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Operator
Good morning, ladies and gentlemen. Welcome to the ATS Automation first-quarter conference call. I would like to remind that you that this conference call is being recorded on August 14, 2012, at 10.00 AM Eastern Time. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.
(Operator Instructions)
I would now like to turn the call over to Stewart McCuaig, Vice President and General Counsel of ATS.
- VP and General Counsel
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 am required to provide the following statement respecting forward-looking information. Which is made on behalf of ATS and all of its representatives on this call. The oral statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast, or projection 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, forecast, or projection 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 ATS's filings with Canadian provincial securities regulators. Now, it is my pleasure to turn the call over to Anthony.
- CEO
Good morning, ladies and gentlemen. I'm assuming you have seen our press release. Maria will review financial highlights in a few minutes. During the quarter, we moved to the next chapter of ATS's development, by launching the next phase of our value-creation plan. Going forward, we plan to grow, expand and scale. I will speak more about our strategy later in the call. First, I will update you on our Q1 performance, conditions in the market and our outlook. I will also update you on solar. And then make some summary comments.
In our core business, first-quarter order bookings were CAD168 million. This was driven by larger programs primarily in transportation and life sciences. And contributed to a record backlog of CAD397 million. Revenues in the first quarter were 20% higher than last year, and 12% lower than last quarter. This sawtooth revenue pattern, with an increasing slope, is characteristic of early-stage work on larger programs with longer periods of performance.
Over the past eight quarters, the revenue compound annual growth rate was 22%. Over the past four quarters, the growth rate was 20%. Our operating margin increased to 10%, up from 9% in Q4, and 8% last year. Overall I'm pleased with our results for the quarter.
Turning to our markets. Activity remains healthy, notwithstanding the economic situation in various regions of the world. Our funnel and proposal activity are strong and our capture rate is increasing. By market, transportation is very strong. And we continue to see a number of opportunities in both traditional and new technologies related to automobiles and heavy equipment. Life sciences also remains strong. In energy, solar is weak. And as I've noted previously, we are pursuing opportunities in nuclear and oil and gas. Consumer and parts of electronics remain largely untapped, and represent significant addressable markets for ATS.
Our goal is to continue to move towards value-based enterprise programs where ATS provides enabling plant-wide solutions for our customers. This approach is a key differentiator for ASG and results in large program wins with variability in quarterly booking numbers. Over time, I believe our revised approach to market will continue to serve us well.
In terms of outlook, our orders have strengthened over the past several quarters, but activity has not yet reached pre-recession levels. We're obviously cognizant of what is happening in the global economy, but to date we have not been impacted. Of course, should the European debt crisis continue unresolved, or growth in China stagnate, or the US recovery stall, then our business would eventually be negatively impacted. Recall that our business typically lags the macro economy due to the size and strategic nature of the programs we undertake.
That said, we have a strong foundation, appropriate flexibility, a sound business strategy, and a demonstrated ability to weather difficult market conditions. Recall in fiscal 2010 our top line dropped 35% from the previous year, yet we still maintained a 10% EBIT margin for the year. Also, this time, we would be better positioned and have the added ability to make strategic acquisitions in distressed situations.
Turning to our strategy. We have completed the fix, and largely completed the separation phases. We have now turned the page to the next chapter of ATS's future. Accordingly, in June of this year, ATS's Board approved the vision, mission, and strategy, designed to create significant shareholder value over time. In essence, our plan is to grow, expand and scale.
By grow I mean apply our approach to market with a view to moving from machines, beyond program, and on to enterprise solutions. Our approach to market is not typical for our industry. We have had initial success and we have significant room to grow. Providing enabling plant-wide solutions for our customers will help drive organic growth.
By expand I mean expand our offering by adding services, pre- and post- automation, core process technology, engineering, selected products and entering new markets. All of these areas are consistent with what we do today, but we have significant room for growth. By scale I mean scale our business model by leveraging our demonstrated ability, and taking advantage of a fragmented industry.
Our industry is characterized by a large number of small- and medium-sized companies. As a market leader, we have the resources to acquire required capabilities. And the organization and business process to facilitate the integration of new companies. As we have said, we review targets based on their ability to bring market or technology leadership, scale and/or an opportunity brought on by the environment.
With respect to acquisitions, over the past two quarters we have intensified efforts to seek out opportunities that provide capabilities, access to end markets, and increase penetration into attractive geographical areas. To assist us in identifying and reviewing potential acquisition targets, we have commenced an active dialogue with several advisors across specific markets. At this time we are in various discussions and stages of reviewing a number of specific targets.
Turning to solar, on the Ontario Solar business, delays in the permitting process have had a negative impact. Ontario's loss for the quarter was CAD2 million. Based on the recently-completed fit review by the Ontario government, we are seeing some increase in activity. With respect to the sale of Ontario Solar, we have received a number of offers and we are continuing discussions with interested parties.
We have experienced unexpected delays in this process due to the delays in the permitting process, and the bankruptcy filing of our joint venture partner's parent company. These issues are not show stoppers. And we are working through them. Our expectation is to have a deal in place in the short term.
On the Photowatt France side, an agreement between the French bankruptcy court and a subsidiary of the EDF group to purchase the assets of Photowatt France and assume its operations and workforce, was finalized in July of 2012. Overall, our goal was to separate the solar business from ATS as quickly as possible and on a cash-neutral basis. Based on the positive outcome of the bankruptcy process, and our expectations related to Ontario, I believe we will surpass this objective.
In summary, our first-quarter financial performance was strong, and we have record backlog. Our core business is robust and growing. It has the demonstrated ability to engage customers on an enterprise basis, select and integrate acquisitions, and remain resilient in the face of macro economic downturns. We have launched the next phase of our value-creation strategy. Our plan going forward is to grow, expand and scale. I am very pleased to be part of ATS during this exciting time. At this point, I would like to turn the call over to Maria.
- CFO
Thank you, Anthony. Overall, the first-quarter performance ending July 1 is a positive start to fiscal 2013. The ASG business continues to perform. And solar has been substantially dealt with as Photowatt France assets were legally transferred on July 16. This morning, my comments will focus primarily on our ASG business and our balance sheet. I will also comment on Ontario Solar and its impact on our Q1 results.
I will start with our results from continuing operations. Q1 revenues of CAD152.2 million increased by 20% over last year. In comparison to Q4, the revenues declined by CAD21 million. Over the last year, we have seen revenues grow from CAD127 million to CAD173 million in Q4 last year. Which, as we told you last quarter, was unusually high. With this quarter at CAD152 million. We are pleased with our revenue growth.
As we have discussed in the past, the composition of our bookings and backlogs has changed with our approach to market. The increase in average program size typically translates to an increase in period of performance and revenue recognition. Historically, our average program length was in the five- to seven-month range. Now, we are in the seven- to nine-month range. And we have approximately 10% of our backlog that extends beyond one year.
The combination of larger programs and longer periods of performance can lead to short-term variability in revenues. As Anthony noted, our expectation is that over the medium and long term, our revenues will continue to grow as a result of our approach to markets. Notwithstanding the quarter-over-quarter variability in revenue, our growth of 20% demonstrates that our approach to market is working.
Q1 bookings were CAD168 million. Likewise, with revenues we expect to see some fluctuations in bookings, given our approach to market and timing of various larger opportunities. On average, we expect bookings to grow over the long term, and are generally not concerned with quarter-over-quarter declines or variability. With Q1 backlog at CAD397 million, ASG is well positioned for fiscal year 2013 revenues.
On margins, Q1 gross margin of 26.3% was slightly lower than last year's Q1 margin of 27.2%. And improved over last quarter, Q4's gross margin of 25%. Normalized gross margins over the last four quarters have been in the 25% to 26% range. We can attribute the slight fluctuations to change in cost mix. Third-party materials content accounted for a larger percentage of costs in sell in Q4.
Q1 SG&A costs were CAD24 million, or about 16% of revenue. SG&A increased by approximately CAD400,000 over last year's average quarterly SG&A costs. The increase is due to a few items which include slightly higher sales and marking spending, and certain corporate initiatives. As noted in the past, we expect SG&A to be in the 15% of revenue range. But will be impacted or grow based on M&A activities.
Stock compensation expense of approximately CAD1 million is the expected quarterly run rate for fiscal year '13. However, this could be impacted by our stock price and the re-valuation of deferred stock units or early vesting of performance-based options. Over the last four quarters, stock comp expense as a percentage of revenue has fluctuated by approximately 0.7%, impacting EBIT margins.
Earnings from operations, normalized for unusual or nonrecurring items, and before stock compensation expense, have gone from 9.2% in Q1 last year, and increased steadily to 10.6% this quarter. Earnings from operations, including stock compensation expense, were 10% in Q1, improving from 8.3% last year. We will continue to work on our cost structure in order to gain more margin. And expect to see further improvements over the fiscal year.
Turning to solar, in the first quarter, solar incurred a loss of CAD2 million, which is included in discontinued operations. All related to Ontario. Revenues in Q1 were low, at less than CAD1 million. Losses are due to low volumes resulting primarily from regulatory delays and project approvals. Ontario Solar has maintained a core team to ramp production up to required levels to be able to deliver on current obligations.
An order for 5 megawatts was received under an existing contract and is expected to be delivered during the third fiscal quarter. As Anthony noted, we are working through various items related to the sale of the projects and business. Our expectation is to complete a sale in the short term.
Moving to the balance sheet, I will review cash used in operations and working capital as a percentage of revenue. At the end of the first quarter, our total cash position in continuing operations was CAD84 million, or a decrease of CAD12 million from Q4. Cash, net of debt, was CAD81 million. In Q1, we invested in working capital. Recall that in Q4, cash increased by CAD27 million, in part due to a large reduction in period end working capital.
We will continue to see quarter-over-quarter fluctuations in working capital, as the timing of investments in certain programs and receipt of cash from milestone achievements will not necessarily offset one another in the same period. Overall, though, our target remains to generate cash approximately equal to EBIT.
ASG working capital as a percentage of revenue of 12% was in the range of fiscal '12 levels of between 11% and 13%. We expect to operate within the 10% to 15% range for the time being. With the separation of solar nearly completed, and the stability provided by a sound automation foundation, we expect to employ moderate debt leverage to support growth.
We are well along in discussions with lenders to establish the next-generation credit facility to replace the existing CAD95 million core facility which matures at the end of September. The new facility is expected to be larger and provide considerable management flexibility. With cash on hand of approximately CAD80 million, and an increased facility, we will continue to support our organic and acquisition growth strategies.
Turning to net earnings, in Q1, we generated earnings per share of CAD0.13 from continuing operations, compared to CAD0.13 last quarter, and CAD0.07 in Q1 last year. Less per share from discontinued operations was CAD0.02, as compared to a loss of CAD0.13 in Q1 last year. Total EPS has improved from a loss of CAD0.06 in Q1 fiscal '12 to earnings of CAD0.11 in Q1.
The effective tax rate for the quarter was 21%. This is lower than the Canadian effective tax rate of approximately 26%, due primarily to higher earnings in jurisdictions with lower tax rates. And where unrecognized deferred tax assets were utilized to lower tax expense.
In summary, ASG's Q1 performance was to expectations. We are focused on our growth strategy, both organically, and through acquisitions. We have the foundation and resources to be able to execute. Now, we would like to open the call to your questions. Operator, could you please provide instructions to our listeners?
Operator
(Operator Instructions) Mark Neville from Scotiabank.
- Analyst
We saw a nice improvement in gross margins over last quarter. Your operating margins are now at the low end of your targeted range. I realize there are a few factors that play at getting to the upper end of your target. But how much more room for improvement do you see in your base business as it stands now?
- CFO
We see room to not get quite to the 15% range but to improve from the 10%. And areas which we are working on, have been working on, will continue to work on, are supply chain management. And that is because over 50% of our costs come from third-party material. We've talked about standardization of design and build. Continue to work on getting to zero red programs. And using our global footprint or lower cost countries, including internal subcontracting. So those are the things that we are working on in our base business. And along with, we talked about our corporate cost structure. And we have a structure in place now that is robust enough to handle acquisitions. And we're at a run rate of about CAD20 million a year. So if we keep that run rate, and we add significant acquisitions, we can improve margins by 1% or 2% there. And then as far as timing goes, on our base business, we will continue to work to improve, but we wouldn't get to the higher end of the range within the year. But we expect to improve each quarter.
- Analyst
Okay. So just 200 bips to be had there. I guess the timing, it moves a bit. Okay. Just on the revenues, your addendum of CAD20 million versus last quarter, which was guided for last call, given almost CAD400 million of backlog now, where do you see revenues over the next two, three quarters?
- CFO
We don't give guidance on revenues. What we said today and last quarter is that we expect there to be variability because we are winning larger programs. And we've said that revenue will generally near bookings, which are lumpy, and generally near bookings over time. We have engineering and design versus build and assembly, which also impacts revenues. And also the timing of material revenues on larger programs can cause a swing. So based on these factors, we do expect revenue growth, but we won't provide any guidance.
- Analyst
Okay. Maybe just one last question, on TWO. You mentioned in the MD&A that OSPV was in the process of seeking approvals to begin construction. Are there any approvals that are necessary, or that you're waiting on, in order to conclude a transaction for the Ontario business, whether in parts or as a whole?
- CEO
No.
- Analyst
Okay. Thanks a lot.
Operator
Cherilyn Radbourne from TD Securities.
- Analyst
This is the second, if not the third, quarter that we've found ourselves in the midst of a fair bit of apprehension about the macro economic outlook. So I would just be curious of your comments, as you speak to customers and run your business, does this summer feel like the last two to you? Or is there anything out there that says this is a little bit different, maybe a bit more worrisome?
- CEO
Just in terms of what we're seeing by way of what the customers are saying, our bid activity, the number of proposals that we are submitting, we wouldn't think there is anything wrong. Having said that, we read the newspapers, look at the same indicators everyone else does. And certainly are cognizant of the potential for things to go wrong. And we're ready, should they go wrong. But we haven't experienced anything and we're not seeing anything.
- Analyst
Okay. That's helpful. I wanted to just also ask about the dynamics in the currency market. And I'm thinking about the Euro and the Canadian dollar there, in particular. What, if any, impact is that having on your competitive positioning?
- CEO
Maybe I will start and then you can talk about the currency issues. Every time we look, generally speaking -- before we get to the specifics on the currency issue -- every time we're looking at an opportunity, we come up with something called the concept of operation. And we configure ourselves in a manner which is appropriate to pursue that particular opportunity. And in a manner which is appropriate to discharge our obligations. So we could have company A in country A act as the prime contractor, and that company could subcontract to other ATS companies and others. We could also have division X or division Y participate, because it may be cost effective or because we're getting paid in a certain currency and we want work performed in that currency. So when we pursue an opportunity, starting from the bid, and also the delivery of it, we configure ourselves in a way which maximizes benefits in a number of areas, including cost, currency, customer preferences, import/export costs, et cetera. Do you want to add anything from a currency point of view?
- CFO
I would just add that from a financial perspective we hedge naturally where we can. And then also enter in support exchange contracts. All to minimize the impact on our P&L.
- Analyst
Okay. I think that's two, so I will get back in queue. Thank you.
Operator
David Tyerman from Canaccord Genuity.
- Analyst
Just a question on the backlog. If I just do a simple chart of the backlog over the last five or six quarters, it looks like the pace of expansion is slowing down. Should I be reading into this that the business growth rates are slowing down? Or is this just, perhaps, a temporary aberration from the higher rates you had maybe 1 year, 1.5 years ago?
- CEO
I will start. I don't think the growth of our business is slowing down.
- CFO
I don't think so, either. If I look back maybe more than a year ago, it might have to do with our acquisitions. And that's where we saw the considerable growth take place. And then if we look at after the acquisitions took place, I would say quarter over quarter we saw about the same growth rate.
- Analyst
Okay. So the pace that we've seen in the last, say, three quarters or so is probably representative of what is going on? Is that fair?
- CFO
Yes, that's fair.
- Analyst
Okay. The other question I had, just on the EBIT margin, your comment, Maria, about seeing room to get maybe not quite to the 15% but higher than you were in the last quarter, is that with respect to this year? Or is that over some medium-term time frame?
- CFO
I've said that we expect improvements over this year. But to get to the higher end of the range, so the 15%, that would take a few years.
- Analyst
A few years. Okay. Fair enough. Thank you. I will get back in queue.
Operator
(Operator Instructions)
David Galison from CIBC World Markets.
- Analyst
The first question, just to touch back on the revenue profile, you talked about revenue following your bookings. But over the last seven quarters, your book to bill ratio has been over 1. How long do you think it will be before you start to see that stabilization, coming back down to maybe 1? Considering that there is going to be variability quarter over quarter.
- CFO
That's difficult to say. I think, similar response to revenues and bookings, it's lumpy. And I think if we go back even over time, we would see -- and I won't have the numbers exactly right -- but we would see over 1, under 1. And it depends on the type of programs that we're bidding on and, of course, their period of performance, et cetera. So difficult to answer.
- CEO
Just to add some color. When we first started with this whole approach to market stuff, we used to build one machine at a time. And so we would build a series of machines over a period of time. And then we said we've got to go from machines to programs. And so we increased the average size of the job from CAD1.5 million to CAD3.5 million, or something like that. That is where we are today. So we're working on programs which include multiple machines. But we are moving towards and extending ourselves towards even a broader offering, which I've called Enterprise Solutions, which is not just a program, but let's say a series of programs. So by definition, it takes a lot longer for companies to appropriate the capital to build an entire line or build an entire plant than it does for them to build a single machine. But the contents of what is inside the enterprise system is actually a series of programs. And inside the series of programs is a series of machines. So it is the same stuff. It is just how it is packaged and how it is won and how it is delivered is different. So then, if you take those 8 revenue points over the last quarter, and you draw the best-fitting line, you get to a slope or something like 22%. And then if you look at the last four quarters in revenue and draw the line, best-fitting line, then we get to, whatever I said, 20%. So our revenue is increasing at a healthy rate, notwithstanding the variability. And I like the term variability, as opposed to volatility, of our bookings and therefore revenue.
- Analyst
Okay. That is helpful. The second question that I had, you were talking about increasing your debts level a bit to support your acquisition activities that you're looking at. Do you have a target capital structure you're looking at?
- CFO
We have talked about debt to EBITDA in the 2 times range. And we would want to be lower. And we could peak to a little higher when an acquisition takes place. But around 2 times EBITDA would be the target.
- Analyst
Thank you very much. I will get back in queue.
Operator
David Tyerman from Canaccord Genuity.
- Analyst
Yes, Maria, you mentioned third-party equipment was higher than usual, I think, in Q1. And I think that has happened on and off for a while. Do you expect that to come down? Or is that the rate you would expect?
- CFO
Just to correct what you said, there was a higher material content in Q4.
- Analyst
Q4?
- CFO
Yes, in Q4. And that is what caused our margins to come down, our gross margins to be a little lower. And if we compare third-party content last year to this year, or sorry, Q4 was greater than 50% -- 55% -- and Q1 of this year was in the high 40% range. And over time, I think it just depends what is happening in the quarter. It will range between, say, mid-40%s to mid 50% range.
- Analyst
Okay. That's fair enough. And then you also made a comment about the typical program length expanding. And I was just wondering, and you talked about it increasing the variability of revenues which is understandable, would it actually have any effect over time on revenue since you're doing percentage completion?
- CFO
Yes, it would. And again, I think it just depends on what phase the program is in. And if it is a particularly large program, the design and engineering versus assembly and build, could impact the revenue recognition.
- Analyst
Okay. So it sounds like there is milestones and if it was a very long design phase, for example, it was a very big project, that would flow the delivery of revenue from the backlog?
- CFO
Correct.
- Analyst
Okay. That's helpful. Thank you.
Operator
Mac Whale from Cormark Securities.
- Analyst
The consumer products division revenue looked really high relative to the backlog where it was three months ago. What exactly is going on there?
- CEO
Hi, Mac. In terms of bid activity and focus, it is an area that we are trying to increase participation. And in terms of converting backlog into revenue, it is just normal course.
- Analyst
So there isn't any big change in the size of the program there? Like in the automotive segment, I think you dedicated specific staff there, but I don't think that was done yet on the consumer side. Is that being done now?
- CFO
It could be that what you're seeing is the result of changing the presentation of our groupings. And what we did is we grouped consumer products and electronics and other category together this quarter. And that could be just a change in the way --.
- Analyst
Yes, I didn't catch that. Okay. And then, secondly, on the acquisitions, from the way you stand now, to go from programs to enterprise, do you actually have all the capabilities you need to do that? Or does it entail something that you don't already have? In other words, is it necessary to do acquisitions to get to that part of your strategy?
- CEO
Tying your last question to your first question, for the segments we have stood up, quote-unquote, so transportation and life sciences, we have very significant capability. And therefore, our offering can be more far-reaching in terms of scope. In other areas, we have more limited capability. So the answer to your question is it depends. In transportation, we certainly could offer a turnkey enterprise, very comprehensive solution. And life sciences, ditto. In electronics, to a lesser extent. In consumer, to a lesser extent. In energy, oil and gas, nuclear, lesser extent. So that's where we are.
- Analyst
Okay. And just a follow-up on that, would the shift to enterprise significantly change your margins and your margin target?
- CEO
Starting from the strategic left and working to the top right, we started off with, we build cost-based single machines, and we don't want to do that anymore. We separate cost and price. And not only do we not want to build single machines, but we want to group machines into programs. Then today, we're basically at programs, and tomorrow we want to move more towards the right. And when I talk about the 15% before corporate costs, how do we get there? If we get the program delivery right, we get the 10%, and then where does the extra 5% come from? The extra 5% comes from better managing supply chain, including giving our divisions character, so that our divisions can specialize in certain area. As well as pricing power created by the value that our offering brings to the customer. So that's how we got from the bottom left to the middle, and now we're moving towards the top right. So when things are bigger, there's typically less risk, because of the way we're organized, where we break the job down into certain pieces so the risk to each division is no bigger than it always was. And potentially there's opportunities for margin. But right now we're just trying to get bigger, as I said, grow and expand, and replicate what we have.
- Analyst
Okay. That's all I had. Thank you.
Operator
Cherilyn Radbourne from TD Securities.
- Analyst
Just wondered if you could comment on whether the turmoil in Europe, if I can refer to it like that, is having on the availability of acquisition opportunities. Because historically there have been a lot of companies in your industry based out of Europe.
- CEO
We're early stages in trying to determine if there is, and potentially capitalize on opportunities. So are there companies in Europe which are attractive to us? Yes. Are there companies in regions in Europe that are having political and economic issues that are attractive to us? Yes. Have we seen a number of companies putting up their hands and saying -- I can't finance the debt anymore, so I would be interested in you buying me? Not quite. But it is an area that we're sensitive to. And it so happens that there's great companies with great capabilities in some of those regions.
- Analyst
And then a quick one on solar. Could you just speak to what wrinkles the bankruptcy filing of your partner in OSPV introduces into a process to try and sell your stake in OSPV?
- CEO
Sure. Without getting into the details, first of all, neither of those two things are show stoppers with respect to the bankruptcy issue. It adds uncertainty for prospective buyers. And then it requires them to perform additional elements of due diligence, which is not surprising given those circumstances. With respect to the permitting, again, without getting into the details, from a buyer perspective, it reduces visibility, or it can reduce visibility. And reduces the current business levels. But I think we are beyond the bottom of both of those issues. And it is unfortunate that it has caused a delay, but I don't expect that is going to cause a problem.
- Analyst
Okay. Thank you. That's all for me.
Operator
Mr. Anthony Caputo, there are no further questions at this time.
- CEO
Thank you very much. And thank you, everyone. Have a nice day.
Operator
Ladies and gentlemen, that does conclude the conference call for today. Thanks for your participation. You may now disconnect.