CGI Inc (GIB) 2014 Q2 法說會逐字稿

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

Thank you, Melanie, and good morning. With me to discuss CGI's second quarter fiscal2014 results are, Michael Roach, our President and CEO; and David Anderson, Executive Vice President and CFO. This call is broadcast on CGI.com and recorded live at 9 AM. on Wednesday, April 30, 2014. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q2 MD&A financial statements and accompanying notes, all of which are being filed with, both, with Sedar and Edgar.

Please note that some statements 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 our press release, as well as on CGI.com. We do encourage our investors to read it in its entirety.

We're reporting our financial results 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 on this call are Canadian, unless otherwise noted.

David will first review our Q2 financials, then, Mike will comment or our strategic andoperational highlights. With that, David?

Thank you, Lorne, good morning. I'm pleased to share the financialdetails of another good quarter. Second quarter revenue was $2.7 billion, up 7%, compared with $2.5 billion in the year-ago period. Foreign exchange fluctuations, favorably impacted revenue by $236 million, or 9%, compared with the same period last year. Adjusted EBIT was $341 million, up 31% versus last year, while our EBIT margin of 12.6% increased by 220 basis points.

Net earnings were $231 million, or $0.73 per diluted share, compared with $114 million, or $0.36 in diluted EPS in the yea-ago period. Similar to previous quarters, we have, specifically, itemized the impact of the integration related expenses and any one-time tax adjustments on our net earnings, as the amounts were not related to operating activities.

In Q2, the integrated related expenses were $26 million and we had a benefit resulting from the settlement of a tax claim for $11.9 million. Subsequent to the finalization of the Logica purchase price allocation, and according to GAAP, the adjustments to the acquisition related provisions must flow through the statement of earnings.

During the quarter, we had realized such benefit in the amount of $11.7 million, to provide a better basis for better intra-period comparability, we have physically disclosed this impact.

Excluding specific items, namely the integration related expenses, the one-time tax benefit, and the adjustments to the acquisition related benefits, net earnings were $230 million, $0.72 per diluted share. This compares with $176 million, or $0.56 in the year-ago period, representing an earnings improvement of, approximately, 31%.

Let me, now, take a minute to walk through where we stood at the end of the Marchquarter, relative to the $525 million Logica integration budget. $497 million, or 95% of the budget, has been expensed to date, and $418 million in cash payment, or 80% of the budget, has been dispersed, including $50 million in Q2. All remaining integration expense also be incurred apt the majority of the cash dispersed this year. More details can be found in the MD&A.

Cash generated by operating activities was $351 million in the second quarter. The sequential improvement in cash was largely driven by the completion and collection related to some largebuilding milestone. This drove of reduction in our DSO from 55 days to 47 days, back in line with our 45-day target. When you add the $50 million of integrations related payment, I just described, we reached$400 million in cash generated from the operations in this quarter. A detailed bridging schedule showing the impact of all moving pieces on our cash from operation can be found in the MD&A, as well as the slide deck we posted earlier this morning.

As we have said many times, given the fluctuations from quarter-to-quarter, we suggest that investors analyze cash generation on a trailing12-month basis. With that in mind, excluding the integration related cash disbursement, our trailing 12-month cash from operations is $949 million, or $2.98 per diluted share.

Turning to the balance sheet, net debt stood at $2.7 billion at the end of March, representing a net debt-to-capitalization ration of 35.6%, down from 39%, sequentially, to 43% year-over-year. At the end of the quarter, we had, approximately, $1.5 billion of liquidity available to continue possibly growing our business.

Now I'll 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 execute our business model on a global basis for the benefit of our clients and shareholders. As European comparisons become more meaningful with each quarter, the significant, positive impact of our integration plan is, now, more visible at the operating level. In other words, the expected benefits continue to materialize.

During the quarter, the Company booked $2.9 billion in contract awards, of which 40% were new business. This represents the book-to-bill ratio of 105%, both, for the quarter and on a trailing 12-month basis.

Revenue of $2.7 billion in the second quarter is up sequentially and year-over-year, reflecting our ongoing ability to convert and expand the pipeline of opportunities into bookings and, ultimately, high-quality revenue. In addition, the planned runoff of low- or no-margin business across Europe was more than offset by a FX tailwind, as global currency strengthened significantly against the Canadian dollar during the quarter. The magnitude of our planned business runoff is diminishing, while the positive impact on the bottom line is becoming more apparent.

As I mentioned previously, one aspect of our strategy to increase the quality of revenue, beyond project runoffs, is the divesture of businesses, which are not core to our client value proposition, or that are underperforming. In this regard, to-date, we have divested, approximately, $24 million of annual revenue, which was generating a negative 12% margin. This is an ongoing initiative as we continue to identify areas of the business that meet our divesture criteria.

Adjusted EBIT grew 31% year-over-year to $331 million, representing a strong 12.6% margin and driving EPS improvement of 29%. We continue to focus on the fundamentals required to meet or exceed our goal of realizing $375 million in annualized cost savings, as articulated in our integration program. Cash generated from our operations was $350 million, and over [$400 million] excluding integrations related expenses. This is indicative of the effectiveness of our business model, the quality of our contracts, and our ability to generate increased cash from operations, as we complete the $525 million investment embedded in our integration program.

In Europe, quarter two book-to-bill was 125%, marking the third consecutive quarter above 100% and was evenly distributed across the key operating segments. As I mentioned on our quarter one call, while markets across Europe continue to strengthen, we remain focused on focused on signing clients to longer-term contracts, adding high-quality backlog necessary for profitable growth and operating stability.

A good example it our UK operation, where after pruning a significant amount of revenue base of low-margin business, posted constant currency growth of 2.5%, while EBIT grew by 32%.

Adjusted EBIT across Europe was up $82 million year-over-year, to $208 million, representing a margin of 12.7%. European revenue and EBIT accounted for 61% of the global totals, demonstrating the effectiveness of our integration program and our ability, over time, to improve the fundamentals that underpin our acquired business.

In summary, these actions, when combined with strengthening market conditions, create additional opportunities for us to continue to improve our performance over time.

Now, turning to North America. Revenue in Canada was essentially flat, both sequentially and year-over-year; however, book-to-bill was an impressive 121%, the highest point in several quarters. As mentioned previously, in addition to targeting new clients, we're, also, focused on successfully renewing and extending existing relationships with marquis accounts across Canada. As an example, I would draw your attention to the recent extension to 2026 of our Wealth Management work with the TD Bank Group.

Adjusted EBIT improved by $20 million year-over-year to $94 million, representing a margin of 22.3%. This industry-leading profitability reflects an ideal mix of long-term recurring revenue, IP-based services and solutions, and an ongoing commitment to operational excellence.

Consistent with last quarter, US operations were impacted by the temporary imbalance of resources assigned to projects with major milestones, notably, state healthcare exchange work. In addition, utilization's rates were temporarily impacted by our wind down of the work that we successfully executed on the Affordable Health Care project. We made important progress with these clients in quarter two, to better align expectations and clearly outline deliverables within a financial framework designed to reduce financial exposures. With delivery commitments complete or in transition, we expect US margins to trend back upward for the balance of the fiscal year.

Similar to our competitors operating in the Federal Government market, CGI's federal performance continues to be impacted by budget headwinds and ongoing delays in procurement decisions, which resulted in most bookings being bridges or extensions to existingcontracts. Currently, we have $1.5 billion in bids submitted and awaiting award, of which, more than half are expected to be awarded in this current year.

Our analysis of the federal marketplace supports the view that our level of recurring revenue, combined with a diverse book of business, has better insulated us from the current market conditions, when compared to the pure play government companies. We continue to see commercial activity picking up across the US as clients increase their technology investments. The result is an expanding commercial pipelinewith notable strength in the financial services and manufacturing. In fact, more than half of the deals are expected to close across our enterprise market during the second half of the fiscal year are in the commercial sector. It is inline with our balanced global delivery model, we're making additional investments to build out our onshore, global delivery network, by investing in New Center in Lafayette, Louisiana.

This represents our fifth onshore center in the United States, and brings with it an increased ability to offer our clients, both government and commercial, greater value in terms of their delivery options, adding to our ability to win new business. Finally, I want to reinforce our commitment to remaina well-managed and financially strong company, delivering superior results over time. Consistent with this philosophy, we are committed to focus on the fundamentals that are necessary to create and share wealth with our investors.

Accordingly, I would like to take this opportunity to reinforce that we are not compensated for performance that is advantaged or disadvantaged by currency gain, one-time tax benefits, or adjustments to acquisition related provisions, as was outlined this quarter. Thank you for your continued interest and support. Let's go to the questions, Lorne?

Just a reminder, a replay of the call will be available by our website or dialing 1-800-408-3053, using pass code 9676329, until May 9. As well, a podcast of the call is available for download within a few hours. Any follow-up questions can be directed to me, as usual, at 514-841-3355.

Melanie, if we could poll for questions from the investment community, please?

Thank you. We will, now, take questions from the telephone line. (Operator Instructions). The first question is from Jason Kupferberg of Jeffries. Please go ahead.

Hey, guys, thanks. Nice job on the cash flow overall here for the quarter. Good recovery there with the DSO.

I did want to ask you about the disclosure about the receivables that you sold, I think about [$75 million] in the quarter. I guess that gave some of the quarter-over-quarter benefit in cash flow. Can you talk a little bit about the nature of those receivables and whether or not you intended to, potentially, intended to sell any more receivables during the rest of this fiscal year?

Thank you, Jason, for the question.

We do, as a matter of course, have some factoring or receivable programs in place, so there was just one particular one that was of a little bit of a larger size that we had specifically called out and here disclosed. It is something that this one is an annual activity. We were expecting to have the cash in before the end of March. It will be receiving it in this next couple of weeks here, and I don't really see it as being a major issue. I don't see it as an issue at all.

It's just something that we are looking at trying to optimize the cash going forward, and from a cash flow prospective, the amount of interest we actually have to pay on this for the discounting is, actually, lower than the credit facility, so it comes up with a better financial solution for to us have done what we have done here.

Okay. So, in other words, you've done some other similar types of sales in the past, just on a smaller scale?

Yes, they are.

Okay. And can you just talk about some of the other portions of the working capital aside from receivables? Obviously, receivables was the huge source of improvement, the DSO came down, which was great, but I'm trying to get a general feel for how you guys think cash flow may play out in the second half of the year? I know you've talked about eventual and, kind of, annual targets of, roughly, $1 billion in operating target cash. I'm not sure if that's realistic for this year, in particular, but how should we be thinking about, directionally, the cash flow trends in the back half, putting side the remaining integration payments?

I think here, again, as I have stated in the past, is that over the longer term, and over the 12 months, that's why we keep focusing, people looking back at 12 months worth of cash generation, not just on the quarterly basis because of some of the variations that can happen in the quarter, is that the change in the working capital, itself, should pretty much balance out over the 12 months. If you take a look at the chart that was posted with the deck this morning, it does try to highlight what the net earnings are, what the non-cash items are, to come up with a number before the working capital, and that should, at least, give you a base from which to go from, and then with that, you can adjust it according to where you think that the integration payments are going to be coming versus changes in the cash flow over the quarter.

Again, with milestone buildings, et cetera, it does have the tendency to have some variation on a quarter-by-quarter basis, but should, roughly, balance out over the 12 months.

Okay, just to quickly switch gears onto the top line. I thought the UK comments were interesting case study, in terms of how you've repositioned the portfolio, and I think you mentioned that you did generate positive constant currency growth there. Overall, obviously, constant currency was slightly negative this quarter.

How are you guys thinking about trajectory going forward there? Because it does sound like you're getting closer to the pruning of the lower margin business in Europe. Should we be thinking over the next couple of quarters, the overall number can get into positive territory in constant currency terms?

Currently, this is what we would hope for. I think what I was telegraphing that it's starting to diminish, so, in fact, the UK side, we've now switched over to positive growth.

Again, clearly, the integration plan, Jason, as I articulated over the last couple of years, is that once we bottom out there, we should start to see us gradually turning the corner. And that's why in the second year of an integration, we're focusing heavily on the business development side of equation and, accordingly, you're seeing the impact of that on the book-to-bill in Europe, and eventually, that will flow down to the top line growth.

So, that's the track that we're on. Again, it takes some time and I, also, called out this time because I don't often talk about it, but meanwhile, in addition to just the running off these low margin contracts, we, actually, have identified a portfolio of assets, do not align to our customer proposition, or that are not as profitable as they need to be, and we're steadily divesting those. Individually, they're quite small, but collectively, as I say, they're $24 million a year, with a negative margin of 12%.

Believe it or not, as we divested that, we actually got cash back for that, not a significant material amount, but net-net; a good business proposition for the Company. So, yes, the intent is, as we bottom out, as the effort on business development takes hold, as that book-to-bill transforms into top line revenue, we hope to cross over.

Okay. Thanks for the comments, guys.

You're welcome.

Thank you. The followingquestion is from Maher Yaghi of Desjardins. Please go ahead.

Yes, thank you for taking my question. I just want to say, guys, for a company that generates [$10 billion] in sales, your disclosure of a few hundred, [$10 million], $50 million of changes quarter-over-quarter is somewhat very good, and I applaud you for that intricate detail, in terms of disclosure, which, sometimes, people can take negatively, but overall, I think it's good for investors.

Thank you for that, and we take that very seriously. I think it's, also, important that investors understand what the pure operations are generating, as I say, excluding things like tax benefits and these types of things.

So, just when we look at the business in general in Europe, we're seeing nice improvement. I just want to go back, maybe, to the US side. On the defense side, we've seen results from competitors highlighting some delays in contracting work on the defense side. Can you talk a little bit about -- you mentioned the backlog there, sitting, potentially, with contracts' awards coming in, in the second half. Can you, maybe, talk a little bit about your expectation for the US business and how you see it improving, potentially, in the second half, in terms of margins, as well?

Well, again, first off, you know, my assessment, and I just came back from our quarterly Federal Subsidiary Board meeting, and it's quite apparent that the impact of the budgeting exercise in the US continues to push work to the right for the whole industry, and while we clearly see some year-over-year pressure there, our assessment is still that our mix of business, split between both defense and civilian, our high recurring revenue, our mi x of IP and services, still puts us in much better shape than some of the pure plays who are much heavier into the areas of defense and to some degree, civilian that turned out to be much more discretionary in the areas we're in.

So, while we expect some top line pressure year-over-year in the federal business, we still believe that we can generate some healthy margins there, and the associated cash. Whether this thing will actually break loose in the fourth quarter, I don't expect to see a lot of awards in the third quarter there; is some sense that maybe in the fourth quarter some of the budgeted money will have reached the operating level and that the contracting officers will be able to start moving away from extending existing contracts to new awarding new business.

My own feeling right now is not likely to happen in the third quarter; it could happen in the fourth quarter. So again, our focus in the federal business is to continue to work very closely with our clients, probably bid more of the task orders, the smaller, quicker turn task orders that are available under the significant amount of vehicles that we have. As you know, we've got about 50 vehicles to bid on, so I think we can do more there in focusing on task orders while we wait for the pipeline to begin to clear.

On the other part of the US business as I mentioned, we've been impacted by the need to dedicate more resources to projects that have major milestones that are, also, linked to our cash. And, again, I highlighted the state exchanges, but on that front I feel better about where we are now. I think we've made a lot of progress with the clients in the second quarter.

We have a much better alignment on our expectations and responsibilities between us and our clients. We have a much better handle on the deliverables, and we've attempted to work in each of these cases, within a financial framework that's really designed to the extent possible to limit our exposure, really, to the first half of the year, and put us in better shape in the second half of the year to actually see a recovery in our revenue and margins in the US.

Thank you.

Thank you. The following question is from Richard Tse of Cormark Securities. Please go ahead.

Yes. Thank you. So, Mike, ow that you have Logica, pretty much,it looks like, under your belt, what do you see as of other opportunities for acquisitions here over the next [12 months] to 24 months?

Well, as you know, our industry continues to consolidate. The announcement is another piece of a consolidating a puzzle here. I would say that, as I've said before,we're still, obviously, very interested in acquiring assets that are in line with our overall strategy. We continue to analyze, and study, and discuss with other businesses what their long-termstrategic aspirations are and we how we could meet them together.

My sense is that in the near term here, we're, probably, more focused on discussions, and our management and leadership time is focused, really, on completing the Logica acquisition, slowly bringing down our debt, buying our shares, as opportunities present themselves, and really continue our work on ensuring that the operating model is optimal. While we've made significant progress in Europe, and again, I really applaud the Team we've goton the ground there, there are still opportunities there to improve.

I think as we've now put in our financial system around the world, our line operating people are in a much better position to identify opportunities here to drive performance. I think from a shareholder standpoint, wecreate more value here by continuing our focus on the operations for the next six months, while continuing to analyze and have discussions for assets that might be interesting to us, should the opportunity come forward. Again, US is a very accretive place for us, in terms of an acquisition, and again, IP-based services and solutions are, also, an area that have great interest to us.

Maybe one other thing. One of the trends we'reseeing globally, now, is many international companies are consolidating the number of vendors; in some cases, going from hundreds of vendors down to 15, or in some cases less.

One of the things we look at is, frankly, some of those smaller vendors that may be currently working with a client, who may have unique industry expertise that benefits the customer, these are, also, companies we will look at in terms of acquiring them, and in doing so, add to our business knowledge, add to our benefit to the customer, and in the process, improve our chances of making that short list of preferred vendors.

Okay. Then, let's go back to Europe. You guys have target operating margins, I suspect there. Like, how close are you to getting to that point? Or is there still stuff that you're still uncovering?

Again, I think honestly, Richard, there's always things we uncover. The thing we've got to continue to work on is anticipate opportunities, get on them faster, and that takes time, that takes experience. It takes time for people to work with the information that the systems are now producing. So, again, my sense is there will be fluctuations in the margins in Europe.

For example, I think a quarter coming up, there's three less billable days in France, for example, because of holidays, so there will be some seasonable adjustments there. But, again, what I'm pleased about is, if I look across the European operations, we started to build some consistency here in our ability to continue to generate very solid margins across Europe and across the various countries that make up our European business.

That's great, thank you.

Thanks, Richard.

Thank you. The following question is from Justin Kew of Cantor Fitzgerald.

Thank you very much for taking my questions. Michael, just if we look at EBIT margins in France, they were particularly strong at 17.5%. Was anything in that, where that stood out? You talked about days going down, there could be some top line compression there, but was there anything that stood out in the quarter for France?

Well, again, first I want to say that the France operation has been a very strong performer within the integration.

There's a lot of time and material business there and, of course, as you increase your utilization rate in that line of business, your margins increases, but as we pointed out in the MD&A, there was an impact relating to the reversal of the acquisition-related provision adjustment in France in the month. This is one of the reasons, again, we're very transparent, so that you're able to understandwhere those type of adjustments are actually impacting EBIT and, ultimately, the net earnings.

So, again, solid operations. Obviously, a temporary uplift in the quarter associated with that reversal.

Okay. Then, just going back to Richard's question, in terms of seeing acquisitions andopportunities on the acquisition side, where are you seeing those? With the large, now, base on the Logicaside, do you see more opportunity with, kind of, tuck-in acquisitions on the European side, as well as the US side?

Yes. I think if I could give you a bit of a context. I think if you look at the Company's acquisitions over the last ten years, we've, essentially, been growing very wide. We've been extending our footprint, and our reach in the markets that our customers are operating in, and in doing so, better positioning us to retain those clients and grow our share of wallet with them.

Our sense right now is that we should be going deeper into various verticals in which we operate, and again, I give you the example of various customers in manufacturing, or finance, that are consolidating vendors, and picking up unique or competitive skills and knowledge through tuck-in acquisitions that better serve those customers, and those vertical is important to us.

IP-base services and solutions are very important to us. As I mentioned numerous times, we, now, have a much larger market and network to pull through services and solutions associated with IP, which makes the opportunity for us to acquire in that area and reach our accretion goals much more realistic now, post-Logica, than it was previously. So, we're looking at those other areas.

On the other side, though, we have to keep our eye on the type of transformational deal, ala Logica, that might become available that would allow us to take another, kind of, large step forward in building out our capabilities and footprint around the globe.

Okay, good. Thank you. And just final question. The US side, we should see an uptick in the second half. What is the quantum of how that plays out? Do you think it's linear between Q3 and Q4? or is it more Q4 weighted?

It will be gradual. What we attempted to do here was, frankly, limit the kind of impact that some of these contracts are having to the first half of our year, and to put this behind us and move forward to a more normal state, if there is such a thing in our business in the US.

I mean, I have to kind of reinforce again, we have a great franchise in the US run by very, verygood people. Clearly, some of the work around the health exchanges have temporarily had an impact on the business; but, again, much like the federal side, we're confident that we can work through this and put the customers and us in a better place.

I'll take the opportunity, again, to reinforce, despite what you hear in the papers, we have not been fired from any health exchange. We have not received a letter of termination for cause, or convenience, from anybody. So, the reality on the ground versus the perception in the press, there's a big gap there. We're dealing on the reality side here, and we're taking what I consider prudent business actions to ensure that, as I mentioned, that we have a better alignment of expectations, and that we're clearer on what deliverables need to be realized, all within the financial framework here, and to ensure we get paid for the work that we've done.

So, we're working through that. Obviously, a conference call like this is not the place to go deeper into it, but I just want to reinforce again that our Company, when it comes to the health care business, was hired by the federal government, and numerous states, and we have not been fired anywhere.

Thank you very much, Mike.

Thanks, Justin.

Thank you. The following question is from Scott Penner of TD Securities. Please go ahead.

Thanks. Mike, could you spend just a minute and describe the US Government project from Stanley that's mentioned in the MD&A?Whether this is a deal, for instance, where a renewal, maybe, didn't meet your hurdles and is being discontinued?

Then, any sort of help you can give us to quantify the impact and whether this is something that will impact the next three quarters, year-over-year over comps, for instance?

That's a good question, Scott. Again, in full transparency, this was, probably, the last significant piece of the Stanley acquisition that really fell into the category of significant revenue, very low margin.

Again, in our approach to acquisitions, in some cases, you have to let those contracts run to term because you can't sit down with a customer and say, I don't like the margins, I want to wrap it up now, especially when you're dealing with a marquis client such as we are with the US Federal Government.

So, this contract has been running down for two quarters or so, and what is happening is that in this quarter, it finished, and to give you some idea. the contract value is, roughly, $100 million. But during the runoff period, our Team on the ground was able to back fill about $80 million of other higher margin business. So, again, as is happening in Europe, in this case, we took a hit on the revenue, temporarily here, because, again, our intent is to continue to back fill revenue with higher quality revenue, but actually our margins and our cash flow actually improved as a result of that situation.

Okay, that's helpful. Just --

Those are annualized numbers, obviously.

Right. Just on the same kind of theme, maybe this is something better for David. Just looking at the go-forward EBIT margins in Europe, you called out the [$11.7 million] adjustment that's in EBIT, but just in reading the MD&A, there's, obviously, that [$10.6 million] in France from the renegotiation. Is that a one-time item; or is the [$11.7 million], kind of, the adjustment we should make when thinking about going forward?

The [$11.7 million] is all of the geographies and it is, really, related to what we had called the PPA, these are the acquisition related propositions. So, had we not had the one-year cutoff, these would have been items that would have gone against the balance, not having the benefit of flowing into the P&L.

There are some other actions that we've taken, some in France, some in some other geographies that we called out here, that are more one-time items, which is why we itemized them in the MD&A, so that you would get a better prospective of what out periods could look like. So, again, just trying to give you some transparency, some visibility, so you don't run off thinking that France is going to be able to repeat a 17.4% EBIT next quarter.

Even my own prospective is that's a couple of points too high, but we want to give you some number so you can make your own estimates and judgments from that. Mike also mentioned in case of France, there's going to be threevacations days coming up in May, which we're keeping a close eye on, just to try to understand what the financial impact will be of those.

Just to add to that, a number of those items, like the rent one, are actually part of our integration program. So, what you'll find is a number of those, and we did call out, throughout the whole time, that during the leasing rent part, there were items that would take longer for us to actuallymaterialize the benefit. So, that's one example.

Another example would be the action we took in one of our geographies to address a wind down of a defined pension plan. Again, these are things that we've identified, have done in North America, to limit ourexposure going forward, but it does take time to actually execute those. So, again, as they get executed, as part of the integration plan, you'll see those benefits appear in the various geographies .

Mike, do you have the -- of the bookings in Europe, the percentage of what was new business this quarter?

Yes, both 45%.

Okay. Thanks, guys.

The flip side of that is the renewal rate is extremely high and, again, we've been able to shape those deals better, in terms of bringing benefits to the client and margins to us. And, again, one of the things that we've made significant progress, and that's what you're seeing in these EBIT numbers in Europe, as we have driven down the SG&A and overhead significantly, over, I would say, at least, five points, which again, you're seeing that drop right to the bottom line and, also, making us more competitive in terms of recompetes and new business.

Great. Thank you.

Thank you. The following question is from Paul Treiber of RBC Capital Markets. Please go ahead.

Thanks very much. On the US business this quarter. Could you clarify, were there any unusual charges or write-downs that impacted the margins this quarter? Then, related to that, could you remind us at what point you would write-down aged accounts receivables?

Aged accounts receivable?

I don't write those down because I go and I collect them.

We don't have a habit of writing off aged receivables here, Paul. You know, I guess the only time that would ever come is if the customer was out-of-business, but for the most part, we have very good contracts and we have good processes to collect our money.

In the US, as I said, we took action in the quarter that was designed to design our future financial exposure. We don't disclose individual provisions against contracts. Obviously, this is something that we do, if we feel there could be a risk going forward, but as a normal course of business, it's, obviously, not something that we would put out there for our clients to see, especially if we're in discussions, but, clearly, that action did impact the performance, both, top line and bottom line in our US segment.

Accordingly, hence when I look forward to the back half, if we've been successful in containing it, which I believe we've taken significant steps to do so, hence, the expectation that the business will rebound to a more normal level in the back half of the year.

If I could just maybe add to that. There's a principle that accountants have to follow, which is to recognize all losses and book them in the quarter that they can be estimated, but if you've got future gains, you cannot book those. So, what we've done here, very simply, is we've come up with our estimates as to what we think the financial impacts are of these projects.

We've had the discussions internally as to how is it really the right estimate? Then, we have recognized that in these accounts, and I think that's pretty much where we are right now. Time will tell as to how good our estimates were.

Okay, thanks for walking us through that. More broadly speaking. Some of your peers have mentioned there's pricing pressure in application outsourcing. Could you remind us how large is your application outsourcing business; and if you're seeing any pricing pressure in it?

Well, again, as I said a couple of times, Paul, as long as I've been CEO, there's constant pressure on the pricing because, in fact, there are more levers than enablers for companies like ours to reduce costs and bring more value to our clients. I'm not seeing any predatory pricing moves by anybody out there.

The application maintenance is, obviously, in the area that falls into that first category, where there are more enablers to bring down the cost to the client of application maintenance. Again, I would refer you to our decision to open a fifth center near our home shore center in the United States, in Lafayette. This type of operation allows us to get a better handle on our costs on the long-term, and allows us to be more competitive in terms of bidding.

There's, also, a lot more, I would say, process improvement in disciplined around application management today than there would have been three or four years ago. I think a lot of companies, including us, have invested significantly to improve productivity in that area, and in doing so, contributed to continuing downward pressure on the top line in that area; but, also, in my view, over time, really creating more opportunities in a very large market.

I would say our application maintenance, Lorne may be able to get back to you on it, but I would say is probably 30% or so of the revenue.

That's about right.

Whenever we are looking at larger bids to come through for application maintenance, we do take it upon ourselves to challenge the Team, if we have enough working done through the home shore or offshore operations. So, if you remember, Mike, we have a fairly large operation in four cities within India; we've got large operations in Philippines; so, we do have offshore capabilities that can make the solution that we make our clients more competitive.

Just, lastly, on the cross-selling of Logica IP or CGI IP into each others installed base, it seems like the pickup in the US commercial space is a good opportunity do this. Also, you're approved for cloud services in the US federal space. Could you update us on where you stand in that process?

Well, again, we're still, I would say, at the early stages, in a sense that where we are, I've mentioned, we've identified all of the IP. We're segmenting it in IP that requires investment to either bring it up to technology standards or to make it more acceptable in the market.

We're, also, looking and are making investments in taking a portion of that IP globally. And in Europe, we have identified a pipeline now of IPs that would have originated out of CGI classic that is already fitted to work in the international markets.

A good example of that is our Trade 360 offering, which is a SaaS offering. It all ready has a global footprint. And, now, with Logica, we have a deeper client base, so we've put that in front of a number of clients. We have a pipeline there we're tracking very closely. We have the same in collections, and on the other side, Logica has solutions in the financial vertical, Best, which is a payment service and, also, a fraud system that is very competitive in that space and, also, an area where financial institutions are looking at very deeply.

It's work in progress, but again, we've made significant steps here, in terms of identifying the IP, and making the investments, which by the way, back to the whole discussion on cash, it's consuming cash, obviously, but our strong belief is that this part of our strategy is very, very key to us continuing to build a very strong, recurring revenue base; having a deeper relationship with the business side, in addition to the IP side that we already have with customers; and, also, helping us to increase, both, margins and cash flow over the long-term.

Okay, thanks so much. I'll pass the line.

Thanks, Paul.

Thank you. The following question is from Thanos Moschopoulos with BMO Capital Markets.

Hi, good morning. Mike, you touched on the outlook for the US federal and US commercial businesses. I don't think you touched on what you touched on what you're seeing in the state and local, so could you provide some commentary on that?

I think if you look beyond the health exchange business, in some cases, there are opportunities there for some follow-on business, probably wouldn't get as much publicity as it would under normal circumstances, but again, we are the experts in the health exchange business, so we have opportunities to continue to leverage that expertise, but beyond that, I would remind you we have a very deep portfolio, especially on the IP side, that relates to the state business. Our advantage ERT is, still, the leading ERT in the state and local business.

We've put it on the cloud, so we've gone down market on that. So, again, we're going to continue to see wins and bookings in that at area. And, of course, on the tax side, we continue to work hard with California and present our capabilities to other states where we can help them collect previously-uncollected taxes. And we're, also, looking at leveraging a solution that we built in Canada here that helps governments address lost taxes in restaurants and other establishments where people may pay cash. And the work we've done in there would demonstrate a very significant and immediate payback of that solution. So, we're looking at how do we get that solution out? Not only in the US, but globally.

Our franchise in the state business is strong. We like the state business, as you can determine, we have very good relationships with many large states, including California. And, again, if you've seen the announcement with Lafayette, you can see again that we have a very strong support in a number of key states for our company and for the products and solutions that we bring to that segment of the market.

Great. Just one last one. In Canada, you keep surprising us in terms of the strong margins and EBIT contribution there. In recent quarters, has that been a function of operational efficiency on the cost side; or more function of the revenue mix in driving up the IP component?

It's probably more of the revenue mix. In some areas, in Canada, we still have an opportunity to increase our utilization rates. In our business, frankly, that's the biggest lever we have to drive margins, so it's an area not only in Canada, but around the globe where we focus very heavily in ensuring that we know whose unbillable, who should be billable, and to call out the plans to increase utilization amongst the designated workforce.

So, in Canada, even though we're operating at those margins, we continue to look at utilization. I would also say that, I didn't comment about it, but across the Company, the amount of projects that we have in the red status that relate to financial pressures have come down massively over the last 12 months, and as a result, every time we address that with a customer, we get healthier on the bottom line.

This is a constant focus for us, so you will see, various quarters, where a number of those projects gets resolved and the financials begin to get better, frankly, very rapidly, because we're no longer transferring wealth from our shareholders to the customer shareholders. We're delivering value to the customer and value to our shareholders, so that's another impact that I would say has helped us drive the kind of margins that we have here across the globe so rapidly.

I, personally, spend a lot of time every month walking through these projects and really ensuring that we're aggressively addressing problems rapidly and correcting them to put us in better shape. That's still a big opportunity because it's not only projects where you're losing money, as I've explained before, there's margin leakage where we're delivering the project profitably, but not at the profitable thresholds that we build into the business case or the customer proposition.

That represents a huge opportunity in all services of businesses, and one that we're, particularly, I think, early adopters at focusing on that as a source of creating additional value for the shareholders. And, again, also for the customers because customers don't like to be disappointed. They need us to deliver on time and on budget, and that's exactly what we're committed to doing.

Great, thanks, Mike. I'll pass the line.

Melanie, we'll have time for one last question, if there is one?

Certainly, thank you. The following question is from Michael Urlocker of GMP Securities.

Thank you very much, I'll be as quick as I can. I wanted to ask about two areas of the business that are, probably, not especially meaningful financially, but I think they would help us understand the business opportunities. So, Michael, when you acquired Stanley a few years ago, I think at that time, the Canadian Defense Department of National Defense business was zero or close to zero for CGI. I wonder if you can describe if there's been any improvement there or what the prospects are?

Again, Michael, to be clear, we have not made the progress that we had anticipated there. The procurement environment in Ottawa is much different than what it is in the United States.

Canada continues to procure, I would say, manpower on an input basis versus an output basis, so, that has not generated revenue up to the expectation that we've had. On the other side of the more of the civilian side of the Canadian Government, we continue to find opportunities in there through the shared services and some of the transformational work that they're doing on the civilian side.

If I were to hazard a guess, as a Canadian taxpayer, I think we might assume that this tells us a little bit more about Canadian DND procurement than anything else; is that fair?

A lot of things in life are fair and unfair. I'll leave you to your opinion.

In a business, at some point, you have to allocate your resources where the return is the greatest, and while we continue to look at opportunities in that space, most of our attention in Canada has turned to the civilian side, where there's a lot more investment going on in terms of transforming the government into a shared services entity.

Thank you. Another one that's a small part of your business, but it might be instructive. I did pass through Holland a couple of months ago and managed to sit down, not with CGI people, but others in the IT Services industry, as I'm sure you can appreciate, the Netherlands as a small country, so anybody's business seems to be well-known, and the sense from the industry in the Netherlands was that CGI's operation and acquisition of Logica was performing exceptionally well. And there was a funny commentary that as a foreign owner, CGI seemed to have an appropriate and respectful approach to allowing local management to run the shop on an optimal basis, you know, so to speak without interference.

I wonder if you could put that into a context for us?When you look at your full performance in Europe in the Logica acquisitions, is the Netherlands' operation especially more effective than the rest, or is this just on par that all of the units are now coming to perform strongly?

Again, I would say two things there, Michael. The kind of feedback you got is in line with our operating model. I would say that, I could stand to be corrected, but I think this is the first year in three years that Logica/CGI combined would have made money in Netherlands.

So, again, I think if you look at the integration strategy that we implement, you know the first year is really focused on restructuring the business, addressing the overhead, making the tough decisions that put us in a better competitive position, and also allow local management some breathing space to go the second leg, which is to develop and change that revenue mix, and that's kinds of where we are in the Netherlands.

The Team is working extremely hard to bring on additional top line, and that would be similar in some of the other entities, but I would say for the most part, we've got a good handle on the cost side of the business. We know where there are additional opportunities and we're focused on those,that the real thing, now, is to really participate and drive along the economic recovery that seem s to be underway in some of the key markets in which we operate in Europe.

And I think that gives us a very good opportunity. We did some internal analysis, in terms of had we looked at acquiring Logica against today's valuations, and our sense is that we would have paid closer to $7 billion, as opposed to [$3 billion]. So, I think our sense is there is significant value in that asset and our teams on the groundare working extremely hard to surface that value. It will take time, but we're convinced that the actions we took in the first 12 months have laid the foundation for us to take the business into a more consistent, higher level of performance over time.

Thank you, I do appreciate that and those observations.

Thank you, Michael. Thank you, everyone, for joining us and I do hope to have you back again at end of July for our Q3 results.