CGI Inc.

Good morning, ladies and gentlemen. Welcome to the CGI third quarter fiscal 2020 conference call. I would now like to turn the meeting over to Mr. Warren Gorber, Executive Vice President, Investor and Public Relations. Please go ahead, Mr. Gorber.

Thank you, Sharon, and good morning. With me to discuss CGI's third quarter fiscal 2020 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 a.m. Eastern Time on Wednesday, July 29, 2020. Supplemental slides, as well as the press release we issued earlier this morning, are available for download, along with our Q3 MD&A, financial statements, and accompanying notes, all of which have been filed with both CDAR and ADGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or applied. and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The complete safe harbor statement is available in both our MD&A and press release, as well as on CGI.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, 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. So with that, I'll turn the line over to Francois to discuss the quarter.

Thank you, Lauren, and good morning, everyone. I am pleased to share our results for the third quarter. Revenue came in at $3.1 billion, down 2.2% when compared to last year, and representing a constant currency decline of 3.5% year-over-year. IP remained stable both sequentially and year-over-year at 21% of revenue. We had a near-term headwind from transaction volumes from certain SaaS-based IP engagements due to the pandemic impact. For example, Travel restrictions reduced U.S. visa volumes, and increased unemployment had a negative effect on payroll volumes. However, UIP revenue was added to the portfolio from the recent acquisitions of Sunflower, Scisis, and Mitzi, which offset these temporary transaction declines. While the impact of the pandemic was felt broadly across our operations in the quarter, we initiated the necessary actions to minimize the bottom line impact to position CGI for future profitable growth. As such, we expect a gradual improvement in the months and quarters ahead. Despite widespread economic pressures around the world during the quarter, we were able to close $2.8 billion in new contracts for a book-to-bill of 93% higher than last quarter, a proof point regarding the strength of our existing client relationships and our ability to win business throughout the crisis. As client executives and CGI consultants continue to slowly and safely return to an adapted workplace, we believe the opportunity for increased collaboration with current and prospective clients will accelerate our book-to-bill going forward. Over the last 12 months, we booked $11.8 billion in new contracts, or 97% of revenue. Our global backlog remains healthy at $22.3 billion, or 1.8 times revenue, the vast majority of which are long-term managed services engagements. Adjusted EBIT decrease in Q3 to $448 million for an EBIT margin of 14.7%, down 50 basis points compared to the same period last year. The decrease was largely due to non-recurring expenses taken in Q3. For example, we took a $10 million impairment charge related to specific IP solutions for both all-in gas and infrastructure. Upsetting this headwind, Canada, the UK, and Asia-Pacific continued to post higher margins year-over-year. Our effective tax rate in Q3 was 27% or 26.1% when excluding non-deductible restructuring expenses. This compares with 25.9% last year and remains within our expected range for the full year. Integration costs related mainly to recent acquisitions total $20 million in Q3, and we also incurred restructuring expenses of $39.5 million in the quarter, initiating the actions in response to the pandemic we outlined in Q2. At that time, we announced an expected range of 2% to 5% of our professionals to be on temporary layoff status until there was more clarity on the evolving crisis. With an additional quarter behind us and more clarity on the business impacts and our recovery prospects, We now expect to permanently restructure approximately 2% of our consultants and professionals. We initiated these actions in Q3 and expect to complete the majority of them in Q4 for a total cost now of up to $115 million. This amount is higher than previously communicated due to the fact that the majority of permanent actions would be concentrated in European geographies with drives higher restructuring costs. We do not expect additional restructuring related to the pandemic at this time. Excluding these costs, net earnings were solid at $308.4 million for a margin of 10.1% and EPS of $1.18. Cash provided by operating activities was robust at $584.8 million or 19.2% of revenue representing an increase of $209.6 million compared with Q3 last year. This improvement was driven by a lower DSO of 48 days compared to 52 days in the same period last year, indicating better collections. Government programs allowing for temporary tax payment deferrals and the positive impact resulting from the adoption of IFRS 16. Over the last 12 months, $1.9 billion in cash has been generated by operating activities, or 15.2% of revenue. In the quarter, we invested $79 million into our business, largely in IP, and managed services engagements. As planned, we did not complete any share buybacks in Q3. Looking ahead, for now the priority will remain the same, which is to focus on investments in growth, for our business, and including the acceleration of both metro market and transformational acquisition opportunities. Net debt to capitalization decreased sequentially due to strong cash generation from 34.8% in Q2 to 28% at the end of June and remains within our comfort zone. With cash of $1.4 billion on hand and a $1.5 billion revolver that remains fully accessible, we now have more than $2.9 billion readily available to pursue profitable growth, including over 1,000 potential merger targets in various stages of our pipeline, with more than 20 discussions ongoing. Now I'll turn the call over to George to provide more details on the operations, our strategy, and on the outlook for our business and markets. George?

Thank you, Francois, and good morning. The global pandemic has brought forward a unique set of conditions requiring resolve and agility in order to take action now while continuing to prepare for the future. I am proud of our consultants and professionals who have remained dedicated to delivering mission-critical technology and business process services for clients around the world. During the quarter, relationships with our clients and professionals deepened, reaching new highs in terms of satisfaction and engagement. These relationships continue to strengthen our positioning and remain key to CGI's ability to exit this crisis even stronger than we are today. Our operational rigor and discipline again enabled us to deliver a solid quarter, which underscores the key elements of CGI's resilience that I spoke about on the last call. It is this combination of diversified industry portfolio, end-to-end services mix and proximity-based model that enabled us to mitigate the full impact of the business and industry disruptions created by the pandemic. As Francois just detailed, we converted several of the temporary crisis response measures we took last quarter into permanent restructuring actions. This drove a year-over-year decrease in non-billable headcount and SG&A costs. Although this restructuring unfortunately also affects some billable consultants, we accelerated virtual boot camps and online learning, utilizing CGI Academia, our global learning and development platform. This enabled us to reassign a large number of our professionals across various project opportunities and minimize the extent of the restructuring action. In addition, the executive compensation reductions that I mentioned last quarter remained in effect throughout Q3. All these actions continue to enable margin improvement opportunities now and in the future. And most importantly, the investments in our talent position us to continue to address the future growth opportunities as we execute on our build strategy. Continuing a trend we have seen over the past few quarters, our mix of services is shifting towards longer-term recurring revenue. In Q3, the percentage of managed services revenue was up again over the last quarter to 54%. On a year-over-year basis, it represented a 500-point basis point increase. In fact, managed services opportunities now make up over 60% of our pipeline, and we continue to see strong interest for IP, with demand up 8% over this time last year. Many of our clients are currently reprioritizing their business and technology initiatives given the crisis, and also reassessing the partners they will turn to for help now and in the future. Our bookings in the quarter demonstrate our positioning as a partner of choice with our clients. In the quarter, we sustained and grew CGI's share with existing enterprise clients with a 96% renewal rate. Across all bookings, 65% of awards were for new projects. These included a large cybersecurity consulting agreement with the UK government, a multi-year consulting engagement to help modernize Danish customs operations, instant payment consulting projects with one of Europe's largest banks, and the modernization of utility asset management for one of the largest utilities in North America, leveraging CGI's unique IP business solution. As one of the few firms with the scale, reach, capabilities, and commitment to be our client's global partner of choice, we are well positioned to continue delivering insights and solutions our clients can act on. With this backdrop, Let's turn to the Q3 regional performance highlights. I'll start in North America. In the U.S., our revenue, margin, and bookings growth reflect the strength of our recurring revenue base and intellectual property across industry sectors as we expanded our share of IT spending with existing clients. We continue to see a strong pipeline of opportunities as the industry rebound and reinvention phases begin to take shape. And in Canada, our strong recurring revenue base enabled us to protect the bottom line. The revenue decline and lower bookings were primarily due to the immediate effect of the pandemic, particularly in the oil and gas and manufacturing sectors. We see growing demand across North America for a more transformational approach to managed services to help clients gain immediate cost savings while improving agility to support their evolving business objectives. Moving now to UK and Australia, The strong results this quarter were again driven by our leadership position in the public sector, where we renewed and expanded existing engagements, notably in the space and defense markets. And now moving on to the rest of Europe. Across the Western Southern Europe and Central Eastern Europe segments, our revenue margin experienced a high-level disruption from the pandemic. This is due to our mix of commercial business in these geographies, which is largely in the manufacturing, transportation, and retail industries. In the quarter, we initiated proactive actions to reduce SG&A and are in discussions with the work councils on these plans. We expect these measures to drive margin improvements across the geographies over the next few quarters. Across our Northern Europe segments, our manufacturing, transportation, and financial services clients experience high levels of disruption from the pandemic. This resulted in significant softness in demand for higher-end consulting and advisory services which are a larger share of our mix in this region. In response, we continued our initiatives to restructure our business consulting and infrastructure services businesses to reflect the current demand. Our healthy bookings in this region were driven by our focus on managed services, including IP, particularly in the government and utilities industries. While the pandemic has temporarily affected overall market conditions across Europe, we see emerging demand for our services as clients across industries reassess their operation for a post-pandemic environment. And finally, in Asia Pacific, revenue growth was strong as we continued to leverage global delivery centers of excellence in our new managed services engagements. Across this region, we continue to see high levels of productivity through automation. The performance in each of our operating geographies reflects regional differences in client and industry impact resulting from the pandemic. Our collective focus, however, is a commitment to meeting our clients' needs, rigorous management of our indirect costs, and investment in our consultants as we prepare for the future, a future that is already prompting our clients to increase the importance of technology in their own go-forward plans. Over the past few years, we saw technology transition from helping drive business transformation to now being core to how clients create value for their customers and citizens. Over a span of just the past few months, organizations' urgent responses to the pandemic became a catalyst for advancing components of clients' digital strategies. Going forward, clients will need help to transition these quick response digitization efforts into meaningful and sustainable outcomes. We see this happening in three ways that will be drivers of future growth for CGI. First, partnering with clients to enable their business agility. through a range of business and digital initiatives focused on human capital and culture practices, process automation, and data analytics. Second, enabling the future workforce and workplace by helping clients quickly adapt how their organizations operate and collaborate, with people and technology at the center of these changes. And lastly, in addition to physical supply chains, the pandemic disrupted technology supply chains. which is reinforcing clients' ongoing efforts to have fewer IT partners. This vendor consolidation is now being driven by a combination of factors, including the desire to mitigate risk across their global operations, gain efficiencies of scale, and achieve greater elasticity in their IT solutions, including through the cloud. These three represent longer-term shifts that will require sustained, trusted partnerships with enterprise firms like CGI. We are well positioned with our end-to-end services and solutions to deliver immediate cost savings through our managed services, accelerate digitization through our IP solutions, and help clients drive revenue growth through our consulting and systems integration services. We also remain committed to accelerating profitable growth through our buy strategy. Our financial capacity, strategic inclination, and operational readiness for both transformational as well as metro market mergers, is very high. With further industry consolidation expected post-crisis, we continue to actively assess a growing pipeline of potential merger opportunities, a pipeline that is growing in both number of targets and the size of those targets. As always, investments in our buy strategy will follow our discipline approach as we look for the right company at the right time and for the right price. We are confident that we will emerge post-crisis in an even stronger position to continue to execute on our build and buy strategy. Our strategic aspiration remains to double the size of the company over the next five to seven years for the benefit of our members, clients, and you, our shareholders. Thank you for your interest and support. Let's go to the questions now, Lorne.

Just a reminder that there will be a replay of the call available either via our website or by dialing 855-859-2056, and using the passcode 149-5772 until August 27th. And as usual, a podcast will be available for download, and any follow-up questions can be directed to me at 514-841-3355. Sharon, if we could poll for questions.

If you'd like to ask a question at this time, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. First question comes from Thanos Mosopoulos. Please go ahead.

George, can you comment on what return to work is looking like for CGI? In some of the economies that have started to reopen, have some of your employees been returning to client sites? And are you seeing productivity improvements as a result? And to what extent have you been able to leverage your local presence competitively as things are reopening?

Yeah. Thanks for the question, Thanos. We do plan to return to the office when it's safe and as it's safe. And that's important, because proximity does drive client intimacy, and that client intimacy is needed to have the trust for those larger managed services and IP engagements. So it's all tied together, and we are seeing that. So we're up to about 15% of our global workforce in in the offices, either our office or a client site. And that ranges everything from 1% in our India Global Operations Center of Excellence to France, which is nearing 50%. Almost half of our members in France are back either at the client site or at the office. And we are prioritizing in two areas. One, work that needs to be done on site. Typically, that's for various security and privacy reasons. and prioritizing business development individuals, because that collaboration, that in-person collaboration is critical, not as much for the existing clients, but in order to gain prospective clients. So, of course, we're practicing all the safety precautions, and it is very different. Like I said, it ranges differences in different locations, and we see that actually being more granular as we move forward. that it's really the pockets of hotspots will happen locally and will react the same way we did during the global shutdown.

Great. And APAC was obviously quite strong. Is there revenue growth being driven disproportionately by customers in one or two specific regions, or is the demand you're seeing more broad-based across regions? And also, is there a dynamic where you're seeing more managed services work, and perhaps some of that lends itself more to APAC, and is that contributing to the growth as well?

Yeah. So managed services is definitely the driver of some of this uptick in work in Asia Pacific. Right now, the demand is, or what you're seeing, is driven mainly by North America a lot in the U.S. and in the U.K., and that's not surprising because those are – Those are the units that are least impacted by the pandemic. But when you look at managed services, we have an active pipeline across every single region, and we've seen demand being quite strong. It's not so much demand varies by geography. Demand for managed services is varying a bit more by industry. Those industries that are most impacted by the pandemic, hospitality, transportation services, some of the retailers, They're having, they're much more open to having the discussions about a broader managed service agreement because they need the savings now. Others, we see various industries are looking more at both savings and reinvesting those savings. And those are some of the banks, some of the leading banks are looking at, yeah, I need to have some savings. I've got to prepare for some potential loan losses. I need to get my expense ratio down. But technology drives my business. and so I'm going to reinvest a set of those savings on new opportunities. So there's multiple flavors now of the managed services opportunity. It's not a one-size-fits-all, but we're seeing demand pretty broad across each of the geographies and, quite frankly, each of the industries, but different flavors in those industries.

Great. Thanks, George. I'll pass the line.

Yep. Thanks, Travis.

Next question comes from Mayor Yagi with Desjardins.

Thank you for taking my question. I wanted to ask you, the first thing I wanted is to dig into your backlog performance. When you look at the third quarter, you had pretty good bookings given the circumstances with the pandemic, etc. But when you look at the trailing 12 months, book-to-bill continues to be below one. So, George, I wanted to ask you maybe It's hard for us here on outside trying to figure out if this is an overall industry dynamic or competitive dynamic versus peers that is affecting negatively your trailing 12 months book to bill. Would you be able maybe to share with us some of your win rates and how those have performed over the last year or so before and after the pandemic? And second, I wanted to ask you about the restructuring that you announced today. it seems like you have more visibility on your operation to have finalized these plans versus what you have discussed last quarter. Could you maybe talk about some of the efficiency improvements that you could see from those restructurings and what's driving them directly? What's behind those restructuring? What are you doing, basically? Thank you.

Yeah, no, that's two pretty broad questions. I'll take the first one on the on the bookings and the backlog. And you do point out that the bookings were relatively strong in this quarter. I want to start there. Actually, stronger than even they look. They're higher, obviously, than last quarter, despite the full pandemic. And that's why I highlighted the 96% renewal rate, and that's across any business. That's not just managed services. That's managed services deals, IP deals, systems integration, even consulting deals, pretty broad-based win rate. And when you dive into the data, that's not on the strength of government. Even though government has actually grown solid growth across every single geography that we operate in, and as you know, government actually grew to 38% or 36% of our business in revenue, government continues to be strong but they're buying a bit differently. They're buying more in systems integration and consulting. Actually, we had a higher bookings in systems integration and consulting this quarter than previous quarters, despite the fact that revenue is being driven more and more by managed services. So I think it's just a point in time where governments had to do more quick responses. It's driving growth in our business, but it's not driving growth in our bookings. So bookings actually for government was less than the 93%. It was in the 80s. So the commercial is really driving that. As government returns to more normal operations, there's active procurements involved in governments around the world. And I would maybe point to the U.K., which had a softer booking, yet had growth overall for the quarter and projecting to continue that trend. So that's what's in the bookings now. When you look at the previous 12 months, so it's not really a competitive dynamic. If anything, what we are talking about in our strategic plan for next year is really a blitz on bringing our value proposition to more of our clients across each of our geographies. We actually already initiated that. We're not waiting for the new fiscal year to do that. That's driving those pipeline increases that I talked about. and ultimately we'll return our book-to-bill to a healthy over 100% on a quarterly basis, and then, of course, on a trailing 12-month. The trailing 12-month will lag a little bit, but we'll get there very quickly. So that's what's going on in the bookings and the backlog environment. So hopefully that gives you a little more color commentary to where we're heading. On the – On the restructuring, yes, there's two big areas of the restructuring. One is obviously does impact our billable members. It's to make sure that our business is reflective of the demand. We've talked about this on calls before, but just to remind you, we run the business by very strict and rigorous metrics about what the SG&A should be, and so we've pull the SG&A back in line with where the strength of the business is in different geographies. And that's not widespread. It goes across geographies, but obviously some geographies aren't doing much of any restructuring at this time, in fact, are hiring and growing their businesses. So it really does vary. But when we talk about the SG&A, we're always looking at this. And so as we take the take the changes on the billable members. We're also taking a harder look at our SG&A, not from a ratio perspective, but where that SG&A resides. And so we're moving some of that SG&A as the business continues to evolve, and particularly based on the demand equation, we're moving some of that SG&A to lower cost centers from the center. That's going to result in sustainable savings on the SG&A regardless of the growth curve and the recovery pace. So that maybe gives you a little more color into the situation. Certainly, that's a tailwind. That element of the SG&A restructuring is a tailwind to our margins going forward.

Thank you. And how fast should we expect those restructurings to pass through your P&L?

Yeah, I think you should see that as early as not all of it at a run rate basis, but you should start seeing that at the beginning of the fiscal year 21.

Okay. Thank you very much.

Next question comes from Stephen Lee with Raymond James.

Thank you. George, in your prepared remarks, expecting gradual improvements through the rest of the year, Would this apply to your organic growth as well in the sense we have seen it bottom this quarter?

Yeah, no, that's a great question. Although the pace of the recoveries is still somewhat uncertain, as I'm sure you read the same news and see the same things I see. But there are many positive signs that provide that optimism that we put in the prepared remarks. The solid bookings above last quarter, which I already talked about, but the growing pipeline that's pretty broad across geographies, but also across our services for managed services, intellectual property, but also for systems integration and consulting. We see that going up. Continued strength in the public sector procurements, as I mentioned. The solid growth in the quarter across each of the geographies, we see that continuing, so that'll be a tailwind. And then a return to normalcy in the discussions around new initiatives with our clients, particularly and advancing their digital strategies, particularly around the areas I talked about, enabling business agility and digitization for their workplace and the ecosystem. So these are all positive signs, although always these take some time, particularly for the managed services, depending on the transition complexity, to go from a booking into recognized revenue. But there's lots of positive signs for growth in the next year. So it won't all happen at once, but there's positive signs there.

Okay, that's great. And I have a question on Scandinavia. The non-renewable infrastructure in Sweden, what's the magnitude of that? Would it represent half of the year-over-year decline, and is it all a condo?

Well, no. On the infrastructure, it would not be a condo. A condo is mainly... business consulting, which is a soft, temporarily point in time, but in fact is absolutely necessary for the rebound and the reinvention phases that we'll be moving into. So no, but a no would not be driven from that. Infrastructure is really our traditional business in Sweden, as you know. We've been taking a very rigorous look at that, and we're not looking at renewing projects that is a race to the bottom. The margin is important to us, and so we're not in that game. And, of course, we do that in a respectful way, but we bid deals to be good for all of our three stakeholders, not just one or two of our stakeholders. So that's really what's going on there. I don't have it quantified. I'm sure we can get that for you. I just don't have that in front of me right now.

All right. Very helpful. Thank you. We'll come back to you.

Next question comes from Ramzi El-Assal with Barclays.

Hey, guys. This is actually Dan on for Ramzi. Thanks so much for taking my question. I wanted to ask one first for George, kind of along the kind of topic of organic growth we were just talking about. You mentioned in your prepared remarks that you're starting to see a return to longer-term recurring revenue contracts. And, you know, a couple quarters ago, it seemed like that was almost the reverse. It seemed like – longer-term, you know, deals were being kind of broken up, and this was sort of signaling a step down in organic growth. Is this sort of a reversal of that, or more just kind of a near-term step up? Maybe if you could give some color around that, that'd be helpful.

Yeah, so what I mentioned at that time is that we saw the uncertainty driving a temporary pause in kind of those larger deals. If anything, the certainty of the uncertainty is has driven a reversal. So yes, it is a reversal. It was not the reversal I expected. I don't think anybody predicted exactly the extent of the global pandemic. But the result is exactly what we thought would happen, is once you've got some certainty, or in this case, a knowledge that we're going to be in a maybe slower growth market, from a GDP perspective, that drives those recurring revenue. Larger deals gives clients the impetus to do that. And, of course, that's a tailwind to CGI's growth in the face of maybe a slowing overall growth environment.

Okay, very helpful. If I could ask one more, just kind of on the M&A strategy and regarding capital deployments. I guess in two parts, maybe on the one side, a few quarters ago, you talked about, you know, being at scale and maybe a quarter of your Metro markets. And so thinking about that strategy, are you, would you say you're more likely to kind of achieve greater scale within the markets you're in or being entering more geared for entering new geographies? And then on the other side of that, you mentioned kind of that buybacks are not the priority right now, but maybe what would, what would sort of change that thinking that would make you more interested in repurchasing your own shares?

Yep. So first on the, on the M&A strategy, It is about going deeper and broader in the markets we're in. So the example is, if we're in the United States, that's a market. But of course, within the United States, we're more concentrated maybe in the Northeast or the Southeast, but aren't as big as we could be in parts of the Southwest, the West, and quite frankly, even the Midwest. So these are opportunities for us to grow in new markets, new metro markets, but not new geographies, so they're still comfortable. We're not entering a brand new regulatory regime. So that's an example. We're doing the same thing in UK, Germany, et cetera. So that's the overall strategy. As far as capital deployment, really the focus right now, and it's really because the opportunity right now is for us to play into the growth opportunities on the managed services side, We want to deploy capital into the transitions, maybe some asset purchases where it's necessary, and other incentives to do those longer-term deals. And so that's a use of our capital. Intellectual property, as I mentioned, big opportunity. So we're doubling down on some of the investments in intellectual property. And then the M&A opportunity, we believe, will be very ripe for the future, and we want to be prepared for that. So that's really the reason for the strategy. I think for the foreseeable future, as long as we see that opportunity, we wouldn't change the strategy. And I'll just remind you, and maybe, Francois, you can go through kind of the priorities and the use of cash. We're not really changing the priorities. We're just being more – more focused on where the opportunity is right now. So maybe Francois, you can do that.

Exactly. So George did alluded, you know, investing back in the business and the opportunity and we're seeing a lot of opportunity on the buy side. And again, we did took some debt lately just to be ready to action on these potentials. But we will need to relook also what do we do with our debt in the near future. And so that's why for now we are concentrating on the internal and on the inorganic side. And naturally after we'll look at see what do we do with our long-term debt and when we'll be able to come back and doing some share buyback.

Yeah, and maybe I'd just add, Francois, that we do still have a tailwind from buybacks that we've done in previous quarters.

We did half of the program already this year, so we did buy more than 10 million shares, where our maximum was 20-point-something million shares in the year. So already we did that. We did half of it in six months, mostly in six months. So it's pretty good until now.

All right, that was great. Thank you so much for taking my questions. Thanks, Ben.

Next question comes from Richard C. with National Bank Financial.

Hi, this is Mihir calling in for Richard.

Hi there.

So just had one question in a follow-up. So wondering if you could talk about some of the trends you've seen in July with the restrictions lifting.

Sorry, I didn't catch that. It was a little muffled with the July.

Yeah, if you could just talk about the trends in July, like with the restrictions lifting somewhat globally. So wondering if you could talk about like what you're seeing in July.

Okay, just in July as a month. Well, I would say we're exiting, and I mentioned this maybe a little bit earlier, but as we move through the quarter, we are seeing a return to more normalcy in the discussions around the new initiatives. So what we saw is most of our clients in the immediate aftermath of the pandemic, once they did the immediate response things, the move remote and stabilize the business, They went into a bit of a reprioritization phase on where their initiatives, where their spends would be. And as we move through the quarter, I wouldn't say it's normal, but more normalcy in those discussions about actual new initiatives, their digital strategies, their future business plans. And so we're having much more of those discussions. I'm having those discussions personally with – with CXOs around the globe, and that's a common theme that I hear, whereas maybe the discussions I was having in April and the last time we got together, it was more all around the response. Now it's really all around what they're going to do to further their business, given the landscape that we're in. So, again, I think that's a positive for investments in IT. albeit maybe a little bit different than it would have been even six months ago.

Okay. Thank you for that. And just one more. I was wondering if you could talk about what solutions and services you're seeing the most affected.

Services and solutions most affected. So the biggest impact from an initial positive was actually infrastructure because there was a need to increase some of the infrastructure. That was kind of a temporary up. We also saw the most impacted on the downside was the consulting activities again. We believe that's temporary. That's just a quick response. Let me just stop everything or delay everything, pause everything until I make a different decision. So those are the most impacted on the two ends of the spectrum. In a longer-term period, the ones that we think are going to be most impacted by this are going to be the desire and the need short-term for more managed services and more intellectual property, intellectual property to accelerate the digitization efforts, And even things in, you know, if you think of IP, even areas where the volumes are up significantly. So a number of our intellectual properties in the financial services space is around loans and collections, and obviously that's an area that's going to be impacted with higher volumes. Payment solutions with the no touch, that's going to drive higher volumes. So there are definitely impacts, but it's almost impacts in every one of the services. And like I said, Even though temporary downside on business consulting, we see intermediate-term upticks there as clients have to reprioritize where they're going. And quite frankly, maybe even some reinventions of industries will go on, and our clients will need to react to that. So I know that's a lot, but it's a very dynamic market right now. And I guess I'd end this way. Dynamic markets are very good for our services. Every change you need to make in your strategy and how you approach things is good for a professional services firm with end-to-end services like CGA.

Thanks so much for the call. I'll pass it on. Thank you.

Next question comes from Jason Kupferberg with Bank of America.

Hi, guys. This is Cassie on for Jason. First question, I just wanted to clarify, not sure if you mentioned it specifically, but what was the organic constant currency revenue growth rate that you guys recorded for F3Q? And when you kind of do your internal scenario analysis, do you see the potential for that to actually turn positive in 2020? That's my first question. Thanks.

Yep. So thanks for the question, Cassie. No, we don't – As we started this pandemic, we haven't been breaking out the difference. I gave you the overall growth rate. And the reason for that is as we integrate new businesses, the run rate changes dramatically. As I just talked about, various services are impacted differently. Geographies are impacted differently. Industries are impacted differently. And so it's not a straight run rate, what you'd normally do around organic growth and inorganic growth. We talked about that on the last call. Having said that, I mentioned the tailwinds that we see going in our favor. It doesn't happen all overnight. So I don't necessarily see that happening immediately. But over time, yes, we see it gradually improving and returning to growth in 2021. Got it.

Thank you. And my second question is just overall, how have you been seeing the pricing environment evolve? Like, have you sort of seen an increase in price concessions or payment delays, or has that actually been improving sequentially throughout the quarter? Thank you.

Yep. No, it's a good question. We talked about that a bit on the last call. And as far as payment delays, I think you see the results of the payment or of our cash generation, and there's multiple factors in there, but certainly one of the big factors is, in fact, increased and continued collections with our clients. So we did get some requests, but we haven't necessarily done anything about that. And that's in cooperation with our clients because of the services that we're delivering and the importance for us to have the cash to continue to invest in providing those services. So payment hasn't been an issue. On pricing, there's always some, I would say, behaviors that change in a crisis. It goes in different ways. But we remain disciplined in profitable organic growth, and that's what we'll continue to do. And I think we're showing that we're able to do that and be very resilient. Even in the face of some declining revenues like in Canada, actually the margin both in percentage and dollars increased by good management and working in cooperation with our clients to bring them increased value. So that's not been an issue for us. I don't know, Francois, do you want to add anything on the cash side?

No, you saw that our DSO went down from 52 days to 48 days. So it's pretty good results in the quarter, reflecting that clients are happy with our services and know the criticality of our services. And so it's a pretty good performance on that side.

Got it. Thank you.

Thanks, Cassie.

Next question comes from Daniel Chan with TD Securities.

Hi. Good morning. You mentioned earlier that you're seeing strong demand in managed services, but bookings were 55% were coming from consulting. I know you mentioned that government was a large driver of that change in mix. Is there anything else there to drive a higher mix of consulting bookings this quarter, and do you expect that to reverse in the future?

Yeah, thanks for the question, Dan. Yeah, the big wins in the quarter, the driving that SINC growth were both government but also health and some retail. And, again, not surprising, those that had to act very quickly in the face of the pandemic. And the good news is we're playing into that demand. We're winning a number of those systems integration and consulting deals. And as I've always said, we'll play to the demand, even as we also make sure that we're for the future. So those larger deals are in the pipeline, are in the works. They do take longer because they're more complex to close. So it's a I think it's a win-win. The consulting, we think, will continue to be strong in those industries I mentioned as managed services starts to take up in those other areas. And, of course, the managed services drives a much higher book-to-bill when they come in.

Makes sense. Thanks. And then can you just remind us what a change in the U.S. government, how that would affect you? Is it generally positive for you?

Yeah. Well, you know, I always start this way. One, We're apolitical when it comes to what administration does or doesn't win the election. But we do do scenario planning on the election. And quite frankly, when a new administration comes in, change is always good for us. But let me maybe talk about it this way. There's kind of three buckets. One is we typically see on a run-up to an election increased activity as we get closer to the election. And I don't think this election will be any different despite the pandemic. That's what our bookings and our pipeline submissions look like. And you saw we had strong bookings in the U.S. federal this quarter. But we see that increased activity going probably through or into September. And then you get a very pronounced slowdown in decision-making right before the election and then during a transition. Let me be clear. there will be a transition regardless of which party wins. Typically what happens is in a second term, essentially there's a turnover of staff, there is a transition, maybe not as pronounced as if it's a party change, but there will be a transition. So the slower decision making, that's why you see some of the uptick. So bookings will take a hit, but not growth, because growth will have been dealt with in the earlier bookings. And then increased activity is expected after the transition. And what we see in almost every scenario is an increase in domestic programs. Now, they may differ in which domestic programs would increase, but we do see an increase. And that would be good for us because the bulk of our work is in federal programs. Over 60% of our work is in the civilian space. So we're well positioned there. But again, I'd end the way I started that change is good for IT. The one scenario, and we're planning for everything, the one scenario that would hurt us depending on who wins the Senate versus who wins the presidency could put some gridlock into the system, and that just slows everything down. In that case, incumbency rules. And as you know, we're on a number of blanket purchase agreements. That's what you buy under when you're in a continuing resolution and more gridlock. We're prepared for that. We've grown our business through those periods, so that's not a concern, but certainly a scenario we plan for. It's not the most likely scenario, but it's one we plan for.

That's great. Thank you very much.

Thanks, Sam.

Next question comes from Paul Treiber with RBC Capital Markets.

Oh, thanks very much, and good morning. In light of the travel restrictions and social distancing over this past quarter, could you provide some indication of how your proximity model performed in the environment? And then also, do you think that your proximity model allowed you to gain wallet share with customers this past quarter?

Yeah, I think the proximity model certainly played into that. Like I said earlier, intimacy is driven by being in proximate nature. We can react faster as pockets reopen faster or reclose, as the case may be. We're there lockstep. When a restaurant opens, we're there to have the meal, the first meal. In fact, I've had a number of stories around the globe where our consultants had the first meal with somebody in a restaurant that the client has had, and that certainly creates more of that intimacy and that relationship. So I think that definitely played into it because you have to be having the conversations in order to understand what the priorities are in order to play into those. So very pleased with the 96% renewal rate. And I want to highlight, and it's not always crystal clear, you know, that renewal rate is not just renewals of large engagements. It's renewals in a number of engagements with our clients, everything from systems integration, consulting, IP, and managed services, and 60% of that was for net new business. So, you know, that word add-ons in the renewals, that drives new business, and that will drive future growth as well. So, We're committed to the proximity model. It's worked very well, but, of course, always complemented with our global delivery centers of excellence because that intimacy drives the trust. It allows you to get the bigger deals, and the bigger deals, the managed services deals, then leverages our entire global delivery network. So the two play hand in hand.

And then in regards to the disruption from COVID and then generally speaking the global uplift, new digital initiatives you know e-commerce work from home etc now how would you rate cgi's competitive advantages or capabilities in digital compared to peers and do you expect the uptick of digital to be a catalyst for cgi to gain market share yeah i think it's a it's a definite uh catalyst i would rank i would rank our uh our consultants and experts uh very high in this we've uh

invested in this in both our own learning and training, our hiring, but also in the metro market mergers that we brought on board, some outstanding talent in all of the digital technologies. So I'd rate us very high. And, in fact, within the clients that we have, we do very well. But as I mentioned back when we talked about the overall book to build, there's a blitz on bringing that value proposition to more clients that don't know us. And that's where the opportunity lies. But it's not a market share opportunity within the existing clients. In fact, it's a reversal. We're doing very well there. We love vendor consolidation because typically we're the winner in a vendor consolidation scenario.

Thanks for taking my question.

Thanks, Paul.

This question comes from Deepak Kushal with SQL.

Oh, hi. Good morning, guys. Thanks for taking my questions. I've just got a couple of follow-ups, and I'll try and be quick, given we're at less than 10. You know, George, you gave some good color on North America, return to kind of normalcy, U.S. government sensitivity. I was wondering if you could give us kind of some more insight into what you're seeing just over the last month, given some of the disruptions we've seen in certain states, whether it's second wave-related or protest-related. Does this have any impact on your business or are customers, you know, kind of reacting differently to the situation today than they were perhaps a couple months ago or a year ago?

Yeah, no, it's an interesting question. As you know, the United States is a big geography and there has been disruption both from the public health crisis as well as the racial justice movement. But most of the companies that we're working for even though we're proximate and local with the local decision makers, they're global companies, and they're making decisions across the globe. And so it's not impacted just by any one city or area. And as you know, the Northeast is doing very well on the public health crisis, and that's where we tend to have a little more concentration. So we haven't really seen that disruption, of course, We're running all the scenarios and we're preparing for all the different situations. But right now, in the immediate term, we haven't seen much difference in the decision.

Okay, thank you. That's interesting. And then just, you know, I guess I can try and dovetail this or segue into an M&A question. You talked about geographic expansion and metro market expansion in the U.S., for example. What about industry expansion? You mentioned public health. You know, when we think of things like ESG or supply chain, which you mentioned earlier, or even defense, as you mentioned, doing well in APAC. Are you looking at any specific vertical industries or do you see opportunities for boutiques focused on certain industries to help build out your business on the M&A side?

Yeah, definitely we do. And in fact, the two go kind of hand in hand. If you look at most countries and geographies around the world, industries tend to concentrate in certain areas. So you might have light manufacturing in the U.S. and the southeast. You might have the pocket of insurance is in this golden triangle in the northeast and so forth. And, in fact, you mentioned health care. That's an area that we increased our life sciences in. right in that pocket of where a lot of pharmaceuticals are in the U.S. with our acquisition merger a few years ago with Paragon. And that then became the catalyst for a broader life sciences initiative across the U.S., and in other pockets of the world. So definitely the two go hand in hand. So we're always looking to build that industry expertise because that becomes a critical point of the value proposition.

Got it. And my last one, just are you able to give us a sense, you know, through the pandemic, to what extent are you seeing customers pull forward some spending and get a positive? Are you seeing certain industries that are meaningful at all or or are we not expecting to see a pause from the pull forward?

Yeah, as far as the pull forward, we haven't really seen that. Yes, there was some spending in the initial aftermath, like I said, temporarily on some of the infrastructure. Some of that was probably overdue and was just a cost of doing business. But I don't see any pull forward and then there's going to be a big delay. In fact, like I said, I think it's the exact opposite. I think there was an immediate kind of delay of activities as each of these various enterprises decided on what their priorities are going to be. That's that reprioritization I talked about. Now we see it actually returning to more normal as we move through the quarters to come.

Okay, great. Thank you for taking my question. Just close before night.

Thanks, Deepak. Sharon, we'll have time for one last question.

We have a question from Stephanie Price with CIDC.

Good morning. Thanks for taking my call. I just wanted to ask a question around the transactional side of the business, and you kind of highlighted that as one of the weaker areas this quarter. Just wondering how we should kind of think of the recovery here and what you've seen in fiscal Q4.

Yeah. Well, I do think it's temporary, but I did highlight it because it did have an impact. Like I said, you know, when nobody's traveling, your visa volumes are going to drop. significantly on the payroll side we use that example we do some of that payroll you know in Canada for small and medium sized enterprises as they take advantage of government programs in Canada and put people on a layoff status there's not a need for the payroll so we took a hit there actually that was actually more of a pause between the time that they actually instituted the program because that actually brought some of the payrolls back I believe most of that, like the rest of the recovery, will be fairly temporary. Those volumes will return. And, again, we see that even in some of the trade-related business where the volumes are – where people are looking at more digital enablement of trade will drive some actually more volumes. So I think it's temporary. Will it return to normal? It could return, actually. It could get a little bump. at least in the immediate aftermath, that would make up for some of it. But that's what I see right now. It's still a great business to be in. It's just that it does get impacted by situations like this.

Great. Thank you very much. And just maybe one more, just on the government pipelines more broadly, you had mentioned that's a driver as well. I'm just wondering what you're seeing in terms of booking environments and how you think that's going to change as kind of these governments roll out stimulus.

Yeah, well, I think it's a big opportunity because as they roll out the economic side of the stimulus, first it was just really to make sure that people could survive. But as they move into the economic stimulus to move more towards a growth environment, every one of those programs requires opportunities for CGI with the various governments to help them and help the industries that are receiving that. And just one example of that is in our intellectual property. In the U.S. government, we have a disaster aid transparency solution that we pivoted towards the pandemic. This facilitates faster transfers between central and local governments with transparency that's needed. But then on the other side, we receive that with our ERP module of advantage in grants management to make sure the financial management and accounting are taken care of. And those are just examples of the back office systems that are required every time you do one of those programs. So it will be a driver for future growth for CJ.

Great. Thank you very much.

Thank you, Stephanie. Thank you, everyone, for joining us this morning. We'll see you in early November for our Q4 and fiscal 2020 results. Thank you all.

Thank you. Thanks, everybody. Okay.

This concludes today's conference call. You may now disconnect.