Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Q4 2015 Earnings Call Company Participants • • • •
Lorne Gorber François Boulanger Michael E. Roach Unverified Participant
Other Participants • • • • • • • • •
Richard Tse Maher Yaghi Rod Bourgeois Jason Kupferberg Kris Thompson James Schneider Ralph Garcea Paul Steep Thanos Moschopoulos
MANAGEMENT DISCUSSION SECTION Operator Good morning, ladies and gentlemen. Welcome to the CGI Fourth Quarter 2015 and Year-End Results 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.
Lorne Gorber Thank you, Wayne, and good morning. With me to discuss CGI's fourth quarter and fiscal 2015 results are Michael Roach, our President and CEO; and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 A.M. on Wednesday, November 11, 2015. Supporting slides, as well as the press release, financial statements and MD&A issued earlier this morning are available on cgi.com and will be filed with both SEDAR and EDGAR. Some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete Safe Harbor statement is available on 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 Financial 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 in this call are Canadian unless otherwise noted.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
I'll turn it over to Franรงois first to review our Q4 financial performance, and then Mike will comment on the full year as well as our strategic and operational outlook. So with that, Franรงois?
Franรงois Boulanger Thank you, Lorne, and good morning, everyone. I'm pleased to share the results of another strong quarter. Revenue was CAD 2.6 billion, up 4% compared with CAD 2.5 billion last year. Currency fluctuations positively impacted revenue by CAD 178 million or 7%. Accordingly, our negative growth rate of 3% represents a 50% improvement from Q1 fiscal 2015, an additional proof point that we are moving towards positive growth. The book-to-bill was 110%, with CAD 2.9 billion in contracts awarded, bringing the full-year book-to-bill to 113% compared to 97% last year. Adjusted EBIT was CAD 370 million compared to CAD 370 million last year. EBIT margin remained strong at 14.7%. When excluding amortization of customer relationships, all operating segments generated double-digit margins. Last quarter, we announced a CAD 60 million restructuring to improve our competitive position. Against this program, CAD 36 million were expensed in Q4. We expect the remainder to be taken in Q1 and the benefits to materialize throughout fiscal 2016. The company's tax rate continues to rise due to the profitability of the U.S. operations. Our Q4 income tax rate increased to 27% from 24.5% last year. Net earnings were CAD 260 million, excluding restructuring charges, representing a margin of 10.1%, 70 basis points higher than last year. The higher tax rate negatively impacted EPS by CAD 0.01. As a result, earnings per share were CAD 0.82 from CAD 0.73 last year, up 12.3% up 12.3% and up 13.7% on a comparable tax rate basis from last year. Based on our current business mix and the continued momentum in our U.S. operations, we expect our fiscal 2016 effective tax rate to be in the range of 26% to 28%, excluded from this range is a CAD 6 million one-time expense to be taken this quarter related to a UK corporate tax rate [ph] trench (04:25) for which details are outlined in the MD&A. This is an additional headwind of approximately CAD 0.02 to Q1 EPS. Turning to cash, our operations generated a record CAD 451 million, or 17.5% of revenue. For the year, the operations generated CAD 1.3 billion in cash or 12.5% of revenue. We ended fiscal 2015 with a DSO of 44 days within our 45-day target. In the quarter we repaid CAD 121 million of the long-term debt and repurchased 5.1 million shares at an average price or CAD 47.23 for a total investment of CAD 239 million. Under the current program, we can still buy back approximately 12.1 million shares before mid-February. We continue to see our shares as a strategic investment based on a compelling valuation relative to the peer group. Net debt at the end of September was CAD 1.8 billion or CAD 334 million lower than last year, improving the net debt to capitalization ratio from 28% to under 22%. With a fully available revolving credit facility and CAD 305 million in cash, we have CAD 1.8 billion in readily available liquidity and access to more as needed to continue executing our profitable growth strategy. Before concluding, I would like to point out the most prominent change we have made to our reporting structure. To better reflect our proximity model, the Nordics is now a standalone SBU and consist of Denmark, Finland, Norway and Sweden, each of which is led by a local leader. In order to compare year-over-year performance, we have published the historic revenue and adjusted EBIT of each new segment for all four quarters of fiscal 2015. I'll turn the call over to Mike.
Michael E. Roach
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Thank you, Franรงois, and good morning, everyone. As Franรงois provided the details of quarter four, I will focus my comments on the full-year results and then wrap up with an update with respect to our profitable growth strategy and outlook. Our team delivered very solid performance in fiscal 2015. Revenue of CAD 10.3 billion; bookings up 14% to CAD 11.6 billion for a book to bill of 113%; adjusted EBITDA, up CAD 100 million to CAD 1.5 billion; EBIT margin, up 130 basis points to 14.2%; net earnings, up 12% to CAD 1 billion; earnings per share expanded by 13% to CAD 3.04 per share; and finally, cash generated by operations was up CAD 115 million to CAD 1.3 billion or over CAD 4 in cash per share. We reinvested our cash in the most strategic and accretive opportunities. We invested over CAD 250 million back into our operations. Specifically, we invested, and we'll continue to invest, in account management to support our proximity model, industry expertise to drive high-end consulting growth, solution development in line with our goal of IP30, and finally, delivery automation in our global delivery centers to enable more efficient outsourcing options for our clients. CAD 900 million against the long-term debt, which will not be a priority in fiscal 2016 as the short-term portion of our debt has essentially paid down. CAD 333 million towards repurchasing 6.9 million shares at an average price of CAD 48. Share buyback will continue to be a priority, giving our valuation and the low cost of capital. And in fiscal 2016, we have allocated and have access to sufficient financial resources to continue to reinvest in our business, repurchase our shares, and complete an acquisition or a series of accretive acquisitions. We entered the new fiscal year well positioned from a strategic operational and financial viewpoint. Our strategy of returning to positive growth is based on utilizing both the build and the buy pillars of our profitable growth strategy. On the buy side, I would like to begin by reinforcing our commitment to continue being an active, aggressive, yet disciplined consolidator within our sector. We have the capacity necessary to execute large transformational deals or a series of small niche acquisitions. And our funnel of potential targets is healthy, being constantly refreshed with additional opportunities. With respect to our initial list of 85 targets, we continue to review and qualify each of them for the next step in our acquisition process. For example, we are currently engaging with a number of management teams to determine their interest and willingness to sell and our ability to create incremental value by successfully integrating them into our operation model. We remain confident that 2016 is the right time to find the right target at the right price. On the build side, the four operational investments I previously highlight will assist our clients in becoming customer-centric digital organizations and will drive towards return to growth in 2016. As we reflect on the market and economic sectors in which we operate, certain previous headwinds are now being mitigated and in some cases turning to tailwinds. For example, FX trends are now lifting revenue and adding to the attractiveness of our Canadian nearshore offering; stability in our U.S. government business recovering and trending towards profitable growth; consolidation activity across sectors and geographies providing growth opportunities for our consulting, systems integration and outsourcing offering; and finally, all industries are facing a dual-track challenge to run their operations and change their operations for growth. On the run side, there are significant opportunities to drive down technology costs and take those savings and reinvest it in change. On the change side, our investment in high-end consulting and IP enables us to assist our clients in their digital strategies. These pressures are most acute in the financial services sector where regulatory requirements are overwhelming the run capacity budgets. At the same time, there's an increased demand from end customers for total digital experience, both of which are increasing demand for our services. In the United States, we continue to be confident in our ability to grow revenue while incrementally improving profitability. On the commercial side, revenue was up 3% year-over-year, as clients continue to invest in IT modernization, digital transformation, and IP within the banking communications and utility sectors, all of which grew at double-digit rates.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Our U.S. federal government business, which represents – which represented a headwind to growth last year, is showing signs of gradual improvement. The recent two-year budget deal now in place extends the U.S. debt limit and raises spending caps. With this context, coupled with a fourth quarter book to bill of 144% in CGI Federal, moves this business towards being neutral and potentially a positive contributor to growth in fiscal 2016. As a reminder, we are well-positioned in this market, with 58 contract vehicles having a combined ceiling value of well over CAD 500 billion. In Canada, there are three main market focuses driving change that represent growth opportunities for us: the new federal government, commodity pricing under pressure in Western Canada, and the banks facing the same global challenges to reduce the run cost in order to advance strategic initiatives. We continue to invest significantly in the greater Toronto area, which represents over 50% of Canada's IT spend. Our banking sector continues to ramp up. As a result, we are experiencing accelerated growth, with revenue up both sequentially and year-over-year. On the whole, our funnel continues to expand with high-quality opportunities, including long-term IP-based solutions. Turning to Europe, we see the same trends and positive opportunities as clients' agendas are focused on transformation. Our teams continue to successfully execute our strategy proactively, engaging with clients and capturing opportunities to earn new business. The book-to-bill in Europe was 107% in the quarter and over 100% for the year. Again, aligned with our strategy to improve the business mix, these awards are higher quality. For example, digitizing the City of Edinburgh is a seven-year engagement that positions us as a top contender for future digitization opportunities across all verticals and on a global basis. Overall, clients around the world need to be customer-centric digital companies with strategies based on achieving that goal. Our high-end consulting helps clients design their digital strategy. Our data and analytics are driving value by providing actionable information. Our cybersecurity offering ensures protection at all levels for all stakeholders. And when taken together, our transformational outsourcing offering allows clients to successfully fund and sustain their long-term strategies. In summary, we believe our consistent performance, improving market conditions, the relevance of our services and solutions, underpinned by our global reach, will contribute to our ability to increase earnings per share through the return to growth and maintaining operational excellence across the business. Thank you for your continued interest and support, let's go to the questions. Lorne?
Lorne Gorber Just a reminder, that a replay of the call will be available either by our website or by dialing 1-800-408-3053 and using the passcode 8806386 until December 12. As well a podcast of the call will be available for download within a few hours, and as usual, follow-up questions can be directed to me at 514-841-3355. Wayne, if we could poll for questions, please?
Q&A Operator Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Richard Tse from Cormark Securities. Please go ahead. <Q - Richard Tse>: Yes. Thank you. Mike, just wanted to get some perspective. In which verticals do you guys see the greatest opportunity for growth here over the next 12 to 24 months?
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<A - Michael Roach>: Thank you for the question, Richard. It's nearly a lay-up in the sense that the financial vertically globally, as I mentioned, are really in a investment phase. They're committed to transforming their business. They're dealing with the cost, as I mentioned, of an increasing run cost just to operate their businesses. This has been driven by regulatory requirements, competitive pressures for new products and new solutions. And on the other hand, they have to free up capital to invest in this transformation. I think if you catch the Globe today in Toronto there's a whole article on Toronto-Dominion Bank that really outlines exactly what I'm speaking about here. I think a couple of weeks ago we saw Scotia announced an investment in digitization center of excellence. So, we see this across the globe and this is one of the reasons why, not only in Toronto but in the other big markets of London, New York, Paris, we're investing heavily in our banking financial business and we're starting to see, as I mentioned, the return in Toronto. We're growing sequentially in our banking division and we're growing year-over-year, and our funnel is very, very healthy, made up of not only longer-term but some near-term opportunities that we expect to close here in the next 60 days or so. <Q - Richard Tse>: So on that, would it be safe to say that when you're looking at M&A that would be sort of the type of transaction you'd be interested in doing, a firm that would be more focused on financials? <A - Michael Roach>: I think if we could find something, financials is certainly at the top of the list. But again, also trying to look for IP that crosses that horizontal, so I could leverage it to beyond the single vertical. But if I look at it, certainly financials, we have a good portfolio there now. So to be able to add to that or fill in any gaps would be very helpful. On the other hand, Richard, is to â&#x20AC;&#x201C; as I mentioned earlier, we want to help the customers actually design their digital strategies, so again, moving up the stack in terms of more consulting capabilities, getting closer to the customer strategy piece and making that link between their business requirements and their IT requirements is also a very sweet spot for us. <Q - Richard Tse>: Okay. And just last question, I know you have like 85 potential deals that you're looking at. But would you say the environment for M&A today is more attractive than it's been in the past 12 months maybe from evaluation perspective or other? <A>: Well, again, I would say our sense is there's a lot of companies looking here in terms of their own strategic plans. And with the shift in technology and where the customers are going, there's clearly some entrepreneurs and various companies looking at whether or not they want to go it alone or do they want to be part of the larger consolidated market. So, we're kind of seeing both out there. Valuations, there's still the issue that we run into over the years especially around an entrepreneurial base firm. We can never pay an entrepreneur for the sweat equity that take put into the company over 20, 30 years of course and we have to base it on solid valuation criteria. So, you get some discussions around that area. But we're â&#x20AC;&#x201C; as I mentioned, as part of our process, we have met and our meeting with management teams of potential targets and having those discussions. And we're also adding to the list which I wanted to mention, it's not a static list because what happens as we start out there talking to companies and talking to customers on a daily basis, we're getting other suggestions which we're also putting in the funnel. So I think you should look at the acquisition funnel much like we look at the sales funnel on the deal side. It's fluid. It can go up. It can go down. Suffice to say that it's a healthy funnel, and it will take some time to go through it, but we're on it. And as I mentioned, we do have the financial capability, not only to continue to invest in the business, buyback our shares, but also do a series or a large transformational acquisition in 2016. <Q - Richard Tse>: That's great. Thank you, Mike. <A>: Thanks, Richard.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Operator Thank you. The following question is from Maher Yaghi from Desjardins Capital Markets. Please go ahead. <Q - Maher Yaghi>: Yes. Thank you for taking my question, and good job on the quarter, guys. I just wanted to talk a little bit about your expectations about margins from here because â&#x20AC;&#x201C; correct me if I'm wrong, but after correcting for some of the help that you got on some onetime items in Q4 last year, this is one of your highest-margin quarter ever. Where do you see those margins heading in 2016, given the funnel of business that you have signed and the integration that you're taking place â&#x20AC;&#x201C; that's taking place? And second one, when we look at these margins, some might argue that you might not be making enough investment in the business to continue to grow on an organic basis and grab market share. What would you say about that Mike? <A - Michael Roach>: Well, I can take the last one first. I don't know who would say that. It might be somebody who's trying to give some context around their own margins. The way â&#x20AC;&#x201C; this is not an either/or. I often say in life, you have to be able to run and chew gum at the same time. So when you look at our business, we're focused on EPS growth. EPS growth comes from being able to bring on quality revenue. And if you bring on quality revenue, the margins will also expand. So, I'll give you a good example. If you sign a long-term SaaS deal on IP, you're going to increase your revenue, and you're going to increase your margins. So, I don't believe we're giving up anything in terms of having higher margins because if I look at where the margins are coming from, they're coming from operating the business more effectively. So instead of having a negative impact on our margins by having write-down on projects by not delivering, we've addressed that. So, we're not taking as much financial hit to bad projects or red projects. And, therefore, the margins are going up. Utilization rates are climbing. The use of the global delivery model that we leverage so well in North America to get the margins up there, we're now extending that into our European operations. So that's another way of increasing margins. So, the real goal here is to increase earnings by share and continue to execute those levers on operational excellence, and I believe there's still other opportunities to do that. And then, bring on quality revenue that's aligned to the strategy here. So, when we look at low end end-user computer, computing very low end. So you could get revenue there, but it's not going to be accretive to our margins and not going to be helpful to our cash and it's not on strategy. On the other hand, if you spend your time closing a 15-year or 10-year collection, collection 360 deal with a company. That's going to bring huge value to the customers, it's going to be very sticky in terms of long-term revenue, going to have immediate cash and you're going to have growing margins as more volumes comes on. So that's the mix, Maher, that we're attempting to do here and that's why you see this thing gradually moving up, and you're also seeing the revenue and the margins, both moving a bit [indiscernible] (26:13) together. Now you won't see that every quarter because in some cases you make the investment, down later, you get the quarter. But that's the goal so it's not just sacrifice one for the other because at the end, you're driving for earnings per share and it come from both levers. <Q - Maher Yaghi>: That's helpful. And in terms of your outlook for 2016, given the business that you signed, how you see that trending? <A>: Well, I think I covered that in the script. I mean, I went through some of the factors. If you take the U.S. for example, the team has done an excellent job on there. We've probably added over nearly CAD 150 million in increased margins there. On the growth side, if you look at that market, the whole industry has been hit hard on the government side. The government, federal government side is 50% of our revenue there. And as I mentioned, I don't expect that to flip like a switch. What I'm saying is I go through those various headwinds that we had last year. Some of them are mitigating. So if they were to follow through, it depends with the rates they follow through. We'll start to see the growth gradually come quarter-over-quarter. And then if you overlay an acquisition or series of acquisitions, it will accelerate that pace throughout the year. So, that's at a holistic view. This is how we view the plan for the year.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<Q - Maher Yaghi>: Thank you, Mike. <A - Michael Roach>: Okay. Have a great day. <A>: Thanks, Maher.
Operator Thank you. The following question is from Rod Bourgeois from DeepDive Equity Research. Please go ahead. <Q - Rod Bourgeois>: Hey, guys. Hey. So, I want to talk a little more about the acquisition strategy. I mean, I guess the specific question here is are you holding back somewhat on your plans to pursue a series of tuck-in acquisitions and hope that you might land a very large acquisition? Are you continuing sort of full-steam ahead on tuck-ins and then you'll evaluate large deals as they potentially become available? How are you thinking about that on the continuum of a large deal versus tuck-ins? <A - Michael Roach>: That's an excellent question and it's probably one that we use to struggle a bit more, Rod, 10 years ago. Where we're at right now, as I mentioned on the call, is we're generating over CAD 1.3 billion, CAD 1.4 billion in cash. We've got a line of credit sitting there for roughly the same amount, and we have access to much more if we require it. So, my view has always been if you're a consolidator, you want to be in the market every day because whether it's a niche or transformational deal, when it comes along, if you're not ready to pull the trigger, you're going to miss it. So, when we view – look at this, we do have the capability, the financial capability and the operational experience to actually do both. Now, if it was a large transformation deal in one geography, obviously, we would gauge a little more any issues going in there not from a financial standpoint but more from the ability to successfully integrate. So the short answer is, no, we're not waiting and we're not pulling back on our commitment to continue to buy our stock. <Q - Rod Bourgeois>: All right. And then just to follow-up on that, I mean do you have a preference for doing a large acquisition or for doing a series of tuck-ins? Is there one path preferable versus the other assuming you have the control over being able to go down either one of those paths? <A>: Yeah. Well, clearly, based on our experience over the years with American Management Systems, Stanley, Logica, a larger transformational deal has a larger impact on the business and depending on where it is can also contribute to accelerating profitable growth. On the other side, the niche acquisition in the right space can also be a significant trigger to growth in a particular area. And I'll use the utility – keep coming back to the utility business in the United States and I think that's a big market for us. We want to be in it more. So, something there, as I say, would move us into another market, help us accelerate growth, help us in fact leverage an existing line of solutions we have through the Logica transaction and some of the solutions we have here in Canada that we're really selling on a point-to-point basis in the United States utility businesses without the wrap around of high-end consulting and the SI and run business that's associated with that. So, short answer, a transformational deal in the right place, right price would obviously move the meter more significantly than a number of niche acquisitions. <Q - Rod Bourgeois>: Got it. And then, hey, finally, you've already given some commentary on the margin front. Could you just boil down? I mean, what's your – if you have one sort of main margin lever remaining over the next year, what's the main positive margin lever, and then what's the biggest challenge that you face on the margin front, just so we can weigh the biggest lever versus the biggest challenge?
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<A>: Yeah. So the biggest – and I think this is universal, by the way. In a services company like we are, the utilization is probably the biggest lever a company has. I mean, if you move your utilization a single point across a company as big as ours, you're going to move margins fairly significantly. So, I would say that is a key indicator. And again, it plays well with the growth strategy here because as we grow more land and expand, this enables us to drive up the utilization level. Kind of a close second in terms of – because you said this year in terms of immediacy, of course the more long term one is a really more managed services that could be stand-alone IP in terms of our goal of IP30, which is very active, and we're pushing extremely hard on that. And As I mentioned earlier, that would drive up both the top line, bottom line and enable cash. So, those would be the two buckets at the top. On the other side is to continue to transform the infrastructure business. So, as you know, the infrastructure business is exceptionally capital intensive. And there's really an opportunity to be much more focused in that business, and some of the things that we're looking at, as they say. We're not going to run to the bottom of that business and chase low-end business there. So we're going to change the mix of that. And we're also attempting to move more to the [ph] Accenture (34:01) model where we would be – it would be less capital intensive. So, to the extent possible, move away from buying IT assets as part of a managed services deal and go to management of customers' infrastructure, which is asset light. And also ensure that we're focused on the higher end part of the tier 1, working on the cloud, leveraging our IP into a SaaS model, those things that are on strategy. So, that's kind of what we're trying to do at, I would say, an executive level to top and the bottom of the margin scale. <Q - Rod Bourgeois>: Very helpful. Thanks. <A>: Thanks, Rod.
Operator Thank you. The following question is from Jason Kupferberg from Jeffries. Please go ahead. <Q - Jason Kupferberg>: Hey. Good morning, guys. I just wanted to follow up on the comments regarding return to growth for fiscal 2016. Just so we are thinking about this right, are you saying that for all of fiscal 2016 on a year-over-year basis, you think we'll be positive constant currency revenue growth? <A>: Well, what – again, I don't give guidance but I shared, Jason, that coming out of the large acquisition that we're going to continue to drive earnings per share. I've said that our goal is to continue to drive double-digit EPS year-over-year which we delivered and as I mentioned in my opening comments in 2015. And to do that, we intend to generate a larger portion in the last year coming from growth with the context that I mentioned earlier. It's not growth at any cost, it's growth on strategy aligned to bringing on more quality revenues. Our plan does incorporate to grow in 2016 using both levers, the build and buy. Now, I'm not going to predict by quarter because there are fluctuations out there. These things happen and closures and how long you can – it takes to bring the booking on but I think that's the context that you should think about our [indiscernible] (36:26) plan. <Q - Jason Kupferberg>: Okay. And just a follow-up question on the M&A pipeline, all that color was helpful. I mean is U.S. commercial still really a top priority here or is the aperture broader? <A>: No. I think again we're looking across the globe but clearly U.S. commercial, UK commercial, very high up the list. <Q - Jason Kupferberg>: Okay. And then just my last question, I think you talked about extending your kind of your low cost service delivery capabilities and I wanted to get your view on the appetite among enterprises in Continental Europe for nearshoring and offshoring, to what extent is that increasing? And then if we can just get an update on the percent of your staff that are currently offshore and nearshore and perhaps where that percentage can go over time.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<A - Michael Roach>: Yeah. So if you think of the European market, first, the answer is the Europeans are interested in [ph] gearing (37:31) – using near-shore, if I take that one first. And if you look across Europe, there are geographies there like Poland where we have a center, in Prague, Portugal, Spain, Morocco. So, we have a number of centers and geographies that can support a near-shore offering on an integrated basis or as part of an individual customer request. That's kind of also underpinned beyond the mere economics of that by legislation in Europe that says certain types of data may be able to move out of the country, but it can't move out of the Euro zone. So, this is more of a – I would say more restrictive than what we see in North America in terms of legislation. And then that goes to your second question, Jason, on the offshore capabilities. So, on the offshore, I kind of break it into a couple of pieces. If you take the large international companies that are operating globally, so they've got U.S. operations, they got maybe operations in Asia, and they got operations in Europe, at that level, they're very open to offshore. So, we would expect that the offshoring there would have both a headwind and tailwind if I look at it from a client standpoint. First, in some cases, companies have gone very big over there are now thinking about whether they sent too much over. And when they look at their digitization strategy and the skills, they're thinking some of that should either reside in their operating territory or in nearshore centers, the service being provided by us or their own centers. You've got other ones who have really come out of by the functions, and they looked at stuff like application maintenance and say, you know I'm about 40% offshore, given the cost pressures I have, and you see this as a good example in the oil and gas business. They're pushing very hard, and rightfully so, to bring down their costs. So you may see more business in certain verticals going offshore in response to individual business pressures that are in a company or in the sector. So, short answer is all very active, all very relevant. But like everything else, like you have to know when to use them. And when it comes to bidding or shaping a deal, you have to be very sensitive to the restrictions on information sharing. And then you have to also layer – over layer cybersecurity, which is another factor that customers look at. Depending on the nature of the business, they're more or less sensitive to where their services are provided. As far as our footprint, we tend to look at wrapping both the nearshore and offshore. And again, we've picked up over the years and grown our Indian operation fairly significantly, not only in head count but in diversifying across various cities. So about a third of our people now are in the – and when I call the global delivery centers, and I always remind investors when you do your calculations, you need to back out the significant portion of government business we have because that, for the most part, does not travel. Certainly outside the country, you can go to some near-shore centers. So, again, I'm not unhappy with the mix. I've always said, over the years, it's how you use global delivery that differentiates you. It's not necessarily the number of people that you have over there. We have sufficient people to address any bidding opportunities better out there. <Q - Jason Kupferberg>: Thank you. <A>: Okay. Thanks, Jason.
Operator Thank you. The following question is from Kris Thompson from National Bank Financial. Please go ahead. <Q - Kris Thompson>: Great. Thanks. Mike, is the recent restructuring fully reflected in your Q4 EBIT margin? <A - Michael Roach>: No. I think what we said is on 60 million you booked about 35 million. <A>: 35 million. <A - Michael Roach>: 35 million shares, we're trying to get the rest of them in the first quarter.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<Q - Kris Thompson>: Okay. I guess, it's reasonable to assume that you can actually improve your EBIT margin from the Q4 level holding your revenue mix steady? <A - Michael Roach>: Yeah. I think you know, some of these restructuring are obviously, Kris, have a more immediate feedback – payback, I guess we're getting feedback on the call – payback than others. But, yeah, I mean, our investment in the restructuring design to help us continue to grow the top line but also improve the bottom line. So, yeah, we expect improvement there and Canada is one good example where we see an opportunity here to continue to grow the margins in Canada. We had a little bit of an offset last year, but they're still at a huge number. But the plan this year would be that the team on the ground will deliver improvements as one example. <Q - Kris Thompson>: Okay. I'm on speaker. I hope you can hear me a bit better. The head count disclosure at 65,000. That's the first drop for almost two years. I'm just wondering what regions and is that going to improve your margins as well going into 2016? <A - Michael Roach>: You have to look at the factors of that. There's three or four. First, we've done divestitures and of course those headcounts need to come out. We did a number across South America, the Middle East, Switzerland, and in other geographies, we are still in those geographies but we have divested some body shop work that Logica had. In some cases, the head count, and one that I can think of is about 150 people. So, a portion of it is that, another portion of it is really reflecting the change in the mix of our work. So if you look at the revenue being down, obviously, the head count should be down as well. And the key there as I've said is that, it needs to be down in the right areas. And if you look – when I look at it, the headcounts are down in the infrastructure business which makes sense because we got a dual headwind tailwind going on there. We're purposely trying to move up the value chain in there and the lower end stuff is actually more labor intensive. So if you take the end using computer – computing, we had a guy on the ground there, if you move up to the stack, the cloud in that, you don't have the same labor mix. So, part of the restructuring that we did particularly in Canada came at that very issue. So, that's what's going on there. And then finally, the productivity that you mentioned, in terms of improving productivity, if you look at the margins in the business and the changes in the mix, when you move to IP, again, you're going to get revenue where over the longer period of time does not have the same labor component. You have the labor component when you're installing it. But when it's in run mode, it's essentially digitized. So as the customer adds more volume, there's not a lot of human intervention there. So, the good news is you end up getting growth and margin expansion with – obviously with less labor, given the nature of the work. So, those are some of the major factors, Kris, behind that change. <Q - Kris Thompson>: BPO revenue in the quarter looked really strong. Is there any particular vertical or solution where you're gaining traction outside of financial services? <A - Michael Roach>: Sorry. Did you say BPO? <Q - Kris Thompson>: I did. <A - Michael Roach>: Okay. Sorry. I was just having a little trouble. So, the BPO does tend to fluctuate depending on certain things that might be seasonal. So to give you an example, we have BPO on the collection side as the volumes increase for seasonal reasons, given the nature of the business that can pop up. We also have payroll businesses, Kris, as you well know, and they have a seasonality to them as well. Some of our insurance verticals do as well. If you take the – some of our work in the U.S. federal government take Visas. That's an area that is in the BPO, and it fluctuates again, of course, given the number of Visas that the U.S. generates. And, of course, they're going to wire Visa volumes going up for all kinds of reasons, so this is what happens. It's as volumes rise for – and I'll give you three, four examples. You will see that percent change. In some cases, it will change quarterly, because if I look at the payroll business, there's a lot of activity in the...
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<A>: January. <A>: ...January, February when we have to issue [indiscernible] (48:08) and summaries with the annual composition of the clients that we serve. <Q - Kris Thompson>: Okay. If I can sneak one last one, in the new business, in the quarter, the bookings look really strong. What are the key reasons where you're winning new business against competitors? <A>: That's a good question. And when I look some of the competitors, I want to â&#x20AC;&#x201C; don't want to name them, but we're going head-to-head with other global players. And we're winning, I would say, on a lot of deals for different reasons. The one that, of course, pleases me the most, where we're going head-to-head with a firm that being maybe more of a consulting slant in their business. As customers, especially as we go around the world, get to know us better, they find out that we can not only provide that deeper operational consulting. And we have a lot of processes to backup the consulting. So, it's not that we just go in and give advice. We actually have, as you know, the management foundation that outlines exactly how to manage a large-scale technology project or a large-scale outsourcing or, in some cases, help companies who are merging to do the due diligence to help them bring out what kind of synergies they should expect. Because, again, if you look at us, we merged two big IT shops, and of course, when we do that, we have to find the accretive savings. So, I would say post logic and more customers are understanding the depth of our operational knowledge and are also very intrigued in our ability to do accretive acquisitions and actually deliver the kind of returns that we have. So, this is paying off significantly. And the other area is our proximity model, which I always believe was a huge advantage here because we have people on the ground that live in the community. So it's not just a sales guy; it's a team. It's a business development and a deliver capability that can be done locally and leverage the other areas. So I think those are two big areas. IP is another one, and I don't think anybody has got the depth of IP that we have that's so universal. So, those would be probably the top two or three that are helping us along the way here. <Q - Kris Thompson>: Thank you for taking my questions and keep up the good work. <A>: Thanks very much. Appreciate it. <A>: Thank you.
Operator Thank you. The following question is from James Schneider from Goldman Sachs. Please go ahead. <Q - James Schneider>: Good morning. Thanks for taking my questions. Maybe following up on the head count question, if I could, for a second. I understand the reduction that happened in fiscal Q4. From here, do you expect the head count to start to uptick, and can you maybe talk about whether there's additional restructuring in Q1 from a head count perspective? And then a little bit longer term over the next three, four quarters, what are your hiring plans relative to kind of historical trends? <A>: That's a good question. So you still get maybe a bit of a tail on the head count reductions coming from the restructuring. In some areas, James, as you know, you have to give notice, especially in Europe. So the headcounts don't follow as immediately as they would, for example, in United States. So you'll get a bit of a tail there. I don't think it's a material amount, [ph] Kris (52:06). On the other side, as we return to growth here, the headcounts will grow and our hiring plans are well in place. We know the type of hiring we want to do, and this is a key lever. So if you look at where the customers are moving to and where they're investing that's where we want to hire, that's where we are hiring. So it's not only the number; it's who
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
you're hiring and where you're hiring and when you're hiring them. So the short answer is yeah, we expect that as the growth rates picks up, so will the head count. It may not be a one-to-one ratio, back to the example I gave you on a SaaS product. You're going to get revenue there that has a lower proportional head count, and relative to what I said on the infrastructure side, with the evolution of our strategy there, it won't be as labor intensive either. But, yeah, we would expect the head count to move. We're hiring. We're looking for people that are very much aligned to those big demand areas that the customers are telling us. <Q - James Schneider>: That's helpful. And then, maybe as a follow-up. Can you maybe talk a little bit about the bookings environment in a little bit more detail? Clearly, some of your competitors have planned to pretty significant deceleration of bookings which you on a period of [indiscernible] (53:46) factor appear to be significantly stronger than that. So, can you maybe talk about any reasons why you think that might be the case? Is it purely share or is it â&#x20AC;&#x201C; do you think there's also an element of geographical or vertical exposure that you have that's somewhat unique? And I guess can you maybe talk about any changes in bookings environment just in the last month and a half since the quarter ended? <A - Michael Roach>: Yes. It's a good question. And again, James, as you know, I don't drive my people to meet a particularly quarter-end on bookings because bookings need to be looked at a 12-month rolling basis. That's good for business, also very good for shareholders because you don't end up taking a discount on a deal just to bring it in on the quarter. I think in our case, what you're seeing here is probably two things going on. One is in our business there's a number of deals that you have to invest, in some cases, two years. So if you take [ph] Edinburgh (54:54) that's a big investment and that didn't turn in three months. So what you see is some work there where the team started two, maybe three years ago. And all of a sudden, two, three years later, you get the bookings, and therefore you can see a pop-up in bookings and in the follow-on revenue that goes with it. In other cases, what's happening here is that our proximity model that I mentioned is taking a better hold now following all of the integration and the runoff of non-strategic assets and the closing of some offices in areas that are not strategic to our customers or to our offering. And the local teams are also getting much more effective in leveraging our global capabilities. And when that happens, of course, our value proposition to the customer goes up, and I think it differentiates us from a lot of the other players. And again, my logic goes like this. First off, we're in the services business. The services business is about relationships. And if you want to have relationships, you have to live in the community where the decision is made relative to IT projects. And then if you look at what happens on larger deals now, so if you take Finland, there's a meeting where they fly guys like me in and there'll be the guy from IBM, although it won't be the President or CEO. Same with [ph] Accenture (56:32). And we talk about the capabilities and the differentiators we have between the global firms. And then as I say, we all get on the plane and leave, and then the local teams all switch and talk Finnish. So, there's two meetings going on. Our strategy is to be at both of them, and our strategy is to make it very clear that the guy in Finland, the person in Sweden, or wherever the country is, they own the total CGI promise regardless of where the work is delivered. I think that's a big differentiator. <Q - James Schneider>: Thank you, Mike. <A - Michael Roach>: You're welcome. <A>: Thanks, Jim.
Operator
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Thank you. The following question is from Ralph Garcea from Cantor Fitzgerald. Please go ahead. <Q - Ralph Garcea>: Hey, Mike. Thanks. Thanks for taking my questions. Just two quick ones, one on the IP 30. What sort of timeline do you guys have to sort of reach that percentage from the IP side, and is there two or three solutions that are driving most of the revenue there, whether it's cyber security or analytics, collections, et cetera, or I mean, do you have a broad offering that you can sort of leverage the margins on those solutions? <A - Michael Roach>: Well, again, if I look at it, the financial services IP are a significant driver. And our embedded base in the government as well, the big ERP systems are very key to continuing to grow that base. As I mentioned, Ralph, we're making good progress on that. I mean we're bumping up gradually on the percent of our revenue coming from there, and we're also making other investments in existing IP to make it more market-relevant and everything else. I believe we're holding our first Investor Day in a number of years here in March in Toronto, so I'm doing a promo ahead of time. And there, we're going to dig in a little more deeper and share with the Street what our strategy is there, what progress we're making. And we're also attempting to set up some demos so that you can actually feel and touch and see this IP. But again, a key part of our strategy, Ralph, we'll give an update on our progress there. We're still hanging in on the 30. I'd like it to be 40, but we got to set a goal, we set 30. And we're getting a better visibility on how to get there. <Q - Ralph Garcea>: Do you think you'll get there by the end of 2016, or it's... <A>: No. I think that's a big of a lift. <Q - Ralph Garcea>: Okay. <A>: I'd like to get there... <Q - Ralph Garcea>: Yeah. <A>: ...by 2016, but 30% of a CAD 10 billion company is a lot of money. But it doesn't â&#x20AC;&#x201C; I think we have the goal out there. It will take longer than 2016, but again what you will see here, you will see bookings and activity that â&#x20AC;&#x201C; this thing is continuing to take hold for the reasons I mentioned earlier, especially in the financial vertical and other verticals much more open now to having a shared environment to get access to outcomes as opposed to actually owning the technology themselves. <Q - Ralph Garcea>: The [indiscernible] (01:00:07) there is to get you from 14% to 16% EBIT in a heartbeat, if you can get to that percentage of revenue, but... <A>: Yeah. <Q - Ralph Garcea>: And just curiously on the Nordics, I mean you guys have done a great job winning market share post the Logica deal, and just working the contracts. And now they got their own SBU. I mean is the next then to do a transformational deal there to basically consolidate your market share, or I mean would you prefer going to Australia or Southern Europe or some other geography from the M&A standpoint? <A>: Yeah. Well, first let me say that the move to put a Nordic SBU is very much in line with our overall philosophy, back to what I answered James' question in terms of having local people. So that is an integrated market at a lot of levels there. The leader the president we appointed was our best performer up there running Finland for years. He's fluently bilingual in Tunisian and Swedish, and English. So we have a lot of benefits of putting that together. We already have a very large share up there. So not that we ever ruled out an acquisition there but I think if I go back to the priorities, Ralph, on which would be most accretive to us again, I circle back on United States and on the UK but we're looking everywhere. But I mean, if you where to try and put it into context, I think that's the context that you need to think about. <Q - Ralph Garcea>: Okay. Thank you. <A>: Thank you.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
<A>: Thanks, Ralph.
Operator Thank you. The following question is from Paul Steep from Scotia Capital. Please go ahead. <Q - Paul Steep>: Great. Thanks. Mike, maybe just talk a bit your view on the portfolio overall as we enter fiscal 2016. Thankfully on this call we hear very little but any red projects or things going poorly but really there's some opportunities to lift things within the business, you seen your reviews. I like to get your take on that? <A - Michael Roach>: Well, I think if you look globally here, there are some similarities in units but there is also differences based on the market and how customers buy and what are the various economic conditions in some of these countries. So the thing that is common in the portfolios the customer demands are very tightly aligned now, between the business side and the technology side. Probably the closes alignment that I've seen in years. And again, I think I explained why that is. When we went out and talked to customers, they're saying, look, we're having real pressure here to free up investment money, to do digitization, to address the regulatory concerns. Regulatory concerns are crossing virtually every vertical now. So, that's a similar pressure, and this is why I said that's good opportunity for us because in a lot of cases, our managed services or our IP strategy helps bring down the run cost, and in the case of IP, it actually helps them on the transformational side as well. So I would say that's very common across the world. Cyber is another one. There's no jurisdiction that we operate in where somebody is not very conscious of cyber. So it'll be two examples on that end. On the other end, where you have something more local is really the discussion around long-term contracts. So, I would say the Nordics are much more open to long-term contracts. We continue to work with our French colleagues. We've had a number of successes there in terms of getting a contract longer than two years, and we're going to continue to push that envelope and open up that discussion and explain to customers why that is good for them in terms of knowledge retention, savings, quality, work, all these type of things. So, the kind of examples that I said are universal, and you've got other things that are much more localized. <Q - Paul Steep>: Great. The second one we haven't talked about for a little while has been the U.S. government business and your outlook there in terms of how it's paced. You came through a tough period there and responded well. What's the thought in terms of 2016 in terms of that team and their business plan and what the opportunity set looks like? <A - Michael Roach>: Yeah. <Q - Paul Steep>: Thanks. <A - Michael Roach>: And again, I try to capture some of that in the comments by saying something that's been really a headwind to our growth in the United States. I always like to reinforce here that we've got an excellent team on the ground there, I would say probably the best team operating in that sector. And they've executed very well in what I call a sector-wide headwind because they've been able to maintain the quality of service. They've been able to continue to reduce costs, to bring more value to the customer and keep us price competitive and contribute to that revenue or bottom line growth that you've seen in the United States. So what I'm looking at, that has been clearly a headwind to the growth in the United States, and I try to be balanced there because, again, I can't predict the future. But when I look at what the team did in the fourth quarter going to a book-to-bill of 144%, that's the first time we went over 100% in a number of quarters. And that gives me the sense that in 2016, this could move to at least a neutral, and even moving to a neutral is positive when you look at this.
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
And if the U.S. government really ramps up and the spending gets down through the departments and gets materialized into project work, then we have the opportunity for it actually to be a tailwind and help us lift the U.S. growth rate. So the team down there, I think, had been very realistic and prudent. They obviously built a plan to try and reflect the environment in which they work. And so it is a factor that we need to keep our eye on here relative to the rate of growth in the United States. <Q - Paul Steep>: Perfect. Thanks, Mike. <A>: Thanks, Paul. Wayne, we're going to have time for one last one.
Operator Thank you. So the final question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. <Q - Thanos Moschopoulos>: Hi. Good morning. Mike, the margins in the UK were exceptionally strong, so certainly, kudos to Tim and his team. Were there any specific one-time factors or was that driven primarily by ongoing operational improvements and the better revenue mix? <A - Michael Roach>: No. We didn't have any one-times in the UK this year in the quarter. Again, the team over there really did a bang-up job not only in putting up the â&#x20AC;&#x201C; improving the margins; they've had to work through some very tough large red projects that was inherited through the acquisition. And at the same time, they've had to go out and win new long-term, better quality revenue margin mix going forward and they've done that. So, I think this is a reflection of that work. I'm not telling you that every quarter will be 17%, but we're on the right path and trend in the UK. And again, when I look at the big markets like UK and France from a growth standpoint, they're going to be big engines over there for us in 2016, as well the U.S. and as well Canada because the Canadian growth rates has a negative radius heading in the right path very rapidly as well. So, no, no one-times there, just good solid management execution by the team. <Q - Thanos Moschopoulos>: That's great. And on Canada, I thought your commentary was interesting about the Canadian near-shore opportunity given the favorable FX rates. And so, is it early days on that front or to what extent are you seeing interest from U.S. and international customers for Canadian services, how meaningful as an opportunity could that be relative to the Canadian domestic opportunity? <A - Michael Roach>: Yeah, I think it's one of a number factors that it can help us improve the growth rate in Canada. It takes a little time to do that because you've got to convince the customer, of course, that you're going to be able, not only just deliver to the scale he's looking at but to lock down on a price that we can hedge on the currency to protect both the customer and ourselves. The other interest thing is seeing really good cooperation between France and our Quebec centers here where we're able to leverage again our proximity model in France and offer delivery services here and actually be able to move for various bids, SMEs both ways. So that's coming along quite nicely. We also have for years and I think it's ramping up. We actually hire a lot of people from France and Quebec. And so, we have a good mobility opportunity here between our French operations and our Canadian operations and, I guess, vice versa. So, yeah, I would say it's another lever. Going to take some time to ramp that up where, I think, our U.S. customers believe that this is not a short-term opportunity but more of a long-term opportunity, given where the currencies stand. <Q - Thanos Moschopoulos>: Great. Thanks, Mike. I'll pass the line. <A - Michael Roach>: Yeah. Thank you.
Unverified Participant
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Company Name: CGI Group Company Ticker: GIB/A CN Date: 2015-11-11 Event Description: Q4 2015 Earnings Call
Thank you, Thanos. Thank you, everyone, for joining us. And we will see you in January, hopefully, at our AGM. If not, we'll talk to you for Q1 results. Thank you.
Operator Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation. This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP. Š COPYRIGHT 2015, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.
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