts would represent? Is it in the low single digit, or was it more like 4% or 5%?

Oh, no. I think it is closer to 4% or 5%. It is maybe a little more.

About 5%.

Yes. On one hand it is a significant dollar number when you look at it, but on the other hand as a percent as I say, it is around 5%, maybe a little bit more, which is not surprising. I think again one of the things with the Logica transaction, the numbers look big, but we have to remember the transaction is big, and I would think in most companies that we have looked at, due diligence or acquired, that the amount of low margin business or passthrough business was certainly in the 5% to 7% range, and I don't think we are seeing anything materially different here with Logica.

Okay. Great. And then just a follow-up. The margins in Europe looked like it was down sequentially. Can you maybe give us some color, was it seasonal, and does it bounce back next quarter? Thanks, Mike.

Well, again, I did point out last quarter that I think that the margins were very strong there. It was a seasonal impact of, and demonstrated again that we got a lot of the fixed costs out. I think one of the things when I look at this, I think the more relevant comparison in Europe is the year-over-year comparison, and you can see the significant improvement we have made year-over-year, and the quarter to quarter again is impacted by a number of factors, including vacation, working days, and a lot of other things that are not in the year-over-year. So again, I would guide you to more look at the year-over-year picture in Europe, and as I pointed out in my opening comments, the segmentations are now a lot more comparable now that we have been through a full year with Logica.

Okay. Great. Thanks.

Thank you. Our next question is from Maher Yaghi from Desjardins. Go ahead, sir.

Yes. Thank you for taking my question. Mike, I am just going to state out the fact that the market seems to be struggling with, and I want to get your opinion on that directly. So there is a camp out there talking about Logica, and all of the transaction, when you did the transaction you took a lot of adjustments after the transaction. I mean we are wondering if the current run rate that we are seeing in Logica is overstating the health of the business, or do you think that we should expect revenue to improve albeit by small increments going forward.

And a follow-up to that, is when you look at the margins of Logica, since you made that acquisition, and you cut costs and simplified and streamlined operations, when you look at the European operation as it stands right now, is your cost structure set up to be able to continue to generate margins similar to the levels we are generating right now, or are you expecting some margin pressure as you ramp up new contracts going forward?

Well, you have got two or three things in there. I will try and remember them all and address them all. On the margin side, again, you go back to the other scripts, we have all of the way through this integration we have been very transparent on our plan, to invest CAD525 million and drive out CAD375 million of annual benefits. We are tracking to that. As I mentioned, the headcounts are down the overheads have been addressed, and we are cutting away at other costs, so the margins have increased, and they link back to a number of proof points that I have gone through, particularly in the year-end conference call. So I refer you back there.

Our margins in Europe now are approaching the top quartile, or rather in the top quartile. We are essentially the best performer in Europe. Our goal is to stay there. Our goal would be to gradually improve earnings as we churn that revenue from low margin to high margin, as I mentioned, that will increase our earning capabilities. There will obviously as you grow the business there are costs. Dave gave a good example, where you have to invest heavily in an outsourcing deal, which is the sales of business and our expense, but as those deals go through, of course, you end up getting the benefit both on the topline and bottom line. So the answer is we always look to gradually improve our earnings per share, and the European operation is contributing significantly to that, and we expect that to continue and expand over time.

If I could just add one comment here, Mike had referenced putting everybody onto the same financial system. So now we have got everybody on the same definition, we look at the financial performance the same way, and in past meetings we have had references to our management ratios, so we have the ability to be able to track and we do watch very closely every month, what the cost ratios are by business unit, and if we see any of them starting to move in the wrong direction, we are able to drill down and action them very quickly. So getting back to this point around sustainability of those margins going forward, we believe we have got the cost structure pretty much in the right place now, and we have the mechanisms in place to be able to ensure that we stay there.

So is it fair to assume that from your understanding of the operations and all of the balance sheet items, we should expect cash flow going forward to move higher to reach or get closer to your EBIT line, versus the EBIT line going down to reach the cash flow line?

That wouldn't be a good strategy to drive our EBIT down to meet the cash.

No. I mean I am trying to bridge some understanding out there, the mixed understanding of the operations?

Well, again, we said it numerous times we reinforced it on the call here we have done many, many acquisitions. This is not unique that the EBIT would run ahead of the cash for a period of time, and over time those two will align in the future as they have in the past. Again, I think we have been very transparent. We have showed investors what that looks like, in terms of the impact of the restructuring costs, and the cash generation. Again, I would reinforce that cash like bookings should be looked at a trailing 12-month basis. We don't run the Company by quarter, and cash and working capital fluctuates by quarter. So again, I think, we are steadfast in the belief that over time this will come back more in line in the future, as it has in the past.

Thank you.

And your concern around which way the lines should be moving, again if I just reference you back to the chart that was provided on the cash flow from operations, you can see that when you put your model together on the net earnings, you add back the noncash items, and that gives you a baseline that you should be working with, and that I would think that you would see over time that the cash line will then start to come up to the EBIT line.

That is helpful. Thank you.

Okay.

Thank you. Our next question is from Justin Kew from Cantor Fitzgerald. Please go ahead, sir.

Great. Thank you very much for taking my question. Mike, you talked about on the when you were talking about margin expansions, talking about business development investment. Can just flesh that out a bit, and just talk about, I guess Paul had asked kind of in the US specifically. But I am just talking about globally, when do you take the foot off the gas, in terms of investment on the business development side?

Well, that is what I was telegraphing, if you look at a normal integration, and Logica given its size and its performance and our commitment to drive accretion, the first year we drove exceedingly hard on the restructuring basis. As you know, the net headcount is down 4,000 or 5,000 which takes a lot of management attention, because you not only have to do the restructuring, but you have got to continue to operate the business. Now that that is complete essentially, we are now turning more of our attention, more of our management time, more of the business development focus on growing new higher quality margin. We have also done a pretty good review as we went through the SG&A on the skills and the capabilities of our business developers, have made some changes that were necessary to reinforce the right message, in terms of selling profitable business, and not only selling revenue, so that work has been done. So I think, what I am saying is that cuts in along with those other factors including the improving market, we are looking to continue to grow the business throughout the year. I don't know if that gets at what you were looking at, but that is essentially what we are doing.

No. That does help. And David, just on the DSOs, the way it is described in the MD&A it feels as if kind of the increase in the DSO is temporary. How should we think about the DSOs coming down over the next couple of quarters?

I think the impression you got from the MD&A is the correct impression. It is a timing difference and because of the mix of the business that we have right now, there is just a lot of the healthcare projects as an example, all falling due on the same date, so there were a lot of milestones that were all within that December, January, February, time frame that we have in front of us. So as we work our way through that, then we will see the DSO improve, see the cash improving, and then we will get back into a steady state of where we have got various milestones, et cetera, that are scattered out over a period of time, and not all lumped up into a single window. So I would expect everyone to see much increased improvement here going forward.

Great, thank you very much.

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

Hi. Good morning. Mike, we saw great margin performance at Logica as you highlighted. I guess the one region where margins were a little bit lower relative to prior quarters was in the UK, and just to clarify, were there any one-time factors there, or is that related to seasonality, or maybe ramping up some of your business development activities? What drove that?

I think, again, we have done a lot of restructuring in the UK. I think we had some fairly significant project issues in that area upon the acquisition. We are working through those. Again, our outlook is that in the UK that we would continue to gradually improve those margins throughout the year. So I wouldn't read in anything particular there. I think the one thing that we ought to remind ourselves is that while we talk about Europe as one entity, and North America sometimes as one entity, the countries are much different in terms of the mix of the business, and also the economic climate there. So again, I think we got a great team on the ground and we are winning business in the UK. I mentioned the smart metering contract as just one example, on the healthcare side we won two of the three contracts that were awarded there. So we have got some good momentum on the ground, and the book-to-bill in the UK in the first quarter was 117%, so again the outlook there I think is promising. As the topline starts to return there as I mentioned, it does tend to drive up utilization and that ultimately ends up in increased earnings.

Great. And then in Canada we had some sequential revenue growth as you highlighted, margins continue to be very strong there. So how should we think about the top line given some of the bookings in recent quarters? Should that return to better growth as we look out through 2014?

Well, that is certainly the goal. I mean I am not one that accepts that Canada is a mature market and there is no growth there. I would believe that there is growth opportunity there. I think what I was trying to telegraph we think that there is some stability now building in there in terms of bookings. We would expect our bookings to continue to strengthen in Canada, and as I said over time that translates itself into revenue.

I think the second point is that our Canadian team has done an excellent job of actually qualifying revenue to ensure that it is in areas where we can bring significant benefits to our clients and to our shareholders. So they have found a very good balance there in terms of earnings and margins. On the revenue side, as I said over time we see more opportunities. The funnels are increasing, and that should translate into some gradual growth in the top line in Canada over time. We are also looking at a number of deals that could bump that up, in terms of longer term deals, but as I mentioned they take some time, and they tend to be lumpy.

Great. Thanks, Mike. I will pass the line.

Great. Time for one last question.

Thank you. Our last question is from Michael Urlocker from GMP Securities. Please go ahead.

Thank you. I just wanted to make sure that an important point isn't lost in the discussion here. To go back to the comment David made, I thought I heard you say that cash from ops should trend towards CAD300 million per quarter. Was that what your point was?

Correct. And we will see that in the chart that was provided.

Okay. And when you say CAD300 million per quarter, that is including any restructuring or one-time charges or disbursements on severance, et cetera?

To get there we will be looking at having those behind us.

Okay.

We have about CAD54 million left to be spent.

Okay.

We have paid out about CAD368 million so far, so then we just have the difference between that and the CAD525 million. So it will still take us part of this year to get that behind us, but we do provide to you the information on a quarterly basis as to what is being expensed and what is being paid out, so you can do your own assessment.

So a substantially strong cash generating business is probably a pretty good indicator of the health of Logica acquisition, I guess?

Exactly. Exactly.

Alright. Thank you very much. I do appreciate you making that precise.

Thanks for the follow-up, Mike.

Thanks Michael, and thank you everyone for joining us.

We will hopefully you will join us for our AGM this morning, otherwise next quarter will be at the end of April. Thank you.

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