ATS Corp (ATS) 2013 Q2 法說會逐字稿

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  • Operator

  • 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 7th, 2012 at 10 a.m. Eastern Time. Following the presentation, we will conduct a question and answer session. (Operator Instructions)

  • I'd now like to turn the call over to Stewart McCuaig, Vice President and General Counsel of ATS.

  • Stewart McCuaig - 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' filings with Canadian provincial securities regulators. Now, it is my pleasure to turn the call over to Anthony.

  • Anthony Caputo - CEO

  • Good morning, ladies and gentlemen. I'm assuming you've seen our press release. Maria will review financial highlights in a few minutes.

  • During the second quarter we continued to make progress towards our strategic plan. We were awarded a 65 million Euro program to provide turnkey automation for a large life sciences project in Nigeria. We have entered into a definitive agreement to sell a number of our Solar assets, and we secured a CAD250 million banking facility, which provides us with improved terms and flexibility. In our core business revenues did not meet our expectations, despite this we continued to operate profitably and generated cash during the quarter.

  • Today I'd like to update you on our Q2 performance, conditions in the market and our outlook. I'll also update you on Solar and then make some summary comments.

  • In our core business second quarter revenues were 3% lower than last year and 7% lower than last quarter. This was largely due to two programs, representing approximately 10% of our backlog being put on hold for several months as those customers refine their product and engineering specifications. These programs accounted for approximately CAD8 million in revenues, delayed revenues, and have recently been restarted. Our operating margin was 10%, notwithstanding lower revenues. Overall I'm pleased with our operating performance.

  • Turning to bookings, in the second quarter we booked CAD112 million. This includes CAD12 million of advance payment to start work on a 65 million dollar Euro program which has been awarded and contracted. The balance of the program will proceed when financial close is achieved, which is expected April 2013. This program is an enterprise solution for which ATS will supply turnkey automation for the production of medical devices in a new manufacturing facility located in Nigeria. The facility will produce 850 million syringes and 150 million IV sets annually for the Nigerian and West African markets. It will augment an existing facility recognized by the World Health Organization as the only prequalified certified manufacturer of syringes in Nigeria and one of two in all of Africa.

  • ATS' scope is part of a larger 200 million Euro initiative. ATS is the prime contractor for the syringe, IV program, which involves five ATS Divisions and six subcontractors in Germany, Switzerland and Austria. The project is being sponsored by the River State Government in Nigeria. Export finance is being arranged through a syndicate of German banks and is guaranteed by German and Austrian export credit agencies.

  • The program is a result of our approach to market, which includes machines, programs, and enterprise solutions. For this and future solutions that require project finance we have chosen to take a conservative approach to recognizing bookings and have only recorded the advance payment. Accordingly, we will book the remaining value of the order when the project achieves financial close. Due to the country risks associated with this program we have implemented a number of incremental security and governance measures and arranged for advance payment terms.

  • Turning to our markets, overall, activity has softened relative to last quarter. Our funnel has experienced a modest decrease, but remains strong in absolute terms. By market life sciences activity and funnel remain robust. Transportation has weakened slightly, however, the funnel is large and we are continuing to pursue significant opportunities in both traditional and new technologies. In energy we are pursuing large opportunities in nuclear and oil and gas, while solar still remains weak. Consumer and parts of electronics remains soft, but largely untapped by ATS.

  • As I've indicated before, we 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 ATS and results in large program wins with variability in quarterly bookings. Over time I believe our revised approach to market will continue to serve us well.

  • In terms of outlook the state of the global economy remains uncertain. While North America is continuing to slowly recover, weakness continues in Europe and Asia. Recall that our business typically lags the macro economy due to the size and strategic nature of the programs we undertake. I have spoken of delays and some customers continue to exercise caution in light of economic uncertainty.

  • That said, we have a strong foundation, appropriate flexibility, a sound business strategy and the demonstrated ability to weather difficult market conditions. We also have a strong balance sheet and the ability to make strategic acquisition in distressed situations.

  • Turning to our strategy, we remain focused on our plan to grow, expand, and scale. This framework will allow us to broaden our portfolio, increase market share, and add new core capability. And as part of our growth strategy we secured a new CAD250 million credit facility.

  • Turning to Solar, Ontario's loss for the quarter was CAD1.8 million as sales continued to be negatively impacted by project development schedules. We have entered into a definitive agreement for the sale of four of our project assets owned by our 50% JV. The sale represents approximately 34 megawatts and is expected to close in early calendar 2013. The net proceeds to ATS are approximately CAD20 million.

  • We now have two Solar assets left, the remaining three projects and the manufacturing operation. I would discourage using the value received for the four projects as a proxy for the potential value of the remaining three. For obvious reasons we're not speaking to potential value of the remaining assets.

  • Overall, our goal is to separate the Solar business from ATS on a cash neutral basis. Based on the outcome of the Photowatt [trans-bankruptcy] process and the result of the sale of the first four Solar projects I am confident we will surpass the objective.

  • In summary, we have achieved a number of important milestones in support of our strategic plan. We have monetized Ontario Solar assets, we have a larger more flexible credit facility, and we achieved the significant enterprise win. Despite some general economic headwinds we have a strong operating and financial basis to pursue our strategic plan. Our [car] business has the demonstrated ability to engage customers on enterprise basis, select and integrate acquisitions, and remain resilient in the face of macroeconomic downturns. While we might face some bumps in the road, overall, we are focused on the next phase of our value creation strategy -- grow, expand, and scale.

  • At this point, I'd like to turn the call over to Maria.

  • Maria Perrella - CFO

  • Thank you, Anthony.

  • Our base business remains sound, with good backlog, strong margins, and advances in our approach to market. Our new CAD250 million next generation credit facility significantly increases our ability to grow, and the definitive agreement to divest four of the seven Solar projects owned through our 50% joint venture is an important step towards separating Solar.

  • This morning I will focus primarily on our ASG business and our balance sheet. I will also comment on Ontario Solar results. I'll start with our results from continuing operations.

  • Q2 revenues of CAD141.4 million decreased by 3% from last year. Normalized for foreign exchange translation, revenues were approximately the same as Q2 last year and down CAD11 million from Q1. The decrease is primarily attributable to two customer programs which were put on hold in the quarter. Lower Q2 bookings also negatively impacted Q2 revenues.

  • For Q3, although we do not provide guidance, I can provide the following data points. Revenues will be impacted by the mid Q3 restart of the delayed programs, which will be recognized over the next 12 to 16 months and lower Q2 bookings. As we have said, our average period of performance on programs and backlog is in the seven to nine month range.

  • Q2 bookings were CAD112 million. As Anthony noted, this includes the CAD12 million payment we received on the Nigerian order. Our approach for programs requiring project financing is they must reach financial close in order to be included in our bookings and backlog. Consistent with this, only the cash received has been recorded in Q2 bookings and backlog.

  • The balance of the program, which is approximately CAD70 million, will be booked when the program reaches financial close, which is expected in Q1 fiscal 2014. The Nigeria order has a period of performance of 18 months, with the majority of revenues to be recognized within the 12 months after financial close.

  • Backlog is CAD361 million, similar to last year's backlog.

  • Normalized gross margins over the last six quarters have been in the 25% to 27% range. Q2 gross margin of 26.7% was similar to Q1 gross margin of 26.4% and higher than last year's Q2 gross margin of 25.3%. We continue to work on our cost structure, program management, and supply chain, with the intent to improve margins going forward.

  • Q2 SG&A costs of CAD23.3 million was slightly lower than Q1 SG&A costs of CAD24 million. We have said that fiscal year '12 normalized average SG&A costs were in the CAD23 million to CAD24 million range. SG&A has been in the 15% to 16% of revenue range. Overall we expect the majority of our SG&A spend to be relatively flat in the long term.

  • Stock compensation expense of CAD611,000 came down from prior quarter's CADA million dollar range. The expected quarterly run rate for fiscal year '13 is approximately a CAD million per quarter, however, this could be impacted by our stock price and the revaluation of certain stock based compensation programs, which are driven off of our stock price. In Q2 the reduction is primarily due to the revaluation of deferred stock units.

  • Earnings from operations were 9.7% in Q2, as compared to 10% in Q1, and 9.1% in Q2 last year.

  • Turning to Solar, as a reminder, all Solar results are included in discontinued operations. In the second quarter Solar incurred a loss of CAD1.8 million, slightly lower than a Q1 loss of CAD2 million. Revenues in Q2 were low, at less than CAD1 million, again similar to Q1 activity. The five megawatt order received last quarter is expected to be delivered during the third fiscal quarter and will increase revenues and reduce losses.

  • On separation, the definitive agreement we reached to sell four of the seven projects owned through our 50% joint venture is expected to close in early calendar 2013. Net cash proceeds of approximately CAD20 million are expected to be received over the balance of calendar 2013, as the projects achieve certain milestones. No income statement impact has been recorded on the sale. The impact of the sale will be recorded when it closes in the fourth fiscal quarter.

  • We are continuing work to divest of the remaining Solar assets. Overall, our expectation is that total proceeds for all Ontario Solar assets will meet or exceed the aggregate book value. Notwithstanding, there may be timing differences depending on when transactions close.

  • Moving to the balance sheet, I'll review cash use in operations and working capital as a percentage of revenue. At the end of the second quarter our total cash position in continuing operations was CAD104.8 million, an increase of CAD21 million from Q1. Cash net of debt was CAD102.5 million. We will continue to see quarter-over-quarter fluctuations in working capital, as we have seen in the last three quarters, with the Q4 reduction in working capital of CAD12 million, Q1 increase of CAD19 million, and then Q2 reduction of CAD14 million.

  • The timing of investments in certain programs and receipt of cash for milestone achievements will not necessarily offset one another in the same period. Overall, our target remains to generate cash approximately equal to EBIT.

  • ASG working capital as a percentage of revenue of 13.3% was consistent with fiscal '12 levels of between 11% and 13%. We expect to continue to operate within the 10% to 15% range. 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.

  • Recently we established a new CAD250 million core credit facility with a syndicate of lenders. The facility will allow us to increase our leverage up to a maximum debt to EBITDA ratio of three to one based on the financial covenants. We do not anticipate operating at the limit of our covenants, however, to give you an idea of how much room this provides us based on our last 12 months' EBITDA our current borrowing capacity would be in excess of CAD210 million as of the end of Q2.

  • The new facility also provides a significant improvement in terms and conditions and management flexibility. With cash on hand of approximately CAD105 million and a credit facility of CAD250 million we have a strong financial base to support our growth strategies.

  • Turning to net earnings, in Q2 we generated earnings per share of CAD0.11 from continuing operations compared to CAD0.13 in Q1 and CAD0.11 in Q2 last year. Loss per share from discontinued operations was CAD0.02.

  • Total EPS has improved from a loss of CAD0.76 in Q2 fiscal '12 to earnings of CAD0.09 in Q2.

  • The effective tax rate for the quarter was 27%, similar to the Canadian effective tax rate of 27%. Year-to-date the effective tax rate of 24% is lower 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, despite the decline in revenues our margins remain strong. We've seen softening in some markets impacting our bookings, however, we are continuing to have success with our approach to market, as evidenced by the significant Nigerian order. With our strong balance sheet, solid operational foundation, and our larger more flexible credit facility we are in an excellent position to support our growth strategy.

  • Now we'd like to open the call to your questions. Operator, could you please provide instructions to our listeners?

  • Operator

  • Thank you. (Operator Instructions)

  • And our first question comes from the line of Mr. Mark Neville from Scotiabank. Please go ahead.

  • Mark Neville - Analyst

  • Hi, good morning.

  • Anthony Caputo - CEO

  • Good morning.

  • Mark Neville - Analyst

  • We saw the decline in revenues in the quarter, but the gross margins came in strong. So assuming no delays I mean wouldn't we have seen similar percentage gross margins and similar SG&A? Just trying to get a feel for the operating leverage of the business and just looking out to potential growth and acquisitions.

  • Maria Perrella - CFO

  • If our revenues would have been higher, yes, I believe we would have seen similar gross margins and the SG&A would have been at the same absolute dollar rate that we have shown.

  • Mark Neville - Analyst

  • Okay, and just to discuss I guess on the gross margins, can you just -- the amount of third-party content in the quarter, was there any variability there? And just on the revenues did you say -- I mean could the business, you know, theoretically do CAD160 million per quarter now just with the headcounts depending on the order flow, I guess?

  • Maria Perrella - CFO

  • On the third-party content it was about 45% for the quarter, which is similar to the last few quarters. And with the headcount that we have we could do CAD160 million. And just keep in mind that our headcount is somewhat flexible in that we have our fulltime employees and we also have some subcontractors to handle the flex or the increases and decreases.

  • Mark Neville - Analyst

  • Okay, so you said you could do the CAD160 million. I mean any idea how much you could handle?

  • Anthony Caputo - CEO

  • Our operations operate essentially on one shift, and some operate on a second shift. So capacity is not the issue.

  • Mark Neville - Analyst

  • Okay, great. Thanks a lot.

  • Operator

  • And our next question comes from the line of Mr. Justin Wolfe from JMP Securities. Please go ahead.

  • Justin Wolfe - Analyst

  • Good morning. My question is on the transportation contract that was delayed. Are you anticipating the delivery to occur in the second half of the fiscal year?

  • Maria Perrella - CFO

  • There were two contracts that were delayed, and we said that delivery would take place over the next 12 to 14 months. Therefore, we would see revenues over the next 12 to 14 months, and we would see a ramp and we would go through the design, engineering phase, and then higher revenues would come in when we get into the assembly and build phase of the programs.

  • Justin Wolfe - Analyst

  • Thank you. And just, secondly, on the Nigerian contract, you had mentioned that 200 million Euro number in your commentary. I kind of missed what the context was. Is the 65 million that you were awarded part of like a first phase, if you will, of a larger scope type project or did I misinterpret that?

  • Anthony Caputo - CEO

  • Yes, no, I should have been clearer. So the 200 million includes a number of operations, including ours, so we make the machines that make the syringes and the IV sets, and the entire program also includes a sterilization, and filling and dispensing facility for IV bags, as well as a number of other operations. So the whole thing is 200 million. Our part of the 200 million is the 65 million Euros.

  • Justin Wolfe - Analyst

  • Got it. And given that you're a prime contractor how does -- how should we think of margins in that type of business? Is it kind of the lower end, the 10% to 15% targeted range or how should we be thinking about that?

  • Anthony Caputo - CEO

  • I think we've said a couple of times that before corporate costs we work to get our Divisions to 15%, and how do we do that? If we have flawless program execution, i.e., we don't have [red] programs then we get to 10%, and the other 5% comes from a combination of supply chain management and what we've termed our approach to market which is machines and programs and enterprise solutions. So as programs get more enterprisey then we have an opportunity, an opportunity to increase margins as long as our program execution remains flawless.

  • Justin Wolfe - Analyst

  • Great. Thank you very much.

  • Operator

  • And our next question comes from the line of Cherilyn Radbourne from TD Securities. Please go ahead.

  • Cherilyn Radbourne - Analyst

  • Thanks very much, and good morning. Not surprisingly, I do want to get into a bit of a conversation about just customer caution and, Anthony, was hoping that you could give us a bit of a flavor as to how that differs by geography and by end market? And if you think the U.S. election last night was sort of any part of it?

  • Anthony Caputo - CEO

  • I'll answer everything except the U.S. election, how's that? So in terms of what we're seeing, the delay in the revenue that I talked about in the quarter is specific to two programs. And those two particular customers delayed because they were considering changing the use of the equipment, and that took a considerable amount of time and back and forth and reengineering at the early phases. So that's kind of item one.

  • Item two, in terms of what we're seeing geographically, I can't really point to geographical strength and weakness in any particular area. In terms of what are we seeing by segment or customers, it's basically what I've said, life sciences continues as it was, we've seen some softening in transportation, consumer was weak and is weak, and energy, solar is down, and we are trying to advance our position on nuclear and the oil and gas side.

  • So in terms of absolute terms our funnel is strong and we are in a good place. Now does the world become worse or does the world become better? We are based on what we're seeing nowhere near where we were a couple of years ago, so then we had an absent funnel, today we have a very strong funnel. Today we have a little uncertainty, and then two years ago we had paralysis. Two years ago we had small programs, today we have big programs. Two years ago or three years ago we had backlog, today we have two times backlog. Today we have no solar drain, we have the ability to make acquisitions in distress situations.

  • So I don't really know. We don't really know where it's headed, but I think we're in a very strong position and, hopefully, it's a bump in the road as opposed to two bumps in the road or three or four.

  • Cherilyn Radbourne - Analyst

  • Okay, that's helpful. I don't know if I missed it, but I didn't see a comment in the MD&A just around your acquisition pipeline and how you're progressing on that part of the strategy. Is there any update you can give?

  • Anthony Caputo - CEO

  • So our positions are, as I've said before, a key element of our strategy, we've identified a number of opportunities which are primary lends us capability, so we're looking for capabilities which we currently don't have. We have an active dialogue with investment banks, so that potentially they can bring us their opportunities.

  • I would say that over the last several months we have been in contact with a number of potential targets, and on two of them we did a fairly deep dive into a sale process, but for a variety of reasons decided not to proceed. So I think we're on it and acquisitions will come when they come, and as you know they're binary, we don't have one and then we have one.

  • Cherilyn Radbourne - Analyst

  • Okay, one last quick one, if I may? Just curious whether the customer that's associated with the Nigerian project is sort of an existing or a repeat customer of yours?

  • Anthony Caputo - CEO

  • It is not a repeat customer of ours, but that same customer a number of years ago built a smaller version of the type of plant that we were contracted to build this time around.

  • Cherilyn Radbourne - Analyst

  • Okay. Thank you, that's all for me.

  • Operator

  • Our next question comes from the line of Daniel Kim from Paradigm Capital. Please go ahead.

  • Daniel Kim - Analyst

  • Hi, good morning. My question centers largely on the transport sector. First question, Anthony, could you provide us any type of clarity in terms of geographic split, specifically within transport?

  • Anthony Caputo - CEO

  • Maria will check my numbers, but I would say it's 60% North America, 40% Europe.

  • Maria Perrella - CFO

  • I would -- maybe 10% of the North America is Asia, 5% to 10%.

  • Anthony Caputo - CEO

  • But those Asia customers would be North American customers with operations in Asia.

  • Daniel Kim - Analyst

  • Did that change materially with the acquisition of ATW a couple of years back?

  • Anthony Caputo - CEO

  • ATW brought two or three things. It brought an opportunity or opportunistic situations. It brought a number of OEM customers, which ATS did not have, and it brought new capabilities, specifically in terms of leak tests and exposure to heavier equipment, in addition to cars.

  • The way that we've integrated ATW is such that we use them in many cases, or that Division in many cases, as the prime contractor to pursue our transportation opportunities. And that is a concept of operation choice in terms of how we choose to interact with the market. And so typically one of our offerings would have a prime contractor Division, which in the case of transportation high probability it could be ATW, and then it would have subcontractor Divisions, which include our own Divisions, as well as potentially other suppliers Divisions.

  • Daniel Kim - Analyst

  • Okay, great, that's helpful. Second question on the transport area, it's the first time we've ever heard of a delayed contract, so my first question would be can you give us any sense as to why this customer delayed? Do you see this as a potential red flag, so to speak, of any other potential delays within the broader industry? I know in the past you've talked about really the model changes driving the CapEx in the automotive market, go-to-market, both. If we look at what's going on in the sector it looks like CapEx, which has been quite robust in the automotive sector, is starting to decline but still quite strong. But if you have a longer term view that'd be helpful? Thank you.

  • Anthony Caputo - CEO

  • I'll try the specific answer, and then get to the longer term view question. The specific answer is that that particular customer contracted with us for -- those two particular customers contracted for equipment and then engaged in a process with us which resulted in changing what the equipment actually does. Now that in and of itself is not unusual. Typically when customers engage and they give us an order, and we engage upfront with engineering, sometimes the performance and function of the machine changes. In this particular case it changed a little more dramatically than it typically changes, number one. And, number two, because the contracts are relatively large that delay impacted us.

  • Now, the second part of your question -- why did that happen? Did it happen because the customer saw a reduction in market activity in one area and potentially an increase in another area? I don't know, it could be an isolated event or it could be bump one or bump two. I don't know the answer to that question. It's not unusual.

  • In terms of the macro trend, I mean I read what you read, and what we experience is a big funnel with customers engaging, with a little uncertainty and not paralysis, as I said before.

  • Daniel Kim - Analyst

  • Great. Thank you very much.

  • Operator

  • And our next question comes from the line of Mr. David Galison from CIBC World Markets. Please go ahead.

  • David Galison - Analyst

  • Hi, good morning, guys.

  • Anthony Caputo - CEO

  • Good morning.

  • David Galison - Analyst

  • So just to touch back on the project that was delayed, just a further question. Since it was delayed because of I'm assuming engineering changes or design changes, does that change the scope of your overall project with these two, did that increase it or decrease it, or how has it impacted the overall project?

  • Anthony Caputo - CEO

  • Ironically, after -- so it's two projects, but ironically after all the engineering and reengineering the projects almost reverted to what they originally were, which is very unfortunate. So the answer to your question is the scope did not materially change.

  • David Galison - Analyst

  • Then just so you had indicated that the delay impacted Q2 revenues by about CD8 million, did I understand that that CAD8 million will be -- would I expect the CAD8 million to be recognized, back on in Q3 or is that CAD8 million spread over the 12 to 14 months that was indicated?

  • Maria Perrella - CFO

  • The -- we talked about these two programs accounting for approximately CAD40 million of our backlog and that would be revenued over 12 to 14 months, and we said that the programs will restart or have restarted about now. Therefore, the CAD8 million will not impact the third quarter and you would have to take into consideration a ramp-up of the program.

  • David Galison - Analyst

  • And then just a final question on the new, the large project that you have, is there an opportunity to build off of this contract or is it more of a one-off type of a project?

  • Anthony Caputo - CEO

  • Well, it's consistent with our strategy, which is to build machines, build programs, and build enterprise solutions. And interestingly we have configured ourselves in a way that we can undertake a CAD100 million program, like this one, but break it down in a way that each of our Divisions aren't really doing anything which brings incremental risk.

  • So, if you will, we create a virtual prime contractor/program management company inside our own Company, and that company subcontracts to our Divisions. And in terms of what our Divisions see, one particular Division may see a program or they may see a series of machines. Another Division may see a machine.

  • So I would say that this is the result of something that we have been trying to get to for three years, and it's the first example of being able to do it, but each of the pieces are not foreign to us, only how to package the pieces is new.

  • David Galison - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions)

  • And our next question comes from the line of [Mr. Chris Bows] from Canaccord Genuity. Please go ahead.

  • Chris Bows - Analyst

  • Hi, good morning.

  • Anthony Caputo - CEO

  • Good morning.

  • Chris Bows - Analyst

  • I guess we were getting used to book-to-bills in excess of one, and I'm just wondering if you'd describe Q2 as normal lumpiness of, to borrow your words, enterprisey large contracts or do you think it's more reflective of a worsening outlook?

  • Anthony Caputo - CEO

  • Do you want to start? Well, we thought about whether to recognize the 112 or the 112 plus, the remainder of the big program, and it was a Management choice to deal with the booking the way we dealt with it as opposed to an accounting choice. So I would have preferred to have a number of 140 plus a Nigerian program, but on the other hand the Nigerian program, notwithstanding we chose to book it the way we chose to book it, in my view is as real as any other program or contract that we currently have. You want to add?

  • Maria Perrella - CFO

  • I think you've said it, but based on the nature of our programs and what we are pursuing, i.e., the enterprise-type solutions, we will going forward start to see this book-to-bill ratio below one and under one. Over the last six to eight quarters I think it's been above one, and this quarter, as you said, we're below one, and I don't know that it's indicative of the economy but definitely our approach is impacting that book-to-bill ratio.

  • Anthony Caputo - CEO

  • And we have worked or we have tried on these calls to communicate that it's not a simple model of input and output because the nature of the programs that we engage in have large engineering components, they're very variable by their nature. These are complex design, build type programs as opposed to receiving a CAD100 order which we can then accurately forecast what the revenue is going to be for that particular CAD100 order.

  • Chris Bows - Analyst

  • All right, fair enough. Do you think that this sort of stretching out of the backlog is going to maybe slow the margin growth or keep it sort of stable, the 10% EBIT range for the next little while before it improves or do you think you're where you should be?

  • Anthony Caputo - CEO

  • I'll start, so we've said that we get the Divisions to 15% in the manner that I spoke of before, so all the red programs and supply chain, and advance our approach to market. Then the Divisions get to 15% and the Corporation gets to 10%. And that's where we are. And that will fluctuate as a function of acquisitions because if we buy stuff and it is not at 15% then there's a little dip and then the little dip goes back up. That was the case in [Sertama] and that was the case in the integration of ATW.

  • So in terms of where do we go from here? If we make acquisitions and we fix them, we've said in the past that our Corporate structure and overheads and organization is sufficient to execute our strategy without significant or material incremental cost. If we get larger programs, larger programs are higher on the value chain from machines to programs to enterprise solutions, and we've already said that as we move up that ladder we've been able to demonstrate that our margin increases. And then as we grow organically and add acquisitions then we see our margins go up.

  • Now can we do better than 10%? Is the right margin 10 point something or nine point something? But the range that we're in is the range that we're in, we're constantly working on best practices, supply chain, improving our terms with our vendors, so we're working on the 10% and working on a strategy that we believe can bring us beyond that.

  • Chris Bows - Analyst

  • That's helpful. Thank you. And just a last one, if I could? On the delayed transportation contract, presumably there was some cost in the quarter, I'm wondering if you can talk about what, if any margin impacts the delay had in Q2?

  • Maria Perrella - CFO

  • There wouldn't have been any material costs that would have negatively impacted the margins. We would have done some engineering work, which we would have recorded as revenue and the corresponding profit on that, but the material and profit on that would not have been material to the quarter.

  • Chris Bows - Analyst

  • Okay, great. Thank you very much.

  • Operator

  • And our next question comes from the line of Justin Wolfe from JMP Securities. Please go ahead.

  • Justin Wolfe - Analyst

  • I still have a question on recurring service revenue. In the past you guys have talked about that being a part of or an area that you wanted to grow, can you give us a sense of how much of your current revenue is recurring service and of some of the recent contract wins are you seeing that number grow?

  • Anthony Caputo - CEO

  • So we have a strategy to increase our service revenue. Maria will correct me, but I think the answer to your question is we're just under 10%.

  • Maria Perrella - CFO

  • Correct.

  • Anthony Caputo - CEO

  • And that's too low relative to where we need to be. And so the definition of service is from the bottom up spares and then training and then installation and ramp, and embedding people and preventive maintenance, and designing machines so that they talk back, like your car talks back to you. And I would say that we are maybe one-third to halfway in terms of executing that strategy, and there we are not where we desire to be in terms of the size of our service business relative to our entire business.

  • Justin Wolfe - Analyst

  • Okay, and is this something that you feel you need to acquire a service type oriented business or is this all organic type of growth that you're looking?

  • Anthony Caputo - CEO

  • We have a broad terminology, which we call services, and that services capability could include things that we might buy. For instance, we might one day buy software capability which enables machines to more effectively communicate to the enterprise system or to communicate back to us as a factory backbone. But the type of service that we were talking about before, which is the spares and the training and the preventive maintenance and all that kind of activity is something that we plan to grow organically and we don't need to buy.

  • Justin Wolfe - Analyst

  • That's helpful. And just if I could, on consumer electronics, it's obviously a pretty small part of your business, how do you feel about this business longer term? Is it something attractive to you, and do you -- would you -- or would you prefer to focus on kind of your core transportation, healthcare markets? And is this something that you would need to acquire to grow?

  • Anthony Caputo - CEO

  • I would say that as a general market it's not highly attractive to us because it's been standardized and commoditized and there's a lot of standard equipment available, whether it be for semi or for electronics in general. Having said that, we have niche capability in areas working with glass inspection and micro assembly which those niches are very interesting, so electronics in general, not attractive, specific niches within electronics attractive, and relatively untapped by ATS.

  • Justin Wolfe - Analyst

  • Okay. Thank you.

  • Operator

  • (Operator Instructions)

  • And our next question comes from the line of Mr. Mark Whale from Cormark Securities. Please go ahead.

  • Mac Whale - Analyst

  • Hi, good morning. Anthony, just to follow-up on that Nigeria program, did you -- did ATS win all that it bid on in that program?

  • Anthony Caputo - CEO

  • ATS won more than what ATS was originally looking at, so this was a case that potentially started as a machine, that through our approach to market, quote, unquote, was moved to a program, was moved to an enterprise solution. So the answer to your question is we won what we wanted to win, but the answer to the question you didn't ask is it's an example of how we can turn an egg into a chicken.

  • Mac Whale - Analyst

  • Well, and that's why I was thinking when you look at the size, is it not in your sort of strategy to go after the 200? And I know you don't have sterilization and dispensing and that type of thing, but presumably you could acquire that and then go after the whole thing and get an even better margin for being the prime, prime contractor, so to speak?

  • Anthony Caputo - CEO

  • Saying it a different way, about half of the major subcontractors in our program are ATS Divisions and the other half are not ATS Divisions. So our concept is to configure ourselves in a way which gives us a multiplier affect in terms of what we bring to market. So we try and create an [opines] match between our Company and the customer, and then in terms of the delivery system we devise a concept of operation that brings to bear capabilities that we have and capabilities that we don't have.

  • So theoretically we could bid and win the CAD200 million program or CAD100 million or CAD300 million, so what's the limitation? The limitation is that we have to have enough credibility and, therefore, enough of the pieces ourselves in order to be able to deliver the entire solution. So that if our scope was only CAD3 million it would be difficult to credibly convince a customer that we can deliver CAD100 million, but other than that in terms of how we're organized, in terms of how we approach the market, in terms of our global strength, footprint, capability, technology, so that's what we're trying to do, what you just described.

  • Mac Whale - Analyst

  • Okay, so if your plan works well we should be seeing more of these types of things and bigger if you had it your way?

  • Anthony Caputo - CEO

  • Yes, what we're trying to do is A plus B, plus C, as opposed to one or the other. So we're trying to build machines, we're trying to build programs, and we're trying to build enterprise solutions. And enterprise solutions take a long time, this took a year-and-a-half. And enterprise solutions are relationships with customers. Programs are relationships with plant managers. Machines are relationships with purchasing departments and engineers.

  • Mac Whale - Analyst

  • And just in the way you're organized now, if you had not gotten this, would we have seen a big impact on your order book? In other words, does chasing a big program and not getting it would that be a headwind for your order bookings?

  • Anthony Caputo - CEO

  • That's a good question. So would the CAD112 million been CAD112 million if we didn't pursue Nigeria, if I understand your question?

  • Mac Whale - Analyst

  • Yes?

  • Anthony Caputo - CEO

  • I would say that big programs take big efforts, but it's not like a one-to-one correlation, you know, like we're going to go in the big program, therefore, we have zero bookings for a few quarters and then we win a big program. It's not like that, but it takes a considerable amount of resources.

  • Mac Whale - Analyst

  • Okay, and then just a follow-up, Maria, on the order delay. It sounds, as Anthony said, it ended up being basically what it was originally, but if you did work with the customer while they figured that out, is that in the contract, like or does that -- do you have to eat all that sort of pre-engineering, call it, or do you get paid for it, is it in excess? I'm just trying to figure out whether, how that type of delay impacts the economics?

  • Maria Perrella - CFO

  • Right. That type of work is in the contract. When we do the costing of the proposal we include this pre-engineering or engineering type work and, therefore, when we record this work we have revenue on it and margins, and the margins would be similar, or the margins that we bid on the program, therefore, no negative impact to our results.

  • Mac Whale - Analyst

  • Okay. Thanks a lot, that's all. Thank you.

  • Maria Perrella - CFO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Mr. Robert Caldwell from Macquairie. Please go ahead.

  • Robert Caldwell - Analyst

  • Hello, everyone, and congratulations on this significant Nigerian project. My question is might it have been of significant materiality to have announced during the quarter as opposed to this morning?

  • Anthony Caputo - CEO

  • No, I mean if that were the case then we would have announced it. We've spoken a number of times about machines to projects, to enterprise solutions.

  • Operator

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

  • Anthony Caputo - CEO

  • Thank you very much, everyone, and have a nice day.

  • Operator

  • Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.