CGI Group, Inc. (GIB)

GIB 
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TRANSCRIPT SPONSOR
Wall Street Breakfast

CGI Group, Inc. (GIB)
F3Q07 Earnings Call
August 1, 2007, 9:00 AM ET

Executives

Lorne Gorber - Vice-President, Global Communications and IR
David Anderson - Executive Vice-President and CFO
Michael E. Roach - President and CEO

Analysts

Mike Abramsky - RBC Capital Markets
Scott Penner - TD Newcrest
Jason Kupferberg - UBS (U.S.)
Paul Steep - ScotiaCapital
David Wright - BMO Nesbitt Burns
Susan Chen - Merrill Lynch
Naser Iqbal - Salman Partners
Richard Tse - National Bank Financial
Ralph Garcea - Haywood Securities

Presentation

Operator

Good morning ladies and gentlemen. Welcome to the CGI Quarterly Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Lorne Gorber, Vice President, Global Communications and Investor Relations. Please go ahead, Mr. Gorber.

Lorne Gorber - Vice-President, Global Communications and Investor Relations

Thank you Melanie and good morning. With me to discuss the third quarter of fiscal 2007 are Michael Roach, our President and CEO and David Anderson, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9 AM on August 1st. Supplemental slides as well as the press release we issued earlier this morning are also available for download along with our Q3 MD&A, financial statement and accompanying notes, each of which are being filed with both SEDAR and EDGAR.

Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. We report our financial results in accordance with Canadian GAAP, but we do discuss non-GAAP performance measures which should be viewed as supplemental. The MD&A contains definitions of each non-GAAP performance indicator used in our reporting. All the figures expressed on this call are in Canadian dollars unless otherwise noted.

I'll turn the call over to David first to review the quarter's results and then to Mike who will discuss strategic highlights of the quarter before making a few concluding remarks at the end of the Q&A. So with that, David?

David Anderson - Executive Vice-President and Chief Financial Officer

Thank you, Lorne, and good morning. I am very pleased to share the financial details of another very good quarter. Revenue was $933.3 million compared with $856.5 million in the same period a year ago, representing 7.7% growth year-over-year. On a constant currency basis, the company grew by 8% year-over-year. On a sequential basis, the net negative impact of foreign currency on our revenue was $22 million, due primarily to the weakening U.S. dollar. Excluding this impact, we were able to grow our business slightly over the second quarter.

EBIT margin strengthened in Q3 to 11.2%, improving from 9.0% in the third quarter of 2006. Net earnings were $64.4 million or 80% better than the $35.9 million reported in Q3 of 2006. Our net earnings margins continue to improve, reaching 6.9% in the third quarter. We continue to maintain our leadership position within our North American and European peer groups.

Basic earnings per share in the third quarter was $0.20 per share on a fully diluted basis... I'm sorry, it was $0.20 per share and on a fully diluted basis, $0.19. This compares with $0.11 in the same period last year. The $0.01 difference between the basic and fully diluted earnings per share reflects the 94% of the outstanding options that we are now in the money.

To summarize the P&L after nine months of 2007, revenue has improved by 6%, EBIT by 40%, net earnings by 60% and our basic earnings per share has grown by 80%.

Now let's turn our attention to the balance sheet and the generation of cash flow. We improved our DSO, reducing it to 43 days from 48 days in the year ago period. We are very pleased with our team's continued focus on cash management. This focus drove our ability to generate $134.6 million in cash from operating activities in the third quarter. That's $27 million than the third quarter of last year. We used $15 million to purchase an additional 1.3 million shares during the quarter. This brings the total number of shares repurchased during the first nine months of fiscal 2007 to 6.7 million shares at an average price of $9.53 for a total investment of $63.8 million. In Q3, we also repaid $70.9 million in debt. Over the last 12 months, our long-term debt is down by nearly $300 million. Including cash and cash equivalents of $96.7 million, our net debt was $421.4 million at the end of Q3 for a net debt to capitalization ratio of 17.7%, a significant improvement from 25.5% at the end of the third quarter of 2006.

As you know, we reported results in Canadian dollars. Given the rapid rise of the Canadian dollar versus its U.S. counterpart in Q3 and the number of related questions we are getting, I want to spend a few minutes on how currency fluctuations impact our financials.

First, in addition to the U.S. dollar, we also contract business in various other currencies such as the euro, pound and the Australian dollar. As we experienced in Q3, the sequentially weaker U.S. dollar was partially offset by the strengthening of most other currencies, resulting in a top line reduction of a net $22 million. However, on a year-to-date basis, the impact to our revenue was not significant at $4.5 million.

With respect to the bottom line, our strategy is to mitigate the currency impact using natural hedges. Cost inputs such as insurance, maintenance and software contracts as well as interest payments, where possible, are paid in U.S. dollars. Although currency negatively impacted our Q3 net earnings by $2 million, the year-to-date impact has been less than $500,000 through the execution of this strategy. The impact of currency goes beyond the P&L, extending to our balance sheet and backlog. As a result of the U.S. dollar weakness, the goodwill on our balance sheet decreased by almost $40 million over the last 12 months. Our U.S. dollar denominated debt has also affected the translated value of our $192 million U.S. private placement issued in 2004 has decreased or declined by more than $50 million Canadian without making a single principal payment.

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