CGI Inc (GIB) 2015 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the CGI's third quarter 2015 conference call.

I would now like to turn the meeting over to Mr. Lorne Gorber, Executive Vice President of Global Communications and Investor Relations. Please go ahead Mr. Gorber.

Thank you Curry and good morning everyone. With me to discuss CGI's third quarter FY15 are Michael Roach our President & CEO and Francois Boulanger, Executive Vice President and CFO. This call is being broadcast on CGI.com and recorded live at 9.00 AM on Wednesday, July 29, 2015. Supporting slides as well as the press release, financial statements and MD&A issued earlier this morning are available on CGI.com in addition to being filed with both SEDAR and EDGAR.

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 CGI.com and included in this morning's disclosures. We encourage our investors to read it in its entirety.

We are reporting our financial results in accordance with international reporting standards or IFRS. However 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 our Canadian unless otherwise noted. I'll turn it over to Francois as usual to first review our Q3 financial performance and then to Mike to make a few comments on our operating strategic highlights. With that, Francois.

Thank you Lorne and good morning everyone. I'm pleased to share the results of another strong quarter.

Revenue was CAD2.6 billion compared with CAD2.7 billion last year and flat with Q2. Four primary factors account for the year-over-year delta. The additional efforts needed last year to complete the wind-down of government health care projects in the US; the temporary slowdown in UK government spending as a result of the recent election; the continued delays in US federal government procurement; and a net headwind from currency as a stronger US dollar is being more than offset by the euro and Swedish krona. These factors were partially offset by the ongoing strengths in our commercial business, growth in IP-related services and solutions globally as well as organic growth in France.

For the last 12 months our bookings totaled CAD10.8 billion or 106% of revenue. For the quarter, CAD2.2 billion in contracts were awarded or 87% of revenue reflecting the seasonality of our government business coupled with delays in US federal and the UK government. Areas of strength in the quarter were France, the Nordics, and the US, excluding federal, each exceeding 100% of revenue and building their backlog of future business.

Adjusted EBIT was CAD371 million, while our EBIT margin increased by 170 basis points to 14.5%. The continued improvement in our North American operations is contributing to the ongoing profitability.

Net earnings were a record CAD257 million up 14% from last year. Net earnings margin was 10.1% up 170 basis points in line with pre-acquisition levels of profitability. Earnings per share's were CAD0.80 up 13% compared with CAD0.71 last year. A higher effective tax rate driven by better US profitability this year reduced Q3 EPS by CAD0.01.

Looking forward we expect to remain at the high end of our 25% to 27% effective tax rate range due to the ongoing extension of US profitability. We will continue to update you on a quarterly basis.

Turning to cash, our operations generated CAD1.3 billion or CAD4.15 per diluted share over the last 12 months. For the quarter, we generated cash of CAD227 million when excluding CAD13 million in integration disbursement. This sequential delta is due to DSO increase of five days from a low of 41 days in Q2 driven in part by the slippage of some large payments in Q4. As a reminder a one day change in the DSO accounts for approximately CAD30 million.

During the quarter we repurchased 1.9 million shares or CAD94 million and reduced net debt by an additional CAD78 million to CAD1.8 billion. This represents a CAD600 million reduction from last year improving the net debt to capitalization ratio from 33% to 23%. With a fully available revolving credit facility and CAD265 million in cash we have CAD1.8 billion and readily liquidity and access to more as needed to execute our profitable growth strategy.

Finally a couple of post-quarter items. The UK authorities announced in early July a corporate tax rate reduction of 1% in 2017 followed by another additional 1% reduction in 2020. We expect the rate change to be enacted this calendar year at which time we will accrue approximately CAD6.5 million of expenses due to our UK tax asset position. And as mentioned in this morning's release, we will incur up to a CAD60 million pretax expense for the next two quarters to strengthen our competitive position.

Now I will turn the call over to Mike.

Thank you Francois and good morning everyone. As we approach the third anniversary of our transformational merger with Logica and finalize our FY16 business plan, I thought this would be a good opportunity to provide investors with additional insight into a number of proactive efforts we have taken to ensure we continue to providing significant value to our stakeholders over time. Let me begin by reinforcing our commitment to continue aggressively executing both pillars of our profitable growth strategy-- the buying or acquisition pillar and the build or organic pillar.

As you know, the successful implementation of this strategy has allowed us to double our company every four years over the past two decades. It has positioned us to better serve our clients at home and around the globe. It has also provided shareholders with an average annual return of 19% since we went public in 1986.

At our most recent strategic planning session, our leadership team reiterated their commitment to doubling the business over the next five to seven years. As always I remind you our goal is not to be the biggest but to be the best in our sector.

To support this growth initiative we have made a number of significant leadership adjustments including the appointment of George Schindler as Chief Operating Officer. As COO George is not accountable for the performance of our global client facing operations.

George's appointment also gave us the opportunity to name three new presidents in key markets: the US, Canada and in our Nordic operations. George, Dave, Mark and Heikki each have the leadership attributes, performance track records and the CGI experience necessary to drive our business forward. Their profiles can be found in the leadership section of CGI.com.

So with these key leadership adjustments in place I would like to update you on where we are with respect to our build and buy strategy. First on the buy front.

Market conditions continue favoring consolidation in response to client demand for higher value and shareholders' expectations of meaningful investment returns. With Logica we went wide, positioning ourselves for organic growth in countries in verticals which represent over 80% of global IT services spent. Going forward our acquisition strategy is focused on going deeper into existing markets and adding to our higher value offerings like IP-based services, cyber security or filling out opportunities in underserved sectors such as the utility market in the United States.

Similar to the buy side of our strategy, we maintain a growing funnel of acquisition targets. These targets were in part identified by our existing clients through 965 face-to-face C-sweet interviews undertaken as part of our annual strategic plan.

Our clients identified some 300 role model companies with whom they have a relationship and considered to be good partners that bring value-added capability to their businesses. We have taken this list, qualified it against our strategic operational and financial criteria, narrowing it to 85 targeted companies and forming a significant opportunity funnel that we are actively working our way through as part of our buy strategy.

Turning to the bill side. Our basic operating belief is that quality and mix of revenue is essential to long-term value creation and to client relevance. Accordingly we have been running off low-margin and nonrecurring revenue while exiting markets that do not align with our strategy-- markets like the Middle East and South America with the exception of Brazil.

While this has created a certain headwind in pursuing organic growth, it has served to significantly increase our earnings and our cash flow. As importantly, it has allowed us to better focus our management and financial resources towards capabilities that create the greatest value for our clients. It has also served us as additional investment opportunities that align both with the quality and rate of revenue growth in the highest client-valued areas.

To fully execute both pillars of the buy and build strategy, it is critical that we continue to deliver superior financial performance. Against this imperative our team continues to deliver. After nine months on a year-over-year basis, adjusted EBIT is CAD1.1 billion up 9%. Net earnings are CAD745 million up 13%. EPS at CAD2.31 up 14%.

Cash generated from operations is CAD838 million up 10%. And net debt has been reduced by CAD322 million while we have invested CAD94 million to repurchase 1.9 million shares.

As you know our valuation is directly linked to our ongoing ability to generate consistent and significant EPS growth and associated cash from operations. 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 2016 to a mix of profitable revenue growth and cost management. Our ability to continue to drive cost improvements in the business has allowed us to deliver significant EPS accretion in 2015.

On the revenue side we have now posted two consecutive quarters of -3.5% growth. We believe we bottomed out and are gradually moving towards positive organic growth. Our optimism is in part related to our success in growing IP-based services and solutions revenue which is up 9% quarter three over quarter one. And is visible in our margin performance in a number of entities particularly in the US.

Throughout this period we have been renewing, expanding and extending long-term management services contracts, increasing our recurring revenue floor and driving up our backlog to CAD20 billion. In addition we have had significant success in time and material business converting it to managed services and have built a strong global outsourcing funnel which also represents future growth opportunities.

Accordingly we have embedded into our FY16 business plan double-digit EPS expansion, fueled by a gradual return to organic growth and continued expense management. In the process of building the plan our operations teams identified cost reduction and revenue generation opportunities which we have decided to advance through a CAD60 million pretax restructuring charge over the next six months. The return on the CAD60 million investment will be recovered over FY16 and is embedded in our business plan.

These actions will better position us for the future and align our workforce to realize ongoing productivity enhancements throughout our business. Specific adjustments are being taken to further accelerate the utilization of our offshore centers, adjust our staff levels to reflect the impact of running off of low-margin businesses and exiting from certain geographies that are outside our current strategic plan.

In addition we will further reduce SG&A and overhead in the line operations and at the corporate level. A portion of the cost savings will be directly return to shareholders through EPS accretion and a portion of these benefits will be reinvested to accelerate growth capabilities. Specifically we are accelerating our investment in the high demand areas of our current potential clients by hiring subject matter experts in cyber security, digital transformation and further enhancing our suite of intellectual properties.

Our business is one of constant restructuring, essential to remain competitive and leading our clients through the many opportunities and challenges associated with the advances in the information technology industry. That's why over our forty-year history we have consistently made the necessary adjustments that set the stage for subsequent steps of growth.

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

(Operator Instructions)

(Operator Instructions)

Steven Li, Raymond James

Thank you. Mike, on organic growth, I presume we're still on track for calendar Q4, so when you look in the different regions--so for the US has the ACA wind-down been lapped so next quarter we might see a little bit of growth back in the US?

So, thank you Steven for your question. As I mentioned in my comments, our 2016 plan embeds EPS growth coming both from the build side in terms of organic growth. In the US, we are lapping the impact, but in some of the states like Hawaii and Vermont we had to push to the end of December there. So we will see continue to see some tough comps on that side but it is running down. So it will be nip and tuck to see whether the US turns the corner, but we are clearly confident that that will change as we enter into 2016. I think the other thing to note is the US federal government business, which is a big part of our US business, it's about 50% -- the awards tend to continue to move to the right. When that happens it makes it more difficult, of course, to drive the organic growth in the US. We are seeing some signs that things may be improving on that front. Just over the last week we've renewed and booked over CAD160 million in the US Army and we've also qualified as one of 25 large businesses on a multi-award contract in the US government with a CAD6 billion ceiling. Those are early signs that things may be picking up in that area. Of course that will be a major driver to our growth in the US.

Great. And for Canada, Mike, can you talk a little bit about the prospects? Do you need Canada to have organic growth for CGI to have organic growth? Thank you.

Well, need and want are probably two different things. I want every operating territory to have organic growth. I think it is important to our overall strategy of recruiting and retaining the best people and also to serve our clients locally, which is part of our strategy and globally. So in Canada, the Canadian team over the last period of time has renewed a significant portion of their recurring revenue and I think there's one more or so that we're close to closing. You will see that booking probably within the next number of weeks. So that gives us, again, a very high recurring level of revenue. It also preserves our mix in terms of being able to deliver margins in excess of 20%. We are running off some lower-margin business primarily in the infrastructure help desk, desktop support areas that are a much more capital intensive part of our business with frankly marginal returns. So that piece, it will run off. We are addressing some of that impact here in the restructuring. All said, I believe the Canadian operation will grow.

We've doubled down significantly on the banks in Toronto. As you know we have formed a separate business unit focused solely on the banks. Peter Sweers, that runs that, has a long career in the Canadian bank and has worked internationally and with the appointment of Mark when you go on and you look at his background, he's also very deep in banking having worked for BofA and other financial institutions. Part of the strategy, or a big part of the strategy, is to renew the base, protect the mix and drive for a disproportional amount of growth coming out of the Canadian banks.

Great. Thanks. And Mike I saw your nice win with the city of Edinburgh. When are you expecting it to get approved and the contract to start ramping? That's all for me, thanks.

That's good Steven, I'm impressed that you are monitoring that Internet that fast. I think for the benefit of the other members on the call, the city of Edinburgh, which we have been in a competitive bidding situation for well over a year now, announced this morning that they have selected CGI as their preferred bidder. It's not a contract win or award just quite yet. It's a full outsourcing contract, it includes Cloud and cybersolutions which are the areas I talked about where we are increasing our investment. It is a significant win for us because it starts to push us into those local governments in the UK which are very significant investors in information technology and also a very targeted group for us in terms of pulling in our IP. Things like Advantage and other enablers that we have built over the years for government. At this point the contract, I think they've announced the contract is worth roughly GBP186 million over seven years and it's an interesting opportunity as well because my understanding is other jurisdictions can actually join. It's kind of like a vehicle as well where other jurisdictions can actually join and take advantage of this contract which, of course, would drive up the benefits to the clients and also drive up the value of the contract. So a very strategic opportunity here and one that you should expect to see us focus a little more heavily on the local side of the US government market. We feel good about that one.

Rod Bourgeois, Deep Dive Equity Research

Hi guys, so your comments on your latest acquisition strategy were helpful. On that topic, can you let us know your stance on the prospect of acquiring a company with a heavy infrastructure outsourcing mix? And I'm asking that because several of the big IT services businesses are quite reliant on the infrastructure outsourcing business, which is pretty troubled right now. That's definitely the case at IBM and HP but also at CSE and Perot. It seems like you've shown discipline in the past, like when you passed on buying Xerox's infrastructure business, and I just wanted to inquire about your stance now concerning other acquisition candidates with the substantial infrastructure mix.

Thank you, Rod. It does give me an opportunity to reinforce some of the points I made in the script. Our sense is we need to go where we're delivering the highest value for the customers, which also in most cases aligns to creating the highest value for the shareholders. If you look at the infrastructure business generally, it is the most cost-heavy piece of the business. It requires a lot of capital just to invest, to stand still in a lot of cases. I will tell you that our operations are very effective, but in the final analysis it is still a business that's very heavy from a capital intensive and a business that's in transformation.

Our percent of revenue coming from that is roughly 15% to 16% of revenue which is down, as a percent of revenue, significantly from a lot of the earlier years and a certainly much different profile that a lot of our competitors. The second thing that's happening in there is there is an opportunity now to use more of a consulting approach to managing a customer's infrastructure which really means gradually shifting away from acquiring assets thus reducing the capital outlay and move to a more of a managed services on the customer's premises or on ours without owning the assets. This is an area obviously we're looking at especially as it applies to a full outsourcing opportunity that has all tiers. Having said that, we will maintain our infrastructure business. It plays a very key part, Rod, in our whole push towards more IP-based services and solutions, especially on the staff side. And it's also very useful to us should there be a full outsourcing opportunity, which we believe are still out there, and for opportunities to provide Cloud services, both private and public Cloud, to customers who require that. We will continue in that business, but, much like we're doing with the other part of our business, we are listening to our clients, we are moving our offerings proactively with the client demands. And we are not afraid to phase out, runoff businesses that aren't core to our strategy and to where the customer is taking their business.

Okay. Great. One other quick question. Your book to bill has been at 87% for the past two quarters, but those book to bill numbers can sometimes be somewhat misleading. So I wanted to ask about bookings conversion. Can you give us a sense about how quickly you are likely to see recent bookings convert into revenues? In other words, is the pace of bookings to revenue conversion prone to be an encouraging revenue factor in the upcoming months or is the bookings conversion pace still somewhat slow?

Good question again. First let me say the right way, as you know, to look at bookings is on a shredding 12 month. This quarter is a good example because the book to bill in the quarter was under one in 12 months. It still over one, and I just mentioned here probably in the last 15 minutes, roughly $160 million US contracts booked over the last week or so in the US federal government. We have others that we will close this month, this quarter, and of course Edinburgh alone is GBP186 million. So bookings, we believe, will continue to run over one.

The conversion rate, there are two things happening there. One is of course we have been locking down those long-term contracts, which has been a very successful strategy for us, because when you lock down a contract for 10 years we have three investment periods. Every three years we can make an investment and get the return which drives value for the customer and more earnings and cash for us. That's a good strategy. On the flip side it does cause a bit of a short-term headwind because you do have to offer additional savings to the customer to secure it. So you have got a headwind pressure on organic growth, and you also have a headwind, in our case, as we runoff that lower margin business and as we exit some of these geographies that I mentioned. And South America, we have been moving out of there. With a couple more countries to exit and we will be left with Brazil. So you've got those headwinds to the organic growth.

On the other side, on the tail side, we are winning better quality business that we will improve and are improving the margins, and we are starting to get more traction in our IP business, which is a winner from virtually every standpoint in terms of revenue growth, recurring revenue, because this stuff is a very sticky cash generation, and of course margins. So the conversion rate, our belief is it will tick up as we go through 2016 and that's why, Rod, we have built into our 2016 plan, which by the way I will remind everybody on the call we are compensated on. Organic growth we haven't profiled it yet, we are still in those discussions with the operations. But as I said we have a sense that we have bottomed out here, but again there are headwinds, tailwinds, that I can't see at this point. But the whole message was today that we are committed to growing the business organically, we are committed to using both the buy and bill side to continue to drive EPS growth, and we've got the financial resources to do both.

Great. That's a helpful weighing of the factors.

Thanos Moschopoulos, BMO Capital Markets

Hi, good morning. Mike, you have mentioned that you're seeing some very good strength in your IP portfolio. Can you update us in terms of what portion of your revenue mix that now accounts for? And also what specific areas within your IP portfolio are driving some of that strength?

So good question. The ones that are -- first up, to give you some context. We have developed a very large funnel in IP-based services and solutions. It's approaching CAD10 billion. So it's a big number. You have to understand what's in this portfolio. It's not a typical portfolio that's driven by an IP license. IP license is part of that component. But what you're really looking at is what we have been doing is building what we call an IP-based services and solutions offering, which has all the elements that CGI offer. An IP license if it's appropriate, installing it, maintaining it, running it, all of which adds more value to the customer, and in the SAS case it means sharing it with other customers and in the case of Trade360.

What we have now built is a global funnel. Some of that funnel has local IP in it that we have done a lot of work on in terms of trying to improve the margin, take a look at the pricing, and some of the restructuring that I mentioned this morning will in fact see us move some of that IP cost in a number of the geographies, some of which we have acquired, move that offshore, which then increases the margin, gives us more room to be competitive on that. So the big ones that are really impactful are again the ones that -- on a global side collections is in big demand right now. A lot of financial institutions and jurisdictions, governments, are looking to improve their rate of collections. We have what I believe is the best end-to-end integrative collection solution on the market. Our funnel there is very large and these are long-term deals. Companies do not change their collection infrastructure systems every five years. In fact this is very helpful when we approach a client and we talk duration of the deal, we always point out when's the last time you changed your collection platform. In most cases it's 10 to 15 years ago which is creating not only an opportunity for us to upgrade it but also lock down a long-term funnel.

The financial institutions are the areas that are probably the most interested in leveraging our IP on the commercial side. We also have a growing offer in the payment side, which is also very relevant when you look at the new entrants entering the payment landscape. And a lot of financial institutions are trying to analyze how they should interact with Silicon Valley or how should they defend against Silicon Valley and we have developed a very strong point of view there that gives them another path should they want to take that. So the other areas on the government side our Advantage product is still the dominant platform of choice, in the United States. So we continue to upgrade and sell a new offering there. And then part of that strategy, which I just touched on, is as we push into the UK local market, we see the opportunity of investing in Advantage making the necessary changes to actually introduce that platform outside of the United States, and it's a very, very important opportunity because if we are able to do that, as I say it will open up a very significant growth market in Europe, especially in the UK.

And finally I called out a bit that really crosses over both the build and the buy strategy. So you take the utility market in the United States --a very big market. When we acquired American Management Systems, they had prior to the acquisition sold off their utilities practice to Wipro. When we did the logic of transaction of course we picked up a significant amount of references and capabilities and IP, in the utility sector, that we believe we can leverage in the United States. You know from an organic standpoint and also from a pulling the trigger on the buy side, that's an example of where we would be able to increase new market for us to grow in, bring in IP either as an opening, and build long-term revenue streams.

That's kind of where it sits. I would tell you these take time to close, but where I'm encouraged here is we've gone from a very little visibility across the European operations when we did the merger three years ago to a much higher profile with an active funnel and with some wins in some European countries. Again the CACS platform in I believe Portugal. We are seeing signs that this strategy will take hold and as it does it will have the desired effects that I've outlined here. Change the mix, improve the margins, and generate cash that we will require in order to do the build and buy strategy.

Thanks, Mike. I appreciate the color. I'll pass it on.

Richard Tse, Cormark Securities

Yes. Thank you. Mike, just judging by your comments on acquisitions, should we be thinking about you guys doing more smaller tuck ins as opposed to bigger transformational deals that you have done in recent years?

Well I think as I said, we went very broad with Logica. It was an ideal pick for us. As you know it hit all the strategic imperatives that we're looking for. Part of the issue right now, Richard, is there aren't a lot of players in the same space as Logica was. It doesn't mean there aren't any, it just means there aren't as many. So as we continue to look at those opportunities, we are, as I mentioned, and actively building and qualifying and will action -- funnel customers or targets that were identified by the customers. So again you should expect us to do obviously more tuck in. Things that as I say will a gap either in the IP portfolio in a specific geography, or areas that align with where the customer is going in terms of cyber and IP and digitization.

I think the other thing that we look at very carefully is the opportunity to be a consolidator in markets that are not yet consolidated. So as I often say, we are often the last handing IP services company in Canada. Logica was the last one publicly traded in the UK so these markets begin to consolidate. There are other markets where there are local champions of significant size and scale, and we would look carefully at them as well as long as they are on strategy and in the geographies that we operate in to move on them as well and they could be as small as CAD100 million and they could be all the way up to CAD1 billion depending on where they are and what the mix looks like.

And then on the IP side notwithstanding your comments on getting a lift in margin via moving some of the stuff offshore, do you generally get better margins off of these IP deals than you would your traditional ones?

If your traditional is more the standalone IT services, the integration, the answer is absolutely. The reason for that is if you look at it -- when you sell something that's IT -based services and solutions, it's increased the utilization of all three classes of assets. My people, the IP, and the data centers. So that drives up the utilization there and contributes to very significant margin appreciation. As well, where you have it in a SAS model, of course it's even better because essentially the infrastructure is in place, the fixed costs are there, and what you're really doing is adding transactions, so that every additional transaction comes on at an incremental higher-margin opportunity. So this is where it's convinced this is one of the key criteria here of being the best in breed in this sector and were pushing hard on that. Part of the restructuring benefits will be reinvested to even accelerate that and so it does form a significant part of our strategic plan and its embedded in terms of the 2016 plan as well.

Great and just one last question. I think in the comments earlier you guys mentioned that the DSO has moved up a bit due to some slippage in payments. Have you received this payments as of Q4?

We unfortunately received some of them three days after the quarter end. So we do have them. Again this is why I reiterate all the time. Look at cash, look at bookings trailing 12 months. But yes, we feel good about our cash generation and I think somebody asked earlier the use of cash so I maybe forgot to cover that so I will now. If you look at our financial situation and you look at the cost of money, which continues to drop, we have the financial ability to really invest across all four of our uses of capital. Reinvest back in the business, which I covered on -- in terms of one of the things we are doing as part of the 2016 plan and part of the restructuring benefits. We can continue to pay down debt, although we are not under a lot of pressure under the debt. We have got CAD250 million that is due in May 2016. But candidly if it moved into the credit line, the interest rates are dropping there so it's not a lot of pressure there. We did start to buy back shares and we will continue. We believe that our shares have a significant appreciation opportunity, so we'll continue what we started last quarter and then as I mentioned, we are qualified the buy funnel -- a lot better over the last nine months. So we are positioned to pull the trigger on an acquisition. And as I mentioned we have the financial resources to do all four of those.

That's great. Thanks, Mike.

Philip Wong, Barclays

Hi. Thanks. Good morning. I wanted to go back to the revenue trajectory for a second. It sounds like the timeline for organic growth has been pushed out a little bit and just trying to better understand what if anything has changed. Would you say that there is a bigger mix of contracts that you feel do not fit with your strategy than you had previously expected? And do you think that there might be a little bit more -- you have to be a little bit more promotional and demonstrate bigger savings in order to drive some of these relationships than you had previously expected?

That's a good question, Philip, and I did try to address earlier the headwinds - tailwinds there. If you look at those headwinds and tailwinds they are not something that are restricted to a quarter. Some of those move over depending on various things. Customers, take the UK government as an example, that's pretty well in a lockdown mode pre-election, contract awards were stopped. The amount of add-on business on the TNM side slipped out to the right and you get things like I mentioned -- the announcement today made by Edinburgh that we are their preferred partner. We have been working on that deal for well over a year. And still a process to go there, Philip, before that can convert into revenue. But what's significant here is we've got visibility on the deals that will bring on the organic growth.

On the flip side, as I say, we're disciplined on our approach to driving quality of business. We made the decision in South America that this is an area that's not core to our strategy. Over the last quarter I think alone we had to take a hit of about CAD4 million to restructure or close off various entities down there. That continues and will have an impact in the fourth quarter, but it's the right thing to do. We always tend to go with the right thing to do. I can't predict this stuff by quarter but I think the whole intent of my script today, Philip, is to reiterate that this is a strategy that we have proven, that works. And we are reinforcing our commitment across that strategy. I understand folks would like to see this pop a little faster. So would I. But I'm also very realistic here that I want quality revenue and I want revenue in line with the strategy.

In some businesses you can give a guy a target, say you have got to sell CAD10 million, and after five months if he has only sold one what happens is he sells anything that moves to get the other CAD9 million. That's not how we operate. We want the sales to align the business development to align to the strategy. Without that what happens over time frankly you end up with a mix that is very loaded to the low-end, and I think there was a question earlier by Rod saying that there are a lot of firms in our industry who have now realized just how much of that they are carrying and therefore they are into some major restructuring and transformation and cultural shifts. We've avoided that because we've always taken this approach. It gets validated, Phil, every time we do an acquisition. As we go into an acquisition we actually can see the proof firsthand that growth without the proper mix and margin is a very short term gain and sooner or later it catches up to you. If you look at Logica, prior to the acquisition they were still posting organic growth. But it cost us a lot of money to dig out of that and some contracts we are still digging out of that because the bid price or what some people term a winning price -- which I don't use winning when it ends up costing the shareholders a ton of money -- were significantly off market. So this is not how we operate, so we're committed to it. We build it in our plan, but the timing, Philip, is very much dependent on the balance of those headwinds and tailwinds.

Do you expect -- I think you mentioned a little bit about a lower utilization in Europe like in Netherlands, Sweden, Denmark, to what extent would you attribute that to deliberate -- deliberately being more disciplined on the contracts and on the sales front? Or do you see perhaps a little bit more macro headwind are less predictable and sort of beyond your control?

Again, in some of these countries what has happened over the years is the labor cost pyramid has gotten out of line with the market price. So what happens is you have embedded costs that are greater than what the customer is prepared to pay for and give you a fair rate of return. So over the time and as part of the Logica restructuring we attempted to start to move that pyramid but it's not an easy one-time adjustment. So what has to happen there is you have to in some cases move these folks to higher end business where the rates are higher which could mean retraining folks. On the other end we've got to juniorize on the other end of the pyramid, and finally we have to improve our rate of business development and sales in some of these countries so that we are also absorbing some of the utilization pressures through growth. So it's a combination of all three factors. Also in some cases it's more utilization of the offshore centers. Again much like we saw in North America years ago in some cases there is still some passive resistance to fully utilizing that lever, but we're addressing that. And as I mentioned in the restructuring in fact we have built-in jobs and functions moving to India which will help make us more competitive on bids that we make in some of those countries and contribute to addressing that issue that I mentioned. The shape of the labor pyramid and the need to win more business in line with the strategy.

Very helpful. Last question for me, just on that last point on the restructuring, how should we -- what magnitude of savings can we expect and how do you see the run rate wrapping up next year?

So again the first thing I'd say on this is it is a CAD60 million pretax. For our own modeling -- and we are looking at perhaps CAD40 million hit in this quarter, the balance in the following quarter. Probably CAD40 million is net CAD30 million Francois?

Yes.

On the P&L. The payback is one year. And so you should expect that. You know the benefits are built into the FY16 plan with the operations.

Got it. Thank you so much Mike.

Kris Thompson, National Bank

Great thanks. Just to follow up on that, the payback is one year, is that because you are spending some of these savings on investing in IP etc? So the savings will actually be higher than CAD40 million?

No, there may be a little bit of that, but Kris a lot of that is back to what I said about some of the entities of where we will make some targeted force adjustments that the severance costs are much higher than we're used to. For example, in this restructuring we're not doing any restructuring in the United States where the restructuring costs are much lower so that the mix here tilts it a little higher. But my sense of one to one payback is a good business investment here, but part of it is that mix.

That makes sense. I saw your EBIT margins fell sequentially in every region outside of Canada and the US. So on that restructuring can you give us some more idea of what regions and have the notices already gone out?

Well no, the notices -- that's a bit of our dilemma here. The notices are in process in some cases, we are working with the line operations right now. In fact George's heading up that initiative working with the line leaders to walk through specific functions and individuals here. So that piece hasn't been fully determined. I think it's a pretty safe bet to make the assumption that the investments are tied to areas where we believe we have additional opportunities to drive margins. And that's exactly what we are attempting to do here. In some cases it's also addressing the opportunity again to take another uptick in changing the mix. So in Canada we have some lower end business that's in the infrastructure side, that's linked to things like help desk, and as I mentioned the desktop support. Our intent would be to adjust the force on the realization that that work is decreasing by design, and then focus the force more in Canada, again to push that high-end services that we talk about. Which we see in Canada a pretty good opportunity. We have nice funnel on IP in Canada that as we work that through will help us on the top line and also on the recurring level -- recurring revenue and margins. So we are working through that detail, but that gives you a pretty good idea of what we're -- where we are targeting.

Okay that's helpful. And the last one for me Mike, the double-digit EPS guidance for next fiscal year is helpful but can you narrow that range a bit? Should we think it's between 10 to 15 or is that safe?

You have got to come back next call Kris.

Okay fair enough. Thanks a lot.

Paul Treiber, RBC Capital Markets

Thanks very much. I wanted to follow up on one of Richard's questions just in regards to M&A. How does your relatively smaller footprint in the US commercial market factor into your analysis of when you're looking at potential software, IP acquisitions -- in that do you need a larger footprint in the US to maximize those synergies from a potential software acquisition?

Actually on the software side what we need, Paul, and we are in much better shape. The evaluation of the software companies are going to be much higher than what we paid in typical services side. The issue we had prior to Logica where we only had the ability to market that in North America essentially. Now we've got 40 countries and a much bigger footprint. That does give us more confidence that we could in fact pay a higher valuation and still get the return that we're looking for. What is very important in that assumption of course is that the business development machine is running optimally and that those relationships with those customers in Europe and these other jurisdictions is well-established and that the IP can in fact travel globally. Hence priority on things like Horizontal IP or Financial Institutions IP which tends to travel very, very easily or more easily.

Now on the US, as I mentioned, first I have to tell you, the US team has done an excellent job this year. They have added over CAD100 million to the bottom line causing a little pressure on the tax rate. In fact hit us for CAD0.01 on the EPS this quarter. But we do need a commercial acquisition in the US to actually help us put in better balance the revenue portfolio we have down there. And also put us in a better position to ride the economic curve up the recovery that is happening in the US and that will happen in other parts of the world.

It's very similar in the UK. You've got a very strong government franchise in the UK as further reinforced this morning with the Edinburgh announcement. But again, we are hitting the UK market on the commercial side essentially from an organic standpoint which can be successful but takes more time. So if we look at it, those are two areas that would be very accretive to us but we have to find somebody who fits the criteria and is willing to sell. Having said that, if -- we are not limiting ourselves to those two markets, we are continuing to look globally at the markets in which we operate along the criteria that I said.

Okay. Just want to switch gears to offshoring. It seems that you're seeing accelerating interest in offshoring just relative to nearshore. How do you review offshore in light of your nearshore strategy, in that -- is offshore negative, has negative implications for nearshore? Or are the two independent in your mind?

They are very complementary. Again what we -- our model is very simple. The account manager, the local guy owns that account regardless of the work, where it's delivered around the world. Huge competitive advantage. The customer doesn't have to visit any local site or any offshore sites. What we didn't do is when we put a bid or an offer in, the customer, we give them different choices and mixes of where that work could be done. Trying to really balance two or three things -- the price or the cost of where the work is done, the quality of where the works done or the skills match what the customer is looking for, and risk. The third one, risk, is taking a much higher profile now than it would have over the last 10 years. So it does make the local centers in fact much more relevant. On the other hand, where we have a huge differentiator is if we move work offshore, is that in fact we can move work from various countries because in each of these countries we have people that are local that can do the full suite of services. So if you have got work over in an offshore site and you say I'm concerned I'd like it moved back, we can move it back and fairly rapidly. We are actually on a single CGI network globally.

The other thing is if you look at the currency right now, the difference between the Canadian and US dollar is as you know approaching 25%. We do have government incentives and a number of the jurisdictions, including here in Quebec, that can be added to that, especially if the work is coming from outside of Quebec. That makes it a very significant benefit to the client. It's really complementary. I would tell you that some of our pure play competitors are trying to get these local centers because I think they're seeing the same thing but through the opposite end of the telescope.

And just one more for me, and I just have to ask this, so I'll apologize in advance if there's any sensitivities around it. But with the appointment of George as COO, what are your thoughts on your role and a potential transition at some point.

Everybody has got to transition at some point. Everybody has an expiry date. I think the good news for me is my expiry date is not near-term here. What the intent here was, was to -- if you're going to take the Company up to the kind of levels that we're talking about, what has always been our tradition is not be in a reactive mode. You have to build the leadership infrastructure and team ahead of those activities and that's exactly what we're doing here. It will also allow me frankly a little more time to spend on the business development transformational work that we're talking about in terms of cyber and the IP portfolio. But be clear, as the Executive Chairman is with me, I still sign the financial statements and I'm accountable for the performance of CGI. George and I work closely as a team to do that. And we've always in CGI taken leadership changes -- in fact we use the term leadership adjustments -- because we always look at it as an evolution not a revolution. And the reason for that is we have a strategy, we know the strategy works, and what we spend our time on is doubling down on the execution of the strategy. And that's exactly what we're doing here. And I did point out of the four senior leaders that have found themselves either promoted in new positions, they are all internal, experienced in the CGI model, and buy in on the strategy here. So not sensitive at all. Ask me any question on that, but as I said my expiry date is still out there. And I intend to certainly continue to help position and grow the Company with the team here for the foreseeable future.

Okay, thanks for that candid response.

Maybe time for one last question.

Rob Peters, Credit Suisse

Thanks very much for squeezing me in. I'll keep my question brief. Mike, just wondering when we look into the UK bookings and specifically after the general election which I believed wrapped up in May, I was just wondering is the Edinburgh contract the first of kind seeing those bookings recover or do you still think it's a little bit -- while out before the government begins to start awarding contracts again?

On the federal side, that's a good question Rob, we had one that got caught in the freeze, that thing is working through. We expect that to clear and be booked in this quarter. Edinburgh will depend on the next steps in the process, but we have a very good visibility there in the UK in the government sector. But as you know, government they do have a few more checks and balances before that stuff actually converts from a booking into a revenue.

The second thing I'd just point out -- nobody asked me the question but I do know the answer, so I feel the need to share it with you -- is in the UK if you look at the margins there they have taken some pressure because we have invested heavily in these big transformational deals. A la Edinburgh. Some of these take a year and a half in terms of start to finish, and in some cases the investment required here is well in excess of GBP1 million, and in a lot of cases we have to do some strategic hiring and some dedication of experts who are unbillable for the pursuit. And then when you're successful of course, the thing starts to turn the other way. So part of leading organic growth is to ensure that we do make the necessary investments and the necessary calculated debts here on these big deals. That's what Tim and his team are doing. They are very successful and I expect that the bookings in the UK will snap back here in the fourth quarter.

Thank you. Thank you everyone and we look forward to joining again on our Q4 call which will take place the second week in November. Thank you.

Thank you. The conference has now ended. Thank you for your participation.