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CGI Group Inc (NYSE:GIB)
Q2 2020 Earnings Call
Apr 29, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the CGI Second Quarter Fiscal 2020 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.

Lorne Gorber -- Executive Vice-President of Investor & Public Relations

Thank you, Elaina, and good morning. With me to discuss CGI's second quarter fiscal 2020 results are George Schindler, our President and CEO; and Francois Boulanger, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. 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 MD&A, financial statements and accompanying notes, all of which have been 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 statements whether as a result of new information, future events or otherwise. The complete safe harbor statement is available on both our MD&A and press release as well as on cgi.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted.

So with that, I'll turn the line over to George and Francois to discuss the quarter. Over to you, George.

George D. Schindler -- President and Chief Executive Officer

Thank you, Lorne, and good morning. First, on behalf of CGI's entire executive leadership team, our thoughts are with those of you most affected by COVID-19. I also want to acknowledge and thank our clients and all others delivering essential services to those in need. On behalf of CGI's 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 working 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 in support of our clients, CGI and our communities.

While 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 COVID-19 is currently impacting our business and how we are responding, I'll ask Francois to review the specifics of our Q2 financial performance. Francois?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

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 $3.13 billion, up 2% when compared with last year. On a constant currency basis, revenue grew by 3% year-over-year.

CGI Federal grew 7.3% in Q2, as large past quarters previously booked continued converting into revenue. Scandinavia grew 19.4%, driven by last year's merger with Acando. Central and Eastern Europe grew by 7.5%, largely due to both the Acando and SCISYS mergers. And in the U.K. and U.S., commercial and state government businesses saw revenue decline 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 COVID in March resulted in clients delaying award decisions. As a result, bookings were $2.8 billion in Q2 for a 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, the vast majority of which is comprised of managed services engagements. CGI Federal and the U.K. had book to bills of 28% and 77%, respectively, as governments were more focused on addressing the public health crisis, resulting in delayed award decisions. The U.K. and CGI Federal both maintained strong government backlogs and pipelines comprised of larger long-term deals. Scandinavia booked 104% of its revenue in Q2, while Central and Eastern Europe booked 129% of revenue on the strength of winning additional work with existing clients. Adjusted EBIT improved to $483.2 million in Q2 and included $9.3 million related to IFRS 16. EBIT margin of 15.4% expanded by 60 basis points year-over-year. The region driving this improvement were 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%, up mostly due to the recent actions taken 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 in utilizing our offshore services. Lower margins in both the U.S. and the U.K. were due 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 $1.18 per diluted share. Excluding $31 million in acquisition- and integration-related costs, net 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%. The adjusted earnings per share, as a result, were $1.26 per diluted share, up 7.7% from $1.17 last year. Profitable growth, operational excellence and share buybacks drove EPS accretion in Q2. Our operations continue to produce strong cash flow. In the second quarter, we generated $396 million or 12.7% of revenue. This includes a positive IFRS 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. 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 continued 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 CGI, and we merged with France-based Meti, bringing additional IP into our portfolio as well as TeraThink, which closed on the last day of the quarter and will deepen our work with the U.S. federal government. These integrations continue to progress at pace and virtual formats and with the same discipline apply to all of our integrations. Both integrations will be 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 IFRS 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 the rebound and beyond, we entered into a 2-year, unsecured term loan credit facility of USD750 million during the quarter. In April, we added USD500 million to that facility for a total of USD1.25 billion or CAD1.76 billion.

Before turning the call back to George, I want to reiterate that financial strength is our core value of CGI and key to the execution of our strategy. We now have nearly $1 billion in cash and an untapped $1.5 billion line of credit readily available. This financial strength anchors CGI's resilience, which George will now talk about. George?

George D. Schindler -- President and Chief Executive Officer

Thank you, Francois. In addition to our financial strength, I would like to underscore the other attributes of CGI's resilience that are enabling us to navigate this crisis and the uncertainty we all face. First, our mix of services is weighted toward the 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 revenue 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, our revenue coming from the government sector is up 6.6% year-over-year.

And finally, CGI's 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 response 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 nearshore locations and the remaining located offshore. When taken in combination, these attributes enable CGI to mitigate the considerable business disruption created by the global pandemic on our clients' operations, in impact, which varies in intensity by industry and by geography. It is important to note that CGI clients across industries and geographies are predominantly large global enterprises and governments, whom, we believe, are better positioned to weather 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 of some CGI 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 CGI has stopped where CGI clients have stopped or delayed CGI projects, employees are using vacation time, reducing their hours or, if needed, taking leave without pay. 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 are 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 our employees on leave without pay. 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 of the rebound activities within the impacted industries and geographies. These are difficult decisions to make, but are necessary to ensure we have the right talent in 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 begin to reopen, we expect to focus for many commercial clients to turn to prioritize an agility and operational excellence, and we'll look to IT partnerships to deliver on these imperatives. For government clients, we expect the focus to be on managing the evolving employment programs, billions of new loans and the initiation of new economic stimulus packages. These policies and programs will require IT services and solutions to implement, while also ensuring public accountability. CGI's annual Voice of Our Clients program was conducted over the past few months, with our leaders holding over 1,400 interviews with client executives globally, in person, and more recently, via video. We completed the program about a week ago, with the interview split nearly 50-50 between the time frame before and after the pandemic was declared. The unique timing of these strategic conversations is providing us preliminary insights into how business and IT priorities are rapidly evolving. For example, the interviews held following the pandemic declaration are revealing in 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, an inseparable role in clients' ability to deliver critical services, sustain productivity of 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 CGI 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 CGI's 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 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 in these growth initiatives, it is our intention not to utilize our stock buyback program at this time.

As a company of owners, CGI is 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 when complex, serious work needs to be done, they turn to CGI as their trusted partner, particularly at this time. We are confident that we will emerge post-crisis in an even stronger position to continue to execute on our Build and Buy strategy to the benefit of our members, clients and you, our shareholders. Thank you for your continued interest and support.

Let's go to the questions now, Lorne.

Lorne Gorber -- Executive Vice-President of Investor & Public Relations

Just a reminder that there will be a replay of the call available either via our website or by dialing one (800) 408-3053, and using the passcode 9364262, that will be available until May 30. As well, a podcast of the call will be available for download within a few hours, and follow-up questions, as usual, can be directed to me at (514) 841-3355.

Elaina, could we poll for questions, please?

Questions and Answers:

Operator

Thank you, [Operator Instructions] The first question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good morning. George,, can you expand on CGI's response to COVID? What has this transition to work from home look like for CGI, would have been the key challenges in getting your employees up and running remotely? And then from a customer-facing perspective, what changes have you had to make to better adapt to your clients' challenges and what that's going to be?

George D. Schindler -- President and Chief Executive Officer

Yes. Thanos. 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 if anything, I would say, we are a few days ahead of the shutdowns in almost all cases and 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're already used to working, in some cases, with teams across different locations, even though, the vast majority of our people are located in proximity to our clients. But it really immediately turned 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 cybersecurity, the infrastructure associated with making sure that happened.

And then in those early days, we found ourselves actually working very quickly with our clients to support their needs on behalf of their clients, putting changes into their applications or into their services to allow them to best implement the programs and serve their clients. And of course, then we also engage in community work, helping schools and the like work more remotely. And I think you've seen the announcements, even helping with recruitment process for a study on a drug with in conjunction with Montreal Heart, that's now in use in Canada, New York and in the U.S. and in Spain and is being looked at, at other places. So a lot of work in 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.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And you mentioned over 90% of employees working at home. But if we think about capacity or productivity, can you quantify what that looks like relative to pre-pandemic levels? And to what extent there still might be a gap with your ability to deliver services?

George D. Schindler -- President and Chief Executive Officer

Yes. As you might imagine, we track that very closely. And in fact, while some certainly, initially, there were some productivity hits, by and large, the fact that our members are equipped to work remotely, working in conjunction with our clients. Our clients have been extremely flexible in kind of modifying the way we work, but the productivity is actually is very high. And I also should mention that about 3% of our workforce, a couple of thousand people, are delivering essential services for our clients and are either still working at a CGI office 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 been able to keep the productivity. Of course, that's for the projects to continue. There has been some impact, obviously, of projects that get delayed or stopped.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Then finally, for Francois. Can you provide some color in terms of the level of COVID transition costs we have experienced in the quarter?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Sorry, I didn't fully understand the question.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Sorry. Yes, the level of transition costs you might have had in the quarter, would expect transitioning employees working remotely. Were those costs material or not worth calling out?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

No, no, no. Nothing material on that side. Transition went pretty fast going from to the home and working from home. So not material costs in there.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks.

Operator

Thank you, The next question is from Steven Li with Raymond James. Please go ahead.

Steven Li -- Raymond James -- Analyst

Thank you, And hope the entire CGI team is doing well in these tough times. Question is on organic growth. I didn't get it from your prepared remarks. So I just wanted to follow-up on that. And also, conceptually, George, should we expect organic growth to deteriorate a little more in the next couple of quarters before turning?

George D. Schindler -- President and Chief Executive Officer

Yes. Yes. So on the organic growth, we are most resilient in our managed services and in our intellectual property offerings. But certainly, there is a bigger impact in the systems integration projects and that are delayed or stopped. And this happens to both our base business and our the business that we merge into the company, in some ways, in even a bigger way because they were 100% systems integration consulting efforts. So we do believe that some of that impact will continue. I can't really predict that right now. But what I can tell you is we see some small positive signs where as certain countries are beginning to go back to work, this is particularly happening in the Scandinavian region, we do see some of our consultants being called back to work. But of course, in other areas, we see some of that being extended. So this is going to be a wait and see, which is why we took the actions we did, but also why we took the actions we did on a temporary basis so we can bring people back if and when needed.

Steven Li -- Raymond James -- Analyst

Is there any specific number for organic growth, George, for the quarter?

George D. Schindler -- President and Chief Executive Officer

Yes. So, as I mentioned, because the SI&C projects are impacted on both the organic side and the inorganic side, it becomes a little more a little less meaningful to break it down and a little more difficult to do that. So maybe, Francois, you can give some of those examples. And the answers...

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Yes, yes, yes. So I'll give you the example of some acquisition we had lately ckc, for example, in Germany, where they are very heavy also on the manufacturing side. And again, manufacturing were hit in Germany. So it hit what we had already in Germany and naturally also what we purchased with ckc. Another example, if I'm taking an example like Acando, where we're doing it was a lot of business consulting. As you know, in this time, with this crisis, the first thing client is cutting is a high-end consulting. And so that's why it had an impact as well as the Acando acquisition and the rest of the business. So that's why we didn't see a relevant to split both of them. But if we would do it based on the run rate like we did in the past or you would expect it, you will have seen a decline in the organic growth by close to 1%.

Steven Li -- Raymond James -- Analyst

Okay. That's helpful. And then a cash flow question for you, Francois. Your CF was down 14% in the first six months, it's now flattish despite the IFRS 16 boost. Anything unusual there, Francois?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

This quarter, we had some payments, larger payments, that we did in the quarter, that we didn't have in the first quarter. So that's why it hit us a little bit. You're right that on a year-to-date basis, we are flat despite IFRS 16, but we had some payments that we did from the restructuring that we announced at the beginning of the year and that put some pressure to on the cash from ops. And that's why you're seeing it flat year-over-year. But still very good cash generation with more than $800 million for the first six months and $1.6 billion more than $1.6 billion for the last 12 months. So still good cash generation.

Steven Li -- Raymond James -- Analyst

Thank you.

George D. Schindler -- President and Chief Executive Officer

Thanks to you.

Operator

Thank you. The next question is from Richard Tse with National Bank Financial. Please go ahead.

Richard Tse -- National Bank Financial -- Analyst

Yes, thank you. So George, I noticed that you guys announced an actual win here this morning, which is kind of quite notable. So I'm wondering, maybe, just give us a bit of color on that. And I guess, in that context, what your ability is like to sign bookings on the current crisis here?

George D. Schindler -- President and Chief Executive Officer

Yes. Thanks, Richard. Yes, we did have a nice win that we just announced. It was actually awarded last week, and we were able to announce it here. It's actually a total cybersecurity engagement for 86 different agencies across the U.S. federal government. It's a sister type effort to one that we were awarded, I think, 18 months ago or so. That had a $335 million booking over six years. Obviously, that's going very well because we were able to win this award. And it's net new business, it will actually, we'll be hiring for 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 strength of the CGI Federal team there in the U.S. It comes in a nice time, too, because you might have noticed that bookings were depressed in the U.S. Federal business. Part of that is just the focus that the government has right now on public health. But we do believe there 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 if you think about the last crisis in 2008, obviously, a very different crisis, and you can't really compare the two. But some of the solutions are being repurposed in a very big way to help our clients at this time, helping them implement government programs and grants management, which, obviously, have 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 lot of those services in Canada, Scandinavia, Finland, Poland and the Baltics. Helping with remote learning. We're actually doing that both in the U.K. and France as our clients transition to a whole new way of working. The education space is kind of pioneering and innovating. We have solutions to help there.

Help in public health. We have telemedicine solutions, and we're actually helping the government in the U.K. and some pilot projects around testing and monitoring because unfortunately, this crisis doesn't necessarily end until we have the final solution, and even as we begin to reopen, I mentioned the opportunity helping Montreal Health. And then also on the as clients rebound from this, there's opportunities for us to help them, both governments, financial institutions and the like in collections, in payments, in fraud detection, even digital solutions for consumer retail. We're actually seeing projects get accelerated on in the consumer retail space around digital. And we recently merged with Meti, 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 current climate? Obviously, much more pressure in the immediate term 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 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 savings are needed by our clients. So we believe that in a safe and responsible manner, we can be there to help our clients with solutions for these tough times.

Richard Tse -- National Bank Financial -- Analyst

Okay. And then with respect to sort of M&A, no doubt, you guys are quite well capitalized here, but my guess is that some of the prospects that you're looking at in the past may not have been given some of these metro market companies. Do you get a sense at this point in time whether those valuations are going to come into you kind of down the road here?

George D. Schindler -- President and Chief Executive Officer

Yes. Well, we would certainly expect that the valuations would change. They are changing for the public companies, for the private companies, it would be the same. The payback period, obviously, would become more attractive for us in merging. I think the impetus for a lot of these companies to join with a company like CGI also strengthens. So I think all of those work in our favor. Of course, we will still be very diligent and focused on making sure that we're merging with the right companies, even if the timing and the price becomes far more attractive, we'll still look for all 3. But that's why I mentioned we did make sure that we were capitalized to take advantage of that opportunity.

Richard Tse -- National Bank Financial -- Analyst

Okay. Just one last one for me, and this is probably more for Francois, but have there been any requests from any of your current customers to maybe push or defer payments here over the short term?

George D. Schindler -- President and Chief Executive Officer

Yes. I'll start, Francois, and then you can close. And the reason I'm going to start, Richard, is that the best antidote for that yes, we have had a few of those requests. But the best antidote for that is superior delivery, which our teams are doing. And that's how we start. And then, of course, we expect the payment to come with that because of the excellent service that we are providing and in many cases, critical service. So Francois, you've had a couple of those requests. We've instituted a process, they all come to Francois. And so far, Francois, what's the answer?

Francois Boulanger -- Executive Vice President and Chief Financial Officer

No. So exactly like George is saying, the first thing I had a couple of calls with some of the CFOs in the market. And again, the first question I ask is, how is their service going and all that. And naturally, with the answer positive answer we have, again, we're saying, you need to pay for these services. So and we put yes, we did put something inside internal to have me going to me for approval for any extension. And for now, we didn't give any extension. At the same time, since clients is asking us for delay in payments, we are also doing the same thing with our suppliers. And in some places, we're taking advantage of some governments, payroll taxes that they accepted to push, so we'll take that in consideration. As like a real estate that we are having discussion with some of the owners to push some payments. So what it's both side of the equation that we're working on the cash.

Richard Tse -- National Bank Financial -- Analyst

Okay, great. Appreciate the call. Thank you.

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Thanks, Richard.

Operator

Thank you. The next question is from Maher Yaghi with Desjardins. Please go ahead.

Maher Yaghi -- Desjardins -- Analyst

I want to start with a question on the things you can control with revenues being in flux and hard to assess what's happening with COVID and how long it's going to take. You have much more control on your cost structure, and we've seen it in the quarter here with earnings growing. I wanted to ask you about your EPS accretion for 2020. What's your expectation in terms of how much revenue would need to decline for you to not be able to support a growth in EPS year-on-year? I have another question as a follow-up.

George D. Schindler -- President and Chief Executive Officer

Yes. Thanks for the question, Maher. It's, as you correctly state, the uncertain times, obviously, make it very hard to predict on the revenue side, but we do have in our business, we're able to protect the margin because most of our costs are variable. And as a services firm, this is mostly high 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 costs in control.

Of course, we can't protect all of the margin given the fact that we do have with the lost revenue. At some point, you do have that. We have a set of different scenarios and we're monitoring that. But you can be sure that we're looking to protect our margin in all cases, even as we are responsible for our clients. And realistically, obviously, our plans for where we want to go in the short term are interrupted, but I want to be clear that we're committed to continuing to meet our aspiration of doubling the company over the next five to seven years, even though our short-term plans may be interrupted.

Maher Yaghi -- Desjardins -- Analyst

Is the situation severe enough at this point in time for you not to be able to grow your EPS year-on-year in 2020? I know. It's hard to predict what's going to happen down the road. But as we see it right now...

George D. Schindler -- President and Chief Executive Officer

Yes. It's hard to predict yes. Right now, like I said, we see a pretty stable environment. We have it fluctuates between 2% and 5% of our members on a temporary leave without pay situation, as I mentioned. But we've already had some of those consultants called back, and then we've had 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 we'll go. But we're talking to our clients right now, we're very close to our clients. We believe we can manage 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, we're in a strong position. But it's right now, it's it literally it's changing on a daily, weekly basis. So it's difficult to predict.

Maher Yaghi -- Desjardins -- Analyst

No, that's helpful. On the backlog, you have a very strong amount of backlog in that you can count on. But how much of that backlog could be at risk? I'm trying to see, could we see some, not delays, but cancellations of contracts that you have in the backlog. Have you started seeing something like that?

George D. Schindler -- President and Chief Executive Officer

No. The vast majority of that work is in the managed services area. It's typically pretty critical to our clients to continue that. In reality, we've actually seen some expansions, some of that work in the early days here, that actually contributed to some of our stronger bookings in places like Central and Eastern Europe. So right now, we believe 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 in how we book that backlog. So we're not very concerned right now at this point. It's pretty solid.

Maher Yaghi -- Desjardins -- Analyst

Great. And my last question. I saw that you increased your credit line 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 potential increases and M&A possibilities in the next couple of years? Trying to just see your views on that.

George D. Schindler -- President and Chief Executive Officer

Yes. Yes, it's a perfect question. And you did give the answer. It's by and large, it's positioning us for the future. But taking that opportunity to do it now to ensure that 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, as I said, we do believe that the managed services value proposition strengthens in this current environment. And to do those deals properly, sometimes it takes some cash. And then obviously, our intellectual property. And as I mentioned, that's 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 clearly going to be opportunities for merger opportunities post crisis.

Maher Yaghi -- Desjardins -- Analyst

Okay, thank you very much.

Operator

Thank you. The next question is from Jason Kupferberg with Bank of America. Please go ahead.

Kathy -- Bank of America -- Analyst

This is Kathy[Phonetic], on for Jason. 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 requests for proposals, conversion of these RFPs in the bookings, ramp up existing work into revenue? And have you seen an uptick in sort of like client price concessions?

George D. Schindler -- President and Chief Executive Officer

Yes. That's a lot of questions there, Kathy, but I'll try and get there. I think your main question was really what are we seeing on the demand side. 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, in the health, the utilities, the critical services and of course, government. And those are really working, although there was that initial interruption due to kind of governments being focused on the public health. We're seeing those projects continue. The demand is actually pretty strong, as I mentioned. And so and that's across all those telecommunications would be one as well on the critical infrastructure side.

And for example, in the U.K., we're a named strategic supplier to the central government, and we've been very active in assisting on projects of national importance on their behalf. And so in fact, we're hiring in the U.K. And as I mentioned, with the award we just had in the U.S. Federal, we're hiring there as well. Where it's most impacted on the demand side is very clear. And I called some of those out, is where you have a factory closed, obviously, the demand is very different, and we do see that in manufacturing. We saw that initially 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 have mentioned, we're working very collaboratively with our clients, and that's part of the CGI model and the proximity. And in those cases where we've been asked for that, we worked collaboratively with them to say, OK, what can we do on scope changes or even expansions to allow for a reduction for them without an impact on CGI, maybe even a positive impact on CGI. And we've been successful on a couple of those. We're in discussions on others. And so we haven't seen any material changes in that regard, much like we talked about 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 they're truly we're working together and thankful in helping them meet their customers' needs and therefore, helping CGI continue to be resilient at this time.

Kathy -- Bank of America -- Analyst

Thanks. And just one follow-up or more like a clarification question. I know you guys mentioned the $40 million to $75 million restructuring costs expected for the next few quarters. Are you sort of expecting that majority to land in third quarter with a little bit in the fourth quarter? And then on the are you guys still expecting incremental restructuring costs with the Portugal, Brazil and Sweden delivery centers?

George D. Schindler -- President and Chief Executive Officer

Yes. We have I'll 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 past us. Francois can give you the exact number, maybe. But then 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 things will recover quicker. And remember, these are members that are very important. They were doing important work. Before this crisis, they're dislocated. It's why we took some of the actions we did on the salary reductions. That money is going to really supplement their pay and, therefore, not impact the company's 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 happen and what we see, how the clarity comes. But right now, if I had to guess, and it really is a guess, I don't think we'll have full clarity for another couple of months.

Kathy -- Bank of America -- Analyst

Yes thanks for answering my question.

George D. Schindler -- President and Chief Executive Officer

Okay. Thanks.

Operator

Thank you. The next question is from Stephanie Price with CIBC. Please go ahead.

Stephanie Price -- CIBC -- Analyst

Good. 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 have gotten more competitive in terms of pricing out there?

George D. Schindler -- President and Chief Executive Officer

Yes. We haven't really seen that, Stephanie. If anything, we've seen some of our competitors maybe not move quite as quickly as we were able to move 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 in the same locations. And so when various shutdowns occurred, shelter-in-place orders happened, our people were already in the locations that didn't 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 of requests from our clients on discounts. But we haven't seen anything regarding broader changes in the landscape. It's still early days, but we haven't seen that right at this point.

Stephanie Price -- CIBC -- Analyst

Okay. Great. And in terms of the IP and cloud business, just hoping you could talk a little bit about the relative resilience of that business, both in the short-term and maybe in the longer-term as well?

George D. Schindler -- President and Chief Executive Officer

Yes. Well, thanks for the question. Certainly, the our IP is becoming a bigger value proposition, and the fact that all of it or the majority of it is accessible via software-as-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 clients add capacity and infrastructure and look to providers like us to provide the service and 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 cloud, it really is the business solutions themselves, Stephanie, that becomes the more important element. And I mentioned, we have a number of our software actually provides critical business services, maybe even more critical at this time for some of those business services, and we've actually modified some of that IP to be more relevant in the current environment. So we think it's a stronger environment for IP. And of course, that's nice to be able to say because both SaaS and license and maintenance IP is at the higher end of the CGI margins, as you know.

Stephanie Price -- CIBC -- Analyst

Great. Thank you very much.

George D. Schindler -- President and Chief Executive Officer

Thanks.

Operator

Thank you. The next question is from Deepak Kaushal with Stifel GMP. Please go ahead.

Deepak Kaushal -- Stifel GMP -- Analyst

Oh, hi. Good morning, guys. Thanks for taking my question. George, Francois, I know there's a lot of questions and there's a lot of uncertainty in the near term. I'm curious, given that you've done 50% of the voice of the client after the impact of COVID and you have an army 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?

George D. Schindler -- President and Chief Executive Officer

Yes. Thanks, Deepak. We actually do have an army of consultants right now thinking through 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 industries. As that gets reorganized as certainly, customers now have been accelerated to be even more digital than they were previously. And I think there are going to be opportunities across each of the industries, and we're evaluating. And quite frankly, they're different by industry. And we're looking at those opportunities.

And essentially, the way we're looking at this is really three phases, Deepak. We're looking at the response 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 response phase. But then there's going to be an initial rebound phase. And in that rebound phase, so that's where some of our IP, as we talked about, will really apply, but also those managed services for the cost savings becomes 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've said, "We're evaluating right now, as we've reacted 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 is looking at that. And I think it will be industry by industry. But in some cases, it will be company by company. And so we're preparing for that as we speak. And that's why it was so valuable to have done the voice of the customer the way we did it. Again, just another shout out 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 value from it, I think, is a testament to the relationships we have

Deepak Kaushal -- Stifel GMP -- Analyst

Okay. And then just a quick follow-up on the M&A strategy. I was hoping for some more nuanced insight on to metro market versus transformation. We know you've been doing a lot of metro that's quite well understood. 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 I know it's hard to give us a sense of timing, but is this kind of a 1-year to 2-year to get done? Or is it a six months to get done or a five years thing that we should think about in terms of transformational?

George D. Schindler -- President and Chief Executive Officer

Yes. No, I wish I could answer the timing point, but we want to be prepared for any of those scenarios. But the tilt toward 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. I'm not as concerned about the point you make about the company takeover scenario because, really, in all cases, we come in as really, the local players, whether it's a metro market merger or a broader one. So in many ways, we can work with governments and mitigate that. We've done that successfully even in the U.S. So I'm not as concerned about that. But certainly, the opportunity and the tilt toward transformational is really all about the opportunity, and the pricing has a big play in that.

Deepak Kaushal -- Stifel GMP -- Analyst

Okay. And should we expect something transformational to look like a CGI and when you take out cost synergies or to look very different from the CGI where you can get a broader kind of capability?

George D. Schindler -- President and Chief Executive Officer

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 look more like that.

Deepak Kaushal -- Stifel GMP -- Analyst

Okay, thank you for taking my question.

George D. Schindler -- President and Chief Executive Officer

Right.

Operator

Thank you. The next question is from Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber -- RBC Capital Markets -- Analyst

Thank you very much. Good morning. I just wanted to follow-up on one of your last comments on CGI's proximity model. Just broadly speaking, are you seeing from your customer base an increasing willingness or improved or change in sentiment that they may have toward onshore or nearshore versus offshore? There's been tremendous push over the last, like 20 years, probably, for offshore. Do you think the disruption that came out in this environment is perhaps, much more apparent to end customers now and they're maybe shifting their priorities a bit?

George D. Schindler -- President and Chief Executive Officer

Yes. We have seen some of that, and we've had discussions with clients or actually in discussions with clients about that now. The pockets of, we call it, rebalancing, not wholesale, it's 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 our India operations has performed extremely well. All of our global delivery centers have but particularly, in India, performed extremely well. Obviously, you know there's a 21 days shutdown and then that was extended. All of our people were able to transition remotely. You saw the margins. This is even in, at least, the beginning of the shutdown period, and that continues. So I think that becomes 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 said to our clients. It's a global delivery, it's not onshore/offshore. It's really a global delivery. We'll put the right services in the right places and make sure that they're comfortable. And that's the conversation we're having as some are looking at doing that rebound Okay, thanks foe taking my question. I'll leave it at that.

Lorne Gorber -- Executive Vice-President of Investor & Public Relations

Thanks, Paul. Elaina, I guess, we'll take one more question.

Operator

Thank you. The last question will be from Rob Young with Canaccord Genuity. Please go ahead.

Rob Young -- Canaccord Genuity -- Analyst

Hi, good morning. You said that you've seen the sales cycle shortening on managed services or perhaps, you said you expected to see that. Maybe clarify that for me. And then what's giving you the confidence to say that? Is it better access to more senior decision-makers and your customers? Is 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 shorten?

George D. Schindler -- President and Chief Executive Officer

Yes. I'll start this way. It's mainly an expectation, but it's an expectation based 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 senior client level. They're more engaged in these discussions, given what they're going through. And then like I mentioned, the value proposition becomes much stronger. So it really is all of the above, but this is where we and it's also based on what we've seen in past crisis and what and how the behaviors and the pressures on our clients change 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 crisis period.

Rob Young -- Canaccord Genuity -- Analyst

Okay. And are you seeing that accelerate? Like is it actually shortening? Or do you expect it to shorten?

George D. Schindler -- President and Chief Executive Officer

We expect it to shorten.

Rob Young -- Canaccord Genuity -- Analyst

Okay. And then just one clarification. One of your peers said that they expected a top line impact from travel reimbursement? I assume that given 85% of your revenue, like you said earlier, comes from members in proximity, that isn't as much of an issue for you. Maybe you can just talk about that and then that's it.

George D. Schindler -- President and Chief Executive Officer

Yes. We have a much smaller amount to that. And that's a good news, bad news story because we also don't have any of the benefits of having people, in the short term, not traveling and have the impact of that on our bottom line. But no, that's not a big item for us. There are some projects where it occurs, but it's minimal.

Rob Young -- Canaccord Genuity -- Analyst

Thanks.

Lorne Gorber -- Executive Vice-President of Investor & Public Relations

Thank you, Rob. Thank you, everyone, for joining us today, and we look forward to talking to you again with the Q3 results in July. Again, follow-up with me (514) 841-3355. Thank you.

George D. Schindler -- President and Chief Executive Officer

Thank you. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Lorne Gorber -- Executive Vice-President of Investor & Public Relations

George D. Schindler -- President and Chief Executive Officer

Francois Boulanger -- Executive Vice President and Chief Financial Officer

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Steven Li -- Raymond James -- Analyst

Richard Tse -- National Bank Financial -- Analyst

Maher Yaghi -- Desjardins -- Analyst

Kathy -- Bank of America -- Analyst

Stephanie Price -- CIBC -- Analyst

Deepak Kaushal -- Stifel GMP -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Rob Young -- Canaccord Genuity -- Analyst

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