CGI Group, Inc. (NYSE:GIB) Q1 2018 Earnings Conference Call January 31, 2018 9:00 AM ET
Lorne Gorber - IR
François Boulanger - EVP and CFO
George Schindler - President and CEO
Thanos Moschopoulos - BMO Capital Markets
Steven Lee - Raymond James
Richard Tse - National Bank Financial
Maher Yaghi - Desjardins
Robert Young - Canaccord Genuity
Paul Steep - Scotia Capital
Paul Treiber - RBC Capital Markets
Robert Peters - Cormark Securities
Justin Donati - Wells Fargo
Daniel Chan - TD Securities
Ralph Garcea - Echelon Wealth
Thank you, Alana, and good morning. With me to discuss CGI's first quarter and fiscal 2018 results are George Schindler, our President and CEO; and François Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. 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&A financial statements and accompanying notes all of which have been filed before 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&A and press release as well as on cgi.com. We encourage our investors to read IP in its entirety and to refer to risk and uncertainties section of our MD&A for a description of the risk 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&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 enjoying us live or via the broadcast at 11:00 a.m.
I'll turn it over to François Boulanger, to review our Q1 financials and then George will comment on our operational highlights and strategic outlook, before taking your questions. Francois?
Thank you, Lorne, and good morning, everyone. I'm pleased to share our results for Q1 fiscal 2018. Revenue was $2.8 billion, an increase of a $141 million or 5.3% compared with last year. On a constant currency basis, revenue grew 4.9%. Bookings were $3 billion or 106% of revenue, 38% of the contract awards were related to new business and 24% were IP-related booking. Over the last 12 months, total bookings were $11.3 billion or 103% of revenue.
Adjusted EBIT was $406 million up 2.4% from last year and EBIT margin was 14.4%. This compares favorably to last year, when excluding the one-time U.S. R&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 million, at the end of December, we had expensed a total of a $121 million against the planned investment of $165 million. We expect to expense the remaining amount by the end of this fiscal year and we are on-track to generate the planned benefit.
Related to the acquisitions of Affecto and Paragon in the quarter, we incurred integration costs of $16 million. We expect to complete these integrations during this fiscal year for an additional estimated cost of $25 million, the majority of which we expect to incur in Q2.
Our effective tax rate in Q1 was 16.3%. This follows several tax policy changers enacted in Q1, first the tax reform in the U.S. which includes the lowering of federal corporate tax rate from 35 to 21% and imposes a one-time repatriation tax. Belgium decreased their tax rate by 8% to 25%. And France imposed a corporate surtax of 5%. Taking together these changes were positive for us, this resulted in a onetime net benefit of $34.1 million in the quarter mostly from re-evaluating our U.S. tax liability. Excluding this net benefit our effective tax rate would have been 26% in Q1 compared to 26.6% in the same quarter last year.
Going forward we 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 million in fiscal 2018.
Net earnings on an adjusted basis improved to 288 million 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 million and EPS was $0.98 also an improvement of 10% compared with 0.89 in Q1 last year.
Turning to cash, our operations generated $410 million in the quarter of 14.6% of revenue including $22 million and 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 $1.4 billion 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 way. $71 million back into our business including the development of our IP and the wrapping up of new outsourcing contracts. 200 million to acquire Affecto and Paragon. and we reduced our debt by $64 million at the end of December net debt stood at 1.6 billion up $143 million compared with last year but down sequentially by $114 million. 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 up the flexibility to purchase 20.6 million shares over the next 12 months. Under the current NCIB we have invested $870 million repurchasing 14 million shares at a weighted average price of $62.87, and reaching 65% of the programs limit. We did not buyback any shares during Q1 of 2018.
With our revolving credit facility and close to $250 million of cash we have $1.6 billion of readily available liquidity and access to more as needed in order to pursue our build and buy strategy.
Now, I will turn the call over to George.
Thank you, François, and good morning, everyone. Overall, I'm pleased with our team's performance in the first quarter. We continued executing the plan further strengthening our position as a global end-to-end IT and business consulting services leader.
This quarter strong results were driven by client demand; CGI brings a combination of local experts and global insights. To help our client 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 operation, 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 environment.
IT remains a key accelerator for our clients and a driver for CGI's profitable organic growth. On year-over-year basis our IP bookings and revenue continue to increase at a faster pace than other services. Our IP innovation will showcase this quarter during two leading global industry conferences, at the Sibos Banking Conference in Toronto, we launched our trade 360 IP approach, enabling banks to integrate powerful Blockchain capabilities applied with an existing trade platform.
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 seamless real time customer experience across all retail channels. IP as a percentage of overall revenue reset to 21% this year to the recent mergers adding proximity-based services revenue largely without IP. We remain committed to our IP30 plan leveraging these new client relationship as an incremental distribution channel for future IP revenue growth.
Now turning to the Q1 highlights of our global operations. I will start in North America. At the beginning of the quarter we created two 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 our proximity model for the build and positions us to grow our pipeline of buy opportunities in both units. Each segment has over a billion dollars 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. North East, 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 would 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 this government initiatives accelerating and we're increasingly well positioned with recent contract vehicle awards, including government-wide Alliant 2, U.S. Army RS-3 and ITSS at the Social Security Administration.
Our prime positions on just these three multi-award vehicles qualify CGI to compete for over $100 billion in technology spending over the next 5 to 10 years.
In Canada, our team delivered their sixth 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 this is 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 telecommunication. And in Northern Europe, we continue the evolution of our infrastructure services business, as a new global manufacturing client awarded us the hybrid cloud-based project which uses CGIs Unify360IP.
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 [indiscernible] 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 and we were selectively higher in line with client demand.
In the UK, slowed toward decisions over the last several quarters, partly due to the uncertainty introduced by Brexit, impacted year-over-year growth. We are now seen 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%. Evolving revenue mix across Europe combined with the expected benefits of the restructuring program and integration of Affecto, 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, we now have access to CGIs 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 partnerships with our proximity-based consultants.
In summary, in the first quarter 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 Affecto and Paragon. We were up 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 based around the world ending the quarter with 72,500 members with the skills, knowledge and experienced to realize the expanding opportunities for delivering on our end-to-end portfolio. We remain to committed to executing our strategic aspiration of doubling over the next five to seven years through a continue build and buy.
Thank you for your interest and support. Let's go to the questions now. Lorne?
Just before going to the questions, a quick mention that we posted our four-quarter supplemental history for the new U.S. segments on the cgi.com. And a reminder, that a replay of the call is available either via our web site or by dialing 1-800-408-3053 and using the passcode 1910302 that'll be available until March 3. And a podcast will be available for download with just within a few hours. Follow-up calls, as usual, directed to me 514-841-3355.
Eleina, can we pull for questions please?
[Operator Instructions] The first question is from Thanos Moschopoulos with BMO Capital Markets.
George, maybe starting off on Federal since you are now breaking that out separately, can you drill a bit into the strength that you are seeing there? And you alluded to within your prepared remarks but to what extent is that defense versus civilian or both how much of it being driven by IP versus non-IP solutions? And what areas of strength that you call out?
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 momentum program continues to be strong in both civilian and in defense. We announce the big U.S. army momentum when a while back so that's part of this.
Cyber security 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 haven't really been able to work during the protest period, we're able to work on that now that whole contract is all about modernization, it's about agile development cloud, cyber security, 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 environments been evolved in recent months as far as the initiatives you are seeing from your new clients.
Just in general we talked about this over the last several quarters, what we see in here and the voice of our clients accelerating need, again and I will remind you, this is being driven by our clients, clients so for the 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 cost, so we've seen on both sides down picking up.
Thank you. The next question is from Steven Lee with Raymond James. Please go ahead.
George you're doing quite well in the U.S. I want to ask about this [SSIQ] is this opportunity as big as IP looks on paper and how do you see IP ramping up through fiscal 2018. Thank you.
It is a big opportunity, I think the ceiling allocated to CGI is $2.4 billion but IP 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 monetization is on their radar. So, IP is a very big opportunity for us.
I mean, how long did you take you IP hit that dealing on a one-way basis.
On the run rate base, is the very, some are very small, some are very large, it's going to take some time to ramp up but it does ramp up quickly but it depends on the contract task orders that we win and just as also as a reminder, we didn’t book any of that, we book a multi-award vehicle like this or any of the three I mentioned, we book that at $1 just as a placeholder and the task order is when we book that. So, you will see that as I announced the booked throughout the latter half of the year.
Thanks, and UK seems to be having some challenges, one of your competitor is down 40% today. But when I look at your margins, IP looks pretty strong at 16%, was there any one-time benefits in then the UK and where should that margin be through the rest of the year.
We did have an adjustment on our final loss-making contract from the logic acquisition, so we're not past all of that, as you remember being a UK based company a lot of that was in the UK, so we will past that. So we did have a onetime but I will tell you that what our play book on UK very similar and I think I mentioned this before very similar to the play book we used in the U.S. Federal government when we let through sequestration and no budget years, IP really is to get close to our clients, make sure that we maintain our margins even though the revenue we don’t entirely control as they close our clients that we can take the opportunity to get future booking when some certainly comes out and we are starting to see that already now in the UK, as I now have some of the booking.
Thanks, and George the Glasgow win, you would expect growth to resume in the UK in the next couple of quarters?
Yeah, so that takes a little bit of time, because you have to get through the transition, so IP doesn’t translate to revenue immediately, but in the back half of the year we will start to see some of that.
Thank you. The next question is from Richard Tse with National Bank Financial. Please go ahead.
Yes, thank you. George, just kind of curious here, of you existing base of clients, which is obviously quite large, how many or what percent is actually deployed in your new technologies from this portfolio, to expand IP into IP and digital. I am just kind of curious to get some perspective on that?
It’s a great question. I’ll answer in a couple of ways. In the voice of the clients, when we talk to our clients, 40% of that which is up year-over-year significantly, 40% of them said that they now have an enterprise wide digital strategy. 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 had they done on a holistic enterprise basis, fewer have done that and then that does again vary by industry, certainly we have seen on the retail side and on the consumer retail side and on the retail banking side, we have seen clearly faster take up and some of those clients would say we have implemented lot 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 percentage, I would 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, obviously incremental here. So, let’s say you take an example of one of your customers, existing clients has moved over. Have they increased their spend with you by, 10%, 20%, 30%? You know kind of give us what that opportunity could be going forward for the...?
It budgets are increasing and so that’s positive news and they are increasing on the new, the new applications but they are also spending money to, as I mentioned to automate more of the operation, so that they can drive some cost out, so we are playing on both sides, but budget are increasing and, but the overall rate of IP growth gets muted by some of those savings on the operational side.
Okay and just a 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 push back the volumes CGI is thinking when IP comes to that? Thanks.
We are 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 in some of the metro market acquisitions which has been a very good strategy for us and IP 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 François mentioned we have the capacity to do both and certainly we have the interest but again I repeat something we talked about before is going to be the right company at the right time and at the right place.
The next question is from Maher Yaghi with Desjardins.
I have a question on -- yesterday President Trump mentioned that he is going to ask Congress to end sequestration of U.S. military, U.S. defense budget. Can you talk about how this has been affecting your business and if we see and then to the sequestration whether IP could do to operationally U.S. government business federal business?
And my second question is on Canada. We've seen recently slowness in bookings and in Canada I wanted to know what's causing this decline and you've talked in the past there is some great success on the financial services like but IP seems like we are kind of pulling back here. Can you talk about what's causing these step-in bookings and what are you doing to improve it?
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 revenue, so we’ve been growing our revenue but also the nature of the booking. And so, we've been having more of our bookings have been in the systems integration and consulting side than and the outsourcing side.
And we've been through and we mentioned this before IP been through a lot of our renewals so you saw natural decline because we are through the renewals but also a natural decline based on the nature of the business. SI&C business tends to be smaller deals and shorter increments but those are exactly the deals that help us build relationships and our 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, really is about transitioning those some of those relationships into value prepositions that generates some of that longer term recurring revenue.
And you see that across the company that a lot of our clients right now are buying and then other side, 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, pumped up our book to bill now within our backlog which is great but now we have the opportunity to transition at SNIC in the outsourcing business.
On the truck and sequestration that's are as are harder one to the sequestration went through a couple of different cycles initially IP was a little of the more detrimental to the business we went through that, we highlighted that as you 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 any 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 the same also to modernize the customer experience and that’s include on [depend].
If I can ask one last question to François, you talked about impact of the change and taxation in the US, if you want to basically, it's around $0.10 per year does is that including the changes in France?
Yes, so when I talking about the 40 million IP was including the French impact for the year. The 5% surtax for France is one-year surtax but like anything else we just need to be close to this and see if they will really be taking IP out next year or not.
Thank you. The next question is from Robert Young wit Canaccord Genuity. Please go ahead.
Looks like you have strong revenue and bookings in the consulting side, and the bookings appear to be leading the revenue as percentage and so, I was wondering if you could take about, is that renewals driven or is that new business and then talk about that kind of the trend going forward.
The bookings is a lot of new business as I said we're past a lot of renewals in fact by looking at our top 10 deals, I have 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 as I see in the outsourcing. That does IP done.
Okay so there is lag effect that you will see, the other side of the business will grow.
Yes, very strong growth across the geographies with the exception of what I highlighted in the UK and you saw that, that leading bookings there and then with that cost as opposed to where we're now.
So, I guess IP will be a healthy aspect of the business that the, the waiting which shifts away from the consulting side, more towards outsourcing may be next year or going forward.
And it’s a mix, right we 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&C and the outsourcing recurring revenue and the intellectual property overlaid across to.
Okay and then you've said a couple of times that you have plans to accelerate the pace of metro market acquisitions, so I was wondering about, how was the retention in those acquisitions you made particular at the high end and then you talk about the reasons behind that pace, just purely just benefit to your strategy or is IP because there is a larger pool of targets, your processes really well built for pulling these metro market acquisitions in, what's the reason for accelerating.
The reason for the strength is to full really is the maturity of the operation across every geography and there ability then to rapidly integrate your question about retaining people and then of course the demand that is there and the opportunity that closure we get to our clients and the more access we have to clients through these relationship, the more we can bring our full offering solution we are seeing just that, even in these most recent mergers that we have done.
As far as retention, we have seen -- we always see a slight uptick of turnover, just a different culture. But what I can and I am very proud of our collective teams on this. We have 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 with most recent go-to operations being from each of the six previous mergers including the two we did this quarter and have a very strong robust sharing of information across. So, that’s kind of how its working very well and so that’s another reason for us to accelerate.
Thank you. The next question is from Paul Steep with Scotia Capital. Please go ahead.
Good morning. George, could you just talk about, you made the U. S. leadership changes in the quarter, could you talk about, how that such a for opportunities in the future and maybe were if any bigger structural changes that made around that? Then I got one quick follow-up.
Sure, it really was as simple as making sure that we had focused leadership on two growth areas of the U.S. it's such a large market, so we have two great leaders and so we are able to break that out, gives you more visibility, give me more visibility, but ultimately IP also allows us to do both the built and the buy more rapidly, it's easier to do, to integrate under that model and therefore more attractive to buy and then same thing on build, just gives us more focus with our clients in those two areas.
I also mentioned, IP is for when us from continuing to share across in fact our IP has proven to have legs in spending the state local commercial business with our federal business both ways. So, our unify360 in the U.S originated in federal, it's now been leverage across commercial and state local. Same with our Atlas software and likewise we have had some opportunities to move commercial into federal including our case book, IT. 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 and I guess we were thinking specifically this morning a bit Northern Europe with the margins down a little bit there for Affecto, what’s the timeline to get those operating margins back on to the model, you obviously gave us good cost guidance there? Thanks.
While you see already a good improvement in the second quarter. Again, was purchased in the first quarter, so IP needs some time to put a new system in, but most of now the region are on our accounting system, so we are capable to generate some synergy on the SG&A and so already in Q2 you will see a good improvement and Q3, the full impact of the full synergies, so IP would be you will see that we can expect Affecto business to be at the average EBITDA of the company.
Thank you. The next question is from Paul Treiber, with RBC Capital Markets.
I just wanted to touch on the Metro market acquisitions that we've seen about two years SI&C the acquisitions of JSL and LCN 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 learned from something that you've seen a JSL on LCN?
They both are working very well, which is why while we are accelerating. Our core rationale is to bring those core relationships into CGI and be able to sell the full offering suite. The key clients that we brought over in both of those acquisitions and mergers have actually increased year-over-year, its 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 and taking some of their skills and leadership into other clients across in the case of JSL and not even just across Canada but also, they were a leader in agile development where you are able to leverage them across North America and even into some of Europe. So, lot of synergies to be had and it's partly driving that strong growth you've seen for consecutive quarters in both France and Canada now 18 months later.
And then just turning to the UK from 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 UK remains attractive to us from that perspective and I see that our rate right from the get go win and some of the uncertainty we got introduced we continued to look at and actually have a robust pipeline of opportunities and we will continue looking at that.
Then just lastly for me just on operating a cash flow was up nicely year-over-year and IP was helped by working capital. Has the working capital essentially normalized following Logica? Or should we expect working capital to be a headwind to cash flow going forward?
As George indicated that we've just finished our last big project in the UK and that was last making in the from the logic acquisition so for sure the pressure of the working capital be a lot less than what you saw in the past. We still have gradually the integration cost that we have a 121 million of expenses that we already booked but only 30 million were paid, so that would still be a little bit of drag on the working capital point a lot less than the years before.
The next question is from Robert Peters with Cormark Securities.
George, just looking at the margin in the U.S. I think you guys highlighted R&D tax credits in 2015 kind of credit that we consider year-over-year comps there. In previous quarter I think you highlighted that some of that is just timing to R&D spend is lumpy, how should we kind think about the trend on that for the rest of the year and may be should we see those margins trend back to where they were in point something.
I think there is a combination 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 quite a 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&C in converting the SI&C to into recurring revenue, I see upside in the margin opportunities particularly as we increase focus and then increased opportunities for growth given the structuring that we just went through. So, I do see that increasing overtime.
Perfect and maybe just focusing on Europe and France obviously you’ve seen very strong performance there, I think we probably get this question everyone for a while, is that still kind of the pace where you guys see that, those margins in by region getting up to North American average or just kind if we think about, how should we think about the rental rate on those.
There are some sub structural differences by country, so when we get to the Canadian 21.7 may be 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 is still this lowest and European operation, but increasing that with the introduction as highlighted in the opening of our retail 360 IP so I think there is upside there, there is up side on the growth and there is upside in that overall mix of business, I still see that plenty of upside in all of our European operation including France.
Thank you. The next question is from Edward Caso with Wells Fargo.
This is Justin Donati on for Ed. So, the question I had, looking at the acquisition that you closed this quarter, I think they had about 220 million of revenue and you also talking about increasing the pace of metro market acquisition. So, can you help me kind of understand are you still thinking about the M&A contribution being about 50% and being 50%, where will M&A kind of the higher.
The long-term plan is still 50-50 because remember even as we bring 220 million of revenue in, we quickly look to increase that through also organic growth and selling the full end to end services as CGI. So, our optimal mix is still 50-50, clearly at any one point in time, it's going to get skewed based on may be an accelerated pace at a point in time but the long-term plan is still 50-50 and the healthiest place for the business to be.
Thank you. The next question is from Daniel Chan with TD Securities. Please go ahead.
Can you remind us what is the impact of the U. S. government shutdown on your different segments, I know the recent shutdown was relatively short, but if we get another one and if it’s a little bit longer, how would you expect that to impact you guys?
Yes, thanks for the question. You are 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 on the quarter. But depending on the duration and timing in the quarter, depends on how much of that will recover. But I’ll remind you a couple of aspects of our business. Number one, mission essential work continues a lot of our work is in that mission essential.
Number two, our fee-based work continues, because they don’t need a budget in order to fund their operations and number three and a 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 offsite, particularly our work associated with our own intellectual property which you know is very high in 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 and 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 are actually already recovered because we were head 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.
Certainly, thank you. The last question will be from Ralph Garcea from Echelon Wealth. Please go ahead.
Thank you for taking my questions. Just two quick ones here. On the blockchain side and the stuff you develop for Trade360. Can you some of that distributed ledger technology in some of your other verticals as you develop IP for a supply chain or healthcare, utilities or, how much of that can you leverage across the different segment?
Yeah, so 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 are introducing them to IP there as well as payment. So, just two examples, so the answer is yes, it’s the underlying technology that can be leverage 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 take over 15% as we move forward over the next three to four quarters?
Well again, I would say that’s definitely the plan and its through that mix of business and it's not just because the blockchain but certainly new technologies help to accelerate that.
Again, and just lastly. When you hold some of these events like the Helsinki one where you guys 1200 sea level executives. If you hold them in other regions, I mean how long does IP 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 these different events in different locations [indiscernible] is one of our largest which is why we highlighted it, it's very impressive. But when you go there and I met with many clients afterwards it's on ongoing relationship but 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. This is why our proximity models is so important to us.
Thank you, Ralph, and thank you all for joining us today. Our Q2 report will be on May the 2 and I look forward that all of you joining us to this morning 11:00 AM for our AGM. Thank you.