ATS Corp (ATS) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation second quarter conference call. I would like to remind you that this conference call is being recorded on November 9, 2011 at 10 AM Eastern Time. Following the presentation we will conduct a Q&A session. Instructions will be provided at that time to queue up for questions. (Operator Instructions).

I would like to turn the call you over to Stewart McCuaig, Vice-President and General Council. Please go ahead.

Thanks Operator, and good morning everyone. Your main hosts today are Anthony Caputo, Chief Executive Officer of ATS, and Maria Perrella, Chief Financial Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information which made on behalf of ATS and all of its representatives on the call.

The oral statements made on this call will contain forward-looking information. The actual results could differ materially from the conclusions, forecasts or projections in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecasts or projections in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in [HSS] filings with Canadian Provincial Securities Regulators.

Now it is my pleasure to turn the call over to Anthony.

Good morning, ladies and gentlemen. I'm assuming you have seen our press release. Maria will review financial highlights in a few minutes. Second quarter results from continuing operations were strong. Key metrics including bookings, revenues, EBIT and cash all continue to improve. We made advances in our approach to market and again ended the quarter with record backlog.

At Photowatt France we did not receive an acceptable offer to sell the company. Despite the actions taken to restructure the business market conditions have continued to deteriorate to the point where the operation in France is no longer viable in its current form. As a result we are supporting Photowatt and its employees through recovery proceedings under bankruptcy protection.

Today I will update you on ASG including the integration of ATW, conditions in the market and our outlook, and on Photowatt I will update you on the bankruptcy process in France and the market activities underway in Ontario. I will then make some summary comments. On ASG, we booked CAD165 million of new orders, a 57% increase over Q2 last year. On an annual basis bookings were up approximately 70% over last year. This increase was driven by larger programs primarily in transportation and life sciences, our revised approach to market, growth in the base business, the additions of Sortimat and ATW all contributed to achieving this level of orders.

For the quarter we finished with record backlog of CAD363 million, 75% higher than Q2 last year and 11% higher than Q1 this year. Consolidated operating margin was 9%. This is also an improvement over last quarter and Q2 last year not withstanding the inclusion of Sortimat and ATW. Recall that they operate at a significantly lower margins than ASG. The base business continued to perform well and we eliminated RED programs at both Sortimat and ATW.

The integration of ATW is well underway. The consolidation of ATW Saginaw division is complete. Efforts to integrate ATW into ATS' sales structure, program management, supply chain and command and control processes are progressing well and should be completed by our fiscal year end.

Turning to our market. Overall activity remains healthy. Our final end proposal activity continue to grow. As I noted last quarter we are engaged with a number of customers on enterprise-type solutions. This approach is a key differentiator for ASG, but keep in mind the large programs cause variability in quarterly booking numbers. Over time I believe our revised approach to market will level out, gain traction and continue to serve us well.

Our orders for the first five weeks of the second quarter were CAD47 million. In terms of outlook. ASG remains focused on growth. We have achieved record backlog for the third quarter in a row. We continue to strengthen our sales organization, improve front end of the business, attract and reward the best talent, engage on a key account basis and increase program type orders.

In addition, organizing by segments has allowed us to tailor our capability and efforts to offer differentiated solutions to our customers. On acquisitions we are moving beyond the separation of Photowatt and acquisitions may become more significant. We intend to apply considerable corporate resources to this activity going forward. Our balance sheet remains strong and we have significant room under the existing credit facility.

Turning to Photowatt. In France, volumes were down 31% compared to Q2 last year and 47% compared to Q1. Compounding Photowatt France's challenges were lower ASPs in the quarter which decreased by about 30% from Q1. In addition to a negative operating quarter, Photowatt France recorded CAD64 million in charges which Maria will take you through in a few minutes.

Despite efforts to reposition Photowatt including the implementation of a significant restructuring plant at Photowatt France, cost reductions did not offset the market and competitive challenges. For many quarters we have been working on separation options including a process involving a sale or spinoff. Unfortunately, our preferred option was not realized due to circumstances outside our control. Yesterday the French bankruptcy court placed Photowatt France into recovery proceedings under the supervision of a Court appointed trustee.

In order to support Photowatt France and its employees ATS intends to offer funding for three months during the recovery process. Under French bankruptcy law the objective of such a recovery is to explore opportunities for Photowatt France's operations in an effort to preserve jobs and maximize value. It should be voted that the French bankruptcy process is different from the North American process and requires a more collaborative approach. Accordingly we expect to incur some costs not typically associated with North American bankruptcies. The entire process of separating both Photowatt France and Photowatt Ontario is expected to last about six months and have a number of cash outflow and inflow implications for ATS.

In aggregate we anticipate that they will offset each other although the timing will not line up. Starting with the outflows, ATS has offered to provide funding for three months during the recovery period. During this time we will work with Photowatt France and the administrator regarding the interests of our French employees. As other matters come up they will be given due consideration throughout the course of the process and could give rise to additional expenditures.

Looking at the inflows we intend to sell our Photowatt Ontario business and will engage our advisor in a few days. Recall that our goal in Ontario was to build an attractive operation that would increase the overall value of ATS' solar business. We expect to sell the ATS building which had been used by Photowatt France to house module assembly. We received a non-binding LOI in this regard.

Overall, our goal is to separate the solar business from ATS quickly and on a cash neutral basis. We are at the beginning of the bankruptcy proceedings. As with any undertaking of this nature there is some uncertainty with respect to the amounts and timing of cash flows. Having said that we have a detailed plan and we are working with advisors very familiar with the French bankruptcy process. I will continue to update you as we move forward.

Moving to Ontario, we continued the ramp-up in terms of production. In the second quarter we added a second shift to the production line. We expect to be at full capacity prior to calendar year end. Looking at the results, Photowatt Ontario sold 3.1 megawatts during the second quarter, a 72% increase from Q1. Photowatt Ontario recorded an operating loss during the quarter as the business continued to ramp up. Until the business is fully ramped up profitability will be impacted negatively.

Looking at Photowatt's market, in Ontario we continue to be encouraged by the level of opportunities and Photowatt's capability. The addressable market in Ontario is estimated to be between 2 to 3 gigawatts over the next five years. Photowatt's plan is to continue to grow by developing projects, building modules and providing contract manufacturing for others. Photowatt Ontario will participate in the consultation process with the Ontario government as part of their scheduled review of the FIT program. We expect to have a takeout agreement in place by Q3 for the 64 megawatts of projects held through our JV.

Photowatt Ontario has a competitive cost structure and operating results are expected to be more are in line with those experienced by ASG. In summary, difficult but necessary steps have been taken to deal with Photowatt France. We are in the early stages of the bankruptcy process and I will continue to update you as things develop. Our plan is to at least offset the cash outflows with cash inflows.

Our core business, growth plans are advancing. The additions of Sortimat and ATW have contributed to revenue and backlog growth and I expect both will make strong contributions to our results over time. I'm encouraged by the level of activity we are seeing in our markets which combined with record backlog should serve ASG well going forward. In terms of creating value, we've turned the corner on separation. We have a solid core business. We are growing organically.

We acquired Sortimat and ATW and successfully integrated them. Our plan is to continue with our approach to market and make acquisitions an increasingly important element of our strategy. At this point I would like to turn the call over to Maria.

Thank you, Anthony. As you have heard, ASG's bookings, revenues and EBIT performance remain strong. Certain strategic projects are being funded through working capital with the resulting impact on cash from operations. We expect this will reverse in the fourth quarter of fiscal 2012 and early in fiscal 2013.

Today my comments will focus on our continuing ASG operations and our balance sheet, but I will begin with the accounting implications of the recent solar separation developments and the impact of the Photowatt France bankruptcy and intended sale of Photowatt Ontario on our go-forward results. At Photowatt, results were negatively impacted by weakness in the solar market, particularly in France. Significant deterioration in solar market conditions have resulted in further impairment in Photowatt France assets. As Anthony noted, Photowatt France has filed for bankruptcy protection and we initiated a formal process to sell Photowatt Ontario. Solar results are reported in discontinued operations.

Going forward, the financial impact of the bankruptcy and the sale process will be recorded as they are incurred. On the balance sheet, we expect to deconsolidate Photowatt France when it is placed into bankruptcy. However, any additional costs which arise will be expensed as incurred on the income statement through discontinued operations. Turning to results. We are pleased with ASG's performance which remains strong despite some uncertainty in the general economic environment.

Overall, Q2 performance improved over last year Q2 and Q1 this year. Revenues of CAD146 million increased as expected over prior quarter revenues of CAD127 million. Compared to Q2 last year, revenues increased CAD32 million or 28% on contributions from ATW and the impact of several quarters of strong bookings.

From a growth perspective the 28% year-over-year increase is approximately 6% from organic growth and 22% from acquisitions. Based on our backlog, we expect to see Q3 and Q4 revenues in line with Q2 which were in turn in line with Q4 revenues last year. As a reminder, starting in Q1 this year the presentation of ASG results from operations changed as we now report corporate costs together with ASG. Gross margins for Q2 fiscal year 2012 were 25.3% compared to Q2 margins last year of 24%.

Another year of improvements in operational efficiencies as we well as the relatively smooth integration of our two acquisitions provided for the increase. In comparison to Q1 fiscal year 2012 when gross margins were 27.2%, there was a decrease due to mix. However, overall EBIT margin was up. With our success in transportation making it a larger part of overall revenues, our margins will be slightly impacted over the next few quarters. There is a larger percentage of third party content in these programs.

SG&A of CAD23 million which includes both ASG and corporate costs was the same as in Q1 but increased by approximately CAD3 million over Q2 last year due to the addition of ATW. Note that Q2 SG&A included a CAD1 million charge for bad debt related to a specific energy customer bankruptcy filing. SG&A was 16% of revenue compared to 18% last quarter and 17% in Q2 last year. Without the bad debt charge, SG&A is 15% of revenue. Our ASG performance and operating margin of 9.1% increased from 8.3% in the first quarter and 6% in Q2 last year. Increased margins were due to higher revenues and improved Sortimat margins.

Last year Q2 included a CAD1 million restructuring accrual, CAD1.5 million of transaction costs and lower revenues. Our Q2 ASG order bookings were CAD165 million or a 57% increase over Q2 last year. Approximately half of the increase was due to organic growth and half from ATW. Although bookings have been relatively stable over the last several quarters, as in the past we expect to see some fluctuations in bookings and are not concerned with the variances given our healthy funnels.

Order backlog at the end of Q2 was CAD363 million, up 11% from Q1 backlog of CAD328 million. This is again record backlog for ASG and puts us in a good position to continue to generate strong revenues in the second half of fiscal 2012. Moving to solar. In the quarter, solar results from operations included a loss of CAD12 million and a CAD64 million charge for the impairment of assets including settlement of supply contracts.

In France, market conditions continued to deteriorate. Market ASPs declined by approximately 30% from Q2 last year and megawatt volume sold also decreased by 31% from Q2 last year as orders and demand diminished. These factors contributed to a normalized operating loss of CAD6 million. In addition non-cash charges of CAD61 million were recorded as was a cash charge of CAD3 million for a silicon contract termination fee. The CAD61 million included CAD18 million to write down inventories to their net realizable value.

The previously announced CAD24 million in charges for canceling certain silicon and wafer contracts. CAD9 million in silicon deposit impairment charges. CAD3 million of bad debt charges and approximately CAD10 million in fixed asset and goodwill impairment charges. We also recorded a CAD4 million write-off of a deferred tax asset in Photowatt France.

Moving to Ontario. Photowatt Ontario had revenues of approximately CAD6 million Q2 compared to CAD4 million in Q1 and CAD0 in Q2 last year. Photowatt Ontario sold approximately 3 megawatts in the second quarter with the loss from operations of CAD1.3 million. The loss is due to the continued ramp-up of operations.

Specifically, in Q2 a second shift was added to production. In the third quarter, we expect to add a third and fourth shift which will increase production to its full 100 megawatt capacity. This will negatively impact Photowatt Ontario Q3 earnings but profitability will then improve going forward.

Moving to the balance sheet. I will review cash generated from operations and working capital as a percentage of revenue. At the end of the second quarter our total cash position in continuing operations was CAD63 million or a decrease of CAD21 million from Q1. Cash net of debt was CAD60 million.

The use of CAD50 million in the first half of fiscal 2012 is made up of funding into the solar businesses of CAD32 million, ASG investments in working capital of CAD44 million, ASG CapEx of CAD2 million, partially offset by cash generated from ASG operations of CAD28 million. Working capital as a percentage of revenue is similar to prior quarter Q1 which had increased by approximately 5% from below 10% in the prior quarters to above 10% in Q1 and Q2 fiscal year 2012. As we have said in the past, the increase is due to the ramp in business as well as decisions taken to use our balance sheet. We will continue to invest in working capital in the coming quarters but we are working to mitigate some of this through supply chain and other measures. We expect to operate within the 10% to 15% range for the time being.

CapEx spending at ASG continues to be in the CAD1 million to CAD2 million change per quarter. With clarity on the separation of solar our cash position is becoming more predictable. In the short-term we see further use of cash over Q3 and Q4 with a positive impact thereafter from the sale of Photowatt Ontario business and other assets resulting in an overall expectation of break even or better.

Turning to net earnings. In Q2 we generated earnings per share of CAD0.11 from continuing operations an increase from CAD0.05 per share in Q2 last year. Loss per share from discontinued operations was CAD0.87 resulting in a consolidated loss per share of CAD0.76, compared to earnings of CAD0.01 per share in Q2 last year.

The effective tax rate for the quarter was 29% as compared to last year's Q2 rate of 24%. This was higher than the Canadian effective tax rate of 28% as losses for income tax purposes were incurred in Europe. Our cash taxes payable are minimal due to the use of loss carry forwards.

In summary, solar operations are expected to impact ATS consolidated results for the next two to three quarters. Our ASG business remains strong and is performing to expectations. We are focused on growth.

Now, we would like to open the call to your questions. Operator, could you please provide instructions to our listeners. Thank you.

Thank you (Operator Instructions). Your first question today comes from Mark Neville with Scotia Capital. Please go ahead.

Good morning. If you look at the ASG business and looking at the bookings, the first five weeks or the last five weeks you have seen CAD47 million or booked CAD47 million. The last 11 weeks it has been CAD122. Are you hearing anything from your customers seeing anything, are they being more cautious or are we looking too much into this?

Hi, good morning. No, I wouldn't read anything into it. Our funnel is as big as it ever was and growing. Activity is very healthy. The nature of the opportunities engagements that we are are having with customers will make bookings sporadic including sometimes the five week number. I wouldn't read anything into it.

Just one more. If you look at the energy component of your automation business can we talk about your expectations for that moving forward?

In general terms we are cautious in part because of what we are seeing in the solar market in general. Having said that, we are making inroads and being successful in other areas of the energy market. For instance,oil and gas and we are looking at some nuclear opportunities. But in general on the [PB] side we are more cautious.

Okay. Thanks a lot. I'll get back in queue.

Your next question comes from Michael Willemse with CIBC. Please go ahead.

Great. Thank you. Maria, I just wanted to make sure that I heard you correctly earlier. Did you suggest that sales for the remainder -- quarterly sales for the remainder of the year will be more or less in line with this quarter or with the last two quarters?

I said more in line with this quarter and Q4 of last year.

Okay. Okay. And margins you said there would be a bit of pressure just because some of the new contracts there is more third-party content?

Yes, a little bit of pressure going forward.

Okay. And then I know I think I asked this question in the last call but maybe you could review it again. When we see changes in backlog up another 11% this quarter and up 75% year-over-year, how do we translate that into sales? Is it just really a moving target there is a lot of programs that are coming on that have a very long backlog relative to what you used to have or when could we see some quarterly sales spike up at some point, maybe in fiscal 2013 or how should we look at the backlog and correlate it to sales?

I think one of the best ways to look at it is take the last four quarters bookings and you will see there is a bit of variability there. So if we go back three quarters, bookings were CAD133 million and some of those would be revenued this next upcoming quarter and that would be in line with the CAD200 million or CAD160 million range. And if you do that, take an average, that would give you an idea of where we would be going forward.

So we wouldn't necessarily see revenue of CAD200 million just because we got to bookings of CAD200 million in one quarter. I said in last quarter on the last quarter call our programs or our bookings are taking a little longer to revenue as well and that is having a bit of an impact also on our revenues and when we would expect to see them or the bookings come through as revenues.

Okay. And just so I can refresh on my model for tax rate. The release suggests that the corporate statutory rate should be about 28%. Is that the number we should use going forward?

Approximately. And I will just provide some numbers and what I have said before, the tax rate, the effective tax rate really just depends on where we are profitable and we have different tax rates in different jurisdictions so, just for example the US and we are having more revenues in the US and therefore more profitability.

The rate there is in and around the 40% range. And that could drive the effective tax rates to increase and offset by what we are seeing in Europe now in tax losses. So we expect to see a tax rate in and around the Canadian tax rate but there is variability to that depending on where or in which jurisdictions we are profitable.

That is helpful. Thank you. I will get back in queue.

The next question from David Tyerman with Cannacord Genuity. Please go ahead.

Yes, good morning. I was wound wondering if you could disaggregate the impact on margins of ATW and Sortimat versus mix and other things, so we could get an idea of what is going on there. And then I guess related to that, you have already given us guidance on the mix impacts going forward or that they will have an impact for a few quarters. I'm wondering the same thing on ATW and Sortimat. Seems like they are taking a while or they're dragging things down. Wondering when we could see them normalize.

Maybe if I start with the fix?In terms of the "fixing" of Sortimat and ATW and when we bought them they operated at low single digit EBITDA and you know what our base business operates at and our objective is to get them to our base business. We are like 75% or 80% done in terms of achieving our goal to "integrate" Sortimat and ATW. Maria if you want to make some comments.

A couple of comments. We don't provide margins by the businesses or the acquired businesses, but a reminder for Sortimat we are expensing CAD1.4 million in acquisition costs a quarter and that is bringing down the Sortimat margin by about 5%. And therefore also impacting the overall ASG consolidated margin.

And then just on the third-party content I have said that that has been increasing. And if we compare versus prior quarters, third-party content is up about 4% or 5%. So we are above 50% and used to be below 40% as compared to last year.

Okay. So maybe another way of putting it, eventually I would imagine that these factors would go away so you would have the ASG business as it stands today including Sortimat and ATW achieve the margins you achieved prior to the acquisitions and the mix of facts. How long should we be thinking in terms of when that happens?

So the answer to the first part of your question is, yes, the effects should go away for two reasons. One, because the acquisitions are integrated and two, because to date we have formally "launched" two segments, transportation and life sciences and in due course we will launch more, and our objective is to be balanced across all of our segments. In terms of how much longer it will take, not much longer, maybe a quarter, maybe two on the outside.

We're as I said 75% or 80% there and there means getting to the margins that we need to get to, eliminating the RED programs that we need to eliminate. Doing what we need to do with supply chain. Doing what we need to do with respect to program control business processes, how we prepare and issue bids, leadership, all of that. All of that stuff, 75% to 80% there.

That is perfect. That is very helpful. So it sounds like the only thing left at that point is the intangible amortization at Sortimat. But otherwise you're there in a couple of quarters.

The only thing left is the accounting issue Maria talked about and time. I think I talked about this before when you have a RED program that is 60% complete or 80% complete it is hard to undo it. Whereas when you bid a program that will not become RED because of the way that was prepared and the way that it was bid and eventually it will be executed. Then it is much easier relatively speaking in order to get the performance that we are looking for.

Right. Okay. Perfect. Thank you.

Your next question comes from Marko Pencak with GMP Securities. Please go ahead.

Thank you. Just so I understand how you think that the Ontario solar projects may progress here because you mentioned that in the short-term you expect to have financing and third-party project ownership in place. Do you contemplate that once you conclude this deal that Photowatt Ontario will still be responsible for the construction of those projects and so really the ultimate realization of the cash proceeds won't be until sometime, I'm going say late summer, when those projects are constructed or will the actual sale happen upon this deal being inked and then you guys just get a module supply contract from your manufacturing operation?

Hi, Marko. Just some structural comments and then Maria can talk to -- I think she talked a couple of quarters ago to revenue recognition and how the thing works. But the projects are developed by the JV. And then the JV sells the projects to a takeout guy and delivers those projects to the takeout guy intheir completed form.

And then in the course of delivering those projects Photowatt Ontario builds the modules and Q-Cells provides the cells. That is how the projects work. Then we have other activities in Photowatt Ontario which we're either manufacturing modules for others, or we are providing tolling services for others. (Then do you want to talk about recognition and how we do that?)

I know Maria's detail's [dotted] but I guess my formal question is when does ownership of the project actually change? Will it really be upon the completion so everything flows through Photowatt Ontario or is it actually much earlier and so we actually won't -- that won't be flowing through? Just in terms of the actual sale of the project itself. I understand everything about the module part and revenue recognition. I'm trying to understand is formally when does the actual ownership change?

So the ownership changes at NTP which is a few months from now. So the process is to have a term sheet and then a definitive agreement with a takeout guy and pursuant to executing a definitive agreement the takeout guy owns the projects and then Photowatt Ontario delivers the modules through the JV.

And then, Marko, this is Stewart. Just to add to that I think as you know, you need FIT contract approval for assignment of these projects. If that is done pre-CODSo, so that would have to be -- so it would be the -- it would be as early as NTP if that consent is in hand.

Okay. I just wanted to go back to Maria's explanation about the revenue expectations for the next couple quarters. I mean if I look at your order intake for the last three quarters, you know, CAD206, CAD157, CAD155, on average that is about CAD25 million or CAD26 million higher than the revenue run rate you are indicating.

I can appreciate for the next quarter you have some of that CAD133 million quarter order intake coming through but it seems to me that you are building up a ton of what I would call surplus bookings over the revenue guidance you are giving. You talked previously about a nine to twelve month cycle time on some of these larger projects. Have these things actually started to push out beyond 12 months or are you just being conservative? It seems like there is too much being -- building up in the pipeline relative to my understanding of your delivery cycle.

We are not being conservative. I think it just has to do with how long it will take to complete and deliver the programs. And I have talked about moving from six to eight months to nine to twelve months and we have some programs that go out beyond that. It is not a matter of being conservativeI think it's just a matter of how long it will take to complete these and then revenue them.

And there has been no change in terms of projects getting pushed out. So projects have not gotten pushed out.

Okay. Thanks.

Your next question comes from [Sherry-Lynn Argulin] with TD securities. Please go ahead.

Thanks very much. Good morning. First question just relates to automation. And your revenue in the quarter was pretty heavily weighted to transportation so I just wondered if that gave you any level of concern or whether you are seeing sufficient diversification in your bookings and in your funnel to make you comfortable?

We are seeing diversification in our funnel. We are seeing diversification in the opportunities that we are pursuing. We are being successful in transportation in part because of how we positioned to be successful. And that involves making an assumption that we were at a certain place in the cycle with respect to launch of new products and requiring new automation. The acquisition of ATW. We have just done well in that segment and our plan and expectation is to do well in other segments and balance the effects of a relatively high transportation segment.

Okay. And then in the quarter if I back out all of the unusuals, it looks like Photowatt lost CAD7.5 million on an operating basis. Is that more or less representative of how you we should think about the operating losses you will be funding during the three month recovery process?

Not necessarily, no.

Okay. So are you saying not necessarily in the sense that there could be other expenses or are you saying that those operating losses could deteriorate I guess based on what we see in the solar market?

Maybe start with the box, the -- sort of the containment, solar containment on the whole separation is that our expectation is that the good news and the bad news will offset or the inflows and the outflows will offset. And in terms of commitments that we have made to Photo watt France to fund their operation for three month period of time, that's component number one, there might be other costs that we might choose to realize in supporting Photowatt for a variety of reasons. But in aggregate we expect that the pluses will at least equal the minuses and right now we would really like not to get into the specific elements for a variety of reasons.

Okay. That's fine. So in terms of I guess ramping up your acquisition agenda at ASG, does that need to wait until we get through this six month period of inflows and outflows associated with the bankruptcy process.

No.

That is all from me. Thanks.

(Operator Instructions). Your next question is a follow-up from David Tyerman with can Canaccord Genuity. Please go ahead.

Just to clarify the takeout agreement to sell the PWO project, did you say that you felt it would be done by the end of Q3 fiscal 2012 so by the end of this calendar year?

Yes, by the end of Q3. This Q3.

Okay. So pretty soon. And it sounds like the NTP is the key thing here to get that and then away you go. Okay.

And then on the working cap, I was a little confused on the -- on what was said. I thought at one point Maria you said you thought there was a buildup in certain projects you felt it would reverse in Q3 and Q4, the fiscal year, but then you went on to say that you were going to continue to invest in it and that you'd operate in the 10% to 15% last 12 months sales range for the time being. Is that all correct and I'm just trying to understand why you would think something would reverse but then you would operate in a higher level anyway.

We expect to it have a little bit more build in our working capital in Q3 and then in Q4 or late Q4 we expect to see that start to reverse and also in Q1. I may have gotten the quarters mixed up but a little bit more build in Q3 and just a matter of timing. We expect to see some reversal in Q4 and also in Q1. Therefore, in the next quarter or so our working capital as a percentage of revenue would be above the 10% range and then going into Q4 and Q1 we would like to see that come down in and around the 10% range.

Okay. Got you. That's helpful. And then on the M&A side should we expect SG&A to start rising as you put more resources in and can you put any bounds on what we should be thinking?

The SG&A will start to increase as we ramp up our acquisition activity and in terms of spend it would be more third-party external spending. We have a corporate structure and resources in place now that we think is sufficient to do the work that we have to do on the acquisition front.

It is just about refocusing people and energy that we have been expending anyway. And by the way, just to be clear, NTP is not a condition for the takeout to proceed.

Okay. That's helpful. Should we not be surprised if SG&A starts going up a couple million a quarter or something like that because of this or is this refocusing that would already be in your budget presumably or already be spent, just spent in a different way now?

I would say you shouldn't be surprised if SG&A increases by CAD1 million or CAD2 million in the quarter and even if we look at last year where we had two acquisitions underway, under IFRS reporting you could see some quarters had CAD0 and some quarters were up to almost CAD2 million in incremental spending.

Okay. Fair enough. That's helpful.

And then the last question. The US, I believe their bonus tax depreciation expires at the end of this year, at least I think they have been saying that for years now but it actually might happen. I was wondering if you have any sense that this may have an impact on order flow or whether it has had an impact on order flow and will have a negative impact, say, going forward?

It hasn't had any impact. And I don't think it will. Will .

Okay. Okay. Thank you.

(Operator Instructions). Your next question is a follow-up from Michael Willemse with CIBC. Please go ahead.

Thank you. Just wanted to get some more color on each of your industry segments. It sounded like obviously the solar segment is ramping down but there has been some offset from pickup in the nuclear segment. Automotive, has the market stabilized or is there still a lot of momentum, a lot of new project there? And then if you could just comment on health care, computer electronics and consumers.

I would say correct on what you said on solar. Correct on nuclear. But also other energy industries like oil and gas. On transportation, transportation has been good, is good and continues to be good in terms of the opportunities and prospects for us. So we haven't seen saturation or reached a peak in terms of what we are seeing in the market in that regard. And keep in mind that we typically get involved with new product launches as opposed to units sold. So it is a target-rich environment in that regard.

In life sciences, we have seen our opportunities grow primarily because of our approach. So our approach was machines and then it went to projects and now approaches moving to key accounts and development of key accounts. So the general trends that we see are positive but how we are approaching that market I think has improved and will continue to improve our position. Consumer electronics is "better than it was" and we are pursuing again because of our approach I think we are seeing more opportunities and we are seeing some positive signs in general trends. But nothing as macro as transportation. And consumer products I would say the same thing as I'm saying for electronics.

Okay. That's helpful. Thank you.

Your next question is a follow-up from David Tyerman with Canaccord Genuity. Please go ahead.

Sorry. Just two last questions. On the computer electronics the numbers that you used to generate in the past were much, much higher than they are now. Has something changed there that we are never ever going to be remotely close to those levels or at least not for years and years and years?

I think what has happened -- actually it is a couple of different things that are happening. The first one is the trends in the market and the cyclicality of some segments or sectors versus others. The second is that in the past we were -- our sales people were organized geographically and our people our sales people would pursue a variety of opportunities.

So one individual would pursue transportation or consumer electronics or whatever or whatever and what we have done now is we have gone to segments and we have organized our sales people to function in segments so the transportation people have to live in that segment. Life sciences have to live in that segment and to date we have formally launched the two segments and the criteria for formal launch is that we understand the segments that we understand the customers that we have excellent relationships and we have very strong capabilities. I think as we go forward and launch formally launch other segments we will see more stability in terms of sales and backlog on or and our position in those markets. I think that is the reason we see ups and downs as much as it is driven by the actual trends in the market.

Okay. That's definitely helpful. And then on Photowatt France, I thought I heard a comment from Maria that would you would deconsolidate it, I think you said when it was placed in bankruptcy which I guess is now. Did I hear that correctly? And I thought it was already deconsolidated now that it's in the discontinued line. On the balance sheet.

Yes, so you heard correctly. The deconsolidate has to do with the balance sheet. Right now we have two lines on the balance sheet. Assets held for sale. Assets and liabilities held for sale. When we deconsolidate what it means is that we will have those two lines and those will be for Photowatt Ontario. And then for Photowatt France it will be one line item, and it will just say investment, in Photowatt France. And then on the income statement, there would be one line item as there is now, which is income or loss from discontinued operations.

The one line item that you would have for Photowatt France would that be a net asset number I take it?

Yes.

So we will see that on the next quarter I assume.

Yes, that's correct.

Okay, great. Thank you very much.

You're welcome.

Mr. Caputo, there are no further questions at this time.

Thank you very much.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect your lines.