CGI Group Inc, (GIB)

3Q 2010 Earnings Call

July 28, 2010 09:00 am ET

Executives

Lorne Gorber - Vice President, Global Communications and Investor Relations

David Anderson - Executive Vice President and Chief Financial Officer

Michael Roach - President and Chief Executive Officer

Analysts

Tom Liston - Versant Partners

Paul Lechem - CIBC

Eric Boyer - Wells Fargo

Mike Abramsky - RBC Capital Markets

Paul Steep - Scotia Capital

Ralph Garcea - Northern Capital Partners

Eyal Ofir - Canaccord Genuity

Michael Urlacher - GMP Securities

Mayer Yaghi - Desjardins Securities

Chris Fidyk - Findlay Park Partners

Presentation

Operator

Good morning ladies and gentlemen. Welcome to the CGI Third Quarter 2010 Results Conference Call.

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

Lorne Gorber

Thank you, Joe and good morning. With me to discuss CGI’s third quarter of fiscal 2010 results are Michael Roach, our President and CEO and David Anderson, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 am on Tuesday July 27, 2010.

Supplemental slides, as well as the press release we issued earlier this morning are available for download on cgi.com along with our Q3 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 maybe 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 on both our MD&A and press release as well as on cgi.com. We encourage our investors to read it and its entirety.

We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each of these non-GAAP performance indicators used in our reporting.

All of the figures expressed on this call are from continuing operations and in Canadian dollar unless otherwise noted.

I’ll turn the call over to David first to review the financial results for the third quarter and then he’ll pass it over to Mike who will discuss a few strategic highlights. So with that, David.

David Anderson.

Thank you Lorne and good morning.

Once again, I’m pleased to share the financial details of another good quarter. Revenue was $901.6 million, foreign exchange fluctuations negatively impacted revenue by $55.3 million or 5.8% compared with the same period last year. When adjusted for 4X, year-over-year growth, on a constant currency basis was 0.7%. EBIT of $124.5 is a 10% improvement versus Q3 of 2009. While our EBIT margins strengthened this quarter to 13.8% from 11.9% in the third quarter of 2009.

Earnings from continued operations in Q3 2010 were $85.9 million or 12% better than the $76.7 million reported in Q3 of 2009.

Our earnings margins from continuing operations was 9.5%, up from 8.1% in Q3 of fiscal 2009. Diluted earnings per share in the third quarter were $0.30. This compares with $0.25 in the same period last year or an increase of 20%. Included in these results were $4.2 million of professional service expenses related to our pending acquisition of Stanley.

As well, there was a partially offsetting positive net tax adjustment of $3.6 Million related to the final determination and expiration of limitation periods. Excluding the effect of these items, our earnings from continuing operations was $86.5 million, representing a margin of 9.6% while the earnings per share on a diluted basis would have remained unchanged at $0.30 per share.

We generated $102.8 million in cash from operations in the third quarter or $0.35 a share. This would have been $124.3 million for the quarter had it not been for the early funding of the Canadian payroll that fell on the Canadian statutory holiday of July 1 st. This 21.5 million variance reverses in Q4.

Against the target of 45 days or less, our DSO at the end of Q3 was 36 days; an improvement of 5 days versus last year. We have remained focused on improving our DSO and our efforts over the last year continue to be seen in our cash management performance.

In the quarter, we acquired 7.1 million shares for $111.8 million at an average price of $15.78 per share. Under the normal cost issuer bit program renewed in February, 10 million shares or 40% of our loaded amount have been repurchased thus far, leaving us with 15.2 million shares which can be purchased over the remainder of the current program which expires in February 2011.

As a reminder, we still have a $1.5 billion credit facility in place until August 2012.

At the end of June, our net debt was $6.4 million, largely due to our ongoing share repurchase activity and for the last 12 months our return on invested capital was 16.8% and our return on equity was 16.1%.

Finally, as you model at the remainder of our fiscal year, I’d like to remind you that one time additional expenses related to the Stanly deal will be forthcoming in Q4 and is in the case each year on a sequential basis, remember to consider the typical seasonal impact of occasions on our Q4 results.

Now I’ll turn over the call to Mike.

Michael Roach

Thank you David and good morning to everyone. I am very pleased with our performance this quarter and year to date. For the second consecutive quarter, year-over-year and on a constant currency basis, our global revenue stabilized and is growing in North America. We continue to anticipate a gradual strengthening of our revenue in the coming quarter.

Our North American operations grew by nearly 2% at a constant currency basis during quarter three. In the US, at constant currency, we grew at 4% demonstrating the ongoing strength of our Federal state and local government franchisers as well as our ability to create and seize growth opportunities while increasing our recurring revenue and backlog in this key market despite some uncertainty at the macro level.

In Canada, we grew by 0.4% in quarter three. As anticipated, each quarter gradual improvements continue to be seen as our long term outsourcing clients begin to invest in SINC projects.

In addition, our business development efforts are beginning to attract new clients such as our end to end 7 year $125 million deal with Atlantic Collateral as well as our multiyear multimillion dollar deal with the Beer Store.

With respect to Europe, European economy continues to have a short term marginal impact on our global operations. To address these adverse market conditions, we continue taking pro active measures which will better position us to take full advantage of the economic recovery as it occurs.

Globally, quarter three bookings came in at $838 million or 93% of revenue. Once again, I want to remind you that bookings are lumpy in our business but we’re off to a good start in quarter four having booked and announced key deals with REXEL, DESO and the state of California.

We believe bookings on a trailing 12 months are the best proxy of future revenue and by that measure our book to bill is a 113% or $4.1 billion in booking over the last year.

We continue to maintain a healthy and stable backlog of the more than $11.4 billion in long term contracts as well our consistent ability to execute the numerous leavers necessary for margin improvement continues to be evident year-over-year. EBIT at 13.8% in quarter three is up from 11.9%. Net margin at 9.5% is up from 8.1% and earnings per share of $0.30 per share is up from $0.25 representing an improvement of 20%.

While our margins remained the most consistent and the best amongst our North American and European peers. We remain committed to better executing against these levers and in the process gradually improving our margins and earnings per share over time.

As reported, we continue to generate very significant cash from our operating activities. In fact over the last 12 months, we have generated $586.3 million in cash from operations or $1.96 a share.

We continue to prioritize the deployment of our cash with the commitment to making the most lucrative investments for shareholders including maintaining the flexibility to continue to buying back shares as we have done this quarter and year to date. We believe our consistent, best in class performance supports a higher valuation over time.

This commitment to creating shareholder value is further reinforced by a return on invested capital, which over the last 12 months is running at 16.8%, a 300 basis point improvement over the same period last year.

Let me provide you with a brief update, on a proposed acquisition of Stanley. As most of you are probably aware on July 12 th we announced the extension of our tender offer until August 2. At the time of that announcement, 84% of the Stanley shares had already been tendered.

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