CGI Inc (GIB) 2014 Q4 法說會逐字稿

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

Thank you, Maude, and good morning. With me to discuss CGI's fourth-quarter and full-year FY14 results are Michael Roach, our President and CEO; Francois Boulanger, Executive Vice President and CFO; and David Anderson, Executive Vice President and former CFO, retiring at the end of January. This call is being broadcast on CGI.com and recorded live at 9:00 AM on Thursday, November 13, 2014. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q4 and full-year 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 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 are reporting our results in accordance with international financial reporting standards, or IFRS. As before, we'll 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. Francois will first review our fourth-quarter financials and then Mike will comment on the full year along with our strategic and operational highlights.

So with that, Francois?

Thank you, Lorne, and good morning, everyone. I am pleased to review our strong financial performance in the fourth quarter. Revenue was CAD2.5 billion, stable from a year ago. Foreign exchange fluctuations positively impacted revenue by CAD108 million or 4%. On the sequential basis, the seasonal vacation impact and currency headwind of CAD45 million due to movements in the exchange rates of the euro, Swedish krona, and to a lesser extent, the British pound, largely account for the variation. As a reminder, the majority of our revenue and costs are designated in currencies other than the Canadian dollar. While we don't hedge our top line, we have been hedging our bottom line exposure for a number of years through natural hedges and financial instruments.

Adjusted EBIT was CAD370 million, up 18% versus last year, while EBIT margin increased by 220 basis points to 14.9%. Net earnings prior to specific items were CAD234 million or CAD0.73 per diluted share, an improvement of 9.5% from last year. There were two specific items impacting Q4. The final charges related to our integration program amounting to CAD64 million offset by a CAD34 million benefit related to the resolution of acquisition-related provisions. Including these two items, on a GAAP basis, net earnings were CAD214 million or CAD0.67 per diluted share, an increase of more than 50%.

With respect to the integration program, all of the activities related to the cost synergies have been implemented and accounted for. The total cost to complete the program was CAD575 million and includes a negative currency impact of CAD24 million and an additional CAD26 million in saving opportunities action in Q4. In the quarter, we dispersed CAD19 million of cash related to the program with the remaining CAD106 million to be mostly dispersed in FY15. To date, we are running in excess of CAD400 million in annual cost savings ahead of our CAD375 million synergy target.

Turning to the balance sheet, we ended FY14 with a DSO of 43 days, an improvement of 4 days sequentially and 6 days from last year. This improvement was due to large project milestones being reached, filled, and collected during the quarter, as reflected by the decrease in work in progress. Consequently, we generated a record CAD412 million of cash from operations, an improvement of CAD246 million year-over-year. At the beginning of September, we entered into a private debt placement for the equivalent of $855 million with a group of institutional investors. The weighted average maturity is eight years with a blended interest rate of 3.6% or less than 2.5% after tax. The funds were used to reimburse a CAD495 million term loan tranche due in May 2015 and the outstanding balance of our evolving credit facility.

As a result, long-term debt totaled CAD2.7 billion at year end and was composed as follows: CAD1.5 billion in unsecured notes, a CAD1 billion term loan due in May 2016, carrying and after-tax interest rate of less than 2% with the option to make early payments without penalty, and some capital leases and other long-term debt. We also extended the term of the credit facility to the end of 2018 with an option to extend again next year. With CAD500 million in cash, our net debt was CAD2.1 billion at the end of September, down CAD276 million in Q4 and CAD627 million over the year. As a result, net debt to capitalization was 27.6%, down from 46.5% two years ago. With our cash on hand as well as a fully accessible credit facility, we have more than CAD2 billion in readily available liquidity to continue executing our business plan.

I will now turn the call over to Mike.

Thank you, and good morning, everyone. As Francois provided the details of quarter four, I will focus my comments on the full-year results and then wrap up with our FY15 outlook and priorities. FY14 was another transformational and successful year. We demonstrated our ability to implement our operating model, including our management ratios. After executing the largest integration in our history, and realizing the expected operational and strategic benefits, our attention is now focused squarely on profitable growth in FY15, top and bottom line. On the whole, our team delivered excellent results in FY14.

Revenue was up 4% to CAD10.5 billion. Adjusted EBIT, up 26% to CAD1.4 billion. EBIT margin, up 220 basis points to 12.9%. Earnings per share prior to specific items, up 22% to CAD2.80. And cash generated by operations was over CAD500 million to CAD1.2 billion or CAD3.68 in cash per share. Excluding the CAD158 million of integration related disbursements, we generated CAD1.3 billion or CAD4.18 in cash per share. With the cash yield representing 13% of revenue, we have now returned to our pre-acquisition levels affording us the operating flexibility to continue executing on our build and buy strategy.

Turning now to operations. In North America, revenue grew by 2.5% to CAD4.3 billion. EBIT was CAD665 million for a margin of 15.4%, improving throughout the year and exiting quarter four at 18%. We successfully completed the remaining US healthcare exchange projects resulting in a notable performance improvement in the second half of the year. With respect to the US federal government business, despite ongoing industry-wide delays, we continue to improve our positioning by executing a multi-year strategy to earn and win prime positions on key contract vehicles. In FY14, we added four more bringing our access now to 56 vehicles with a combined ceiling value of approximate CAD445 billion. We believe this strategy combined with a gradually improving contracting environment will result in improved performance in this business in the year ahead.

In Canada, revenue of CAD1.6 billion was essentially flat year-over-year while EBIT margin improve to 22%. Our primary focus of FY14 was renewing and extending our long-term recurring revenue base. In line with the strategy, we have renewed and extended more than 60% of our Canadian backlog, including the recently announced extension with Bell Canada to 2026 adding CAD2 billion of future revenue to our backlog. It's worth mentioning had this extension been finalized a few weeks earlier, bookings in book-to-bill would have been materially improved. In fact, quarter four book-to-bill would've been 163% and 116% for the Company over the last 12 months.

Our European teams delivered strong bookings of CAD6.8 billion during the year for a book-to-bill of 112%. Revenue across Europe was CAD6.2 billion and includes a number of moving pieces. The plan to run off, and divestiture of non-core, [our] unprofitable revenue, which was offset by CAD528 million in currency fluctuations. The contract runoffs were one of the factors contributing to the improvement in European profitability during 2014 and these benefits will extend into 2015 and beyond. EBIT was up 47% from last year to CAD692 million, representing a margin of 11.2%, up from 8% last year and putting us in a leadership position among European peers. The strategic importance of completing the integration successfully and in a timely manner was critical. By implementing the CGI model and embedding the management foundation, the baseline is now set for the next phase of our business strategy.

Looking ahead, as we reflect on the markets and economic sectors in which we operate, we remain optimistic. We have the global diversity to leverage opportunities with any client anywhere in the world. In North America, we continue to be confident in our ability to grow organically while incrementally improving profitability. As the US economy strengthens and clients increase investments in technology, we see our commercial activity picking up, evidenced by our opportunity pipeline expansion of nearly 40% year-over-year.

The European economic sentiment is mixed. But our teams continue creating opportunities to get in front of clients earning both mind and wallet share. We continue to capitalize on our global footprint and expertise to focus on industry segments where a stronger economy will help accelerate growth. Within our targeted economic sectors, we are seeing a marked demand improvement in our financial services and manufacturing verticals. On the technology side, clients are asking more and more about digital transformation and big data, while we continue to see momentum and activity in the form of qualified opportunities with our cloud and cyber security offerings. As a further proof point of this momentum, our cyber security business has grown more than 65% over the last two years.

To support our long-term profitable growth strategy, we have put in place a flexible capital structure to make accretive investments. We begin this year with over CAD0.5 billion in cash with the replenished CAD1.5 billion credit facility and with the long-term debt insulated from future interest rates swings locked in at 2.5% after tax. Couple this with our ability to now generate over CAD1 billion in cash per year, we are extremely well-positioned. As you know, our valuation is directly linked to our ongoing ability to generate consistent and significant EPS growth and cash. In fact, over the past five years, both EPS and our stock price have expanded by an average of 25% per year. We remain focused and committed to EPS growth in FY15 through a mix of profitable revenue growth and cost management. Obviously FY14, our focus was on the cost management side.

Going forward and based on our post acquisition experiences, we see the weighting gradually shifting and rebalancing between revenue growth and cost containment and in this case and 2015, we are looking for that growth in the back end of the year and accelerating thereafter as we enter into 2016 and beyond. Thank you for your continued interest and support and Lorne, let's now go to the questions.

Just a reminder that there will be a replay of the call available either by our website or by dialing 1-800-408-3053 and using the passcode 2184776 until November 22. As well, a podcast of this call will be available for download within a few hours and follow-up questions, as usual, can be directed to me at 514-841-3355.

So Maude, if we can poll for questions from the investment community.

(Operator Instructions)

Justin Kew, Cantor Fitzgerald.

Good morning, and thank you for taking my question. Good morning, Michael, David, and Francois.

So the first area that I wanted to dig in a little here was on EBIT margins; and just in terms of the sustainability going forward, I know it's been asked a bunch of times, but from the EBITDA progression that we've seen over the last couple of quarters, how much of that is coming from IP -- shifting in a higher IP like a revenue mix, versus cost-containment? And how does that trend going into 2015?

Thank you, Justin, for the question.

Clearly, our commitment is not only to maintain the EBIT numbers but continue to focus on increased execution and really pulling more levers, including a change in the mix of IP. For the most part, when you look at Europe, the impact of IP is not in there to any material extent to date. Much more obvious in North America, where, of course we've been at this for a longer time.

So when we look forward, this is clearly a goal that we have. As you may know, I think we are running about 16% of our revenues now, what I call IP-based services and solutions. We've set a target for ourself of 30% over the next three or four years, and that will have a significant impact not only on our revenue growth but also on our margin and on our cash generation. It does take some time, but we've been able to demonstrate that this is possible. We did that with the EMS acquisition; and again, we are seeing opportunities in Europe to do the same thing.

Okay. Excellent.

And then, just on the US federal side, we are looking for a bottoming and turning around in that business. You alluded to a multi-year strategy, Can you talk a bit about the elements of how you position yourself to win contract vehicles and get a meaningful piece of new contract vehicles that get implemented?

Sure. Again, I think you have to get some context. We are really tied in to an industry-wide situation where the US government has slowed down the awards in many cases. They are just exercising the option here, so you see the term of everybody saying the awards are moving to the right.

So we have seen this before, and again, our strategy during these periods is to look through them to the other side by looking at vehicles with various jurisdictions in the government where we believe there will be significant IT investments going forward, and to ensure that we qualify to be on those vehicles. And then as the work starts to pick up, those vehicles will be used by those government agencies to award work, so it's very, very strategic. If you're not on those vehicles, you don't get to play. And again, the reason I highlighted that, we're on a significant number, having gone up to from 40 to 56, so that's the strategy.

The second part of the strategy -- in a time like this, you've got to stay very close to your customers. You've got to really manage your costs tightly, and you've also need to go after task orders, because a lot of times the government will issue shorter, more punchier awards called task orders. You have very little time to respond to them, but they can keep your people busy and they are very lucrative if you manage them correctly.

So we are looking for a gradual uptick as we go into 2016. Again, our team has managed this, I think, exceptionally well. While we've had an impact on the top line and a small one on the bottom line, my belief is, we have not been hit as hard as the pure plays that operate in the same space.

Absolutely. And last question, and maybe this is for David or Francois -- just in terms of the cash flow and the DSOs, with the long-term payments in this quarter, should we expect DSOs to trend a little off the loads that we have seen this quarter?

Good question. No. Our target, as you know, is 45 days and less, so we finish at 43 days. For sure again, quarter over quarter, we can have some milestone billing that we will hit it or not in the quarter, but the goal is always to manage below our target of 45 days.

Excellent. Thank you very much.

Maher Yaghi, Desjardins.

Thank you for taking my questions.

I just wanted to mention, we all have seen the recent filings made by the SEC on questions they had sent you to clarify some of your filings. The most recent letter you received seemed to indicate that the SEC does not have any more questions outstanding, but could you tell us if other discussions are taking place with the SEC beyond what we can read?

And as a follow-up question -- just on your North American operation, we have had some weakish bookings in the last couple of quarters, both in Canada and the US. Could you give us your views on what's being done to improve the situation in terms of what you can control, not because of government weakness but on the commercial side, maybe some clarification on what's going on, on the commercial side, as well?

Okay. Thank you, Maher, for the question. I welcome the opportunity to actually provide some color commentary around any interactions we have with the SEC. So the first thing is, the SEC did release correspondence, as it typically does, related to their routine review of our disclosure and accounting practices. This is something that the SEC must do at least every three years as part of SOX. This is a regular part of our interaction with regulators in all our jurisdictions for public companies.

Of course, given that they were reviewing our FY13 disclosure, they asked for additional clarification on purchase accounting related to Logica and the evolution of the associated provisions. On October 9, with its last response, the SEC indicated that the file is now closed. In other words, there were no changes; there were no amendments; and there was no refilings. So from our perspective, we consider the matter closed. We are not in any other discussions with the SEC, or, for that matter, any other regulator. And Maher, as you know, my view of all this at the end of the day, it all comes down to cash. And we are now generating over CAD1 billion of cash and I think that pretty well says it.

Relative to North America, North America is a very significant engine of growth, both on the top and bottom line. We had a softer quarter on the bookings, although, as I mentioned, in the Canadian side had the Bell deal close a couple weeks earlier would have changed the, obviously, the complexion of the bookings in Canada.

There is no silver bullet here. Our strategy is to ensure that we are getting in front of our clients more frequently, and over time, hear what we are doing is evolving our organization towards more of a consulting model so that we can actually grow customer mindshare and also take a larger part of their IET and business [bank]. The second area is to focus -- continue to focus on IT. We're having very good success in North America on our IT, especially in the financial side of the verticals. Finally, and particularly in the US, we are actually in 2015 expanding into other markets, other cities, where we currently don't have sufficient coverage. Even though we have 11,000 or 12,000 people in the United States, there are many large metro centers there where we believe we are under-represented and if we increase our coverage there, we believe we can also increase our revenue.

So that would take a little more time and that links back into our buy strategy, as I mentioned numerous times. If we could find a suitable target in the US that would accelerate the expansion of our footprint down there, and ultimately organic growth, we would pull the trigger on that. So it's still at the top of the menu.

Thank you, Mike.

Jason Kupferberg, Jefferies.

I just wanted to start with a follow-up on the margins, to make sure I heard the commentary accurately there. So are you saying that the 14.9% that we just saw for adjusted EBIT in Q4 -- that, that level plus or minus is sustainable for the duration of FY15? And was there anything one time-ish helping the margins in the quarter? Thanks.

So again, what I am talking about is our ability to maintain and improve margins throughout the year. As you know, in the summer quarter, which is our fourth quarter, it's a heavy vacation period so when some of our businesses, especially where we're pricing on a fixed price basis, you get a decrease in our labor costs as people go on vacation that shifts the expense over to our vacation accruals where we've been taken all year. So you do get a bit of a lift in the fourth quarter. We saw it last year and again we saw it this year.

There is always a lot of moving pieces, Jason, in a quarter. Again, as you know, we have decided to always be transparent with our investors, and we continue to release any adjustments we have made -- TPA adjustments. Again, we had some of those in the quarter, and so they have been outlined in the MD&A. So I think you can get good access there. I will tell you, though, on the other side, what I look at it is, what are the organization really generating at the operating level?

As you know, the things like amortization for intangibles actually deflate what you see every quarter relative to our EBIT level, so to the extent in this quarter we had some positive on the EPAs, we also continue to carry the amortization of intangibles, especially in Europe following the Logica transaction. So there is a bit of a put and take there. I think what I'm particularly pleased, when you net it all out, most of our operations now in Europe and Asia PAC, are all double digit, which is a significant delta from where we started.

I wouldn't say we are going to keep the same margin rates going from quarter four into quarter five, but when you look at quarter over quarter from the prior year, Jason, this is where we would look for continuous improvement.

Okay. That's helpful.

And then just on the free cash flow. Obviously, very strong in the quarter here. And I think for the full year, if I got the numbers right, it came in actually about in line with your adjusted net income even with the headwind from the integration payments. And I know some of the integration payments will continue to be made in FY15. But that general one-to-one relationship between free cash flow and adjusted net income -- should that hold again in FY15?

Again, thanks for the opportunity to comment on that. That's been our position, as you know, from the get-go. That is part of our whole business plan on Logica was to significantly increase our ability to generate cash back up to the levels that we were doing prior to the acquisition. As I said, now, we are on a cash yield of 13%, which is frankly putting us again back up into the top performers, and are looking ahead, our sense is, for the most part we're back to normal course of business year relative to our ability to generate cash.

Okay, and just last one for me on the revenue -- is there any way to quantify what the revenue headwinds has been from the contract pruning out of Logica? Obviously, that's been part of the margin expansion story. But just as we try and think about normalized growth after the pruning is over, any way you can help us quantify what that number was in FY14?

I think as I mentioned in the script, there is headwind and tailwind on that. Obviously, the planned runoff and divestures, that non-core business had a significant impact of probably around 6%, 6% or 7%, which isn't far out, Jason, of what I thought going in. Candidly, I thought it would probably be closer to 10%. And if you look at it, it was essentially offset by currency.

I think the good news there is, we have got all the low-hanging fruit on that, and clearly, just normal course of business, we are going to win some business, we are going to lose some business, but I'm not expecting to see a material drop in European revenue due to runoffs in 2015.

Okay. Very good. Thanks for the comments.

Scott Penner, TD Securities.

Just wondering if you can help us understand some of the dynamics in the US business? Specifically, in the past quarters you've split out the federal book-to-bill from the commercial and local side of things. Do have those numbers at your fingertips?

I don't. I think -- I only break them out periodically to lend continued visibility in terms of the ongoing industry [right] pressure, Scott. But I think it's safe to say that it's still a drag on our bookings and on our revenue in the US. But my sense is, I always come back to that, keep the big picture. It's an CAD80billion market, that US federal business, and it's somewhere we want to be in the long haul. So certainly it's impacting our business there, but it's not a critical element here of our ability to look past it into other lines of business in the US.

For example, the state business is picking up, and you can see that with some of our wins in numerous states around Advantage, so look to close more of that. I think part of the issue, and I think you know it, I've said it a number of times -- we need access to more commercial business in the United States. Our balance is not where we want it. We love the government business we are in. We want to grow it. We believe we can. But we are light on the commercial business. So again, through organic and acquisition, we look to reinforce that and get a better mix in the US.

And one more, just a segue from that one. We're thinking about the usage of capital and M&A opportunities. What would you think, either regionally or vertically would be the top hit areas right now?

Clearly in the United States for the reasons I covered on the call -- big market, great team down there. But we don't have enough coverage, and especially on the commercial side. The UK -- big market. Again, an area where we are underrepresented, and an area, frankly similarly, we could use more on the commercial side. Australia, for the reasons I said before, an area where we have, again, a great team, but really an opportunity to consolidate a market that's very fragmented.

And also, some of the Eastern Bloc -- former Eastern Bloc countries. I just came back from Prague. We've got a very solid operation there, about 500 people. And those areas like Poland and former Czech Republic and areas like Romania -- all of these areas represent future growth opportunity for us and they also double up as a global delivery center in that costs there are very competitive with some of the other centers that we have in the world.

And just lastly to follow up.

Francois, the integration opportunity, is it CAD26 million of additional expense? Was that headcount related and when -- do you have any idea when we should expect the related savings to come through?

I'll take that one. It was primarily headcount related and the savings should be visible in the first quarter because we book those in the expense in the fourth quarter. You don't necessarily see the runoff of the headcount right away because, as you know, Scott, we have things like garden leave that folks go home, and there is a bit of a lag. But most of that will be seen in -- clearly, it will all be seen in 2015, starting in the first quarter.

Again, some of this is areas where we are starting now to look at moving certain work offshore, and that drives some of the need to do that. And we've also consolidated, now, in the process of consolidating our data center operations across Scandinavia. So those things are still ahead of us, but we've begun.

Appreciate it. Thank you.

Jim Schneider, Goldman Sachs.

Good morning. Thanks for taking my question.

Mike, I was wondering if you could provide some a little color on Europe and particularly what countries you're seeing incremental improvement or deterioration in terms of bookings?

Thanks, Jim, and again, welcome to the call.

It's a good question because I think a lot of time in North America, we've tried to look at Europe as a single entity, and as you all know, it's a series of countries. So you've got headwinds and tailwinds happening in each of those entities. Again, I think from our perspective, the UK is a market where there is not only a lot of domestic business, there's a lot of customers who run global businesses out of the UK. So our sense is, the UK market is gradually improving and the bookings and the growth should follow in line with that. Germany -- very big market; another area where if we found the right target, we would pull the trigger in Germany. But Germany, in my sense, is a little more gradual. There are some good opportunities there where large customers are starting to consolidate their vendors. We are in front of them, giving them our credentials, and I feel good about our chances with getting on those short lists and doing more work there.

The Nordics, again, very balanced up there. I think for us when I look at it, we have a significant opportunity in our Swedish operations. We are the largest player there. We haven't met our expectations in Sweden in FY14, but we have a new leader in place. I was up there a couple of weeks ago; the team is very focused on putting us in a better spot. So if I went through it, that would be on the plus side.

On the other side, clearly Spain remains very difficult. Fortunately, we don't have a big footprint in Spain. We are also in Portugal. Portuguese operation is also serves as a global delivery destination for us, and it's doing exceptionally well. And then if I go, as I mentioned, Jim, into some of the East Bloc, Poland is very strong, as is Czech Republic.

That's helpful.

And then as a follow-up to that, can you talk about your competitive position in Europe? I think there's some questions about to what extent the Indian offshore vendors are being more aggressive in Europe. And can you maybe talk about the willingness to do more of an offshore delivery model from your European customers versus more near-shoring or local support?

I definitely think -- and I don't think there's any new there -- and the Indian competitors have been in Europe. I think the model, though, the go-to-market model in Europe, with the exception of the UK, Jim, is I think much more attuned to our operating and go-to-market model. So I think the ability to have a very strong local presence of local people who speak the language -- Finnish, or Swedish, or German -- is essential in that play. And again, we've got that and we've got the Indian capability.

My own view is you will see the pure play's attempt to either acquire or grow organically in Europe, but with the exception of the UK, my sense is it's a tougher haul in some of those countries. In our case, we have already won a number of deals, where, when we put it all together with the accountability resting in Finland, as an example, for the deals regardless of where the work is done, is a much more compelling proposition to the customers.

Having said that, I will tell you that with over 10,000 people in India, with a lower turnover, I would say, in comparison to our peers, that pound for pound, dollar for dollar, we are very cost competitive with the Indian pure plays. The challenge we have is to utilize that asset and the asset we also have in the Philippines more extensively across Europe, and that's part of our plan, and we certainly see that as an opportunity.

Thank you.

Richard Tse, Cormark Securities.

Mike, on Europe, is there any chance you could give us an example of where you think the big revenue opportunities are for Logica over the next 12 months? Are these transformational outsourcing deals, upselling new products? Just to get a flavor for what those opportunities would be?

Sure. It's probably a combination of things.

The term land and expand, in terms of us really coming at more of that market that the Indians and to some degree the IT arm of the consulting firms have dominated in -- we are certainly targeting that globally. But in Europe, and particularly given how they buy, I think that's an opportunity. There are more outsourcing opportunities in our funnel in Europe, and in a lot of cases these are companies that operate globally, so they are feeling the economic pressure in their own business, not only where their headquarters is, but in the markets in which they operate.

And then finally the IP piece. So on the IP piece, we've got out in front of our intellectual property, where it already travels on a global basis. So again, a lot of this stuff is in the financial institutions, and we've built funnels up over there. So again as we close those deals, it'll actually have that impact that we're looking for. It's really the triple-header: profitable revenue, backlog, and cash generation. Again, that takes some time.

But we are in the right markets over there. As I said, we are not heavily in Southern Europe. We are in North and Central Europe, and those economies are much stronger and there are a lot of global companies headquartered there, where as I mentioned, they can to look at their IT budgets and their business strategy, not from a local standpoint, but from a global perspective.

Okay, and then just shifting gears to the US government. I think in the past quarter, you talked about the dollar value of contracts that you guys are waiting for decisions on. If you can maybe update us on that number?

And then secondly, there's a huge opportunity by the sounds of it there, but what really needs to happen on the government side to have these things flow through? Is it just specific cases? Or is it a broad swath, a call on the budgets? So just some color on that would be helpful.

I think from what we have got pending there, frankly, that number is still about CAD1.7 billion. There are puts and takes every quarter, obviously, when things are won or renewed or pushed out. And I don't think we are alone in that. I think a lot of, as I say, the pure plays are in the same situation.

In the final analysis, Richard, it's the same in the commercial side. Governments eventually have to make the investments in order to put in place their programs. So if you look at a typical government agency, they have got regulatory changes through legislation. Those changes have to impact systems, and in a number of cases, I remind you, that on the federal side we have got our ERP system momentum in a number of jurisdictions, including the courts, EPA, State, and again every time there is a regulation change, we're the guys that make it.

So as the legislation gets pushed through down there, these things need to start up. And then you've got the other side of the coin, again, like a business, where they need to cut costs. So when they extend a contract, not really getting the full benefits of re-competing it in the sense that, in a lot of cases, they are just picking up the option year. So on the ability to manage their costs, I do think that will be a second driver in terms of releasing these projects.

So the key here, as I said, is, you can't stay idle while this is going on. So again, as I reiterated, we are very focused on getting on vehicles and on attacking new opportunities, defending our existing business, and going after the task orders.

Okay. Thank you, Mike.

Thanos Moschopoulos, BMO Capital Markets.

Mike, just a follow-on, on the US business.

The margins were obviously very strong this quarter. You mentioned the health projects dropping off; presumably that helped. In addition, the MD&A mentions a higher mix of IP revenue. Could you clarify what's driving that? Would that be primarily on the financial modernization projects? And how can we think about margins in the near term?

Again, I want to start out by saying I'm very pleased with the margin expansion in the United States. Not only the fact that it snapped back as we predicted in the second half, but again, I would remind you the amount of government business we have down there. So when you look at the government business, most of that is time and material or cost plus, which really restricts the percent margin that you can earn.

On the other hand, it does give you certainties of earnings per share. So the team down there, I think, has continued to look at numerous levers to not only grow but to continue to shape a better mix of revenue. One good example is the new center that we have opened up in Louisiana. A very solid business proposition from our perspective. It will allow us to move some federal work to Louisiana, which makes us more competitive, and it also gives us another tool on the commercial side to grow that aspect of the business.

On the IP side -- clearly our IP is really embedded in a lot of companies down there, and I think what we are trying to do is extend some of that. In some cases, what we are doing is saying that we can do the BPO part now, especially on the back of the team we've got in the Philippines. So we're in much better shape to extend our capabilities to our customers using, frankly, a lot of the capabilities that we acquired through Logica.

Okay, that's helpful.

And maybe just to clarify, there weren't any specific one-time items driving the margin strength this quarter. As you mentioned, it's these factors which should be sustainable over the next while?

Yes, nothing material in Canada or the US.

Okay. Now in the past -- turning to capital deployment -- in the past you've provided us your thoughts in terms of how you go about evaluating potential uses of capital. If we were just to focus specifically on debt repayment versus buybacks, putting aside M&A and organic initiatives, would it be fair to say that, given the current interest rates, it might make more sense to focus on buybacks over debt repayment right now?

It would be fair.

Okay.

(laugher) Clearly, if you look at what we've done here, our sense is we are not going to bet against a 40-year low on interest rates. So we've gone long on CAD1.3 billion of our debt at a very effective interest rate of tax [affected]. We have CAD1 billion of term loan that is out to May of 2016. We can make payments on that and probably will make payments on it, but we are under no pressure to pay that off early.

And then, of course, that leaves us looking at acquisitions, and we have declared here that we're wrapping up the Logica acquisition from a lot of perspectives, including the restructuring program. Our cash generation is back to where we expected it to be. So we are in very good shape to pull the trigger on acquisition. Again, the challenge here is the right one at the right price and the right time. So we are actively looking at targets.

And when it comes to share buybacks, frankly, it's not going to surprise you. I believe our stock is undervalued, certainly from a cash EPS basis or PE basis. I think there is significant opportunity here for appreciation. So if we see the opportunities here, we would be buyers now of our stock.

Great. Thanks. I'll get back in line.

Paul Steep, Scotia Capital.

Mike, just one quick one, and I'll get Francois to maybe clarify.

If we think organically about the areas of investment focus of where you're spending money -- if you could talk to that? We've obviously seen positive results. Maybe two or three year ago, we talked about you putting money into security, cyber security, some of the centers of excellence. We've seen those bear fruit. Where are you now planting seeds for the next few years?

And then, Francois, if you can just give us an update on 2015 CapEx? And one final one for Mike, which is, just clarify -- you went fairly fast on your comments around timing of ramp-up in revenues just back end of 2015. I just want to make sure I got that. Thanks.

All right. Well, there are two or three in there. I think again, I highlighted in the script a number of areas in which we are investing. And again, just to give you the context, we go out and we speak to our clients as part of our strategic plan update, and this year we spoke to over 800 face-to-face, TXO-type customers. And out of there, we asked them what are their top business priorities and what are their top technology priorities for the year ahead.

And of course, we use that to validate where we are making investments and we also use it to derive future investments. I won't go through them all, but I can tell you that some things that are common across all those is regulatory, regardless of the sector. A lot of our customers are investing heavily in IT in order to meet regulatory filings and changes. This is an area where, again, we have a lot of experience in verticals like government and financial and telecom. Mobility is also on the list. Cyber is top of mind. And the digitization, or as some folks refer to it, the Internet of everything, is also on that list. So we are investing in behind those in terms of either IT or, in some cases, as I said, we are going to look at it from an acquisition standpoint.

Cloud is still a big area of investment for us. I think you know in the military side, we are one of only three firms now that have been certified for the [Fedrep] business. We also are looking also to partner. I think you saw the Dell announcement where we are partnering with Dell to actually build out commercialized IT. That should be viewed as not the last announcement with Dell, but rather the first announcement with Dell.

So these are all the areas we are investing, some directly, some with partners, and some with clients.

Great, and what about CapEx levels for next year for it, as well? Just in terms of magnitude of those investments. And I was thinking specifically about that partnership as well in terms of whether that was going to drive higher any numbers next year?

Not necessarily. I would say to you it would be pretty similar to 2014. Or also, we are always base it little bit on revenue. So between 2.5% to 3% of revenue. Again on contract costs, that's where it can be lumpy a little bit, depending if we are winning very large outsourcing contract where it can ask for some investment at the start of the contract.

Great. Thank you.

Thanks, Paul. Maude, I think we have time for one last question.

Paul Treiber, RBC Capital Markets.

Thank you for taking my question. I'll just ask one here, and it's a fairly high level one. Despite the environment, you saw considerable profit growth in all your geographies in 2014. As you head into 2015, where do you think the opportunities for profit growth are the highest?

That's a good question, because each market is a little bit different, Paul, in terms of their mix. I think the way I would come at that is that, if you look at all our operations, we have similar opportunities to maximize a series of levers that drive up productivity and margins. So one obviously is an increased use of our global delivery centers, both our home shore, near shore, and offshore sites. Pushing and increasing the mix of IP. Increasing our ability to land and expand, which drives up utilization, which obviously is probably the most powerful lever that we can.

We will continue to look at the structure. We've been implementing a five-layer structure from the business unit leader to the programmer developer, which is something else that over time flattens the organization and makes us much more nimble.

I think the other big area is, even though we have significantly reduced the out-of-trouble projects -- and that was a big contributor in Europe -- in terms of delivering higher margins, the opportunity is still there, especially in the area of margin leakage, where we are completing a project within the original budget but we are not necessarily completing it within the business model; and, therefore, in some cases we are not generating as high a margins as we could.

Beyond that, as we look at really gearing up now to capture more of the economies of scale. So I mentioned our initiative in the Nordics to consolidate first the management of our GIS organization or data center organization. But on the back of that, the return of doing that gets to be very significant as you standardize on platforms and technology and you look at bringing and removing a duplication in terms of coverage of the various centers. We also have an initiative that we have tested in 2014 in terms of improving significantly the productivity of our teams that do application maintenance and support. Our plan is to roll that out in 2015.

So, I could go on. There is always a long list of levers that we can pull. Of course, the challenge is to get everybody to pull on them hard, fast, and consistently and that's the ongoing challenge and opportunity that we have in 2015.

Thank you. I will leave it at that.

Thanks, Paul, and thank you everyone. We look forward to seeing you January 28 for our AGM and Q1 results. Thank you.

Thanks, everybody.

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