Earnings Call: Q1 2018

Jan 31, 2018

Good morning, ladies and gentlemen. Welcome to the CGI First Quarter Fiscal 2018 Conference Call. I would now like to turn the meeting over to Mr. Loren Gorber, Executive Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorber. Thank you, Alana, and good morning. With me to discuss CGI's Q1 fiscal 2018 results are George Schindler, 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 am Eastern Time on Wednesday, January 31, 2018. Supplemental slides as well as the press release we issued earlier this morning are available for download along with our Q1 MD and A, financial statements and accompanying notes, all of which have been 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 intention 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 and A and press release as well as on cgi.com. We encourage our investors to read it in its entirety and to refer to the Risks and Uncertainties section of our MD and A for a description of the risks that could affect the company. We are reporting our financial results in accordance with the International Financial Reporting Standards or IFRS. As before, we will also discuss non GAAP performance measures, which should be viewed as supplemental. The MD and A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian unless otherwise noted. We will be hosting our AGM this morning, so we will keep the call inside of an hour. We do hope you will join us live or via the broadcast at 11 am. I'll turn it over to Francois now to review our Q1 financials, and then George will comment on our operational highlights and strategic outlook before taking your questions. Francois? Thank you, Lauren, and good morning, everyone. I'm pleased to share our results for Q1 fiscal 2018. Revenue was $2,800,000,000 an increase of $141,000,000 or 5.3% compared with last year. On a constant currency basis, revenue grew 4.9%. Bookings were $3,000,000,000 or 106 percent of revenue. 38% of the contract awards were related to new business and 24% were IP related bookings. Over the last 12 months, total bookings were CAD 11,300,000,000 or 103 percent of revenue. Adjusted EBIT was CAD406 1,000,000 up 2.4% from last year, and EBIT margin was 14.4%. This compares favorably to last year when excluding the onetime U. S. R and D tax credit as we are starting to see the planned benefits of our previously announced restructuring actions. In the quarter, regarding the restructuring plan, we expensed $33,000,000 At the end of December, we had expensed a total of $121,000,000 against the planned investment of $165,000,000 We expect to expense the remaining amount by the end of this fiscal year, and we are on track to generate the client benefits. Related to the acquisitions of Affecto and Paragon in the quarter, we incurred integration costs of $16,000,000 We expect to complete these integrations during this fiscal year for an additional estimated cost of $25,000,000 the majority of which we expect to incur in Q2. Our effective tax rate in Q1 was 16.3%. This follows several tax policy changes enacted in Q1. 1st, the tax reform in the U. S, which includes the lowering of federal corporate tax rates from 35% to 21% and imposes a onetime repatriation tax. Belgium decreased their tax rate by 8% to 25%. And France imposed a corporate surtax of 5%. Taken together, these changes were positive for us. This resulted in a onetime net benefit of $34,100,000 in the quarter, mostly from reevaluating our U. S. Tax liabilities. Excluding this net benefit, our effective tax rate would have been 26% in Q1 compared to 26.6 percent in the same quarter last year. Going forward, expect the tax rate for the full fiscal year to be in the range of 24.5% to 26.5% from the previous 27% to 29%. This overall rate reduction would result in an increase to our net earnings of approximately $40,000,000 in fiscal 2018. Net earnings on an adjusted basis improved to $288,000,000 in Q1 and EPS grew 10% to $0.99 per diluted share. Net margin on the same basis was 10.2%. On a GAAP basis, net earnings improved to $285,000,000 and EPS was CAD 0.98 also an improvement of 10% compared with CAD 0.89 in Q1 last year. Turning to cash. Our operations generated CAD410,000,000 in the quarter or 14.6 percent of revenue, including $32,000,000 in payments related to the restructuring plan. As a reminder, the cash related to these payments will lag the recorded expenses. Over the last 12 months, we have generated $1,400,000,000 or $4.76 in cash per share. We ended the quarter with a DSO of 47 days compared to 44 days last year. In addition to the investments made as part of our restructuring program, we continued investing our cash in the most accretive ways. Dollars 71,000,000 back into our business, including the development of our IP and the ramping up of new outsourcing contracts. Dollars 200,000,000 to acquire Affecto and Paragon. And we reduced our debt by $64,000,000 At the end of December, net debt stood at $1,600,000,000 up $143,000,000 compared with last year, but down sequentially by $114,000,000 This represents a net debt to capitalization of 19.3%. We continue to view buying back CGI stock as an accretive use of cash. As such, this morning, our Board of Directors approved the extension of our NCIB until February 2019. This will give us the flexibility to purchase 20,600,000 shares over the next 12 months. Under the current NCIB, we have invested $870,000,000 repurchasing 14,000,000 shares at a weighted average price of $62.87 and reaching 65 percent of the program's limit. We did not buy back any shares during Q1 of 2018. With our revolving credit facility and close to $250,000,000 of cash, we have $1,600,000,000 in readily available liquidity and access to more as needed in order to pursue our build and buy strategy. Now I'll turn the call over to George. Thank you, Francois, and good morning, everyone. Overall, I am pleased with our team's performance in the Q1. We continued executing the plan, further strengthening our position as a global end to end IT and business consulting services leader. This quarter's strong results were driven by client demand. CGI brings a combination of local experts and global insights to help our clients address the complexity of implementing an enterprise wide digital strategy. These enterprise wide strategies are focused on customer experience as well as digital evolution of the operations, leveraging automation, IoT, supply chain and secure data services. And we continue to see an accelerating need across all industries to connect legacy and digital environments. IP remains in a key accelerator for our clients and a driver for CGI's profitable organic growth. On a year over year basis, our IP bookings and revenue continued to increase at a faster pace than other services. Our IP and innovation were showcased this quarter during 2 leading global industry conferences. At the Sibos Banking Conference in Toronto, we launched our new Trade 360 IP approach, enabling banks to integrate powerful blockchain capabilities applied within existing trade platforms. And at the National Retail Federation in New York City, we launched a new CGI Retail 360 IP, a platform developed by our French team of experts to deliver a seamless, real time customer experience across all retail channels. IP as a percentage of overall revenue reset to 21% this quarter due to recent mergers adding proximity based services revenue largely without IP. We remain committed to our IP30 plan, leveraging these new client relationships as an incremental distribution channel for future IP revenue growth. Now turning to the Q1 highlights of our global operations. I'll start in North America. At the beginning of the quarter, we created 2 separate operating segments in the U. S, given the size and strength of our operations and the tremendous opportunity for growth across the U. S. Market. One segment focused exclusively on the federal government and the other segment on commercial and state government. This construct best aligns to our proximity model for the build and positions us to grow our pipeline of buy opportunities in both units. Each segment has over $1,000,000,000 in revenue, strong organic growth and expanding profitability. In the U. S. Commercial and State Government segment, revenue growth was 15% in constant currency. This growth was driven by recent commercial acquisitions and organic demand across most industries. The addition of Paragon in the quarter strengthens our footprint in the U. S. Northeast, specifically in the key quarter between New York, New Jersey and Pennsylvania. In addition, Paragon brings deep life sciences expertise, covering the full spectrum of healthcare delivery and completing the CGI Healthcare portfolio of services and solutions for our clients. I'd like to warmly welcome 300 professionals from Paragon as new CGI members. U. S. Federal Operations grew 9% organically and delivered an EBIT margin of 13.5%, driven primarily by federal program initiatives in new technologies, including IoT, cyber, digital IP and intelligent automation. We see these government initiatives accelerating, and we are increasingly well positioned with recent contract vehicle awards, including government wide, ALLIAN2, U. S. Army RS3 and ITSS at the Social Security Administration. Our prime positions on just these 3 multi award vehicles qualifies CGI to compete for over $100,000,000,000 in technology spending over the next 5 to 10 years. In Canada, our team delivered their 6th consecutive quarter of organic growth, delivering constant currency revenue growth of 5%. We see increasing demand for intelligent automation solutions across industries. For example, we were recently named Global RPA Partner to a leading retail chain. We also continue to have strong growth in the digitalization of operations for commercial and government entities across the country. EBIT margin was 21.7%, reflecting the balance of IP, business and IT consulting engagements, recurring revenue and evolution to new infrastructure delivery models. Turning to Europe. We see continued strength in France as growth in this geography continues to outpace the market. We now also have growth in Eastern, Central and Southern Europe, including double digit growth in Germany. And Northern Europe grew significantly in the quarter, propelled by the acquisition of AFFECTO. Our mix of European revenue continues to evolve. For example, we are introducing more IP into France, including the recently launched Retail 360 solution. And business consulting continues to position us for new work with our existing enterprise clients, leading to increased wallet share across industries. In ECS, we closed several new outsourcing engagements during the quarter with global clients in manufacturing, banking and telecommunications. And in Northern Europe, we continued the evolution of our infrastructure services business as a new global manufacturing client awarded us a hybrid cloud based project, which uses CGI's Unified 360 IP. Clients in this region tend to test and adopt digital strategies and emerging technologies quickly. A point I heard again last week when I was in Helsinki to present at our annual 2 day Raqqaizu Conference to over 1200 C level executives and decision makers. The first day is devoted to sharing insights and innovations with clients. And on the second day, we hosted over 650 future talent recruits, whom we will selectively hire in line with client demand. In the UK, slowed award decisions over the last several quarters, partly due to the uncertainty introduced by Brexit, impacted year over year growth. We are now seeing optimistic buying trends with strong bookings in this quarter, including the previously announced Glasgow award and positive indicators for Q2 strong commercial bookings. EBIT margins across our European operations were 12%. The evolving revenue mix across Europe, combined with the expected benefits of the restructuring program and integration of Effecto, will yield increasing margins throughout the remainder of fiscal 2018 and beyond. And in Asia Pacific, our teams posted growth of 14% and an EBIT margin of 19.6%. In India, we are getting considerable traction from new clients, particularly those from recent mergers who now have access to CGI's proven global delivery network. Through multiple new client visits every week, our India team showcases the strength of our expertise and model. This spans our technology and design innovation, industry knowledge and use of intelligent automation to enhance quality delivery across all services. These services are always delivered in close partnership with our proximity based consultants. In summary, in the Q1, we delivered revenue growth of over 5%, roughly 2% of which is organic earnings per share accretion of 10% and we completed the mergers of Effecto and Paragon. We are off to a great start for the year and with several tailwinds in our favor. We see a continuation of the positive macro business environment globally, including corporate tax reform in the U. S. The expected benefits of our restructuring program are beginning to take hold as planned. And client demand is strong in each of our proximity based business units for our services and solutions. We are increasing our talent base around the world, ending the quarter with 72,500 members with the skills, knowledge and experience to realizing realize the expanding opportunities for delivering on our end to end portfolio. We remain committed to executing our strategic aspiration of doubling over the next 5 to 7 years through continued build and buy. Thank you for your interest and support. Let's go to questions now, Loren. Just before going to the questions, a quick mention that we posted a 4 quarter supplemental history for the new U. S. Segments on cgi.com. And a reminder that a replay of the call is available either via our website or by dialing 1-eight hundred-four zero three sorry, 408-three thousand and fifty three and using the passcode 1,910,302 that will be available until March 3. And a podcast will be available for download with Justin within a few hours. Follow-up calls as usual directed to me, 514-841-3355. Alana, can we poll for questions, please? Certainly, thank you. We will now take questions from the telephone lines. The first question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Hi, good morning. George, maybe starting off on federal since you're now breaking it out separately. You drill a bit into the strength you're seeing there? And you alluded to it in your prepared remarks, but to what extent is it defense versus civilian or both? How much of it being driven by IP versus non IP solutions? What areas of strength did you call out? Thanks. Yes. So I guess the quick answer is yes. It's driven by all of the above. So it's both in defense and in civilian. IP continues to play a prominent role in our work in the U. S. Federal business. Our momentum program continues to be strong in both civilian and in defense. We announced the big U. S. Army Momentum win a while back. So that's part of this. Cybersecurity again in both sides is a driver of this growth. And overall modernization, I mentioned the SSA contract win, which was protested and that was all lifted. So we can begin work on that contract now. We hadn't really been able to work during the protest period, but we're able to work on that now. That whole contract is all about modernization. It's about agile development, cloud, cybersecurity, data analytics, artificial intelligence and machine learning. So it's really driven by all of the above right now. Great. And maybe then just on digital. Obviously, digital has been a key source of growth across many of your verticals and geographies. Can you talk about how the digital environments, the demand environment has been evolving in recent months as far as the initiatives you're seeing from your clients? Yes. Just in general, we talked about this over the last several quarters, what we see and hear from the voice of our clients accelerating need. Again, and I'll remind you, this is being driven by our clients' clients. So if it's a government, the citizens are demanding a different digital experience. If it's a consumer, the consumer is expecting and voting with their feet on a different digital experience. So we see that picking up. And as I also mentioned though in the opening, we're seeing this on both sides. So it's the customer experience side, but it's also now increasingly in the operations, leveraging some of the digital technologies, including elements of robotic process automation and AI to increase the operations efficiency and reduce costs. So we see it on both sides now and it's picking up. Great. Thanks, George. I'll pass the line. Thanks Thanos. Thank you. The next question is from Stephen Lee with Raymond James. Please go ahead. Thank you. Can you guys hear me okay? Yes, sir. Very good. All right. Thanks. George, you're doing quite well in the U. S. I want to ask about this SSA IDIQ. Is this opportunity as big as it looks on paper? And how do you see it ramping up through fiscal 2018? Yes. So it's it is a big opportunity. I think the ceiling allocated CGI is $2,400,000,000 But it really is being driven by modernization. SSA is one of the largest organizations in the U. S. Federal Government. Obviously, a very large budget given their mission and modernization is on their radar. So it is a very big opportunity for us. Typically in IDIQs, I mean, how long does it take you to hit that ceiling on a run rate basis? On a run rate basis, the task orders vary. Some are very small, some are very large. It's going to take some time to ramp up, but it does ramp up quickly. And but it depends on the contract task orders that we went in. And just as also as a reminder, we didn't book any of that. So when we book a multi award vehicle like this or any of the 3 I mentioned, we booked that at $1 just as a placeholder and the task orders is when we book that. So you'll see that as I announce the bookings throughout the latter half of the year. Okay, great. And thanks. And conversely, UK seems to be having some challenges. One of your competitors is down 40% today. But when I look at your margins, it looks pretty strong at 16%. Was there any one time benefits in the UK and where should that margin be for the rest of the year? Yes. We did have an adjustment on our final loss making contract from the Logica acquisition. So we're now past all of that. As you remember, being a U. K.-based company, a lot of that was in the U. K. So we're past that. So we did have a little bit of one timer. But I will tell you that what our playbook on UK very similar I think I mentioned this before, very similar to the playbook we use in the U. S. Federal government when we went through sequestration and no budget years. It really is to get close to our clients, make sure that we maintain our margins even though the revenue we don't entirely control and stay close to our clients so that we can take the opportunity to get future bookings when some certainty comes out. And we're starting to see that already now in the U. K. As I announced some of the bookings. Thanks. And George, with the Glasgow win, you would expect growth to resume in the U. K. In the next couple of quarters? Yes. So that takes a little bit of time because you have to get through the transition. So it doesn't translate to revenue immediately. But in the back half of the year, we'll start to see some of that. Okay, great. Thank you. Thanks, Steve. Thank you. The next question is from Richard Tse with National Bank Financial. Please go ahead. Yes. Thank you. George, I was just kind of curious here of your existing base of clients, which is obviously quite large. How many or what percentage have actually deployed these new technologies from this portfolio that you expanded into IP and digital? I'm just kind of curious to get some perspective on that. Yes. No, it's a great question. I'll answer it a couple of ways. In the voice of the clients, we when we talk to our clients, 40% of them, which is up year over year significantly, 40% of them said that they now have an enterprise wide digital strategy. And but taken otherwise, 60% still are creating that enterprise wide strategy. So what we see is a lot of our clients, in fact, I would say the vast majority of our clients have implemented some of these technologies. But have they done that on a holistic enterprise basis, Fewer have done that. And then that does again vary by industry. Certainly, we've seen on the retail side and on the consumer retail side and on the retail banking side, we've seen clearly faster take up. And some of those clients would say we've implemented lots of this, but still are in the process of doing that across all of their lines of business in a connected enterprise way. So I can't give you a percentage. I'd say it's probably 90 plus have done something and I would say it's probably 90 plus are not through it. Okay. And then I guess related to that, those businesses are obviously incremental here. So, let's say you take an example of one of the customers existing clients that's moved over, Have they increased their spend with you by 10%, 20%, 30%, kind of give us a sense of what that opportunity could be going forward for the group? Well, IT budgets are increasing. And so that's positive news. And they're increasing on the new applications, but they're also spending money to, as I mentioned, to automate more of the operations so that they can drive some costs out. So we're playing on both sides, but budgets are increasing. And but the overall rate of IT growth gets muted by some of those savings on the operational side. Okay. And just the last one for me. Some of your competitors have kind of signaled interest here in making some transformational sort of IP type deals. Can you give us some perspective on CGI's thinking when it comes to that? Thanks. Yes. Well, we're always interested in, as I mentioned, on the buy side, the way we're going to double the company is through both the build and the buy. And that will include on the buy side, both some of the metro market acquisitions, which has been a very good strategy for us and is playing out exactly as we planned, both on the inorganic side and now on the organic side. But we're always looking for some of those transformational deals. And as Francois mentioned, we have the capacity to do both. And certainly, we have the interest. But again, I'll repeat something we've talked about before. It's going to be the right company at the right time at the right price. The next question is from yesterday, Trump President Trump mentioned that he is going to ask Congress to end sequestration of U. S. Military, U. S. Defense budgets. Can you talk about how this has been affecting your business? And if we see an end to the sequestration, what it could do to your operation in the U. S. Government business federal business? And my second question is on Canada. We've seen recently slowness in bookings in Canada. I wanted to know what's causing this decline. You've talked in the past some great success on the financial service side, but it seems like we're kind of pulling back here. Can you talk about what's causing this dip in bookings? And what are you doing to improve it? Thank you. Yes. Thanks for the two questions. I'll start with the Canadian question. And you're correct, there has been a slowness in the bookings. The book to bill though is a reference to both our revenues. So we've been growing our revenue, but also the nature of the bookings. And so we've been having more of our bookings have been in the systems integration and consulting side than in the outsourcing side. And we've been through and we mentioned this before, we've been through a lot of our renewals. So you saw a natural decline because we're through the renewals, but also a natural decline based on the nature of the business. SI and C business tends to be smaller deals in shorter increments, but those are exactly the deals that help us build relationships and earn trust with our clients to turn into longer outsourcing deals in the future. So both what's going on and what we're doing about it, it really is about transitioning those some of those relationships into value propositions that generate some of that longer term return revenue. And you see that across the company that a lot of our clients right now are buying on the other side, but that's what gives us the relationships and the trust to build those larger outsourcing deals. And in Canada specifically, again, the good news is we're past a lot of those big renewals, which pumped up our book to bill. Now it's in our backlog, which is great, but now we have the opportunity to transition to SI and C and the outsourcing business. On the trough and sequestration, that's a harder one to the sequestration went through a couple of different cycles. Initially, it was a little more detrimental to the business. We went through that. We highlighted that. As know, the federal bookings and the federal growth was down for a while. That has stabilized. It's early days to determine what that will or won't have an impact on our business moving forward. I can tell you though that the demand in the federal government is high, especially for the modernization, both to save and also to modernize the customer experience. And that includes on the defense side. And if I can ask one last question to Francois. Francois, you talked about the impact of the change in taxation in the U. S. If you want to basically, it's around $0.10 per year. It's about that. Is that including the changes in France? Yes. When I was talking about the EUR 40,000,000, it was including the French impact for the year. The 5% surtax for France is a 1 year surtax, but like anything else, we just need to be close to this and see if they will really taking it out next year or not. Okay. Thank you. Thanks, Maher. Thank you. The next question is from Robert Young with Canaccord Genuity. Please go ahead. Hi, good morning. It looks like you have strong revenue and bookings in the consulting side, and the bookings appear to be leading the revenue as a percentage. And so I was wondering if you could talk about where is that renewals driven or is it new business? And then talk about how that's going to trend going forward. Yes. The bookings is a lot of new business. As I said, we're past a lot of the renewals. In fact, if I look at our top 10 deals, I've seen more and more of those top deals now are in the new category or in the increase of existing business category rather than just straight renewal, and that's certainly a positive trend for future growth. But as I mentioned earlier, like in Canada, we're also looking forward to converting some of that consulting SI and C into outsourcing. That does take time. Okay. So there's a lag effect that you'll see the other side of the business will grow? Okay. Yes. So you have some very strong growth across the geographies with the exception of what I highlighted in the UK. And that you saw that leading indicator on the bookings there and then what that caused as far as where we are now. Okay. So I guess there'd be a healthy aspect of the business that the weighting would shift away from the consulting side more towards outsourcing maybe next year or going forward? Is that what you're saying? Yes. And it's a mix, right? We want to have you want to have a mix of both, which is why our ideal mix, and I highlighted that in Canada, where we get our best margins is when we have that ideal mix of both the SI and C and the outsourcing recurring revenue and the intellectual property overlaid across the 2. Okay. And then you've said a couple of times that you have plans to accelerate the pace of metro market acquisitions. And so I was wondering about how is the retention in those acquisitions you've made, in particular at the high end? And if you could talk about the reasons behind that pace. Is it just purely just the benefit to your strategy? Or is it because there's a larger pool of targets, your processes really well built for pulling these metro market acquisitions in? What's the reason for acceleration? Yes. The reason for the strength is twofold really. It's the maturity of the operations across every geography and their ability then to rapidly integrate to your question about retaining people. And then, of course, the demand that is there and the opportunity that the closer we get to our clients and the more access we have to clients through these relationships, the more we can bring our full offering solution. We're seeing just that even in these most recent mergers that we've done. As far as retention, we've seen we always see a slight uptick of turnover, just a different culture. But what I can and I'm very proud of our collective teams on this, we've maintained the senior leadership on these recent mergers, which is really where the relationships are both within the company because people work for people as well as with our clients. And so we have a very strong team. In fact, we brought all of the leaders together, our most recent global operations meeting from each of the 6 previous mergers, including the 2 we did this quarter and had a very strong robust sharing of information across. So that's kind of how it's working very well and so that's another reason for us to accelerate it. Okay. Thanks. I'll pass the line. Thanks, Rob. Thank you. The next question is from Paul Steep with Scotia Capital. Please go ahead. Great. Good morning. George, could you just talk about you made the U. S. Leadership changes in the quarter. Can you talk about how that sets you up for opportunities in the future? And maybe what, if any, bigger structural changes you made around that? And then I got one quick follow-up. Sure, sure. It really was as simple as making sure that we had focused leadership on 2 growth areas of the U. S. Is such a large market. So we have 2 great leaders and so we're able to break that out. It gives you more visibility, gives me more visibility, but ultimately it also allows us to do both the build and the buy more rapidly. It's easier to integrate under that model and therefore more attractive to buy. And then same thing on bill, just gives us more focus with our clients in those two areas. I also mentioned it does not prevent us from continuing to share across. In fact, our IP has proven to have legs in spanning the state, local and commercial business with our federal business both ways. So our Unified 360 in the U. S. Originated in federal. It's now being leveraged across commercial and state and local, same with our Atlas software. And likewise, we've had some opportunities to move commercial into federal, including our Caselow IP. So we continue to share across, but we have the focus and the attention now. Great. And then quick follow-up, Francois, just on the acquisitions, I guess, we were thinking specifically this morning about Northern Europe with the margins down a little bit there, presumably an effect. What's the time line to get those operating margins back onto the model? You obviously gave us good cost guidance there. Thanks. Well, you'll see already a good improvement in the Q2. Again, it was purchased in the Q1. So it needs some time to put the new system in, but most of now the region are on the our accounting systems, so we're able to generate some synergy on the SG and A. And so already in Q2, you'll see a good improvement and Q3 full the full impact of the full synergy. So we'll be you'll see that we can expect the whole business to be at the average EBITDA of the company. Great. Thanks, guys. Thanks, Quinn. Thank you. Thank you. The next question is from Paul Treiber with RBC Capital Markets. Please go ahead. Thanks very much and good morning. I just wanted to touch on the Metro market acquisitions. It's been about 2 years since the acquisitions of GSL and Alcyon. Just hoping if you can elaborate on what you've seen in terms of revenue synergies and cross selling versus your expectations, if you can provide any tangible examples of that? And then also if you've made any changes to your integration or strategy to learn from some of the things that you've seen at GSL and LCN? Yes. No, thanks for the question. Both are working very well, which is why we're accelerating. Our core rationale is to bring that bring those core relationships into CGI and be able to sell the full offering suite. The key clients that we brought over in both partly driving some of that growth you've seen both in France and also in the financial services, which is what where JSL played in Canada, which is outpacing the growth of the rest of Canada and of the market. So I don't have any specifics for you here, but I can tell you that both are working well. The other thing I can tell you is that leadership teams from both of those organizations, we've been able to leverage in taking some of their skills and leadership into other clients across in the case of JSL, not even just across Canada, but also they were a leader in agile development. We're able to leverage them across North America and even into some of Europe. So a lot of synergies to be had, and it's partly driving that strong growth that you've seen for consecutive quarters in both France and Canada now, 18 months later. And then just turning to the UK for a moment. Just given the uncertainty in that market, what's your thoughts on the consolidation opportunity at this stage? Yes. I've said before, U. K. Remains attractive to us from that perspective. And I said that right from the get go when some of the uncertainty got introduced. We continue to look at and actually have a robust pipeline of opportunities and we'll continue looking at that. And just lastly for me, just on operating cash flow was up nicely year over year and is helped by working capital. Has the working capital essentially normalized following Logica? Or should we expect working capital to still be a headwind to cash flow going forward? As George indicated, we just finished our last big project in the UK that was lost making in the from the Logica acquisition. So for sure, the pressure on the working capital will be a lot less than what you saw in the past. We still have naturally the integration costs that we have $121,000,000 of expenses that we already booked, but only $30,000,000 that we paid. So that will still be a little bit of a drag on the working cap, but a lot less than the years before. Great. Thank you. I'll pass the line. Thanks. Thank you. The next question is from Rob Peters with Cormark Securities. Please go ahead. Hi, thank you very much for taking my question. George, just looking at the margins in the U. S, I think you guys highlighted R and D tax credits in 2017 kind of was part of the reasons for the year over year comp there. In previous quarters, I think you highlighted that some of that is just timing because R and D spend can be lumpy. How should we kind of think about the trend on that for the rest of the year? And maybe should we see sort of see those margins trend back to what they were in 2016, 2017? Yes. I think there's a combination of factors. It's also the mix of business and not only are some of those tax credits lumpy and of course, we had a catch up a year ago, which we highlighted, which is why the comparative is off a little bit year over year. But again, we do continue to see through our mix of business, both IP and the SI and C and converting the SI and C into recurring revenue, I see upside in the margin opportunities, particularly as we have this increased focus then the increased opportunities for growth given the structuring that we just went through. So I do see that increasing over time. Perfect. And then maybe just focusing on Europe and France, obviously, you've seen very strong performance there. I think you probably get this question every once in a while. Is it still kind of the pace where you guys see that those margins in that region getting up to North American average? Or just kind of if we think about how should we think about the run rate on those? Yes. There are some structural differences by country. So when we get to the Canadian 21.7%, maybe not. But there is definite upside in all of those European operations, including in France, and the teams have done a fabulous job. But remember, we can also increase the margins now through the introduction in France of intellectual property. There's still the lowest in our European operations, but increasing that with the introduction, as I highlighted in the opening, of our Retail 360 IP. So I think there's upside there. There's upside on the growth and there's upside in that overall mix of business. So I still see that plenty of upside in all of our European operations, including France. Perfect. Thank you very much. Thanks, Ram. Thank you. The next question is from Edward Caso with Wells Fargo. Please go ahead. Hi. This is Justin Sandotti on for Ed. So the question I had, looking at the acquisitions that you closed this quarter, I think they had about $220,000,000 of revenue. And you're also talking about increasing the pace of metro market acquisitions. So can you help me kind of understand, are you still thinking about the M and A contribution being about 50% and organic being 50%? Or will M and A kind of be higher? Yes. The long term plan is still fifty-fifty because remember, even as we bring this $220,000,000 of revenue in, we quickly look to increase that through also organic growth and selling the full end to end services of CTI. So our optimal mix is still fifty-fifty. Clearly, at any one point in time, it's going to get skewed based on maybe an accelerated pace at a point in time. But the long term plan is still fifty-fifty. It's the healthiest place for the business to be. All right. Thank you. Thank you. The next question is from Daniel Chen with TD Securities. Please go ahead. Hi, thanks. Can you remind us what is the impact of a U. S. Government shutdown on your different segments? I know the recent shutdown was relatively short, but if we get another one and it's a little bit longer, how would you expect that to impact you guys? Yes. So you're thanks for the question. You're right. The one that we had over that weekend and part of the day Monday is largely recoverable. So that's not a big impact in the quarter. But depending on the duration and timing in the quarter, depends on how much of that we recover. But I'll remind you of a couple of aspects of our business. Number 1, mission essential work continues. A lot of our work is in that mission essential. Number 2, fee based work continues because they don't need a budget in order to fund their operations. And number 3, and the most important part, I think, is that a lot of our work is already obligated. So it's not work that needs the immediate budget. That's more for the future. But the issue is when the office shuts down and you have to be at the government office to execute. But a lot of our work can be done off-site, particularly our work associated with our own intellectual property, which you know is very high in the federal government. So the vast majority of our work continues even in place. And then that's why the reason I mentioned the duration and timing in the quarter, we can make that up for that obligated work if it happens at a time in the quarter where we can work some extra time. In fact, in this most recent shutdown, our operations in the U. S. Federal, we actually did some of the work upfront prior to the shutdown knowing that might happen. So we were actually already recovered because we were ahead on some of our work. So vast majority continues, again, depending on the duration. I wouldn't I don't think anybody is expecting the duration at this point in time to be long, if anything, right now. Great. That's very helpful. Thank you. Thanks, Dan. I think we have time for our last question. Certainly. Thank you. The last question will be from Ralph Garcia with Echelon Wealth. Please go ahead. Thank you for taking my questions. Just two quick ones here. On the blockchain side and the stuff you developed for Trade 360, can you use some of that distributed ledger technology in some of your other verticals as you develop IP for supply chain or healthcare or utilities? Or how much of that can you leverage across the different segments? Yes. So Ralph, on that one, and I believe I may even have mentioned this last quarter, we do see opportunities to use that exact technology, the underlying technology of distributed ledger in areas like utilities trading. So we're introducing an indoor IP there as well as payments. So just two examples. So the answer is yes, it's the underlying technology that can be leveraged in multiple ways. So with that, do you see as you increase your IP and then you get to reuse some of these tools from an agile development perspective. Can you see EBIT margins tick over 15% as we move forward over the next 3 to 4 quarters? Well, again, yes, I would say that's definitely the plan. And it's through that mix of business. And it's not just because of blockchain, but certainly new technologies help accelerate that. Okay. And just lastly, when you hold some of these events like the Helsinki one where you got 1200 C level executives, if you hold them in other regions, I mean, how long does it take you to sort of convert that pipeline into revenue? It's an ongoing dialogue and relationship, and that's why we embrace the proximity model because we do this different events in different locations. The Raikaizu is one of our largest, which is why I highlighted it. It's very impressive. But when you go there and I met with many clients afterwards, it's an ongoing relationship. And I'm meeting with them with our great leaders there across the operations in Finland. And it's an ongoing relationship and dialogue that occurs. It's why that proximity model is so important to us. Okay. Thank you. And congrats on a great start to the year. Thank you very much. Thank you, Ralph, and thank you all for joining us today. Our Q2 report will be on May 2, and I look forward to all of you joining us this morning at 11 am for our AGM. Thank you. Thank you. Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.