Q2 2020 Earnings Call
[music].
Participants please stand by your conference it's ready to begin.
Good morning, ladies and gentlemen, welcome to defeat on second quarter fiscal Twentytwenty Conference call I would now like to turn the meeting over to Mr., Lorne Gorber Executive Vice President Investor and public Relations. Please go ahead Mr. gorber.
Thank you a lot I and good morning.
We can discuss C.G.I. second quarter fiscal towards the 20 results or George Schindler, our president and CEO and cross what would our chief Executive Vice President and CFO.
This call is being broadcast on C.G.I. Dot Com and recorded live at nine am Eastern time on Wednesday April 29 2020.
Supplemental slides as well as the press release, we issued earlier. This morning are available for download along with our Q2 Mdna financial statements and accompanying nodes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on the call maybe forward looking.
Actual events or results may differ materially from those expressed or implied and CGS disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
That completes safe Harbor statement is available in both our in DNA and press release as well as I'd see dji dotcom, we encourage our investors to read it in its entirety.
We are reporting our financial results in accordance with international financial reporting standards or IMF Rs.
As always we will also discuss non-GAAP performance measures, which should be viewed as supplemental.
The Mdna contains definition to each one used at our reporting.
All of the dollar figures expressed because color Canadian unless otherwise noted.
So with that I'll through the light over to George and Pfos were to discuss the quarter over to you George.
Thank you Laurie and good morning.
First on behalf of see guys entire executive leadership team.
Our with those of you most affected by Coven 19.
I also want to acknowledge and thank our clients and all others delivering essential services to those in need.
On behalf of CJ adds employees around the world, we are proud to be supporting our clients and their customers and citizens with critical technology services. During these uncertain times.
In March more than 90% of our employees successfully transitioned to work and delivering services remotely.
We rapidly mobilized our resources and systems to maintain continuity of service for our clients.
I want to take this opportunity to thank our employees for their commitment and ongoing engagement and supportive our clients CGS and our communities.
While the pandemic has created unprecedented business conditions at Q2 performance is a reflection of our resilient business model and operational excellence.
Before sharing some additional perspectives on how cobot 19 is currently impacting our business and how we are responding I'll ask France lottery viewed specifics of our Q2 financial performance as well.
Thank you George and good morning, everyone.
I will share the results for our second quarter and in doing so highlight the main drivers behind our financial performance.
Revenue in Q2 was three point $13 billion up 2% when compared with last year.
On a constant currency basis revenue grew by 3% year over year.
CDAI Federal grew 7.3% in Q2 as large task orders previously booked continue converting into revenue.
Scandinavia grew 19.4% driven by last year's merger with at Kendall.
Central and Eastern Europe grew by 7.5% largely due to both the at Kendall and faces mergers.
And in the UK and US commercial in state government businesses saw revenue decline in Q2 to 2.1 and 4.6% respectively.
In both cases, the decrease stems from the strong comparable for last year's second quarter due to a large financial services IPO.
IP based services and solutions represented 22% of revenue flat year over year, but up sequentially by 1% or $47 million.
The impact of Cove. It in March resulted in clients delaying award decisions.
As a result bookings were $2.8 billion in Q2 for book to Bill of 89%.
And $11.9 billion or 97% for the last 12 months.
Backlog remains healthy at $23 billion or 1.9 times current revenue.
Last major retail, which is comprised of managed services engagements.
CG federal and the UK had book to bills of 28% and 77% respectively.
As governments were more focused on addressing the public health crisis, resulting in delays award decisions.
The UK and CJ federal both maintained strong government backlogs and pipelines comprise of larger long term deals.
Scandinavia booked 104% of its revenue in Q2, while central and Eastern Europe book, 129% of revenue on the strength, a winning additional work with existing clients.
Adjusted EBIT improved to $483.2 million in Q2 and included $9.3 million related to Iflorist 16.
EBIT margin of 15.4% expanded by 60 basis points year over year.
The region driving this improvement where Canada with an EBIT margin of 21%, mostly due to the benefits of previously announced optimizations to its infrastructure business.
Western and southern Europe, with an EBIT margin of 16.1%.
Mostly due to their recent actions taking to exit, Brazil, and refocus the Portugal business.
And Asia Pacific with an EBIT margin of 28.2%, which reflects the quality of delivery and ongoing clients trust and utilizing our offshore services.
Lower margins in both the us in the UK Where'd you to the same IP deal in Q2 last year, which included a large license.
Our effective tax rate in Q2 was 25.9% compared with 25.5 last year, which is within the expected range for the full fiscal year.
On a GAAP basis net earnings were $314.8 million and EPS was $1.19 cents per diluted shares.
Excluding $31 million in acquisition and integration related costs net earnings for the quarter were $238.4 million up 4.3% from last year and net margin increased by 20 basis points to 10.8%.
Adjusted earnings per shares as a result were one dollar and 26 cents per diluted share up 7.7% from one dollar and 17 cents last year.
Profitable growth operational excellence and share buybacks drove EPS accretion in Q2.
Our operations continued to produce strong cash flow.
And the second quarter, we generated $396 million or 12.7% of revenue.
This includes a positive IYR fries 16 impact of approximately $45 million.
Over the last 12 months, we generated $1.6 billion and cash from operations or 13.4% of revenue.
Cash management as always remains a priority.
We continue sustaining service levels for our clients, allowing for strong cash collections.
The DSO was 51 days stable compared with last year, when adjusting for the impact of currency fluctuation at the end of Q2.
In Q2, we continue in allocating capital with discipline, we invested $89 million back into our business.
We invested over $1 billion buying back and canceling 10.4 million shares of CJS.
And we merged with France base, Mitzi, bringing additional IP into our portfolio as well as tariff Inc., which closed on the last day over the quarter and will deepen our work with the us federal government.
These integrations continued to progress at base and virtual formats and it was the same discipline applied to all of our integrations.
Both integrations will being completed as planned in the second half of this fiscal year.
Net debt at the end of Q2 stood at $3.8 billion or 29.2% net debt to capitalization when excluding IP for 16.
This compares to 17.4% and the end of Q2 last year.
With an objective of successfully navigating the current prices and reinforcing on competitive position for a rebound and beyond.
We entered into a two year unsecured term loan credit facility of 750 million us dollars during the quarter.
In April we added 500 million U.S dollars to debt facility for a total of one point $25 billion, you west or one point 76 billion Canadian dollars.
Before turning the call back to George I want to reiterate that financial strength is our core value of see Jive and key through the execution of our strategy.
We now have nearly $1 billion and cash and a non top 1.5 billion dollar line of credit readily available.
This financial strength anchors CG eyes, resilience, which stores will now I'll talk about darts.
Thank you francoise.
In addition to our financial strength I would like to underscore the other attributes assi guys resilience that are enabling us to navigate this crisis and the uncertainty we all phase.
First our mix of services is weighted towards longer term recurring revenue projects, including SaaS based intellectual property solutions, which are continuing without interruption. In fact overall managed services accounted for 53% of our total revenue in the second quarter.
Second our diversified industry portfolio includes over 60% of revenues coming from industries less affected by the current crisis, including government healthcare insurance utilities and communications.
For example, the vast majority of our government managed services and systems integration projects have remained funded and operating.
In Q2 revenue coming from the government sector is up 6.6% year over year.
And finally CGS proximity based model allows us to stay close to our clients, which is particularly important in times like these.
Approximately 85% of our revenue is driven by members located in proximity to our clients, allowing for faster responses and adapting to evolving client needs.
This model is further complemented by a robust network of global delivery centers with just over half located in onshore or near shore locations and the remaining located offshore.
When taken in combination these attributes enable CG guide to mitigate the considerable business disruption created by the global pandemic on our clients operations and impact, which Verizon intensity by industry and by geography.
It is important to note that CJ clients across industries geography, and geographies are predominantly large global enterprises and governments and we believe are better positioned to whether this crisis.
Industries that have been significantly impacted by the current crisis include manufacturing due to factory closures transportation and logistics, particularly passenger transport consumer retail, excluding food services and energy, particularly in oil and gas.
Although we have less overall exposure to clients in these industries the impact some clients are facing results in the stoppage or delay some CGS systems integration projects.
While we cannot predict the future. We can continue to take preventive action to preserve and protect shareholder value and to retain our talented employees of whom 86% are also shareholders.
As part of our crisis response, we have instituted cost reduction and avoidance efforts to protect our margin.
In instances, where see John I have stopped.
CJ clients have stopped or delays CE Gen projects employees are using vacation time, reducing their hours or if needed taking the without pain.
We instituted temporary salary adjustments, starting with me as well as our executive Chairman and the co chair of our board the three of US our forfeiting all salary during this time.
In addition, the independent members of our board and our corporate executive Vice Presidents have taken significant salary reductions.
These actions as well as our engagement and relevant government programs allow us to supplement in large part loss compensation for employees on leave without pain.
This ensures that our talent is available to support clients in the rebound.
While at the same time protecting shareholder value.
Some of these temporary measures may need to become permanent depending on the duration of the pandemic and the pace as a rebound activities within the impacted industries and geographies.
These are difficult decisions to make that are necessary to ensure we have the right talent and the right places to support rapidly evolving client demand.
For now we estimate that these permanent restructuring actions will result in a cost between 40 million and $75 million, which we would plan to expense over the next couple of quarters.
As countries began to reopen.
We expect to focus for many commercial clients to turn to prioritize and agility and operational excellence and we'll look to IP partnerships to deliver on these imperatives.
For government clients, we expect to focus to the on managing the evolving employment programs billions in new loans and the initiation of new economic stimulus packages.
These policies and programs will require IP services and solutions to implement while also ensuring public accountability.
So you guys annual voice of our clients program was conducted over the past few months with our leaders holding over 1400 interviews with client executives globally in person and more recently via video.
We completed the program about a week ago with the interviews split nearly 50 50 between the timeframe before and after the pandemic was declared.
The unique timing of these strategic conversation is providing us preliminary insights into how business is 90 priorities are rapidly evolving.
For example, the interviews health following the pandemic declaration, revealing and even higher client demand for services and solutions associated with data analytics application managed services and business agility when compared to the pre pandemic discussions.
As organizations around the World have responded to this crisis technology has played an intrinsic and inseparable role in clients ability to deliver critical services sustained productivity, a remote workers and quickly adapt business models and services to new realities.
Going forward, we expect this dependence on technology to deepen creating larger and longer term opportunities for CGS to partner with clients on initiatives to meet business objectives, including delivering operational savings.
In order to best prepare for our clients evolving priorities, we have secured additional financial flexibility to allowance to invest in CGS future organic growth, including through large recurring opportunities in both managed services and intellectual property.
We also continue to assess opportunities on the buy side of our strategy and preparation for continued consolidation in our industry.
To continue to best serve our clients, we plan post crisis to accelerate the pace of metro market and transformational mergers.
In order to prioritize the investment in these growth initiatives is our intention not to utilize our stock buyback program at this time.
As a company of owners suggests focused on being there for our people for our clients and for the communities we call home.
We continue to hear from our clients than mine complex serious work needs to be done a turn to CGM as their trusted partner, particularly at this time.
We are confident than we will emerge post crisis, and an even stronger position to continue to execute on our build my strategy to the benefit of our members clients and you are shareholders. Thank you for your continued interest and support.
Because of the questions network.
Just a reminder that will be a replay of the call available either via our website or by dialing one 804, 083, 053 and using the pass code 9364 to six too that will be available until may thirtyth as well a podcast with our call will be available for download within a few hours.
A follow up questions as usual can be directed to me at five one for eight for wireless Threethree Firefox allow bucket, we pull for questions. Please.
Certainly thank you.
You have a question and then you from the Speakerphone. Please mr. handset prior to making your selection.
You have a question. Please press star one on your telephone keypad.
You said any 20 wish to cancel your question. Please press the pound line. Please press star one at this time if you have a question there will be a brief pause from other participants register thank you for your patience.
First question is from sandals mischief Wolf with BMO capital markets. Please go ahead.
Hi, good morning.
George can you expand them. So Josh response to co heads of what has his transition to work from home look like procedure.
We have been the key challenges and getting your employees, appearing remotely and then from a customer facing perspective, what changes have you had to make to better adapt to your clients challenges, what that's going to gear.
Yep. So thanks for the question Santos I would just start with our leadership team and our employees did a fabulous job preparing for an executing.
On our business continuity plans and and if anything I would say we were a few days ahead of the such shutdowns and in almost all cases in moving to working remotely and really immediately and that happened I would say pretty smoothly I think part of that is our global delivery network, where.
We are already used to working in some cases with we wrote teams across different locations, even though the vast majority where people are located in proximity to our clients.
But it really immediately turns we turned our attention to assisting many of our clients first in helping them move to remote work, helping them implement collaboration software in many cases enhance cyber security the infrastructure associated with making sure that happened.
And then and those early days, we found ourselves actually working very quickly with our clients to support their needs on behalf of their clients, putting the changes into their applications or into their services to allow them to best to implement the programs and serve their client set.
And.
And of course than we also engaged and and community work, helping schools and.
And in the like work more remotely and and even.
I think you've seen the announcements, even helping with recruitment process.
For a a study on a drug with in conjunction with Montreal Heart, It's now use in.
And Canada, New York and.
In the us and in and in Spain, and is being looked at and other places. So a lot of work and many of those cases people would work.
All night day, and night to implement changes very rapidly so our customers could respond but always in collaboration with our clients.
Okay, Great and you mentioned over 90% of employees working at home, but we think about capacity or productivity to quantify what that looks like relative to accrete pandemic levels and to what extent, there's still might be a gap with your ability to deliver services.
As you might as you might imagine we track that very very closely.
And in fact.
Well some.
Certainly initially there was some productivity headset buying large.
The fact that our members are equipped to work remotely working in conjunction with our clients clients have been extremely flexible and kind of modifying the way we work, but the productivity is actually is area is very high and I also should mention that.
That about.
3% of our workforce a couple of thousand people.
Our delivering essential services for our clients area Theres still working at a CDAI office in in a very safe manner and or working at a client site and certainly.
So that work has continued as well so by and large we've we've been able to keep the productivity of course, that's that's for the projects that continue there has been some impact obviously of projects that they could delayed or stuff.
Great and finally, Herve Francois key pricing color in terms of the level of company transition costs, we've experienced in the corner.
Sorry, I didn't fully understand a question.
Sorry at the level of transition costs, you might have in the quarter with respect transitioning employees working remotely we're prepared commentary older not we're calling out no no nothing material on that side.
Transitioning one pretty fast so going from from two to two the through the home and working from home sold not that material costs in there.
Great. Thanks, what offline thanks matters.
Yes.
Thank you.
Next question is from Stephen meet with Raymond James. Please go ahead.
Thank you and then have the entire CDAI team is doing well in these test times.
Question is on organic growth I Didnt get it from your prepared remarks. So just wanted to follow up on that and also conceptually, Georgia should we expect organic growth to deteriorate a little more in the next couple quarters before tightening. Thank you.
Yep Yep so.
On the on the anger.
Organic growth.
We are most resilient and our managed services and in our intellectual property property offerings.
But certainly there is a bigger impact in the in the systems integration projects and that are delayed or stop and this happens to both our base business and our.
The business that we merge into the company in some ways and even a bigger way.
Because they were 100% systems integration consulting.
Efforts, so we do believe that.
Thats some of that impact will continue.
I can't really predict that right now, but I can tell you as we see some small.
Positive signs where as certain countries are beginning to go back to work. This is particularly happening in and Scandinavia region. We do see some of our consultants being called back to work.
But of course and other areas we see.
Some of that being extended so this is going to be.
Wait and see which is why we took the actions. We did that also why we took the actions we did on on a temporary basis. So that we can bring people back if and when if and when needed.
Is there any specific number for organic growth George for the quarter.
Yes, so while as I mentioned, because the the SNC projects are impacted on both the organic side in the inorganic side it becomes a little more a little less meaningful to break it down and and it varies a little more difficult to do that so maybe a France. While you can give some of those examples and.
And the out years, yes, yes, so ill give the example of as some acquisition we had lately CK see for example in Germany, where there were very heavy also on on the manufacturing side and again.
Manufacturing where hit in Germany. So it hit what do we had already in Germany and actually also what we've purchased with.
We'll see Casey. Another example, if I'm taking example at Kendall Nowhere, we're doing it was a lot business consulting as you know Andy Stein.
With this crisis. The first thing client is cutting is a high end consulting and so that's why it's it had an impact as well as as the kendo acquisition than than the rest of the business. So that's why within.
See relevant to split both of them, but if we would do with based on on on the run rate like we did in the past or you would expect that you would have seen a decline in India.
In the organic growth by close to 1%.
Okay. That's helpful. And then ill ask your question for you first start.
Yes, it was down 14% and six months.
It is now flattish despite the isolation 16 boost that anything unusual therefore shrunk. Thank you.
No. This quarter, we had some some some payments larger payments that we did and the in the quarter.
That that we Didnt had in the first quarter. So thats why it hit us a little bit Youre right. Then on the year to date basis, we are flat despite the.
I have for a 16, but we had some some payments that we did from the restructuring that that we announced at the beginning of the year and that puts some.
Pressure to too.
The cash from ops, and that's why you're seeing it flat year over year, but they're still very good cash generation with more than 800 million.
For the first six months and 1.6 more than 1.6 billion for or the last 12 months, so still good cash generation.
Thank you.
Steve.
Thank you.
Next question is from Richard Tse with National Bank Financial Please go ahead.
Yes. Thank you so talk I noticed that you guys announced the actual wind here this morning.
Which is quite notable so wondering maybe just gets a bit of color on that I guess in that context.
What your ability you like to sign bookings.
Current crisis here.
Yes, thanks, Thanks Richard.
Yes, we did have a nice nice win.
We just announced is actually awarded.
Last week, and we were able to announce it here.
It's actually a total cyber security engagement for.
86 different agencies across the us federal government, it's it's a sister type.
For two to one that we were awarded.
I think 18 months ago, or so they had a $335 million booking over six years, obviously, that's going very well because we were able to to win. This this award and it so its net new business. It will actually will be hiring or that which is nice given some of the other.
Headwinds that are going on in other parts of the world and I think it's a testament to the the strength of the CJ federal team there and in the US. It comes at a nice time too because you might have noticed that bookings were depressed in in the U.S federal business part of that's just the.
The focus that the government has right now on public health, but we do believe it will be stronger bookings in the next quarter in all of our government businesses and then looking forward, we actually believe that we're well positioned.
If you will to help our clients both respond to the crisis and rebound.
From the crisis and and if you think about the vast crisis in 2008, obviously a very different.
A different crisis and you can't really compare the two.
But some of the solutions are being re purpose and a very big way to help our clients at this at this time.
Helping them implement government programs and grants management, which obviously have a ERP software around the world, particularly in the us helping them with payroll services because a lot of the stimulus programs go through payroll, we have a lot of those services in Canada, Scandinavia, Finland, Poland Baltics, helping with remotely.
Morning.
We're actually doing that both in the in the UK and France as our clients transition to a whole no new way of working the education spaces is kind of pioneering innovating we have solutions to help their health and public health, we have tele medicine.
Solutions, and we're actually helping the government in in UK, and some pilot projects around testing and monitoring because.
Fortunately this crisis doesnt necessarily and until we have the.
The the final solution and even as we began to reopen I mentioned the opportunity, helping Montreal health.
And and then also on the analysts as clients rebound from this there's opportunities for us to help them, both governments financial institutions and the like in in collections.
Payments and fraud detection.
And digital solutions for consumer retail, we're actually seeing projects get accelerated on on in the consumer retail space around digital.
And we recently merged with and that team who has some solutions in that area that complement our own retail solutions. So.
It's a long way of answering your very simple question of do you think you can book.
Work in the in the current climate, obviously much more pressure in the immediate term when when clients were just focused on.
Making sure that they could keep their services going but as we look to kind of the new normal. If you will all of these solutions help and I guess I should mention the biggest one which is really the the managed services, we believe that the selling cycle will shorten and the savings.
Value proposition will strengthen for our managed services solutions.
And it because fewer partners can be relied on and obviously the the savings are are needed by our clients. So.
We believe that.
That in a safe and responsible manner, we can be there to help our clients with solutions for these tough times.
Okay, and then what struck this or M&A you guys are quite well capitalized here, but my guess that some of the prospect, but youre.
Looking at about May not have been given some of the.
Help me.
Do you get a sense at this point.
Whether those valuations are going to come in here.
On the road here.
Yes, well, we would we were certainly expect that the.
The valuations would would change or they are changing for the public companies for the private companies that would be the the same.
The payback period, obviously would become more attractive for us and merging I think the impetus for a lot of these companies to to join with the company like CJ also strength strengthened so I think all of those work in our favor of course, we will still be very very.
Diligent and focused on making sure that where margin with the right companies.
Even if the timing and the price becomes a far more attractive we still look for all three but thats why I mentioned, we did make sure that we were capitalized to to take advantage of that opportunity.
Okay, and just one last one coming is falling off last fall, but.
Are there any request from your current customers.
Maybe push or deferred payments here over the short term.
Yes, I'll start I'll start France won and problem you can you can close and the reason I mean start.
Richard is the best antidote for that yes, we have had a few of those request, but the best antidote for that is superior delivery with your teams are doing and Thats, how we start and then.
And then of course, we expect the the payment to come with that because of the excellent service that we are providing and in many cases critical service. So our French law, you've had a couple of those requests that we've instituted a process. They all come to francoise and so far francoise lets the answer.
No.
So.
Adequately like Georgia, as saying that first thing I had a couple of calls with some of the CFO was in the in the market. Then again. The first question I ask is how's the service going and all that and naturally with the answer positive answer we have again, we're saying we know by you know we you need to pay for.
These services, so and we put yes, we did put the something and sign internal to have.
Me going to me for our pool took for any extension and for now. We then gave any extension as the same time since clients is asking us for or delaying payments.
We are also doing the same thing with far suppliers and in some places or taking advantage of some governments payroll taxes that they accepted to push a little where it will take that than consideration as like real estate that we are having discussion with some of the owners to to push some some some payments so.
What I know, it's it's a both side of the equation that we're working on on the cash.
Okay, great appreciate the color. Thank you thanks Richard.
Thank you next question is from Marianne with Deutsche Bank. Please go ahead.
Yes. Thank you for taking my question I wanted to start with.
A question on on on the things you can control.
With revenues being influx and hard to assess what.
Happening with Covidien, how long, it's going to take.
You have much more control on your cost structure, and we've seen that than in the quarter here.
The earnings growing.
I wanted to ask to vote your EPS accretion poor 2020.
What's your expectation in terms of how much revenue.
Would need to decline for you to not be able.
To support any growth.
Year on year.
I have another question yes.
Yes, thanks for the thanks for the question there.
It's as as you correctly state.
The uncertain times, obviously make it very hard to predict on the on the revenue side, but we do have.
And our business, we're able to protect the more margin because most of our costs are very variable and as a services from this is mostly other costs, which is why we took the actions we did.
On the both the permanent restructuring, but also on the temporary.
Leave without pay situation to make sure that we keep our our cost.
In control.
Of course, we can't protect all of the margin given the fact that.
That we do have.
With the loss revenue at some point you do have that we have a set of different scenarios.
And and we're monitoring that but you can be sure that we're looking to.
To protect our margin in all cases, even as we are responsible for our clients and and realistically obviously our plans for.
Or where we want to go in the short term or interrupted but I want to be clear that we're committed to the.
To continuing to meet our aspiration of doubling company over the next five to seven years, even though our short term plans, maybe maybe interrupted.
The situation.
The year and laugh at this point in time for you would not be able to grow year over year on year end 2020.
I know, it's hard to predict what's going to happen again larger projects be approach not yet.
Yes, it's depends right now like I said, we see a pretty stable environment, we have.
As fluctuate between two and 5% of our.
Our members on on.
A temporary leave without pay situation as I as I mentioned.
But we've already had some of those consultancy called back and then we've as others added to that so it's fairly stable in that range right now and from talking to our clients, we don't know where at where it will go live from talking to our clients right now, we're very close to our clients.
We believe we can we can manage and that in that range, but again, it's going to be dependent on both governments and the timing of when and how they reopen and dependent on our customers our clients and their customers on how quickly some of that returns we believe in the intermediate term when we're in a strong position but.
It's right now it's it literally it's changing on on a daily weekly basis, So it's difficult to predict at Thats. Okay.
That's helpful on on the backlog.
When you have a very strong.
A month backlog in.
But you can count on but how much of that backlog could be a truskin on trying to see could we see some not delays but.
Cancellations.
Contracts that you have in the backlog.
If you started seeing something like that.
No. The vast majority of that that work is in the managed services area. It's it's typically pretty critical to our clients to continue that in reality, we've actually seen some expansions of some of that some of that work in the in the early days here they actually contributed.
Some of our stronger bookings in places like central and Eastern Europe. So right now we believe that looks that looks pretty solid we don't see a lot of that of course, some add on systems integration projects on top of that backlog doesn't happen as quickly, but we're pretty conservative and how we Uh huh.
We booked at backlog. So we're not we're not very concerned right now at this point, it's pretty solid.
Great and my last question I saw that you increased your current decline in April you as you mentioned this morning you.
You are putting a pause on your backlog.
How much of those moves are related to conserving cash.
Versus being opportunistic for.
Potential increases and I'm in the possibilities in the next couple of you're trying to just.
The.
Your views on that.
Yes, it's a perfect. It's a perfect question and.
And you did give the answer it it's by and large is positioning us for the for the future.
But but taking that opportunity to do now to ensure that we we had that at our access for if and when those opportunities present themselves. So.
It really was more about our future growth both organically because we as I said, we do believe that the managed services value proposition strengthens and this current environment and.
And to do those deals properly sometimes it takes some some cash and then obviously our intellectual property and as I mentioned that is well suited for these tougher times that our clients face and then ultimately on the buy side as we mentioned.
We do believe there are clear clearly going to be opportunities for merger opportunities post crisis.
Okay. Thank you very much.
Thank you ma'am.
Thank you. The next question is from Jason Kupferberg with Bank of America. Please go ahead.
Hi, This is Kathy on for Jason.
Turning to ask about on the demand side I know you guys said that there were delays in contract awards, but just wanted to get a little more color on what you're seeing in terms of the pace of new request a couple of questions proposals.
None of these RFP than a booking ramp of existing work into revenue and have you seen an uptick in start up like client price concessions. Thanks.
Yep.
As a lot of questions there Kathy, but I'll try to try to get there I think there. Your main to remain question was really Anna what are we seeing in on the demand side and.
And what we're seeing is it does vary by both industry and by geography, and the industry is that we are seeing.
More demand, obviously or in the healthy utilities, the critical services and of course government and those are really working although there was an initial.
Interruptions due to kind of governments being to focus on the public health. We're seeing those those projects continue the demand is actually pretty strong as I mentioned and.
And so and that's across all those telecommunications would would be one as well in the on the critical infrastructure side.
And you know for example in the UK, we're a name strategic supplier to the to the central government and and we've been very active in assisting on projects of national importance.
On their behalf and so in fact, we're hiring and in the UK and as I mentioned with the award we just had in the and the U.S Federal we're hiring there as well where it's most impacted on the demand side.
It is very clear and I call. Some of those out is where you have.
A factory closed obviously the demand is the is very different and we do see that manufacturing we saw that initially and in consumer retail, but even in consumer retail, we're seeing a shift to omnichannel help as.
Their customers are shifting very quickly and then on your final question on price concessions. We have had some of our clients come to us and look for various discounts.
We as I mentioned, we're working very collaboratively with our clients and Thats part of the CE Gen model in the proximity.
And in those cases, where we've been asked for that we worked collaboratively with them to say, okay. What can we do on scope.
Changes or even expansions to allow for a reduction for them without an impact on CGM, maybe even a positive impact on CJR and we've been successful on a couple of those were in discussions on others and so we haven't seen any material.
Changes in that regard much like we talked about with the with the payment terms and it all comes down to having those close relationships.
With our customers I've had a number of.
These discussions.
At the CEO levels, and I think there kluge truly we're working together and thankful and helping.
Helping them meet their customers' needs and therefore, helping CJ continued to be.
Resilient at this time.
Thanks, and just one follow up a more like a clarification question I know you guys mentioned at the 40 to 75 million restructuring costs.
The next few quarters are you sort of expecting that majority to land and third quarter with a little bit important corner and then on the are you guys still expecting incremental restructuring cost with particle, Brazil, and Sweden delivery centers. Thanks.
Yes.
We have.
Answer your last question first we are expecting just a limited amount.
Still within the range, we announced there's just some trailing items in Sweden, all the rest is.
His past us.
France, while can give you the exact number maybe but but then on the.
On the.
On the other items.
The.
Timing is difficult to predict and let me maybe start this way. It is our hope that we won't need to use anything close to the upper end of that range because.
Because things will recover quicker and remember these are members that that are very important they were doing important work before this crisis. There dislocated. It's why we took some of the actions we did on the on the salary reductions that money is going to do.
Really supplement there.
Their pay and and therefore not impact the the companies.
Bottom line protecting our shareholders. So we don't want to do any of it.
But we will have to take actions if necessary. So I think it would probably be split between the quarters just depending on how these openings happened in what we see how the clarity comes but right now if I had to gas and it really is a guess I don't think we'll have full clarity for another.
Couple of months.
Okay.
Yes, no sorry my question. Thank.
Thank you Jeff Thanks.
Thank you. The next question is from Stephanie price Missy RBC. Please go ahead.
Good morning.
A follow up on the last question and just wondering what you're seeing from competitors in the current environment and whether competitors gotten more price more competitive in terms of pricing out there.
Yes, we havent, we haven't really seen seeing that Stephanie if anything we've seen.
Some of our competitors may be not move quite as quickly as we were able to move to the to the new way of working remotely we filled some gaps for some of our competitors from that perspective, I think that was.
I think our ability to do that was really the fact that we are in proximity to our clients, we live and work and the same locations and so.
So when various shutdowns occurred shelter in place orders happened.
Our people were already in the locations and then have to.
Have a disparity between your home location shelter at home versus your clients shelter at home.
Area, but right now as I mentioned, we have had a couple request from our clients on discounts will we haven't seen anything.
Regarding the broader changes in the end landscape, it's still early days, but we haven't seen that right at this point.
Okay, great and in terms of the IP and cloud business, just hoping you could talk a little bit about the relative resilience about this nuts.
Both in the short term and making a longer term as well.
Yes, well you. Thanks for the question is certainly the our IP is is is becoming a bigger value proposition in the fact that.
All of that where the majority of it is accessible via suffers a service it's still right around only half of our IP is purchased.
Software as a service, but we do believe that that would increase.
As a as clients add capacity and infrastructure and look to two providers like us to provide the the service and not have to not have to deal with that themselves. So we think it's a strong environment for that but I got to tell you more important than the.
Infrastructure side on on cloud, it's really is the business solutions themselves Stephanie that that becomes the more important element and I mentioned, we have a number of our software actually.
Provides critical business services made even more critical at this time for that some of those business services and we've actually modified some of that IP to to be more relevant in the current environment. So we.
We think it's a it's a stronger environment for IP and of course, that's that's nice to be able to say because.
Both SaaS and license and maintenance.
IP is at the higher end of this CJ margins as you know.
Great. Thank you very much.
Thanks.
Thank you.
A question is from Deepak shall we see from JMP. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
George France, while I know, there's a lot of questions of and there's a lot of uncertainty in the near term I'm curious given that you've done 50% the voice of the client after the impact of coal that.
And you have an army of of high value consultants, what kind of permanent structural changes do you anticipate as a result of this pandemic and what do you think in terms of strategy. How you can change or tactically adjust to take advantage of these structural changes going forward.
Yes. Thanks, Thanks, Deepak, we actually do have an army of consultant is right now thinking through those those questions and in fact, we have.
Really a point of view quite frankly by industry, because it's going to vary by industry and I do agree with you there will be some permanent changes obviously, we had a broken.
Supply chain in many many industries as that gets reorganized as.
Certainly.
Customers now have been accelerated to the even more digital than they were.
They were previously and.
I think they're going to be opportunities across each of the industries and we're evaluating and quite frankly, there are different by industry and.
And we're looking at those those opportunities and essentially the way. We're looking at this really three phases Deepak we're looking at the respond phase, which essentially is what we're in now and I mentioned some of the things that we're going to help our clients, which only deepened our relationship during the respond phase.
But then there is going to be an initial rebound phase and in that rebound phase so thats, where some of our IP as we talked about will really.
We'll really apply but also those managed services for the for the cost savings becomes a better value proposition. But then we believe is going to be a third phase, which is reinvent and thats, where some of those permanent structural changes are going to occur.
And I've had a number of discussions with Ceos, where they said you know we're evaluating right now.
As we've reacted to this to this crisis when things are we going to keep doing that same way and what things are we going to change back to the way we were before and everybody's looking at that and I think the industry by industry, but in some cases it will be company by company and so we're we're preparing for.
For that.
As we speak and that's why we're so valuable to have done in the the voice of the customer the way we get it again, just another shout out to to both our member employees as well as our clients.
The fact that we were able to continue those strategic discussions.
Really almost seamlessly in the remote world and get the.
Yet the value from it I think is a testament to the relationships we have.
Okay. Thank you and then just a quick follow up.
On the M&A strategy I was hoping for some more nuanced insight on that to metro market versus transformational you'd be doing a lot of metro.
Quite that well understood.
Transformational like a lot big one was logica.
It seems like it's becoming a bigger priority now to look at transformational.
How can you get these done in environments, where governments are saying, we don't want companies to be forced to sell.
How do you think that plays out and.
And.
I know, it's hard to give us a sense of timing but.
Is this kind of a one year to year to get done or is it is it a six month to get down or a five year thing that that we should think about terms a transformational.
Yes, no I wish I could I wish I could answer the timing point, but we want to be prepared.
For for any of those scenarios, but.
Tilt towards.
This transformational is very simple right the valuations of those larger companies, obviously become more attractive the payback period becomes more attractive and becomes more.
Doable.
Not as concerned about the point you make about.
About the company.
The company takeover.
Scenario because it really in all cases, we come in as as really the local players whether it's a metro market.
Merger or broader one so in many ways. We can we can work work with governments and mitigate that we've done that successful even in the us so I'm not as concerned about that but.
But certainly the opportunity in the tilt towards transformational is really all about the the opportunity and that pricing has a big.
Big play in that.
Okay and should we expect something transformational to look like a CGS and when you take a cost synergies or to look very different from the C.G.I., where you you can get a broader kind of Bob capability.
No I think it's we have end to end services, we like our end to end services I think you'll see us stay true to those end to end services. So.
It would it would look more like that.
Okay. Thank you for taking my questions.
Right Okay.
Yes.
Your next question is from Paul Treiber with RBC capital markets. Please go ahead.
Hi, Thanks, very much and good morning, just wanted to follow up on one of your last comment on synergize proximity model.
Broadly speaking are you seeing from your customer base, and increasing willingness or improve or change in sentiment on that they may have towards onshore or near shore versus offshore I know, there's been tremendous push or loss and on the 20 years probably for offshore do you think you know the disruption.
That that came out in this environment is perhaps much more apparent to end customers now and there may be shifting their priorities event.
Yes, we have seen we have seen some of that we've had discussions with clients are actually in discussions with clients about that now.
Pockets of I would call it rebalancing.
Not wholesale is not exiting.
The offshore, but there are pockets of rebalancing and we think we're very well positioned for that.
I also should take the opportunity to let you know R&D operations has performed extremely well.
All of our global delivery centers of extreme, but particularly in India performed extremely well.
Obviously, you know the 21 day shutdown and then that was extended.
All of our people were able to transition remotely you saw the margins. This is this is even in.
At least the beginning of the shutdown period and that continues so.
I think that becomes a.
A differentiator and I guess, Paul what I see is clients looking for partners that can do the right balance and this is what we always have had to our clients.
The global delivery, it's not.
Onshore offshore it's really a global delivery will put the right services and the right places and make sure that they're comfortable and that's the conversation were having as some are looking at doing that rebounds. Okay.
Alright, Thanks for taking my question I'll leave it that thanks, Paul I guess I'll take one more question.
Thank you the last question will be from Rob Young with Canaccord Genuity. Please go ahead.
Hi, good morning.
You said that reviews that you've seen the cycle sales cycle shortening non managed services or perhaps you said you expected to see that maybe be clear that clarify that for me and then what did you use the confidence to say that is it.
Better access to more senior decision makers and your customers. This crisis getting you better access.
At the higher level is it previous discussions that are accelerating.
Why are you confident that you're going to see that cycle shortly.
Yeah I'll start start this way.
It's mainly.
An expectation business expectation based on.
On a strength.
And the value proposition as far as what that provide.
More discussions as being had at the at the senior client level. They are more engaged and these discussions given what what they're going through and.
And then like I mentioned, the the value proposition becomes.
Much stronger so it really is all of the above.
But this is where we.
The plans change and and how we can then provide the offering to help them and yes. We have had a number of these discussions ongoing.
Straight through this this crisis period.
Okay and are you seeing that.
Salary.
It's actually shortening or you expect it to short.
Line impact from travel reimbursement I assume that even 85%. Your revenue like you said earlier comes from members and proximity that isn't as much of an issue for you. If you just talked with that.
Yes, we have that we have a much smaller amounts that and that's good news bad news story, because we also.
The impact of that on our on our bottom line, but no that's not that's not a big item for us.
There are some projects where occurs but it's minimal.
Thanks.
Thank you Rob.
Thank you everyone for joining us today, and we look forward to were talking to again with the Q3 results are in July.
Follow up between 544 13355. Thank you. Thank you.
Right.
Thank you.
Come from smartphones.
Please disconnect your lines at this time and we thank you for your participation.
[music].
Yes.
[music].
[noise] [noise].
[music].
Yes.
[music].
[noise] one.
[music].
Oh.
[music].