CGI Inc (GIB) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the CGI second-quarter 2016 conference call.

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

Thank you, Melanie, and good morning. With me to discuss CGI's second-quarter FY16 results are Michael Roach, our President and 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, April 27, 2016. Supplemental slides, as well as the press release we issued earlier this morning are available for download along with our Q2 MD&A, financial statements, and accompanying notes, all of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The complete Safe Harbor statement is available in both our MD&A and press release as well as on cgi.com. We 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 will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted.

Before turning it over to Francois to review our results, I would like to thank those of you who came out to the investor day in Toronto last month and to those of you who joined us on the webcast. We hope you found the day to be informative and useful. For everyone else, the full archive is available on cgi.com/investors.

So with that, Francois will review our Q2 financial performance, and then Mike will comment on the strategic and operational highlights before taking your questions. Over to you, Francois.

Thank you, Loren, and good morning, everyone. I am pleased to share our results for Q2 FY16.

Revenue was CAD2.8 billion, up CAD149 million compared with the same period last year and representing growth of 5.7%. Foreign exchange fluctuations favorably impacted revenue by CAD174 million resulting in constant currency growth of minus 1%.

For a better year-over-year comparison, growth at constant currency was minus 0.7% when excluding the wind down of some low margin business in Spain and South America. This is a significant improvement from minus 3.5% in the year-ago period. In addition, sequentially, revenue at constant currency grew by 1% demonstrating the ongoing momentum towards positive organic growth.

We booked CAD2.7 billion in new contracts during the second quarter, nearly half of which is new business bringing global bookings for the last 12 months to CAD11 billion or 104% of revenue. Adjusted EBIT was CAD391 million, up CAD28 million while our EBIT margin increased by 20 basis points to 14.2%. This reflects an improved revenue mix, the ongoing benefits from the restructuring program competed in Q1, and expanding news of our global delivery centers.

For the quarter, our tax rate was 23% when including a CAD14 million one-time favorable tax adjustment. On a comparable basis, our tax rate was 27%, an increase from 26% in Q2 last year reflecting higher profitability in the US and India and negatively impacted EPS by CAD0.02. We continue to expect our normalized tax rate to be in the 26% to 28% range for the full fiscal year.

Earnings were CAD283 million, up 12.6% for a margin of 10.3%, while EPS of CAD0.90 compared with CAD0.78 last year is an improvement of 15.4%. EPS was CAD0.86 when excluding the tax benefit I just described representing an increase of 10% over last year.

Turning to cash, our operations generated CAD251 million in the second quarter. This figure includes CAD20 million in cash disbursements related to the restructuring. Cash from operations for the last 12 months is CAD1.2 billion or 12% of revenue.

We ended the quarter with a DSO of 41 days, the same as last year and below our 45 day target. Long-term debt at the end of March was CAD2.1 billion, a reduction of CAD111 million quarter-over-quarter. We invested CAD509 million in Q2 to repurchase 9.1 million shares at an average price of CAD55.73. Under our current NCIB, an additional 14.3 million shares can be purchased before February 2017.

As a result, net debt at the end of March stood at CAD1.9 billion, up by CAD353 million sequentially as we repurchase shares and completed an acquisition in France. Net debt to capitalization was 23.8%, down from 24.4% in Q2 2015 and well within our target zone. By maintaining this balance sheet strength, we have the flexibility to continue executing our Build and Buy profitable growth strategy.

Now, I'll turn the call over to Mike.

Thank you, Francois, and good morning, everyone. Our second-quarter results were strong, balanced, and continue to track to our 2016 business plan.

Revenue was essentially flat on a constant currency basis and continues to improve steadily towards positive growth. In fact, several operating segments again delivered year-over-year revenue growth, and the remaining segments are showing steady progress towards this goal. As outlined at our recent Investor Day, we are experiencing growing customer demand for our services and solutions. In line with this demand, our strategy is focused on helping clients reduce their run or operating costs while also helping them to become digital organizations. Our ongoing investments in high end consulting, our IP30 solutions portfolio, as well as transformational outsourcing, are all aligned to this customer demand imperative.

Now I'll briefly walk through our operating entities. In France, our operations continue to show strength across all indicators with revenue up 5.7% representing the second consecutive quarter of constant currency growth. EBIT margins were strong at 11.5% further demonstrating the ability of our team to expand both top and bottom line.

The acquisitions of Alcyane combined with the growing backlog of new wins, long-term extensions, and a book-to-bill above 1 will contribute to additional growth in the back end of the year. Our new center of excellence dedicated to digital transformation brings together best practices in security, big data, digital customer expense, and mobility further positioning us as a market leader in France.

In the UK, revenue was up 3.5% as past bookings begin to convert to revenue growth. EBIT margin was 12%, up 70 basis points. With the book-to-bill over 120% both in the quarter and over the last 12 months, our UK operation is well-positioned for continued growth.

For example, in the quarter, we were awarded a 13-year digital transformation contract by the Scottish Borders Council. This is the first add-on contract awarded under the Edinburgh digital government framework. To date, we have booked over CAD500 million and have the opportunity to enter into similar agreements with the remaining 19 Scottish municipalities. We expect the revenue to begin ramping up in the back half of the year.

We also continue to experience strong demand in the financial services where we have booked new business with key clients. Again, helping them build their digital transformation road maps including selecting new platforms for growth. Similarly, we're seeing growth in payments across industries as the need for faster processing continues.

Across the Asia-Pacific, revenue was up 11.6%. EBIT margins were 18.6%, up 260 basis points. Book-to-bill was 142%.

The strength in this segment is in line with our strategy to solidify our competitive position while improving productivity and associated margin expansion through the use of our global delivery centers. This accelerated growth can have an impact on our operations reporting revenue but it remains a significant growth lever for the corporation as a whole.

In Canada, for example, revenue grew 1% when including the increased Canadian volume of work sold in Canada but delivered from our offshore centers. EBIT margin was up 21.4%, up 140 basis points. Book-to-bill was 107% and 109% over the last 12 months.

We continue to experience significant demand and related growth in the banking sector and in Western Canada. Aligned with our IP30 strategy, we have seen growth in our IP business, specifically our Collections360 platform. For example, a top financial institution has awarded us a CAD100 million agreement to be their collections partner on a SaaS basis over the next 10 years. Our pipeline continues to strengthen including a noticeable increase in transformational outsourcing opportunities both with new and existing clients.

In the US, revenue grew 4% when excluding our defense business which remains under industry-wide pressure. In this area, we are experiencing delays in re-competes and task orders which are pushing both the bookings and the project starts to the right. We currently have CAD1.2 billion in submitted proposals awaiting award of which more than half is related to the defense sector. EBIT margins were strong at 16.3%, up 80 basis points.

On a trailing 12-month basis, our book-to-bill continues to strengthen across all segments, federal, state, and local, as well as commercial. Our commercial pipeline is up more than 50% as we were experience increased customer demand, again primarily in the financial services.

Across the Nordics, revenue was down by 5.3%, EBIT margin was 10.6%, and book-to-bill was 121% in the quarter and 105% over the last 12 months. As the benefits relating to the restructuring program continue to materialize, we expect profitability to gradually improve in the second half as new bookings convert into higher quality revenue.

Short-term macroeconomic pressures in Finland and Norway have impacted the results in the quarter. However, with ongoing momentum in Sweden, our largest Nordic business unit, we continue to anticipate gradual improvement in the second half of the year. For example, clients like the Swedish Social Insurance Agency selected CGI as their digital transformational partner. The funnel of opportunities in the Nordics remains healthy, particularly in Sweden where we are the market leader.

In eastern, central, and southern Europe, revenue was down 4.7% on a comparable basis excluding the wind down of certain operations in South America and Spain. Our German operations, the largest market in the segment, has now posted its second quarter of year-over-year growth supported by strong bookings and a healthy pipeline of opportunities. EBIT margin for the SBU was 9.4%. Book-to-bill was approximately 90% for the quarter and over the last 12 months.

Like elsewhere, we are seeing opportunities in the payment and the financial services space. In Germany, we recently entered into a partnership to implement an integrated payment platform to accelerate digital transformation for a leading media provider. In the Netherlands, we continue to work with oil and gas clients to adjust their cost base in response to fluctuating oil prices. As such, a significant volume of work moved offshore in the first half of the year.

On the other hand, the Dutch team continues to gain market share in key growth sectors. Transformation where we are seeing double-digit growth, and energy, where we're recognized as the leader in sustainable solutions having delivered 11 of 17 central market systems worldwide.

In summary, our comprehensive portfolio of services and solutions is directly aligned with the rising demand for our clients to become digital organizations. Our IP30 initiative remains on track with momentum across all sectors and geographies. And, as we returned to positive organic growth, we also remain committed to double-digit EPS expansion for the full fiscal year.

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

Just a quick reminder that a replay of the call will be available either via our website or by dialing 1-800-408-3053 and using the passcode 5515794 until May 28. A podcast of the call will also be available for download within a few hours and as usual, follow-up questions can be directed to me, 514-841-3355. Melanie, if we could poll for questions, please.

(Operator Instructions)

Daniel Chan, TD Securities.

Thanks. The book-to-bill weakness in the US, is that all driven by the defense sector, and if so, when do you expect that to improve and do you expect the US to grow this year?

The US, as I mentioned, is growing when you exclude the defense sector and as I mentioned on the call there, excluding that segment we are growing 4%. It's an industry-wide problem. I think if you look at our pure play peers that are in the defense sector, there's a lot of things moving to the right.

I think on an optimistic sign, Dan, we have a lot of opportunities in there awaiting award, so we can't really determine when decisions are going to be made on that. Clearly, the book-to-bill is impacted by that segment, excluding that we are at 100 or above in commercial, state, and local.

Thanks. And as a follow-up, as costs continue to rise with high revenue, EBIT margins continue to stay in the low 14% range. Do you anticipate it to stay here or do you think you can move it higher from here?

When you mention EBIT's margins low at 14%, I think there would be a lot of companies that would like to hit that as low in our industry. What's happening there and again, you have to watch again quarter-by-quarter. As we pursue more deals, obviously the cost of sales, there's a lag between things like due diligence on an outsourcing project versus the revenue stream. You will get some short-term misalignments between expenses and revenue coming on-stream. It's all part of returning to organic growth.

We are not seeing anything structurally in the business that's impacting our margins here. Our margins are still very strong and again, I remind folks that when you pull out the intangibles, especially in our European peers, they're all above 10% at the peer operation level.

And if you look at North America, Canada was over 21% and the US was over 16%. Those are world-class margins in our business. And again, really reflecting our push on IP30, the mix of our work, outsourcing deals, high-end consulting, the digital strategy work, this is all exactly in our sweet spot and aligned with customer demand.

The following question is from Paul Treiber of RBC Capital Markets.

I just wanted to follow up on the investment ahead of new potential revenue question. It seems like from our tracking it seems like hiring is picking up in Europe and the US. How do you weigh the cost of having new hires sitting on the bench versus adding capacity ahead of potential new revenue streams?

It's a business call. Clearly, you need to hire people to the customer demands so in the digital space, agile development, these type of things. So you need to secure those people.

We need some time really also to educate them on our operating model, our management frameworks, how would we do development, and these type of things. So there is a bit of a lag there. That's one of the reasons why I said you can't really look at some of this quarter-by-quarter, especially when you're looking at the systems integration consulting business because it ramps up at the pace of the customer can push over the requirements.

We are not carrying high benches, especially in North America. If you look at those margins and utilization rates, both in Canada and the United States are very strong.

In Europe, I think what you're seeing there is the hiring is linked to the growth. You can see our two big geographies over there, in the UK and France are both growing organically and they're ramping up. As an example, if you look at the book-to-bill in the United Kingdom at 120% and revenue streams coming on in the back end of the year, you do need to hire.

It's a very positive sign, Paul. And again, nothing out of the ordinary here other than as I say, as we ramp up, you are going to see a bit of a lag between the expenses and the revenue coming on.

And then, just in regards to Easter, Easter fell into March this year whereas last year it was in the June quarter. Did that have any notable impact on margins or organic growth in your calculations?

Yes. Depending on the country and the mix of the work there, it probably impacted anywhere from one or two days which would hit the top line, and it would hit the bottom line. That has now shifted to the quarter we are in. We expect to get some lift from that in the third quarter.

So yes, that is a difference. For us, it's probably a bigger difference than it would have been pre-Logica because the mix of our work now we have a lot more that's SI&C type of work or timing material where when you have holidays like that, we are not able to work or bill.

Thank you. I'll pass the line.

Steven Li of Raymond James.

Mike, in doing the M&A deal, you highlighted non-renewal of some contracts in the US defense market. Were these just delayed or were they lost to competitors?

No. What I'm talking about here is deals that we have submitted answering IRPs. The procurement groups are sitting on these, not just in the case of CGI, I think it's market wide.

We are just waiting on them to make a call and as they do, this should help us on book-to-bill and also on the revenue side. So that's what I was referring to, Steven.

Okay. Can you quantify the impact of these non-renewals on the US side?

Well as I say, what I've done is I've just pulled out just the defense sector in the US so what you read from that is the commercial is growing, state and local. The civilian side of our federal government business is growing.

The defense side is having a -- it's kind of the last piece of the federal business to turn up. Fortunately for us, we have got a good balance between civilian and defense. I think by last count, about half the revenue or less was in the defense side and the other side in the civilian side.

It's the last piece coming out of there. The bookings are growing stronger there. We continue to deliver good margins, good cash there. We just have to be a little more patient there. But I think what's significant if you look again at the US excluding that we're growing at 4% in constant currency -- organic growth and the margins are extremely strong. Going to point as Francois called out, we're paying more taxes as a result of the good work of the US team.

Maybe the last one, last one for Francois. I might have missed it, but how much was restructuring investments in the quarter and how much is expected next quarter? Thanks.

CAD20 million in the quarter that we have disbursed and we're pretty close to the end of all the disbursement because again, it started in Q4 of last year. Since it was mostly severances, it was paid in the next month.

Thank you.

Jason Kupferberg of Jefferies.

This is a Amit Singh for Jason. Quickly on the top-line trend, if you look at your constant currency revenue growth trend, it is definitely improving. But just tying it to some of your past comments, should we still expect the revenue trajectory to turn positive some time in the second half, maybe third quarter or fourth quarter?

I think I've been pretty explicit that our plan was to gradually move to positive growth in the back half of 2016, and we are on task to do that. I think the second thing that we have is a goal there. As I mentioned before, it's not to have the machine snap back and load up revenue that's not aligned with what the customers value the most and is not on our strategy and that is heavily capital intensive.

We are on track there. As they say when you go apples to apples, we were 0.7 different than last year -- year-over-year constant currency. And on a company this big, that's essentially flat. We have got a good platform.

What happens here is you have a lot of things going on in a company this big, so you could have one unit pop up one quarter. So we are going to take some time over the next period to get more consistency here across the operating entities. But as you can see in France now, they've had two quarters and they have had I think it's four quarters, all of six or something where they've shown organic growth. In UK, it's on a good path.

So we're heading in the right direction. Canada as well, we have got good funnel there. We're working on a lot of deals and our banking business is red hot, oil and gas in the west. We have got a lot of good things going, and we like where we are positioned for the back half of the year.

Perfect. Thanks.

Just talking about the M&A, during the analyst day, you talked about you have identified I think around 384 niche and 63 transformational acquisition targets. Is there any update there? What's sort of preventing you right now from executing on anything sort of in the very near term?

As I said many times, what's preventing us is three or four things. One, we need to be sure that the companies that we have in that pipeline are aligned to our strategy which is aligned to the customer strategy. We have to look at valuations because again, we are very diligent here in terms of investing money.

It has to have an accretive benefit, and you have to have a willing seller. You have to do good due diligence. As I mentioned before, we have had a number of cases where we have done the due diligence and found things that we didn't like and walked away.

Again, what you're always trying to balance here, and I think you know that, we don't buy things or invest in things for short-term gain. We do it for the long term.

There are opportunities out there. We continue to qualify the pipeline, and where appropriate, we move forward to due diligence. We don't have anything to report today but we'll keep you posted as we go through that funnel.

It's still a very key part of our strategy, though. It's linked to the organic growth in a sense it is an accelerator to the organic growth, and it's just on the investor day I give three examples in some areas that allows us to enter another portion of a customer if it's a bank. The retail side if we're heavy in the commercial side, or accelerate penetration across a group of customers or technology as you saw in the case of France.

We like the opportunities there. We are very committed to it. We have the operation capability to integrate these folks, and also we have the financial capability to pull the trigger. But it's got to be the right target, the right price, and the right time.

Perfect. Thank you very much.

Paul Steep of Scotia Capital.

Mike, maybe you could talk a little bit about the amount of work you're moving to some of your offshore centers. You flat called that out particularly in the Nordic and in Canada I think over the last couple quarters. Maybe talk a little bit about the process and how disruptive or not it might be to margins in that period, and then how much or what volume you think you might still move offshore.

That's a good question, Paul. It gives a good chance to firefly what I was trying to explain.

If you look at where we are using offshore, so where we do an acquisition like Logica, as I mentioned, we did the same thing in AMS. We go in there and we look at work that we are doing for ourselves essentially. An IP is a prime example.

What we do is we go in and we look at IP and where we are doing development or maintenance of our own IP, we shift that work offshore. And of course the logic there is that the people that are working in country on that IP, we can now put them billable.

If you look at it from a business standpoint and a member standpoint, they become billable. They have a lot of expertise in this IP and technology. They become billable that helps on the growth side.

The cost of doing the development and the maintenance goes down significantly, which brings down our cash draw and it brings up the margins in the geography where this work has been done. If you look at that as example, that is going on, and it's more pronounced obviously in the Nordic countries where they have a lot of rich deep IP. And also, in central eastern Europe, and that's one block of the work. You see that in some of the margins, for example in Sweden where our strengthening as that type of lever is pulled in those operating territories. So you see that.

The second thing is we are using more in India, our billable delivery probably more appropriately, where we're dealing and working on opportunities where the customer in a lot of cases is frankly looking for rebalancing of the work. So even you'll see our portion of global delivery growing, what is behind that is a more integrated delivery solution to the customer that has the local component, which is a huge competitive advantage for us being client proximity.

And then part of the work being done so for example, we have a customer in the Nordics. We're doing some work there. Because of European regulations, we are doing some in Poland because it stays in the eurozone and then we may be doing some work in the Philippines or in India.

As I mentioned in my comments, it can dampen down in the short run when you look at some of the segments. In Canada, as I say when you look at what the Canadian operations sold in those type of deals, their revenue on an apples-to-apples basis is up 1% organically. But when you then pull out of that that part of that revenue is being delivered out of India but owned by Canada. Always owned by the local business unit and local SBU.

How much of it we are going to do? I would that say clearly on the internal side, we're quite far along but we still have more opportunity there. That is part of the plan to grow earnings and really capture that value creation model that I described.

On the external part with customers, we are going to see it in those type of deals, and we are also seeing the outsourcing managed services wrapping up. And there will be a significant component of our global delivery centers and managed services deals. It's just by the nature of those deals that has been going on for years. We are seeing a ramp up in outsourcing.

As customers are trying to take down their run costs, refresh access to human capital that understand the journey towards the digital organizations. And of course, as we said at the investor day, we're straddled on both sides of that. We know the current foundation systems, and we know how to design, implement, and operate a digital environment, so we think we are well positioned to be the partner of choice to help customers on that journey.

Great. Just a quick follow-up.

Could you call out what the trend was for IP solutions as well in the quarter? I know you called out Collections360. Where you have seen that growth and what you're trending to at this point. Thank you.

Quarter-to-quarter, it doesn't necessarily a meaningful thing. Suffice to say, Paul, we are continuing to grow that business.

We called out that opportunity in Canada. That's the third financial institution now that has gone on to that particular IP in the collection side. It's a long-term 10-year deal, significant benefits for the customer being on a SaaS model and also very important to us from an overall profitable growth strategy. We probably will give that number.

I don't think it's meaningful in the quarter but on an annual basis. Suffice to say as we said at the investor day, it's moving up. Not at IP30 yet, but hadn't intended to be at IP30 at this point.

You will see more deals that have an IP component that is in line with that big opportunity still in some of the geographies in Europe, Canada, and the US as you can see in the margins are pulling that lever on a more consistent basis as is the UK. Good news is, we have more opportunities in many of our geographies to increase the penetration and hit that number.

Great. Thank you.

Richard Tse of Cormark Securities.

Mike, you've seen some [conservo rev] post strength in France and the UK. Would you attribute that to market specific factors or something specific you are doing in those markets?

I think it's a combination of both. I think if you look at where the UK market was post the financial crisis, they are really snapping back, big, big financial services industry in the UK. A lot of investment going into the digital platforms.

I think in the UK, digital generally has a higher adoption rate. You can see that in the Scottish situation which by the way, as I call that, we have are booked CAD500 million just with two jurisdictions in Scotland, all organic growth.

In the -- in France, I think it's a combination of again demand rising there, and our scale and scope. We have over 10,000 people in France, growing rapidly there. The team is very, very focused on high end consultancy, the very things that our customers are in demand. We're getting good alignment there between the customer demand, the recovering economy in the case of the UK, and our coverage in that market, our ability to serve these customers locally and globally.

And as I say, same thing is happening in Germany. We're coming out of there. We've got positive growth, and the other areas. I talked about Canada, the US.

We are seeing a combination of market conditions and customer demand, and then as I mentioned at the analyst call, this is not a short-term bounce here. There is some significant time and money and energy being pushed into companies and governments transforming themselves to a digital organization.

On our side, we are always very focused on not only where the customer is but where the customer is going. They have been pretty both clear verbally and have aligned their business and IT investments right on this area.

We like where we are. We like the market conditions. You still have the odd country where they may be feeling some economic pressure but for the most part, things are picking up.

I guess related to that, we are seeing some potential for big transforming deals in financial institutions in North America, but it has been slower to adoption. What do you think the gating factors are to that accelerating investment in this market here from a client perspective?

If I look at globally and financial, my sense is in some cases there will be additional companies formed in areas like investment banking and that so this affords an opportunity for us to help them actually start off as a digital organization and strand some of their legacy investment that would have been required in a more integrated go-to-market strategy. There is a lot of drivers in the financial services business globally. The approach of Fintech into that market place, regulation, cyber, customer demands, government policy, and all of that requires the assistance of IT.

We are seeing that in our decision to dedicate a unit in Toronto. We're looking at that in other countries now to ensure that we have enough market coverage to capture the start of this wave and take it right through from an end-to-end perspective.

As we reiterate, we just don't want to be at the front end of this thing. We want to do exactly what we've done with our core business over 40 years. We want to be the long-term partner of our customer. We want to be able to provide him with a single point of accountability for his service, his risk, and his costs.

Okay. And just one quick final one for France while maybe on the financials.

If you look at your property, plant, and equipment and the contract costs, it seemed to be up a little bit year-over-year. Can you give us a sense of what that may be for the FY16?

I would need to look over further on the forecast side. On the contract costs, it went up especially for example in the UK with the outsourcing contract that we won.

And also on the P&E side, the property, plant, and equipment, a lot of it is related to UK and the new deals that we signed naturally. We did start to have (technical difficulty) -- that we are doing the transition and the set up of these.

Okay. Thank you.

Thanos Moschopoulos of BMO Capital markets.

Maybe a related question for Francois. The cash flow was a little bit later this quarter year-over-year. Any impact as well perhaps from some of the project startups or just normal quarterly volatility in that number?

It's related to the cash outflow. Inflow was pretty good, like I was saying, 41 day DSO was a pretty good DSO for the quarter.

On the cash outflow, some are seasonal. Example, prepaid, we have also some hardware and maintenance, software maintenance fees to pay to our suppliers on an annual basis. And that hit in the January February time frame.

And also payroll that can swing from a quarter to a quarter. I'll give you an example. We had three payroll in Canada in the month of March, so that had an impact on the cash from ops. Naturally, will be picked up in reverse in the subsequent quarter, and that's why again we are looking at them on a 12 months basis.

Great, and then one for Mike. Mike, you talked about the growth that you are seeing on the US federal civilian side. Can you elaborate a little bit in terms of the dynamic in that market and whether or not we should see any sort of election related impact this year either positive or negative?

I'll probably, which I don't often do, take a pass on answering part of that question. The election dynamics are interesting but I couldn't at this point give any kind of educated assessment of what it could do from a CGI perspective.

I think on the civilian side, remember the civilian side is very tied to policy. Things like visas where we're have a significant position. Take passports, these are driven by my policy and also by activity in the world. We're seeing some increased volume there that follows through.

We are also are actively promoting our IP in that space. You may recall we talk about advantage a lot in the state and local side.

We have similar -- really a category killer in there called momentum which is an ERP for the federal government. This is more activity around that. Not only add-ons, but I would say that there is more activity where opportunities are coming up to actually put that platform in. Help customers consolidate multiple platforms and again create significant value for them and for us.

Again, you contrast that with the defense side and the same drivers are not there. There are more longer-term type arrangements tied to larger procurements, more strategic than tactical in comparison to the civilian side.

Sorry, Mike. I was referring to pre-election impact rather than post-election impact. Anything you see on that front or no?

I can't really call what will happen there. I don't think there will be any impact here for -- in this fiscal year. 2017 will get a better look when we see how the policies of those that take office differ or align.

But I have to tell you, over all the years when we do a lot of business in government, government continues to need to invest in IT not only for their policy but they're also being hit hard by demographics. And as you see in the case of a number of the deals that we have announced, the citizens -- the demographics of their citizens is also more aligned to doing business with them on a digital platform than face to face. In the final analysis, it also drives efficiency and cost reduction in there which again, I think will continue to be top of mind for governments, especially if interest rates start back up.

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

James Schneider of Goldman Sachs.

I was wondering if you could you maybe comment on your headcount and hiring plans over the course of the year. Maybe give us some sense about what those plans are, what the pipeline of new talent is and maybe where you expect headcount to be exiting this fiscal year in terms of an incremental step up from the beginning.

Sorry, the last part, James, was exiting this year?

Exiting fiscal year, yes.

Again, at a macro level, obviously as we grow, organically we will see headcount decline. But again, remember if you look our headcount revenue ratio, we don't have the same one-to-one correlation that say an offshore player would.

We are selling outputs here. So by the very nature of that, we're heavily incentivized to do more for less. There wouldn't be a one-to-one correlation there, especially if you look at things like our infrastructure business or our outsourcing deals.

On the SI&C business is certainly where it's time and materials. If you look at France and geographies like that, you will see a ramp up headquartered in hiring. Our turnover rate is 10% to 12% a year so that alone generates significant hiring.

I think directionally back end of the year as we enter 2017, you will see gradual hiring here to meet the demand and to be positioned for the demand in areas like agile, digital strategy, all these areas, cyber. So we keep a pretty good eye on that in terms of making sure our hiring is aligned to the customer demand. Not sure I can say a lot more about that.

The talent pool, there's a lot of talent out there who are in companies that are focused on internal matters like splitting their companies or restructuring at a significant level that are looking to join a company like ours that is stable, very stable, very consistent, not for sale. Where they can come over and build a career.

Of course, we continue to work on graduate hires and bringing in people who would have a growth path into areas like consulting and business account manager, this type of thing. There's no shortage of talent out there.

That's helpful. And then just a quick follow-up.

On the mix of outsourcing versus SI and consulting, that mix has kind of steadily moved towards outsourcing for a while now. Can you comment on first of all what is the mix of your total backlog in terms of the split between outsourcing consulting? And can you imagine a scenario as we get into 2017 where that mix of outsourcing looks to be pushing 60%?

A couple of points there for context. First, the goal that we have is to increase our recurring revenue. This allows us to invest on a regular basis and capture the return within that investment cycle.

So 10-year deal, we have three investment opportunities, year 1, year 3, year 6, and year 9. We're going to get the return within those three year windows. That's one reason we want to do that. We can bring more benefits to clients and also have some certainty around investing in our business.

Our experience from the last significant downturn because we have 60% recurring revenue we have a floor here. Regardless of where the economy is going, we are not going to drop below 60% recurring revenue and it was -- we positioned us as a defensive stock. And certainly, we're able to protect our investors in light of that headwind.

What you are seeing in a bit of the shift is I can tell you we are not de-emphasizing our SI&C business. What's happening again is part of our strategy, especially in the acquired assets, in Logica, we've always been very upfront about that, is to convert some of those shorter-term contracts into longer-term contracts. We have seen that in the Nordics. You've seen it in France. I think the French team is making a lot of progress frankly on that score.

The UK has always been that way but if you just look at the Scottish Borders in 13 years, what you will see is outsourcing. The IP is another good example that's in the backlog. A 10-year -- a deal that we announced, CAD100 million. This has grown by our strategy, IP30 transformational outsourcing, going longer on contracts in countries where this is not the norm.

I think to answer your last question, the mix is in the backlog is heavily swayed to outsourcing managed services IP deals. I don't have it at my fingertips but I would say it's probably 80% long-term deals. I think the average age of that backlog is still six to eight years.

That's great. Thanks for your help much, Mike.

The other thing I will say about our backlog, the margins aren't all back-ended loaded.

Good to hear. Thank you.

Ralph Garcea of Cantor Fitzgerald.

Thanks for taking my questions. Two quick ones here. One on the small acquisitions that you've done.

The JSL deal, at the investor day, you said you started to have about 320 million plus new opportunities in the pipeline. That's like 30 times the revenue run rate. Do you see a similar sort of leverage on accelerator on the France side with the Alcyane deal?

It's a little early there. I think on the JSL deal, because we were focused -- they were focused on one client, we were able to get a better handle on that.

I would just put a point of clarification though that the JSL acquisition has not only positioned us for growth in that account, we have now been able to take that offering on the agile digital side and when engagements with other financial institutions and other large Canadian corporations that are headquartered around Toronto there, Ralph. So that was -- is an interesting one.

We are getting leverage based on the relationships in the institution that they were operating and we're also getting the leverage based on their strategy and technology skills around agile development, which you know is red hot out there. That's a good example.

We continue frankly to put business against that backlog. There is still a lot to be done there in terms of turning that pipeline into backlog and into profitable growth. If you look at the Canadian, the Toronto operation on banking, we are growing there at a very significant rate.

On the [PD] there, the CAD11 million run rate, there's your inorganic revenue percent. You have got CAD300 million plus in organic revenues, you'd convert that pipeline.

I should be increasing the guide's target there probably, Ralph.

Lastly, on the oil and gas side, can you leverage what you do in Western Canada into let's say the Shell? The Shell is merging with BG and they're going through their own headaches. They had two different IT providers in those entities. Can you wedge yourself in there and then sort of leverage what you have done in Western Canada into Europe and then grow the oil and gas vertical there or vice versa?

It's actually the combination of both. So in some cases, we are putting IP in there. In one instance, it's IP that we use in the financial vertical that we are able to embed in an oil and gas global player to help them protect their own card business.

We also have IP that we are refreshing in the oil and gas business that would be applicable certainly to the United States oil patch, also to Calgary and [well traveled]. As I mentioned earlier, we are helping clients who are rebalancing their cost base to the fluctuation in oil price. We are offering obviously more access to our managed services, to our global delivery centers. And really using it as an opportunity to have a business discussion about the future and what capabilities should be retained from an IT perspective within their company and which should be done by a partner like ours.

It is a good time to have those focused discussions because I think these companies have a very good beat on their revenue line and their cost structure. Where I called it out in Canada, called it out on the other side in the Netherlands, but in both cases, we are gaining share. In one case, it's having a short-term impact on the revenue because more of it is going offshore.

In the long haul, again and we always think long haul, we're gaining share. When that comes back with a higher share, we are well positioned to ride the curve up the other way.

Thank you.

Edward Kaslow of Wells Fargo.

It's actually Rick Eskelsen on for Ed. The first question was just a clarifier on the go forward tax rate.

I apologize. My line cut out when Francois mentioned that. Could you just remind us what we should look for, for the tax rate?

26% to 28%.

Perfect. And just sort of building on the talent question earlier. Mike, you touched on this a little bit in your earlier response.

Can you dig a little more deeply into your ability to find the talent in the digital areas? What are some of the hottest areas? And then maybe some more on what you guys are doing internally on the training and re-skilling side. Thanks.

That's an excellent question. I didn't address the re-skilling. Thanks for raising that, Rick.

Clearly, we have a re-skilling program. We have it up and running in a number of geographies. The re-skilling there is not limited only to digital, so we are re-skilling on the cyber side is an example, where our people obviously have a very strong base of knowledge that can easily translate into adding more cyber competencies. In some jurisdictions as well, the governments will assist in the re-training.

We do a lot of work in ensuring that the person has the base knowledge and desire to advance their knowledge and become more relevant and more billable. That's on the training side.

On the hiring side, again you are looking for skills that cover the end-to-end opportunity here on the digital world. It starts with consulting. We have people and continue to add them. For example, we've added a number of people from McKinsey who have come over, also from some of the other consulting firms.

They come, we hiring them on the front and helping the customers with the digital strategy, high end consulting. We're also helping them put a path forward on how to get from where they are to where they want to get to and in there, we do some SI&C work. We would embed in some cases as we mentioned our IP because it's a key part of a company's digital strategy.

There we're can leverage what I mentioned earlier where we're moving some of the work that we are doing internally on IP development offshore. And then taking our folks that know that IP that built that IP and make them billable within that context of digital skills. Again, I reiterate there are programs and kids coming out of school that have agile skills and other skills that are very relevant here.

Finally as I mentioned, there are competitors who are focused on other things right now. Or to put it in a more positive vein, I'm only focused on our customers full time so I don't have to spend any time looking at major restructuring alignment or spitting of our Company.

Great. Thank you very much.

Melanie, we have time for one last question.

Robert Peters of Credit Suisse.

Thank you very much for squeezing in. Two quick housekeeping ones for me.

Firstly, when we think about most of this version has paid out on the restructurings from last year, is it now safe to assume that we recognize all the cost savings, particularly in ECS or is there more to go there?

There's always a bit of a tail there because some of the restructuring could be beyond people. I would have to look at ECS more directly, Robert. But no, our sense is we would have a little more in the ECS and maybe a little more in the Nordics.

Thank you. And then just a quick follow-up.

When we look at the buyback, you have obviously been very active in the quarter. Obviously, the question came up on M&A. How do you guys think about balancing that for the remainder of the year?

It's a good wrap-up question.

Remember, the priorities for us is number one reinvest in our business. We are seeing more opportunities to do that. When you look at managed services, IP30, you should probably expect more money going back into the business.

The debt situation is locked down. It's long-term debt. We don't have any short-term requirements to pay back.

We are really left with share buyback or M&A. We have the capability of doing both. We have probably over -- access to over CAD2 billion in terms of cash and line of credit.

On the shares, we believe our shares are an excellent long-term investment. For me, if I can't find a company that is accretive to our Company, I am better to invest the money buying our own Company. It's had a hell of a return for our shareholders. That's kind of the trade-off that we ultimately look at.

Short answer is you should expect to see us invest more in our business. You'll see increased capital expenditures to contract ramp-ups with clients. We will continue to look at both buybacks and M&A. In the enviable position we are in, we can do all three.

Perfect. Thank you very much.

Thank you, all.

Thanks. Take care, everyone. Look forward to being back in July for the Q3 call. Take care.

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