Q2 2020 Earnings Call
All participants please stand by your conference it's ready to begin.
Good morning, ladies and gentlemen, welcome to defeat second quarter fiscal Twentytwenty Conference call.
I like to turn the meeting over to Mr., Lorne Gorber Executive Vice President Investor and public Relations. Please go ahead Mr. Gordon.
Thank you a lot I had good morning.
With me to discuss C.G.I. second quarter fiscal Twentytwenty results are Georgia, <unk>, President and CEO.
Sorry.
<unk>, 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 notes all of which have been filed with both SEDAR and Edgar.
Please note that some statements made on their call maybe forward looking.
Actual events or results may differ materially from those expressed or implied and C.J. disclaims any intent or obligation to update or revise any forward looking statements, whether as a result of do information future events or otherwise.
That completes safe Harbor statement is available in both our in DNA and press releases as well as artsy GR dotcom.
Coverage, our investors to read it in its entirety.
We are reporting our financial results in accordance with international financial reporting standards or <unk> our EPS.
As always we will also discuss non-GAAP performance measures, which should be viewed as supplemental.
The Mdna contains definitions of each word to use our reported.
All the dollar figures expressed on this call or Canadian unless otherwise noted.
So with that I'll turn the light over to George and Francois to discuss the quarter over to your George.
Thank you Lord and good morning.
First on behalf of see guys entire executive leadership team.
Our with those of you most affected by covert 19.
I also want to acknowledge and thank our clients and all others delivering essential services to those in need.
On behalf of she joins 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.
Delivering services remotely.
We rapidly mobilized our resources in systems to maintain continuity of service for our clients I.
I wanted to take this opportunity to thank our employees for their commitment and ongoing engagement and sport as our clients see July and our communities.
Well the pandemic has created unprecedented business conditions. Our 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're responding well last francoise to review the specifics of our Q2 financial performance.
Well.
Thank you George and good morning, everyone.
I will share the results for a second quarter and in doing so I like the main drivers behind our financial performance.
Revenue in Q2 Wall Street went $13 billion up 2% when compared with last year.
On a constant currency basis revenue grew by 3% year over year.
See Jive 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 I can do.
Central and Eastern Europe grew by 7.5% largely due to both the Kendall and faces mergers.
And then the UK and U.S. commercial in state government businesses saw revenue declined in Q2 to 2.1 and 4.6% respectively.
In both cases, the decrease stems from a strong comparable for last year's second quarter due to a large financial services IP deal.
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%.
$11.9 billion for 97% for the last 12 months.
Backlog remains healthy at $23 billion or 1.9 times current revenue.
The majority of which is comprised of managed services engagements.
C.G.I. federal and the UK at book to bills of 28% and 77% respectively.
As governments, we're more focused on addressing the public health crisis, resulting in delays award decisions.
The UK and C.G.I. federal both maintain strong government backlogs and pipelines comprised of larger long term deals.
Scandinavia booked 104% of its revenue in Q2, well central and eastern Europe booked 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 I promise 16.
EBIT margin of 15.4% expended 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 client trust and utilizing our offshore services.
Lower margins in both the U.S. and 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.
Earnings for the quarter were $338.4 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 $1.17 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 would generate the $396 million for 12.7% revenue.
This includes a positive I have for 16 impact of approximately $45 million.
Over the last 12 months, we generated $1.6 billion in 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.
Yes, So 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 <unk>.
And we merged with France base, Missy, bringing additional IP into our portfolio.
Well I still think which closed on the last day over the quarter and will deepen our work with the U.S. Federal government.
These integrations continue to progress at base and virtual formats, and what the same discipline applied to all of our integrations.
If integrations will be completed as planned in the second half of this fiscal year.
Net debt and the end of Q2 stood at $3.8 billion or 29.2% net debt to capitalization when excluding I have for 16.
This compares to 17.4% at the end of Q2 last year.
With an objective of successfully navigating the current prices and reinforcing our competitive position for a rebound and beyond.
We entered into a two year unsecured term loan credit facility of 750 million U.S. dollars during the quarter.
In April we added 500 million U.S. dollars to death penalty for a total of one point $25 billion U.S. or one point 76 billion Canadian dollars.
Before turning the call back to George I want to reiterate that financial strength is a core value of see Jive and key to the execution of our strategy.
We now have nearly $1 billion and cash and non top 1.5 billion dollar line of credit readily available.
This financial strength anchors CG eyes, resilience, which stores will now talk about darts.
Thank you francoise.
In addition to our financial strength.
Like to underscore the other attributes I see guys resilience and are enabling us to navigate this crisis and the uncertainty we all phase.
First our Nexus services is weighted toward longer term recurring revenue projects, including SAS, They intellectual property solutions, which are continuing without interruption.
That overall managed services accounted for 53% of our total revenue in the second quarter.
Second our diversified industry portfolio includes over 60% of revenue coming from industries less affected by the current crisis.
The 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 revenues coming from the government sector is up 6.6% year over year.
And finally see guys proximity based model allows us to stay close to our clients, which is particularly important in times like these.
Approximately 85% of our revenue was driven by members located in proximity to our clients, allowing for faster response to the and adapting to evolving client needs.
Mottos 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 I'd to mitigate the considerable business disruption created by the glow pandemic on our clients operations in impact, which varies and intensity by industry and by geography.
It's 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 impacts some clients are facing results in the stoppage or delay some C.G.I. 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 up from 86% are also shareholders.
As part of our crisis response, we've instituted cost reduction and avoidance efforts to protect our margin.
In instances, where see John I have stopped.
CJ clients have stopped or delayed CJ projects employees are using vacation time, reducing their hours worth 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 boss compensation for employees and leave without pay.
This ensures that our talent is available to support clients in the rebound.
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 of the 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 plan to expense over the next couple of quarters.
That's countries begin 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 the 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 I.T. 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 the video.
We completed the program about a week ago with the interviews split nearly 50 50 between the timeframe before and after a pandemic was declared.
The unique timing of these strategic conversations is providing its preliminary insights into how business is 90 priorities are rapidly evolving.
For example, the interviews held following the pandemic declaration, revealing and even higher client demand for services 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 sustain productivity, a remote workers and quickly adapt business models and services to new realities.
Going forward, we expect this dependents 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 allow us to invest in cpis future organic growth, including through large recurring opportunities in both managed services and intellectual property.
We also continued to assess opportunities on the buy side of our strategy in 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 and these growth initiatives is our intention not to utilize our stock buyback program at this time.
As a company of owners do you guys focused on being there for our people for our clients and for the communities we call home.
We continue to hear from our clients that mine complex serious work needs to be done they turned to CGM as their trusted partner, particularly at this time.
We're confident we will emerge post crisis, and even stronger position to continue to execute on our building by strategy to the benefit of our members clients and you are shareholders. Thank you for your continued interest and support.
Let's go to the questions now.
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 passcode 9364 to six too that will be available until may thirtyth as well or podcast on their call will be available for download within a few hours.
Follow up questions as usual what can be directed to me five one for eight for one Threethree Fivefive Oh I could we poll for questions. Please.
Certainly thank you.
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First question is from.
With BMO capital markets. Please go ahead.
Good morning.
George can you give them. Some tries response to co. That's what has its transition to work on the please proceed.
Got it into two challenges getting your employee something 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 you.
Yep. So thanks for the question Santos I would just start with our leadership team and our employees did a fabulous job preparing for and executing.
On our business continuity plans and and if anything I would say we were a few days ahead of the such shutdowns and a in almost all cases.
Moving to working remotely and a really immediately and that happened I would say pretty smoothly I think part of that is our global delivery network, where we're 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 turn we turned our attention to assisting many of our clients first in helping them move to remote work, helping them implement a 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 the best implement the programs and serve their clients.
And and of course, then we also engaged and a and community work, helping schools and and Ah and the like work more remotely and a and even.
I think you've seen the announcements even helping with the recruitment process for a a study on a drug with a in conjunction with Montreal Heart. That's now in use in ER, and Canada, New York and a in the U.S. and in a in Spain as being looked at it.
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 their clients.
Okay, Great and you mentioned over 90% of employees working at home, but we think about capacity your productivity to quantify what that looks like relative to creep pandemic levels and to what extent, there's still a maybe a gap with your ability to deliver services.
Yeah as you might as you might imagine we track that a very a very closely.
And and in fact, well some certainly initially there was some productivity headset by and large.
The fact that are members are equipped to work remotely or working in conjunction with our clients clients have been extremely flexible and kind of modifying the way we work, but a the productivity is actually a is very is very high and I also should mention that that about a three.
3% of our workforce a couple of thousand people are delivering essential services for our clients are either still working at a C.J. office in a in a very safe manner and or working at a client site and certainly Ah Ah. So that work has continued as well so by and large.
With we've been able to to keep the productivity of course, that's a that's for the projects. The continue there has been some impact obviously of projects that are they could delayed or stuff.
Great then finally herve Francois.
Some color in terms of the level of the company transition costs, we've experienced in the corner.
Sorry, I didn't fully after a I'm just kind of question sorry at the level of transition costs, you might have in the quarter with respect to transitioning to place working remotely relos commentary old or not we're calling out no no nothing material on that side the.
Transitioning one pretty fast so going from from two to two the through the home and working from home so not that material costs in there.
Great. Thanks, what offline thanks that us.
So.
Thank you.
Next question is from evenly between and James. Please go ahead.
Thank you and hope the entire C.G.I. team is doing well in these tough times.
Question is on organic growth I didn't 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 of quarters before tightening. Thank you.
Yeah, Yeah, so I'm on the on the anger.
Organic growth or we are most resilient and our managed services and in our intellectual property property offerings, but certainly there is a a bigger impact in the in their systems integration projects and a 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.
They were 100% a systems integration consulting effort. So we do believe that Ah. That's 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 a certain countries are beginning to go.
Back to work is particularly happening in ER and Scandinavia region, we do see some of our consultants being called back to work, but of course and other areas. We see a some of that being extended. So this is going to be a wait and see which is why we took the actions. We did that also why we took the actions.
We did on temporary basis, so that we can bring people back a if and when if and when needed.
Yes, I think number of organic growth by George for the quarter.
Yes, so as I mentioned, because the the SNC projects are impacted on both the organic sat in the inorganic side it becomes a a little more a little less meaningful to break it down and a and it varies a little more difficult to do that so maybe a France. While you can give some of those examples and.
ER and the out years, yeah, Yeah. So I'll give the example of some acquisition we had lately CK see for example, in Germany, where they're very heavy also on the manufacturing side and again.
Manufacturing where hits 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 and these time.
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 we didnt.
See that relevant to split both of them, but if we would do with a base on on on the run rate by could we did in the past or you would expect that you would have seen a decline in the.
In the organic growth five by close to two one person.
Okay. That's helpful and then they got cash flow question for you Francois.
Yes, yes, it was down 14% and the first six months, it's it's about flattish. Despite the I've always said 16 boost that anything unusual there postrock. Thank you bye and though this quarter, we had some some some payments larger payments that we did in the in the quarter.
That that we Didnt had in the first quarter. So that's why it hit us a little bit youre right that on a year to date basis, we are flat despite the.
I have for like 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 them.
Pressure to too on the cash from ops, and that's why you're seeing it that flat year over year, but still very good cash generation with more than 800 million.
For the first six months and 1.6 more than 1.6 billion for for the last 12 months, so still good cash generation.
Helpful. Thank you.
Thanks, Steve.
Thank you.
The 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 win here. This morning, a which is the kind of quite notable so I'm wondering maybe just give some color on that and I guess in that context, what your ability you like to sign bookings.
Correct crisis here.
Yep. Thanks, Thanks, Richard.
Yeah, we did have a nice nice win or that we just announced is actually awarded or last weekend, we we're able to announce it here.
It's actually a a total cyber security a engagement for.
86 different agencies across the U.S federal government, it's a it's a sister type or effort to a two one that we were awarded a 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 Ah to win this.
This a award and it it's a it's net new business. It will actually will be hiring where 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 a in the U.S. it.
Comes at a nice time too because you might have noticed that bookings were depressed and a in the U.S federal business a part of that's just a the the focus that the government has a 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 a 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 a at this time.
Helping them implement government programs and grants management, which obviously have a ERP software around the world, particularly in the U.S., helping them with payroll services because a lot of these stimulus programs go through payroll.
We have a a lot of the services in Canada, Scandinavia, Finland, Poland, the politics, helping with remote learning.
We're actually doing that both in the a in the UK and France as our clients transition to a whole no new way of working the education space is a is kind of pioneering innovating we have solutions to help their health and public health, we have tele medicine or solutions and we're actually helping the.
Government and a in UK and some pilot projects around testing and monitoring because unfortunately, this crisis doesn't necessarily and until we have the the a the final solution and even as we began to reopen I mentioned, the a the opportunity helping Montreal health.
And a and then also on the you know it's as clients rebound from this there's opportunities for us to help them, both governments, a financial institutions and the like and in collections maintenance and fraud detection.
Even digital solutions for consumer retail, we're actually seeing projects get accelerated on a on a in the consumer retail space around digital.
And we recently merged with and that GE, 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 a work in the a 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 a kind of the new normal. If you will all of these solutions that 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 because fewer partners can be relied on and obviously the the savings or are needed by our clients. So.
We believe that that a in a safe and responsible manner. We can be there to help our clients with solutions for these tough times.
Okay, and then with respect to it. So M&A you guys are quite well capitalized here, but my guess is about some of the prospects that youre.
Looking at what's May not have been given some of these.
Companies, you give a sense at this point and.
Whether those valuations are going to come in here.
Oh here.
Yeah, well, we would we would 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.
At this for a lot of these companies to to join with a company like C.J. also strength strengthened so I think all those a work in our favor of course, we will still be very a very diligent and focused on making sure that where merging with the right companies even if the the timing.
And the price becomes a far more attractive we still look for all three but that's why I mentioned, we did make sure that we were capitalized to ER to take advantage of that opportunity.
Okay, and just one last one from there is probably not quite as well but.
Hey requests from your current customer, so maybe push or for payments here.
The short term.
Yes, I'll start I'll start Francoise and then you in a problem you can you can close and the reason I mean to start a Richard is the best antidote for that yes. We have had a few of those requests but the best antidote for that is a superior delivery with your teams are doing and that's how we start and.
And and then of course, we expect the a the payment that come with that because of the excellent service that we are providing and in many cases critical service. So a French law you've had a couple of those requests are they a we've instituted a process. They all come to francoise and so far francoise, what's the answer [laughter] no [laughter].
[laughter] so.
Exactly like Georgia, saying, you know 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 or service going and all that.
And that's really what's the answer positive answer we have again, we're talking saying they know by you know 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 for our pool took for any extension and for now we do that and gave any extension has the same time you know since clients is asking us for four or delaying payments that we are also doing the same thing with far suppliers and in some places we're taking advantage of some governments payroll.
Taxes that they accepted to push so where it will take that than consideration as a like a real estate that that we are having discussion with some of the owners to to push some some some payments. So what no. It's it's as both side of the equation that we're working on the cash.
Okay, great appreciate the color. Thank you thanks Richard.
Thank you.
Next question from Marianne.
Please go ahead.
Yes. Thank you for taking my question I wanted to start with.
Question on on on the things you can't control.
With revenues being influx and hard to assess what.
Happening with Covidien, how long it's gonna take.
You have a much more control on your cost structure and we've seen that then in the quarter here.
With the earnings growing.
I wanted to ask you vote your EPS accretion poor 2020.
What's your expectation in terms of how much revenue.
Would need to decline for you to not equal.
To support growth.
Year on year.
I have another question yes.
Yeah. Thanks for the thanks for the question there.
It's a as as you correctly state or the uncertain times, obviously make it very hard to predict on the on the revenue side, but we do have a 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 cost, 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 costs are in control of.
Of course, we can't protect all of the margin given the fact that are that we do have yeah with the lost revenues at some point a you do have that we have a set of different scenarios.
And ER and we're monitoring that but you can be sure that we're looking to.
To protect our margin and 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 content.
Doing to meet our aspiration of doubling the company over the next five to seven years, even though our short term plans may be a maybe interrupted.
The situation a severe enough at this point in time for you would not be able to grow your EPS year on year and plenty plenty.
I know, it's hard to predict what's going to happen.
No.
Yeah. Its depend right now like I said, we see a pretty stable environment, we have as fluctuate between two and 5% if I were ER our members on a on a a temporary leave without pay situation as I as I mentioned.
But we've already had some of those consultants that call back and then Weve 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 a wearable goldman from talking to our clients right now we're very close to our clients.
We believe we can or we can manage and that a in that range, but again, it's gonna 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 a it literally it's changing on on a daily weekly basis. So it's difficult to predict I'd say that's okay.
No. That's that's helpful on on the backlog or you know you have a very strong.
A month backlog in.
But you can count on but how much of that backlog could be a twist and I'm trying to see could we see some not delays, but cancellations on.
Contracts that you have in the backlog.
We started seeing something like that.
No. The vast majority of that that work is in the managed services area. It's a it's typically pretty critical to our clients to continue that a in reality, we've actually seen some expansions of some of that or some of that work a in the a in the early days here they actually contributed.
Some of our stronger bookings in places like a central and eastern Europe. So right now we believe that looks a 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 a we're not very concerned right now at this point is pretty solid.
Great and my last question I saw that you increase your credit applying in April you as you mentioned this morning you.
You're putting a pause on your backlog.
How much of those moves are related to conserving cash.
Versus being opportunistic for a potential increases and I'm in the possibilities in the next couple of you're trying to just.
See you.
Your views on that.
Yeah, It's a perfect a 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 now to ensure that we we had that a 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 a value proposition strengthens and this current environment and a and to do those deals properly sometimes it takes some some cash and then obviously are intellectual property and as I mentioned, a that's well suited.
For these are tougher times that our clients face and then ultimately on the buy side as we mentioned Oh, we do believe there are clear clearly going to be opportunities for merger opportunities or post crisis.
Okay. Thank you very much.
Thank you Mary.
Thank you. My next question is from Jason Kupferberg with Bank of America. Please go ahead.
Hi, this is.
Jason I'm just wanted 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 for proposal will catch up proposal conversion of these are keeping a bookings ramp of existing work into revenue and have you seen an uptick in sort of like climb.
Price concessions thing.
Yeah, that's a lot of questions there Kathy, but I'll try to try to get there I think there. Your main to your main question was really I know what are we seeing and on on the demand side and and and what we're seeing is a it does vary by both industry and the geography and.
The industry is that we are seeing more demand, obviously or in the healthy utilities. The critical services and of course, a government and those are really a working although there was an initial a interruptions due to kind of governments are being to focused on the public health.
We're seeing knows a those projects continue the demand is actually pretty strong as I mentioned and ER and so and that's across all those telecommunications would or 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 ER 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 and the ER and the U.S. Federal we're hiring there as well where it's most impacted on the demand side is very clear and I call. It some of those out is where you have.
A factory closed obviously the demand is a is very different and we do see that manufacturing we saw that initially in a in consumer retail, but even in consumer retail we're seeing a shift to omnichannel help as a as their customers are shifting very quickly and then.
On your final question on on price concessions, we have had some of our clients come to us and look for various discounts are we as I've mentioned, we're working very collaboratively with our clients and Thats part of the CE Gen model in the proximity and 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 or changes or even expansions to allow for a reduction for them without a an impact on c., John and maybe even a positive impact on C.G. and we've been successful on a 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 or are these discussions at the at the CEO levels and I think there the kluge truly are working together and and thankful and helping.
Helping them meet their customers' needs and therefore, a hoping a C.G. I continue to be a resilient at this time.
Thanks, and just one follow up.
Okay second question I know you guys mentioned.
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 the Portugal, Brazil in Sweden delivery centers. Thanks.
Yeah.
We have a ill answer your last question first we are expecting just a limited amount still within the range, we announced a there's just some trailing items in Sweden. All the rest is is passed us France, while can give you the exact number maybe but but then on the Oh.
The on the other items.
The 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 ah things will recover a quicker and remember. These are members that are that are very important.
They were doing a important work before this crisis a their dislocate is why we took some of the actions we did on the on the salary reductions that money is going to do.
So really supplement there.
Their pay and a and therefore not a impact the the company's a 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 a couple of months.
Okay.
Yes, sorry my question. Thank you guys. Thanks.
The next question from Stephanie placements. The RBC. Please go ahead.
Morning.
Just 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.
Yeah, we haven't we haven't really seen a scene that Stephanie if anything we've seen a some of our competitors or maybe 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 a shelter in place orders happened or are 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 requests from our clients on discounts we haven't seen anything.
Regarding the broader changes in the a and landscape or it's still early days, but we haven't seen that right at this point.
Okay, great and in terms of the IP in cloud business, just hoping you could talk a little bit about the relative resilience about this nuts, a those in the short term and making a longer term as well.
Yeah, well the is thanks for the question is certainly the or IP is a is is becoming a bigger value proposition and the fact that all of that are where the majority of it is accessible via suffers a service it's still right around only half of our IP.
He is purchased a software as a service, but Ah we do believe that that would increase as a as clients add capacity and a in victors infrastructure and look to a two providers like us to provide the a the service and not have to not have to deal with that them.
So so we think it's a strong environment for that but I got to tell you more important than the infrastructure side.
On cloud, it's really is the business solutions themselves Stephanie that that becomes the more important element and I mentioned, we have a a number of our software actually Oh provides a critical business services, maybe even more critical at this time for though some of those business services and Weve.
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 a 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.
Next question is fun Deepak Michelle.
Please go ahead.
Hi, Good morning, guys. Thanks for taking my question, George France, why 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 coated and.
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 can 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.
Yeah. Thanks, Thanks, Deepak, we actually do have a an army of consultants right now thinking through those are 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 or.
Supply chain in many many industries.
As that gets reorganize as a as and certainly customers now have been accelerated to E. B, even more digital than they were a they were previously and Ah I think there they're going to be opportunities across each of the industries and we're evaluating and quite frankly there.
Different by industry and and we're looking at those are those opportunities and essentially the way. We're looking at this is 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 doing to help our clients, which only deepened our relationship during the respond phase.
But then there's going to be and initial rebound phase and a in that rebound phase so thats, where some of our IP as we talked about will really will really apply but also those managed services for the for the cost savings or becomes a a better value proposition, but then we believe there's going to be a third.
Phase, which is reinvent and that's 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, what 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 I'll be industry by industry, but in some cases it will be a company by company and so we're we're preparing for.
For that as we speak and Thats why it was so valuable to have done the the voice of the customer the way we did it again just another shout out to a 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 a world and get the get the value from it I think as a testament to the relationships we have.
Okay. Thank you and then just a quick follow up on.
On the M&A strategy I was hoping for some more nuanced insight on that to metro market versus transformational you've been doing a lot of metro that's quite that well understood a transformational like the last big one was logica.
It seems like it's becoming a bigger priority now to look at transformational.
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.
Ted.
I know, it's hard to give us a sense of timing but.
This kind of a one year to year to get done or is it isn't a six month to get done or a five year thing that that we should think about terms a transformational.
Yeah, No I wish I could I wish I could answer the timing point, but we want to be prepared.
For a for any of those scenarios, but the tilt towards a touch transformational is very simple right. The valuations are those larger companies, obviously, a become more attractive the payback period becomes more attractive and becomes more doable I'm not at.
Is concerned about a the point your make about about the company or the company takeover.
Scenario because it really in all cases, we come in as a as really the local players whether it's a metro market merger or or broader one so in many ways, we can or we can work or work with governments and mitigate that we've we've done that successfully even in the U.S.
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 looked like a few giant 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 a 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. Thanks.
Yeah.
Your next question from Paul Treiber with RBC capital markets. Please go ahead.
Oh, thanks, very much and good morning sort of follow up on one of your last comment on since you guys proximity model.
Broadly speaking are you seeing from your customer base, increasing willingness or a improved or change in sentiment.
That they may have towards onshore or near shore versus offshore I you know there's been tremendous push our Los Angeles like 20 years, probably for offshore do you think you know the disruption that that.
Came out in this environment as perhaps you know much more apparent to end customers now and there may be shifting their priorities at that.
Yeah, we have seen Ah, we have seen some of that and we've had discussions with clients are actually in discussions with clients about that now.
The pockets of I would call it a rebalancing.
I'm not wholesale it's not exiting a the offshore but there are pockets of a 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. A this is a this is even in a at least the beginning of the shutdown period and that continues so.
I think that becomes a 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 you know the global delivery is not a onshore offshore it's as really a global delivery will put the rights.
This isn't 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, we'll take one more question.
Thank you. The last question will be from Robbie young with Canaccord Genuity. Please go ahead.
Hi, good morning.
You said reviews.
You've seen the cycle sales cycle shortening on managed services or perhaps you said you expected to see that maybe be clear that clarify that for me and then what's give you use the the confidence to say that is it.
Better access to more senior decision makers in your customers. This crisis getting you better access higher level is it previous discussions are accelerating.
Why are you confident that you're going to see that cycle shortly.
Yeah, I'll start a I'll start this way its mainly a an expectation of his expectation based on a on a strengthening value proposition as far as what that provides to our clients, but it's all of the above.
There are more discussions being had at the at the senior client level, they're more engaged and these discussions given what what they're going through and ER and then like I mentioned, the a the value proposition becomes a much stronger. So it really is a all of the above.
But a this is where we and and and it's also based on what we've seen in past, a and pass crisis, and and what and how the behaviors and the pressures on our clients change and ER and how we can then.
Provide the offering to help them and yes, we have had a number of these discussions ongoing a straight through this this crisis period.
Okay.
Are you seeing that salary.
It's actually shortening or you are expected to shorten.
We expect it to shortly.
And then just one clarification one of your peers said that they expect to the topline impact from travel reimbursement I assume that you have an 85%. Your revenue said earlier comes from members and proximity that isn't as much of an issue for you maybe just talk with that and then.
Yeah, we have that we have a much smaller amount to that and that's a good news bad news story, because we also don't have a a of any of the benefits of having people in the short term or not or not traveling to have the a the impact of that on our on our bottom line, but no. That's not that's not a big item for us.
You know if there are some projects where 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 didn't follow up its being probably about 44 13355. Thank you.
Thank you.
Right.
Thank you.
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