CGI Group Management Discusses Q1 2014 Results - Earnings Call Transcript

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CGI Group (NYSE:GIB)

Q1 2014 Earnings Call

January 29, 2014 9:00 am ET

Executives

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

David R. Anderson - Chief Financial Officer and Executive Vice President

Michael E. Roach - Chief Executive Officer, President and Director

Analysts

Scott Penner - TD Securities Equity Research

Richard Tse - Cormark Securities Inc., Research Division

Paul Treiber - RBC Capital Markets, LLC, Research Division

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

Steven Li - Raymond James Ltd., Research Division

Maher Yaghi - Desjardins Securities Inc., Research Division

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division

Thanos Moschopoulos - BMO Capital Markets Canada

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

Operator

Good morning, ladies and gentlemen. Welcome to the CGI First Quarter 2014 Results Conference Call. I would now like to turn the meeting over to Mr. Lorne Gorber, Senior Vice President Global Communications and Investor Relations. Please go ahead, sir.

Lorne Gorber

Thank you, Audrey, and good morning. With me to discuss CGI's first quarter fiscal 2014 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, January 29, 2014. Supplemental slides, as well as the press release we issued earlier this morning are available for download, along with our Q1 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 on both our MD&A and press release, as well as on cgi.com. We do encourage our investors to read it in its entirety.

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&A contains definitions of each one used in our reporting. Unless otherwise noted, all of the dollar figures expressed on this call this morning are in Canadian dollars.

As many of you know, we're also hosting our Annual General Meeting of Shareholders this morning, so we'll keep our scripted comments brief in order to take as many questions as we can within the next 45 minutes or so.

I'll turn it over to David first to review our Q1 financials, and then Mike will comment on our strategic and operational highlights. So with that, David?

David R. Anderson

Thank you, Lorne, and good morning. I'm pleased to share the financial details of another good quarter. First quarter revenue was $2.64 billion, up 4.4% compared with $2.53 billion in the year-ago period. Foreign exchange fluctuations favorably impacted revenue by $160 million or 6.3% compared with the same period last year. Sequentially, revenue increased by 7.6% or 5.1% on a constant currency basis. Over the last 12 months, we have been exiting low-margin business and offsetting it with higher quality revenue as part of our integration activities. Although this puts near-term pressure on our top line, it contributes to ongoing margin expansion. As such, adjusted EBIT was $303 million, up 45% versus last year, while our EBIT margin of 11.5% increased by 320 basis points.

Net earnings were $208 million or $0.65 per diluted share when excluding integrated costs. This compares with $138 million or $0.44 in the year-ago period, representing an increase of 51%. On a GAAP basis, net earnings were $190 million or $0.60 per diluted share compared with $22 million or $0.07 in diluted earnings per share in the year-ago period.

Now let me take a minute to walk through where we stood at the end of December relative to the $525 million Logica integration budget. $471 million has been expensed and $368 million in cash payments have been made, including $53 million in Q1. All remaining integration expenses will be incurred and the majority of the cash disbursed by the end of this fiscal year. More details can be found in the MD&A.

Cash generated by operating activities was $66 million in the first quarter. Two important factors impacted cash in Q1: the $53 million of integration-related payments I just described, and the increase in DSO related primarily to the timing of milestone billings and collection had a cash impact of $220 million sequentially and $310 million year-over-year. A detailed bridging schedule showing the impact of all of the moving pieces of our cash from operations can be found in the MD&A, as well as the slide deck we posted earlier this morning. As we wind down our integration efforts in the coming quarters, we expect cash from operations will more closely align with our adjusted EBIT.

Given normal fluctuations in working capital elements from one quarter to another, we have always suggested that investors analyze cash generation on a trailing 12 months basis. With that being -- with that in mind, excluding the integration-related cash disbursements, our trailing 12 month cash from operations is $819 million or $2.58 per diluted share.

Turning to the balance sheet. Net debt stood at $2.9 billion at the end of December, representing a net debt-to-capitalization ratio of 39%, down from 45% in Q1 of last year. Finally, we will continue to have an excess of $1.2 billion of liquidity available to continue properly growing our business.

Now I'll turn the call over to Mike.

Michael E. Roach

Thank you, David, and good morning, everyone. We delivered very solid performance in the quarter as we continue to leverage and build on our expanded global scale and scope for the benefit of our clients and shareholders. As this is the first reporting period in which year-over-year European comparisons are meaningful, the significant positive impact of our integration plan has now more visible at the operating level.

Global bookings of $2.8 billion in the quarter or 107% of revenue were well distributed across all major markets. In fact, 6 of our 7 strategic business units were at 100% book-to-bill or greater. Of these awards, 45% were new business, reflecting our increased focus on business development all in the year of major restructuring. It also reflects signs of an improving market conditions across parts of Europe and in the United States. Our sales funnels have increased significantly quarter-over-quarter and year-over-year with a healthy mix of SI&C and outsourcing opportunities.

Revenue of $2.6 billion in the first quarter is up sequentially and year-over-year. On a constant currency basis, revenue is up in North America and slightly lower in Europe, reflecting the planned run-off of underperforming business. With the majority of these revenue reductions behind us, we are intensifying our efforts to replace this business with higher quality recurring revenue.

On a year-over-year basis, our adjusted EBIT grew 45% to over $300 million, representing a strong margin of 11.5% and driving EPS improvement to nearly 50%. In North America, we reported growth of 6%, fueled by the ongoing strength of our U.S. operations. Adjusted EBIT improved by $13 million year-over-year and the associated margin remained healthy at 14.2% in North America.

Our U.S. business grew 12% organically, as all segments, federal, state, local and commercial, delivered year-over-year revenue growth. In the U.S., adjusted EBIT increased by $7 million to $67 million, while the margin of 10% was slightly impacted by the assignment of additional resources necessary to meet year-end project milestones. Our business development focus, our expanding pipeline and the associated book-to-bill of 102% for the quarter and 108% over the last 12 months continue to position us for future growth in the U.S. market. U.S. commercial and state bookings grew by more than 25% year-over-year, while bookings in our Federal business were impacted by an industry-wide ongoing delays in contract awards.

On the U.S. Federal side, we continue delivering year-over-year improvements to both the top and bottom lines despite ongoing government-wide contract delays. Currently, we have approximately $1.3 billion in bids submitted but not yet awarded at the federal level. Going forward, with the U.S. Federal budget in place, we are more optimistic that contract and past order awards will return to a more normal pace over time. As a reminder, CGI Federal continues to be well-positioned to grow by leveraging its 51 contract vehicles, including 45 prime positions utilized government-wide and across agencies.

I am also very pleased to announce the appointment of Lieutenant General James Peake, U.S. Army retired, M.D., as the new President of CGI Federal following the planned retirement of Donna Ryan. Dr. Peake joined CGI Federal in 2009 after a decorated career serving in the U.S. Army, which included his appointment as U.S. Army Surgeon General from 2000 to 2004. In 2007, he was nominated and confirmed the Secretary of Veteran Affairs, serving a net post until 2009. Dr. Peake is a proven committed leader with an impeccable reputation, and we're proud to have him as a key member of our leadership team.

I would now like to provide you a brief update on our work pertaining to the U.S. Affordable Care Act both at the federal and state levels. As I outlined on our call in November, we have been working with our federal client, CMS, and other technology partners to improve the user experience on healthcare.gov. Tremendous progress has been made in the past month and we are proud of the key role CGI played in the tech search. Enrollments across the federal state exchanges have now surpassed 3 million. The system's performance has been significantly improved, enabling the year-over-year enrollments spike to be successfully processed. In short, the system we were contracted to build, specifically the federal-facilitated marketplace, works. Unfortunately, despite these significant accomplishments, we recognize that our client will proceed to the next phase with another provider and accordingly, we are working on a professional transition. To be clear, CGI's contract was not terminated. Our current base contract is ending as scheduled on February 28, 2014. We value our ongoing business relationship with HHS and CMS, and look forward to working closely with them on existing and future initiatives.

At the state level, we continue to play a role in the building of 6 state health exchanges. With all of the state-based exchange projects that CGI supports are live. Some of them are performing better than others. We remain deeply committed to all of our state clients and are working every day to meet key service delivery releases.

With respect to our experience and involvement integration of the health care exchanges, we continue to believe our commitment to support our clients through critical times is the right strategy for the long-term success. We remain confident in the fullness of time, our role and responsibility in these initiatives will become clearer. We appreciate the strong support we have received from our many clients around the world and have not seen any impact on our ability to conduct and grow our business.

Turning to Canada. Recent...

[Technical Difficulty]

Lorne Gorber

It seems we have some technical difficulty there. We apologize for that. I'm going to turn it back to Mike, and hopefully we didn't miss much of the message. We'll try to pick it up right where we left off.

Michael E. Roach

Okay. I think I'll ensure that I cover off our state involvement in this health exchange. So if I repeat something, I apologize. At the state level, we continue to play our role in the building of 6 state health exchanges. While all of these state-based exchange projects that CGI supports are live, some of them are performing better than others. We remain deeply committed to all of our state clients and are working every day to meet key service delivery releases.

With respect to our experience and involvement in the creation of the health care exchanges, we continue to believe our commitment to support our clients through critical times is the right strategy for our long-term success. We remain confident that in the fullness of time, our role, contribution and responsibility in these initiatives will become clearer. We appreciate the strong support we've received from our many clients around the world and have not seen any impact on our ability to conduct or grow our business.

Turning to Canada. Recent momentum and opportunities arising from our expanded solutions and capabilities have led to sequential growth of 3%. Book-to-bill was at 100% this quarter and the outlook continues to improve. Adjusted EBIT is up by $6 million year-over-year, and the Canadian operations recorded industry-leading margin of 21.4%. In Europe, our quarter 1 book-to-bill was 112% comprised of 36% new business and continues to trend upwards for the fourth consecutive quarter. In the meantime, our goal to transform this business towards higher quality recurring revenue is well underway. We can now point to early examples where we have either reshaped or assigned clients to longer-term contracts. Examples include the Swedish transportation authority, the U.K. government smart meter initiatives and 2 leading financial services companies in the U.K., all chose CGI as their partner following a competitive procurement process. These commitments are 5 to 7 years in length and represent almost $1 billion in high-quality backlog.

Adjusted EBIT in Europe and Asia was $145.5 million, up $80 million year-over-year and represents a margin of 9.5%. In fact, Europe and Asia now make up 48% of our global EBIT, up from 31% a year ago. We are very pleased with the execution of our integration plan and the value creation realized to date.

Looking ahead, our optimism around future growth and margin expansion is growing based on a number of key factors: evidence of an improving business climate in our key markets; an increasing funnel of opportunities and consistent book-to-bill exceeding 100%; increased allocation of resources, the business development and account management; tangible examples of European clients committing to long-term engagements; increased utilization of our expanded global delivery network to increase revenue productivity and margins; and finally, a favorable foreign exchange tailwind. All of these factors are consistent with our firm belief that CGI remains a very good investment. As a result, the Board of Directors approved this morning the extension of our Normal Course Issuer Bid until February 10, 2015. This will give us the flexibility to purchase approximately 22 million shares over the next 12 months. At today's price, this would represent an investment of approximately $750 million.

As we wind down our cash disbursements associated with the integration, we will increase our focus on debt reduction and on share repurchases, with a bias towards the latter given the current valuation and the positive outlook for our stock.

In closing, I want to reinforce our commitment to remain a well-managed and financially strong company, delivering superior results over time. Our business strategy, leadership approach and performance-based ownership philosophy are all focused on achieving this commitment. Thank you for your continued interest and support. Now let's go to the questions, Lorne.

Lorne Gorber

Just a reminder, there'll be a replay of the call available within a few hours on our website, or by dialing 1 (800) 408-3053 and using the passcode 1482648 until February 7. Follow-up questions can be directed to me, (514) 841-3355. So let's now go to the questions, Audrey, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Scott Penner from TD Securities.

Scott Penner - TD Securities Equity Research

Just 2 questions. First of all, Mike, on the government, the U.S. government, it looks like the bookings were very strong there. In the past, back in 2011, there was definitely some pent-up demand that was released after the government situation was cleared up. Just wondering, as you look in the pipeline right now, whether there's a similar potential?

Michael E. Roach

Thanks, Scott. A couple of good things I'd like to just reinforce. Unlike a lot of our competitors are operating in the federal space, I'm extremely proud that our team has been able to grow the top line and bottom line year-over-year in the Federal business. I think it goes a lot to our strategy and ability to execute to it. We do believe, as I mentioned in the script, from the past that, as the budget starts to work its way down to the departments that, in fact, these bids that are on hold will be released. As I mentioned before, this is work that the government needs to do to run their operation and implement changes to their existing programs. So we think it'll be gradual. I don't think you'll see the tap open rapidly next quarter. I think it'll be gradually seeing an uptick over the next 3 quarters.

Scott Penner - TD Securities Equity Research

I also wanted to ask David. Just on the deferred revenue in particular, if you look at the year-end numbers, both the long-term and short-term, it looked like about $734 million. That's up quite a bit from pre-Logica. I'm just wondering if you could flesh out what do you think sort of the structural level of deferred revenue is right now given the level of IP and the larger business size? And then what is the profile of sort of getting back to whatever level that is?

David R. Anderson

Okay. Scott, I would think that over time, I haven't really spent a lot of time thinking about it. But just understanding some of the basics or fundamentals underneath that, we will see that number over time and will probably take about 2, maybe 3 years for it to drift down. It will drift down probably about $125 million. But it will be offset as we do more and more, especially within the European environment and introducing IP being able to sell more maintenance contracts and then being able to get revenue from those because, as you know, that then is a great source of deferred revenue for us and it also helps our cash position because it brings in cash a little bit earlier in the process. So I guess -- but all I can really tell you at this particular point, I would expect to see it coming down a little bit over time. But then it should also continue to -- some of that will be backfilled as we continue to expand the business into some of those other areas.

Operator

Our next question is from Richard Tse from Cormark Securities.

Richard Tse - Cormark Securities Inc., Research Division

Mike, on your filing here, you talked about the run-off of low-margin business in Europe. Are we coming in there, or should we expect that to continue for next couple of quarters still?

Michael E. Roach

As I mentioned in my remarks, I think the bulk of it is behind us. We can see the impact on the margins as we address that low-margin business, of course, Richard, the margins continued to strengthen. So I would say the vast majority of it is behind us. We still kind of look at some areas that aren't core that we may divest if we verify that they're not useful to our customer proposition, so we continue to look at that. I think the other factors I mentioned is that, now that we have our financial system in across all the European operations, their ability to really segment and analyze the revenue at a more micro level may, in fact, surface other revenue streams or business that isn't core or lower margin. But as I said, I think the top line is primarily behind us now and we're really focusing on replacing that with a higher quality recurring revenue which is in line with our transformation strategy.

Richard Tse - Cormark Securities Inc., Research Division

Okay. And just one last question here. As you look forward to the next 12 months, can you kind of talk about some examples of where the bigger revenue opportunities would be? I know the broad markets, like government, are a big opportunity, but what type of engagements are people sort of looking for in terms of what you guys are providing?

Michael E. Roach

I think there's a number of things. Clearly, they're looking at our IP. As you can see, we continue to sell IP to customers wrapped more as a long-term service which adds to our backlog, our margins, our utilization. I think the outsourcing business, especially in Europe where our ability to be the local company and leverage our global presence, is really meaningful. If I look at some of the deals I mentioned, I think the fact that we were local in Sweden, that we were local in Finland, we were able to win those deals by really bringing to the customer the best of both worlds, local accountability with access to global network. So I think if you look at it, outsourcing, IP, we will get a lift, I think, on the SI&C business as the economies continue to improve, and helping customers really increase their own top line and control their costs, so a combination of those things.

Operator

Our next question is from Paul Treiber from RBC Capital Markets.

Paul Treiber - RBC Capital Markets, LLC, Research Division

In regards to the U.S., you called out that you're making some investments for some state-related projects. Do you see that those investments, the headwind on margins, diminishing later in 2014? And then also, in regards to Europe, with the new bookings that you're signing, the new contracts, are you taking some upfront costs on those new contracts that may be weighing on margins in the near-term?

Michael E. Roach

So on the U.S. margins, Paul, I called that out because I wanted to make sure that you've seen that, first off, it's a very small delta from where we're operating. I remind you again that we continued incurring [ph] intangibles there, so when you look at a 10% margin in the U.S. we're probably closer to 11.5%, which is a very strong margin. And we increased EBIT, which is key here because our goal is to increase our earnings, and so the U.S. operation has accomplished that and continues to accomplish that. I think on these, what I'm saying is that the 31st of December, there's number of milestones that needed to be met. We had to put more people on those to ensure that we met those milestones. And you can see that on a number of state contracts, there are milestones, our WIP and payments are tied to those, so it's very important that we focus on those. So there may be a little bit more of that as we push through the various milestones, but I'm not telegraphing that we have any kind of a major issue in the U.S. margins, and that's why I called it out. I think it's a very much localized and targeted to these type of milestone opportunities. In Europe, normally on an outsourcing deal, we do have stand-up cost. Dave, I don't know if you want to comment any further on that?

David R. Anderson

Well, I think we need to separate out what Paul was maybe getting at here. Any of the business development expenses around chasing after the engagement and coming up until the time that we actually have a signed contract, all of that stuff gets flushed through the P&L. So there isn't anything that's going on in the balance sheet at that point in time. Only once we have a contract that is signed, then any of the cost to stand that contract up, those will be looked at. Some items are not capitalizable, so those will be expensed. But the items that are capitalizable, we will put them into contract cost in the balance sheet and then we will amortize those against the contract over the period of that contract. So hopefully, that is clear and it is consistent with what and how we've done it in the past.

Paul Treiber - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And then also in Europe, in regards to the improving market conditions, I think you're -- you sound more confident than you did last quarter. I think last quarter, the comment you used was passing the bottom. So could you elaborate on what gives you improved confidence in Europe at this point?

Michael E. Roach

I think it's a number of things, Paul. First off, the book-to-bill continues to be strong there and continues increase, which means we're bringing on more revenue which helps us increase our utilization rate which falls to the bottom line. I think the second thing is that the number of projects that were troubled this year -- this quarter versus same quarter last year has come down significantly, so that is also, of course, increasing margin. As I mentioned, most of the low-margin business has been aggressed or run-off which, again, gives us more capability to grow our margins. So -- and I think the important thing, as I said, as we replace that margin or that revenue with higher quality, as I cited, those 4 deals alone added $1 billion to our backlog. All 4 of those factors will contribute to margin expansion. And just a reminder, we still have the tail of our restructuring program of about 50...

David R. Anderson

$54 million.

Michael E. Roach

$54 million that we should see some benefits of in the P&L as those charges are worked against the operations. We're still hammering away on some SG&A in some countries. And I think when we addressed that, and we will, that, that should drop to the bottom line as well.

Operator

Our next question is from Kris Thompson from National Bank Financial.

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

When I look at your revenue segmentation, doing my best to back out Logica, looks like the system integration and consulting is very strong, looks like a record high in North America, and the BPO looks a little bit weak. Could you maybe just talk a little bit about the dynamic there, and if that's what's impacting your margins in this quarter?

Michael E. Roach

Relative to the U.S.?

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

Yes.

Michael E. Roach

Yes. Well, the SI&C business is strong and certainly, is a major factor driving that growth that you're seeing there. A lot of the work we're doing for customers are focused in that area. I think on the BPO, I wouldn't read a lot into that. There are certainly areas of the BPO business that are lower margin for us. And again, we're watching that business very carefully. Obviously, we're not trying to expand low-margin business in that area. We are more apt to let it run off or lapse. But I don't think you're really seeing any kind of major shift in mix here other than the U.S. economy picking up, which is driving more SI&C.

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

Okay, that's helpful. And maybe, David, just on the cash flow. You mentioned accounts receivable and some collection issues. There's been a lot of accounting releases going around in the news as you're aware. Could you maybe just address this head on? Do you think your cash flow forecast back up to the $150 million range?

David R. Anderson

No, actually -- and if you go back -- if you take a look at the chart that Lorne has provided as part of the backup to Mike's script here, there was a chart around the cash flow from operations where it takes a look at the net earnings that are coming in, it's looking at the noncash item, so the amortization, et cetera, are coming down to a subtotal. And then beyond that, then I get into the working capital adjustments. Well over a period of time, those working capital adjustments should balance out to close to 0. If you're growing on the business, there's going to be a little bit more in the way investment that you have to put into working capital. So it's going to actually grow, so you have a little bit of a deterioration coming from that. But it's relatively small, maybe 10% of the revenue that would be tucked away for an increase working capital. So when we take a look at the results of that number and then compare that back to the adjusted EBITDA right now, you're going to find that those are -- over the number of quarters, there's been a strong correlation. And again, if you look at the schedules, that number that we should be looking at is going to be closer to $300 million than the $150 million that you're describing.

Operator

Our next question is from Steven Li from Raymond James.

Steven Li - Raymond James Ltd., Research Division

Question for Mike. You touched on it earlier, the run-off of low-margin business in Europe. Can you quantify that like how much of these contracts would represent? Is it in the low single digit or was it more like 4%, 5%?

Michael E. Roach

Well, I think it's closer to 4%, 5%. It's maybe a little more, but 4% or 5%.

David R. Anderson

Yes, yes, it's a very -- I want to add, it's a significant dollar number when you look at it. But on the other hand, as a percent, I would say it's around 5%, maybe a little bit more, which is not surprising. I think, again, one of the things with the Logica transaction, the numbers look big, but we have to remember the transaction was big. And I would think in most companies that we've looked at, due diligence or acquired, that the amount of low-margin business or pass-through business was certainly in the 5% to 7% range, and I don't think we're seeing anything materially different here with Logica.

Steven Li - Raymond James Ltd., Research Division

Okay, great. And then just a follow-up. The margins in Europe looks like it was down sequentially. Can you maybe give us some color? Was it seasonal and does it bounce back next quarter?

Michael E. Roach

Well, again, I did point out last quarter that I think that the margins were very strong there. It was a seasonal impact of -- and demonstrated again that we have a lot of the fixed costs out. I think one of the things when I look at this, I think the more relevant comparison in Europe is the year-over-year comparison and you can see the significant improvements we've made year-over-year. And the quarter-to-quarter, again, is impacted by a number of factors, including vacation, working days and a lot of other things that are not in the year-over-year. So again, I would guide you to more look at the year-over-year picture of Europe. And as I pointed out on my opening comments, the segmentation are now a lot more comparable now that we've been through a full year with Logica.

Operator

Our next question is from Maher Yaghi from Desjardins.

Maher Yaghi - Desjardins Securities Inc., Research Division

Mike, I'm just going to state out the fact that the market seems to be struggling with, and I want to get your opinion on that directly. So there's a camp out there talking about Logica and all the transaction -- when you do the transaction, you took a lot of adjustments prior to the transaction -- after the transaction, sorry. And we're wondering if the current run rate that we are seeing in Logica is overstating the health of the business, or you think that we should expect revenue to improve all by that small increments going forward? And a follow-up to that is, when you look at the margins at Logica, since you made that acquisition and you cut costs and simplified and streamlined the operation, when you look at the European operation as is stands right now, is your cost structure set up to be able to continue to generate margins similar to the levels we are generating right now? Or are you expecting some margin pressure as you ramp up new contracts going forward?

Michael E. Roach

Well, you got 2 or 3 things in there. I'll try to remember them all and address them all. On the margin side, again, if you go back to the other scripts, we've all the way through this integration. We've been very transparent on our plan to invest $525 million and drive out $375 million of annual benefits. We're tracking to that. As I mentioned, the headcounts are down, the overheads have been addressed and we're cutting away at other costs. So the margins have increased and they link back to a number of proof points that I've gone through, particularly in the year-end conference call, so I refer back there. Our margins in Europe now are approaching the top quartile or rather in the top quartile. We're essentially the best performer in Europe. Our goal is to stay there. Our goal would be to gradually improve earnings as we churn that revenue from low margin to high margin, as I mentioned. That will increase our earning capabilities. There will -- obviously, as you grow the business, there are costs. Dave gave a good example where you have to invest heavily in an outsourcing deal, which is the sales and business development at our expense. But as those deals go through, of course, you end up getting the benefit both on the top line and bottom line. So the answer is, we always look to gradually improve our earnings per share and the European operation is contributing significantly to that, and we expect that to continue and expand over time.

David R. Anderson

Maher, if I could just add one comment here. Mike had referenced the -- putting everybody onto the same financial system. So now, we've got everybody on the same set of definitions. We look at the financial performance the same way, and in the past meetings, we've had references to our management ratios. So we have the ability to be able to track and we do watch very closely every month what the cost ratios are by business unit. And if we see any of them starting to move in the wrong direction, we're able to drill down and action them very quickly. So getting back to this point around sustainability of those margins going forward. We believe we've got the cost structure pretty much in the right place now, and we have the mechanisms in place to be able to ensure that we stay there.

Maher Yaghi - Desjardins Securities Inc., Research Division

So is it fair to assume that your -- from your understanding of the operations and all the balance sheet items, we should expect cash flow going forward to move higher to reach or get closer to your EBIT line versus the EBIT line going down to reach the cash flow line?

Michael E. Roach

That wouldn't be a good strategy to drive our EBIT down to meet the cash.

Maher Yaghi - Desjardins Securities Inc., Research Division

No, no, I mean, that -- I mean, I'm trying to bridge some understanding out there, mix understanding of the operation status.

Michael E. Roach

Well, again, I -- we said it numerous times, we reinforced it on the call here, we've done many, many acquisitions. This is not unique that the EBIT would run ahead of the cash for a period of time. And over time, those 2 will align in the future as they have in the past. Again, I think we've been very transparent, we've showed investors what that looks like in terms of the impact of the restructuring cost and the cash generation. Again, I would reinforce that cash, like bookings, should be looked at a trailing 12-month basis. We don't run the company by quarter, and cash and working capital fluctuates by quarter. So again, I think we're steadfast in the belief that over time, this will come back more in line in the future as it has in the past.

David R. Anderson

Maher, just in your concern around which way the line should be moving. Again, if I just reference you back to the chart that was provided on the cash flow from operations, you can see that when you put your model together in the net earnings, you add back the noncash items and that gives you a baseline that you should be working with. And that, I would think that you'd see over time than at the cash line will then start to come up to the EBIT line.

Operator

Our next question is from Justin Kew from Cantor Fitzgerald.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division

Mike, you talked about under -- when you're talking about margin expansions, talking about business development investment. Can you just flesh that out a bit and just talk about -- and I guess, Paul talked -- asked kind of in the U.S. Pacific. I'm just talking about globally, when do you take the foot off the gas in terms of investment on the development side?

Michael E. Roach

I guess what I was telegraphing, Justin, if you look at a normal integration and Logica, given its size and its performance and our commitment to drive accretion, the first year, we drove exceedingly hard on the restructuring basis. As you know, the net headcount is down 4,000, 5,000, which takes a lot of management tension because you not only have to do the restructuring, but you got to continue to operate the business. Now that, that is complete, essentially, we're now turning more of our attention, more of our management time, more of the business development focus on growing new higher-quality margin. We've also done a pretty good review as we went through the SG&A on the skills and the capabilities of our business developers and made some changes where necessary, reinforced the right message in terms of selling profitable business and not only selling revenue. So that work has been done. So I think what I'm saying is that, that cuts in along with those other factors, including improving market, we're looking to continue to grow the business here throughout the year. I don't know if that gets at what you were looking, at but that's essentially what we're doing.

Justin Kew - Cantor Fitzgerald Canada Corporation, Research Division

Yes, that does help. And David, just on the DSOs, the way it's described in the MD&A, it feels as if kind of the increase in the DSO is temporary. How does -- how should we think about the DSOs coming down over the next couple of quarters?

David R. Anderson

I think the impression you got from the MD&A is the correct impression. It is a timing difference. And because of the, I guess, the mix of the business that we have right now, just a lot of the health care projects as an example, all falling due on the same date. So there were a lot of milestones that were all within that December, January, February time frame that we have in front of us. So as we work our way through that, then we will get -- we will see the DSO improve, see the cash improving and then we'll get back into a steady state where we've got various milestones, et cetera, that are scattered out over a period of time and not all lumped up into a single window. So I would expect that we're going to see much increase improvement here going forward.

Operator

Our next question is from Thanos Moschopoulos from BMO Capital Markets.

Thanos Moschopoulos - BMO Capital Markets Canada

Mike, we saw a great margin performance with Logica, as you highlighted. I guess, the one region where margins were a little bit lower relative to prior quarters was in the U.K. And just to clarify, were there any one-time factors there, or is that related to seasonality, or maybe ramping up some of your business development activities? What drove that?

Michael E. Roach

I think, again, we're -- we've done a lot of restructuring in the U.K. I think we had some very significant project issues in that area upon the acquisitions. We're working through those. Again, our outlook is that, in the U.K., that we would continue to gradually improve those margins throughout the year. So I wouldn't read in anything particular there. I think the one thing that we ought to remind ourselves is that, while we talk about Europe as one entity and North America sometimes is one entity, the countries are much different in terms of the mix of the business and also the economic climate there. So again, I think we got a great team on the ground, we're winning business in the U.K. I mentioned the smart metering contract is just one example. On the health care side, we've won 2 of the 3 contracts that were awarded there, so we've got some good momentum on the ground. And the book-to-bill in the U.K. in the first quarter was 117%. So again, the outlook there, I think, is promising. As the top line starts to return there, as I mentioned, it does tend to drive up utilization, and that ultimately ends up in increased earnings.

Thanos Moschopoulos - BMO Capital Markets Canada

Great. And then in Canada, we had some sequential revenue growth, as you highlighted. Margins continue to be very strong there. And so how should we think about the top line given some of the bookings in recent quarters? Should that return to a better growth as we look out through 2014?

Michael E. Roach

Well, that's certainly the goal. I mean, I'm not one that accept that Canada's a mature market and there's no growth there. I would believe that there is growth opportunities there. I think what I was trying to telegraph, we think that the -- there's some stability now building in there in terms of bookings. We would expect our bookings to continue to strengthen in Canada, and then, as I said, over time, that translate itself into revenue. I think the second point is that our Canadian team has done an excellent job of actually qualifying revenue to ensure that it is in areas where we can bring significant benefits to our client and to our shareholders, so they have found a very good balance there in terms of earnings and margins. On the revenue side, as I said over time, we see more opportunities, the funnels are increasing and that should translate into some gradual growth in the top line in Canada over time. We're also looking at a number of deals that could bump that up in terms of longer-term deals, and -- but as I mentioned, they take some time and they tend to be lumpy.

Lorne Gorber

Great. So Audrey, we have time for one last question.

Operator

Our last question is from Michael Urlocker from GMP Securities.

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

I just want to make sure that an important point isn't lost in the discussion here. To go back to the comment David made. I thought I heard you say that cash from ops should trend towards $300 million per quarter. Was that what your point was?

David R. Anderson

Correct, and we will see that in the chart that was provided.

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

Okay. And when you say $300 million per quarter, that's including any restructuring or one-time charges or disbursements on severance, et cetera?

David R. Anderson

Well, when the -- to get there, we will be looking at having those behind us. Because we only have about 50 -- or sorry, we're about $54 million left to be expensed. We've paid out about $368 million so far, so then we just have the difference between that and the $525 million. So it will still take us part of this year to get that behind us, but we do provide to you the information on a quarterly basis as to what's being expensed and what is being paid out, so you can do your own assessments.

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

Okay. And so a substantially strong cash generating businesses is probably a pretty good indicator with the health of Logica acquisition, I guess?

David R. Anderson

Exactly, exactly.

Lorne Gorber

Thanks, Michael, and thank you, everyone, for joining us. We will -- hopefully, you'll join us for our AGM this morning, otherwise next quarter will be at the end of April. Thank you.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.

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