CGI Group Management Discusses Q3 2012 Results - Earnings Call Transcript

CGI Group (GIB)

Q3 2012 Earnings Call

July 25, 2012 9:00 am ET

Executives

Lorne Gorber - Senior Vice-President of Global Communications & Investor Relations

R. David Anderson - Chief Financial Officer, Executive Vice President and Member of Disclosure Policy Committee

Michael E. Roach - Chief Executive Officer, President, Director and Member of Disclosure Policy Committee

Analysts

Richard Tse - Cormark Securities Inc., Research Division

Thanos Moschopoulos - BMO Capital Markets Canada

Ralph Garcea - NCP Northland Capital Partners Inc., Research Division

Kris Thompson - National Bank Financial, Inc., Research Division

Steven Li - Raymond James Ltd., Research Division

Maher Yaghi - Desjardins Securities Inc., Research Division

Paul Treiber - RBC Capital Markets, LLC, Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Michael Urlocker - GMP Securities L.P., Research Division

George A. Price - BB&T Capital Markets, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the CGI Third Quarter 2012 Results Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President, Global Communications-Investor Relations. Please go ahead, Mr. Gorber.

Lorne Gorber

Thank you, Matt and good morning.

With me to discuss CGI's third second quarter fiscal 2012 results are Michael Roach, our President and CEO; as well as David Anderson, Executive Vice President and CFO.

This call is being broadcast on cgi.com and recorded live at 9 a.m. on Wednesday, July 25, 2012.

Supplemental slides as well as the press release we issued earlier this morning are available for download 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 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 financial 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.

I'll turn the call over to David first to review the financial results for the quarter, and then Mike will discuss operations and segment highlights. David?

R. David Anderson

Thank you, Lorne, and good morning. I'm pleased to share the financial details of another good quarter. In the third quarter, revenue was $1.1 billion. On a year-over-year basis, revenue was 5.1% or $52 million higher. Adjusted EBIT was $136.3 million and our EBIT margin remained strong at 12.8%. Net earnings were $87.2 million, representing a net margin of 8.2% and diluted earnings per share of $0.33. This number includes $6.7 million in acquisition-related cost, as well as $5.3 million in real estate optimization charges and $3.7 million in additional year-over-year financing costs associated with the fixed rate notes. As a result, the underlying net operations or net earnings were approximately $100 million, representing a net earnings margin of 9.4% or $0.37 per diluted share. This quarter's earnings and EPS were in line with the same quarter last year, excluding a favorable tax adjustment as well as the transition margin from the windup of the financial services contract during Q3 fiscal 2011.

Regarding the charges incurred this quarter, I'd like to take a minute to expand upon them. With respect to the real estate initiative, the business case will yield $111 million in benefits over the next 10 years as we consolidate our Montréal real estate. Associated with this initiative, approximately $4 million of additional charges related to accelerated amortization will occur in Q4. On the charges related to the Logica transaction, expect to see a growing level of charges in the upcoming quarters as we move beyond closing and into the integration period.

Looking at the balance sheet, our DSO was 49 days in Q3 compared to 52 days we posted for the year-ago quarter. The decrease is mainly due to the timing of payments. We generated a record $251.0 million of cash from our operating activities compared with $93.2 million in the same period last year. This was the result of the improvements in the DSO from last quarter and the timing of payments related to other working capital items. Over the last 12 months, we have generated $690.5 million or $2.50 -- $2.57 in cash per diluted share. During the quarter, we booked $1.5 billion in contract wins bringing the total bookings over the last 12 months to $5.1 billion for a book-to-bill ratio of 123%.

As usual, we continue to stress the importance of considering our performance on cash and bookings trends over a trailing 12-month period.

During the quarter, we reduced our debt by $152.5 million for a net debt of $633.4 million. That's down almost $300 million from the year-ago period. And our net debt to capitalization ratio was 19.4% having being reduced from a peak of 31% following the Stanley acquisition. At the end of the quarter, we had approximately $4.5 billion in committed liquidity. In the quarter, we acquired 453,000 shares of $9.4 million, an average price of $20.82. Under the current buyback program, which expires in February 2013, we can still purchase more than 21 million shares.

At the end of Q3, our return on equity was 15.4%, while our return on invested capital was 11.8%. The primary drivers of the year-over-year change was a reduction in our participation in our normal course issuer bid in anticipation of the closing of the Logica transaction, as well as the flow-through of the favorable impact for the tax adjustments we benefited from last year.

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