ATS Corp (ATS) 2013 Q3 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen. Welcome to the ATS Automation third quarter conference call. I would like to remind you that this conference call is being recorded on February 6, 2013 at 10 AM Eastern Time. Following the presentation we will conduct a question-and-answer session. Instructions you will be provided at that time for you to queue up for questions. (Operator Instructions). I would now like to turn the conference over to Stewart McCuaig, Vice President, General Counsel of ATS. Please go ahead, sir.

  • Stewart McCuaig - VP, General Counsel

  • Thanks, operator, and good morning everyone. Your main hosts today are Anthony Caputo, Chief Executive Officer of ATS, and Maria Perilla, Chief Financial Officer.

  • Before we begin I'm 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's my pleasure to turn the call over to Anthony.

  • Anthony Caputo - 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 third quarter we continued to advance our value creation plan. We had strong bookings, revenues, EBITDA and cash. Strategically we strengthened our balance sheet with a new CAD250 million credit facility to support growth. We initiated work on our EUR65 million enterprise program for Nigeria, and we won a CAD40 million order for a second enterprise program for the life sciences market.

  • Today I would like to update you on our Q3 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 third quarter revenues were up 2% over Q2 and 3% lower than last year. Our operating margin was 9.5%, consistent with our normalized operating margin last year and down marginally from the second quarter. Overall I'm pleased with our operating performance.

  • Turning to bookings. In the second quarter we booked CAD173 million. Life sciences drove much of the growth, and transportation remained very strong. We initiated work on the Nigeria program, pursuant to the CAD12 million deposit we received last quarter.

  • As a reminder, Nigeria is a EUR65 million program awarded and contracted to ATS. This program is an enterprise solution for which ATS will supply turn-key automation for the production of medical devices in a new manufacturing facility located in my Nigeria. ATS is the prime contractor and delivery involves six external subcontractors and five ATS divisions. The balance of the program will be booked when financial close is achieved, which is on track to happen in the first quarter of fiscal 2014.

  • During the quarter we booked an orders for approximately CAD40 million with a highly recognizable North American life sciences market leader. This order represents phase one of a multi-year enterprise solution governed the by a memorandum of understanding and a master supply agreement. ATS is the prime and responsible for modeling, engineer, build, support and development of the next-generation system.

  • The manufacturing system was co-developed by ATS and the customer through a year long structured collaboration and incorporates a number of propriety ATS technologies. Future phases of the program are dependent on successful launch of thecustomer's product and market penetration.

  • Turning to our markets. Overall our funnel is robust and growing. By market, life sciences remains strong. We're seeing opportunities in both pharmaceuticals and medical devices, [for] machines, projects and enterprise solutions. Transportation is also strong.

  • The funnel is large, and we're continuing to pursue significant opportunities in both automotive and heavy industry for existing and new technologies. In energy we're pursuing large opportunities in nuclear and oil and gas, while solar still remains weak. Consumer and parts of electronics remain soft.

  • As I have indicated before, we continue to move towards value based enterprise programs where ATS provides enabling plant-wide solutions in addition to traditional machines. The benefit of this approach is increased predictability for our business, more strategic customer relationships, better program control and less sensitivity to market downturns. This approach is a key differentiator for ATS and is appreciated by our customers. We should expect large program wins with variability in quarterly bookings, which should dampen over time.

  • In terms of outlook, the state of the global economy remains unclear. While we're seeing encouraging signs in Asia, the North American recovery is slow and Europe remains weak. Recall that our business typically lags the macro economy due to the size and strategic nature of the programs we undertake. While we are seeing significant opportunities, our customers continue to be very deliberate with their investments.

  • That said we have a strong foundation, flexibility, a clear strategy and a demonstrated ability to weather difficult market conditions. We also have a strong balance sleet and the ability to make strategic acquisitions.

  • In terms of moving forward we remain focused on our plan to grow, expand in scale. Recall that grow means apply our approach to market to win orders related to machines, programs and enterprise solutions. Expand means expand our offering byadding services, core process technology, engineering, selected products and entering new markets. Scale means leveraging our demonstrated ability and using our resources to acquire additional capability. We have the organization and business process that facilitates the integration of new companies.

  • Turning to solar. Overall our objective was to separate solar on a cash neutral basis. As I previously reported, the separation of solar assets in France exceeded our expectations. In Ontario we have sold four of seven projects through our joint venture. The sale is subject to customary regulatory approvals, and the net proceeds to ATS are expected to be approximately CAD20 million cash.

  • We are continuing with the sale process of our manufacturing operation and the three remaining projects. We took a noncash impairment charge of approximately CAD20 million, which brings our carrying costs to approximately CAD8 million. Based on the outcome in France and the sale of the first four projects, I expect to surpass our stated solar separation objective.

  • In summary, I'm encouraged by the little of activity we're seeing in our markets, which combined with our backlog, will continue to serve us well. Our approach to market, which is moving from machines to programs to enterprise solutions, has traction and should continue to present new opportunities.

  • We have dealt with the addressable risks related to solar and can expect upside to our book value going forward. We're focused on our value creation strategy to grow, expand and scale. We have a strong operating and financial basis to pursue our strategic plan.

  • At this point I would like to turn the call over to Maria.

  • Maria Perrella - CFO

  • Thank you, Anthony. We have had another successful quarter. Withstrong bookings, our second highest backlog of CAD388 million, and continued strength in our life sciences and transportation segments, out base business performed to expectations. This morning I will focus on ASG and our balance sheet and also make a few comments on solar.

  • I'll start with our results from continuing operations. Q3 revenues of CAD144.2 million decreased by 3% from last year. Normalized for foreign exchange translation, revenues were approximately the same as Q3 last year and slightly higher than CAD141 million in Q2.

  • Last quarter I provided some information regarding two customer programs which were put on hold in Q2. As I said, these programs had an immaterial impact on revenues in this quarter, as they restarted mid Q3 and will be recognized over the next 12 to 16 months. Our average period of performance on programs and backlog at the end of Q3 is in the seven to nine month range.

  • Q3 bookings were CAD173 million. In the fiscal year we have recorded bookings of CAD168 million, CAD112 million and CAD173 million in Q1, Q2 and Q3 respectively. This speaks to our approach to market and resulting variability, which we are not concerned with.

  • In Q2 we spoke of the Nigerian program where we expect the customer to confirm the close of its financing structure in Q1 fiscal 2014. The expectation is to book the balance of the program at that time, which is approximately CAD70 million. Backlog has increased to CAD388 million, up from CAD361 million last quarter.

  • For margins, when comparing to prior year Q3, I will do so on a normalized basis, removing the two one time gains, the CAD3.7 million US R&D tax credits, and the CAD3 million gain on sale of buildings. Q3 gross margins were 24.5%, a slight drop from normalized gross margins, which have been in the 25% to 27% range in the last six quarters. The decrease in gross margins in Q3 was due to higher costs on certain programs over what was originally anticipated.

  • Incremental costs were incurred in Q3, and these programs are now closed. With these costs behind us, we continue to work on our costs structure, program management and supply chain with the intent to improve margins. Q3 SG&A costs of CAD20.7 million were approximately CAD2 million lower than prior quarter and the normalized run rate of CAD23 million to CAD24 million. With lower revenue, actions were taken Q3 to reduce spending in marketing, administration and people costs.

  • SG&A has been in 15% to 16% of revenue range, with Q3 at 14%. Overall we expect the majority of our SG&A spend to be relatively flat in the long-term. However, we expect there will be a notable M&A impact on SG&A spending when an acquisition is made.

  • Earnings from operations were 9.5% in Q3, compared to 9.8% in Q2 and 9.2% in Q3 last year. As we have said in the past, the noticeable margin increase will come from increased revenues, as synergies combined with similar SG&A base should increase margins.

  • Turning to solar. As a reminder, solar results are included in discontinued operations. We continue with the sale process of our Ontario solar assets. In Q3 we took the decision to separate the sale of the remaining projects from the manufacturing assets. Based on this decision, a noncash charge of CAD20 million was taken to write-down the manufacturing assets and inventories to their net realizable value.

  • In the third quarter solar incurred a loss of CAD21.7 million, which includes a loss from operations of CAD1.8 million. Revenues were low, at less than CAD1 million consistent, with recent quarters.

  • Moving to the balance sheet, I will review cash from operations and working capital as a percentage of revenue. At the end of the third quarter our total cash position in continuing was CAD109.6 million, compared to second quarter's CAD104.8 million. Cash net of debt was CAD108.3 million.

  • Overall our target remains to generate cash approximately equal to EBIT. We will continue to see quarter-over-quarter fluctuations in working capital. The timing of investments in certain programs and receipt of cash from milestone achievements will not necessarily offset one another in the same period.

  • ASG working capital as a percentage of revenue of 11.3%was consistent with fiscal 2012 levels of between 11% and 13%. We expect to continue to operate within the 10% to 15% range. With cash on hand of approximately CAD110 million, the new credit facility of CAD250 million, a strong financial base, and the strategy of employing moderate debt leverage, we have considerable flexibility to support our growth strategies

  • Turning to net earnings. In Q3 we generated earnings-per-share of CAD0.12 from continuing, compared to CAD0.11 in Q2 and CAD0.12 in Q3 last year, normalized for the two one-time items. Loss per share from discontinued was CAD0.24, compared to CAD0.02 prior quarter. On a Q3 year-to-date basis total EPS has improved from a loss of CAD0.71 in fiscal 2012 to earnings of CAD0.08 in fiscal 2013.

  • The effective tax rate for the quarter was 18%, lower than the Canadian effective tax rate of 27%. Year-to-date the effective tax rate of 22% is also lower. For both the quarter and year-to-date, the lower effective tax rate is due primarily to higher earnings in jurisdictions with lower tax rates and where under recognized deferred tax assets have been utilized to lower tax expenses.

  • In summary, our automation business is strong. Our funnel remains healthy, and our bookings reflect this. We have a historically high backlog, which is setting us up for fiscal 2014 organic growth. Finalization of the Nigerian order in Q1 and other potential enterprise programs, as Anthony described, will help further organic growth.

  • In addition, we will continue to pursue opportunities for growth through acquisitions, and we are in an excellent position to support our strategies. Now we would like to open the call to your questions. Operator, could you please provide instructions to our listeners. Thank you.

  • Operator

  • (Operator Instructions). And our first question comes from the line of Mark Neville from Scotiabank. Please go ahead, sir.

  • Mark Neville - Analyst

  • Hi. Good morning. While we're not currently seeing anything drastically different in the numbers, you're transitioning your business, you're advancing your approach to market, and you're now starting to secure these enterprise type orders. Can you talk a little bit just about how the transition is going internally? And secondly, maybe try to help us better understand how it may show up in the numbers later?

  • Anthony Caputo - CEO

  • So I'll speak to the first part and touch on the second part, and then Maria, if you want to touch on the second part as well. So what we tried to do is we used to bid one time machines where customers would come to us and say how much for this. And then we said, well, we need to do some bundling and take those machines and wrap them together and make a program. And then the next logical extension was to move from programs to enterprise solutions.

  • So the characteristics of and enterprise solution is that they're significant. It's a strategic relationship with the customer. We're bundling a number of services and offerings. It often involves a number of our divisions as well as other companies.

  • In terms of rationale, as I indicated, better visibility, better program control, much, much more strategic relationship. It's not your typical "respond to this RFP" type relationship. So where are we?

  • We talked about Nigeria, and that was our first enterprise program. And today, of course, I talked about a second one, which is pharma market leader whose name you would recognize. It's a new product launch in a space that they are in and they are dominant in. It is the first two lines of potentially more, and it is a very collaborative effort.

  • In terms of so what does it mean financially, recall that I talked about if we get program execution right, that gives us 10% before corporate costs, right? Everything before corporate costs. And then when we went from executing programs well to programs, we got to 15%. So the 5% comes from better control of the supply chain and bundling and so on and so forth.

  • So enterprise programs are the logical extension and the continuation of that type of activity. So that's where we are today.

  • Maria Perrella - CFO

  • And I would just add on the revenue side the profile of the program would impact our revenues, because it's significantly larger. And we have talked about the different phases of a program, which are engineering and design, and then assembly and build. And depending on when the third-party materials come in, that would significantly drive materials up at a certain point in time.

  • Mark Neville - Analyst

  • Okay. I guess just to follow-on that, at some point, as your bookings are much higher or just continue to come in very strong, do we see a step function in the revenues, or are we just -- am I thinking about it wrong?

  • Maria Perrella - CFO

  • If we look at what we have in our backlog right now, and let's assume that there are no more enterprise programs, which is not the case, we would see a step function because of what I just explained. So for example on the two enterprise programs -- the one that we have in backlog, the CAD40 million one, and Nigeria, which we expect to close in the next quarter -- the -- we would see -- or toward Q3 and Q4 of fiscal 2014 -- a significant step-up as the assembly and build happens and the material parts come in.

  • Mark Neville - Analyst

  • Good. That helps. Just one question on the M&A front. You have previously indicated that you're dedicating significant resources to due diligence. I was just wondering you'd comment on what you are experiencing and what you're seeing out there. Are valuation multiples higher than what you're comfortable with? Is there a lack of opportunities or sellers? Is there anything else make unexpected that you're coming up against?

  • Anthony Caputo - CEO

  • Valuations are not prohibitive. Last quarter I talked about the fact that we did a deep dive on two opportunities which we aborted, and one was a valuation issue, but that was just because other bidders were not being reasonable and it was a bid situation.

  • I would say that 75% of the things that we go after are not part of a process run by somebody. They are initiated by us. They are typically towards founder-owners, and the issues really there are estate planning issues and when the founders are ready to transition more than they are valuation type issues.

  • We are engaged in a number of discussions with a few companies as we speak. We have, as you said, significantly increased our efforts and activity, and I'm pretty confident that this is a robust component of our strategy.

  • Mark Neville - Analyst

  • Okay. So there's nothing really that's changed [over the last] -- okay. Thanks a lot.

  • Anthony Caputo - CEO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Mr. Justin Wu would from GMP Securities. Please go ahead, sir.

  • Justin Wu - Analyst

  • Good morning. My first question is on the transition, [just] a follow-up on it that. I'm assuming that you have a fair amount of engineering and upfront design costs related to [some -- as] you kind ever bid on these larger enterprise solutions. Is that -- [you guys] expense that I'm assuming, but do customers typically pay for that, or do you guys view that as kind of and upfront concession that you can make?

  • Maria Perrella - CFO

  • No, customersdo pay for that, and when we put together our costing, it's included in there. And we recognize revenue based on hours incurred, and the margin on that activity would be the same as the rest of the program. The rest the of the program including the materials and design build phases.

  • Anthony Caputo - CEO

  • I would add that the front-end effort in terms of SG&A to acquire an enterprise program is more significant than responding to and RFP, but you're already seeing those costs in our results. So there's no new incremental costs relative to what you're seeing. So sometimes it takes a year to win and enterprise program.

  • Justin Wu - Analyst

  • Okay. That's helpful. And just secondly on the M&A side, do you think you guys can transact within the next six to 12? And maybe if you can comment on -- I guess Europe is fairly weak economically. Is that a market that you guys are focusing on, given the large number of competitors or companies in that market?

  • Anthony Caputo - CEO

  • In reverse order, Europe is not only weak, but it is well one of the principal places to find the kind ever capability that we're looking for, so certainly we're there and we're active and engaged.

  • In terms of the first part of your question I don't want to put timing on acquisitions. I never have. They happen when they happen, and we're not going to go and spend the money just because we have it. We're fairly disciplined.

  • I don't think we're over disciplined in terms of looking for perfection, but at the same time our primary lens is capability. Does it give us a capability that we currently don't have. And then we look at a number of return parameters. And then we look at it within the context of the framework that I always describe, which is does it give us technology or market leadership, does it give us scale, or to your point potentially in Europe, is it opportunistic. And we continue to pursue [many] of those front, and it will happen, and they will happen as they happen.

  • Justin Wu - Analyst

  • Okay. Thanks very much.

  • Operator

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

  • Daniel Kim - Analyst

  • Morning. Thank you. I just wanted to get a little bit more clarity with regards to how this whole Nigerian contract is going to roll out. Maria, I believe you suggested that some of the equipment deliveries will begin in the third quarter. Could you give us a sense of how long this deployment will go on? Is it a one or two year installment type thing? And would we see kind of a linear build-out, or how should we take a look at this type of contract?

  • Maria Perrella - CFO

  • It wouldn't be a linear build-up. The contract, we would have the revenue benefit over approximately eight quarters, and we would see about 70% of that over three quarters. And depending on when the financial close happens, those three quarters would be in and around Q3, Q4 fiscal 2014 and Q1 fiscal 2015.

  • Daniel Kim - Analyst

  • Okay. Great. And how about -- and likewise on the CAD40 million contract announced in this press release, when can we expect deliveries on that win?

  • Maria Perrella - CFO

  • That one, most of the revenues would take place over approximately six quarters, and about 70% of those revenues we would recognize in the latter half of calendar 2013 and a little bit into calendar 2014.

  • Daniel Kim - Analyst

  • Great. And when we talk about enterprise wins, obviously, two nice wins in the life sciences division. Is there a dynamic at play here where by perhaps the product offering is more comprehensive, allowing you to secure enterprise wins in this vertical versus others? Or should we assume over time that we'll see more enterprise like wins in the other verticals as well?

  • Anthony Caputo - CEO

  • I think the segments that we've realized our wins in -- life sciences, pharma -- offer the highest probability to bundle things, and consumer I think is next. And transportation is probably least, in part because the typical transportation customer has a very significant in-house capability and typically manages and constructs his own enterprise system per se. Many other segments don't do that.

  • Daniel Kim - Analyst

  • Okay. And, Maria, you suggested as well gross margins should start to trend backup again. Are these large enterprise wins within the life science division helping you get there?

  • Maria Perrella - CFO

  • That's one item that can help us get there. I think in addition to that we said that in the quarter we had these costs overruns, and these programs are substantially complete, thereforewe went see the downward pressure going forward. And based on what we do have in our backlog, we do have some higher margin bid programs, and those things combined with help us get to the 10% or higher -- or sorry, the 25% or higher gross margins.

  • Daniel Kim - Analyst

  • Okay. And typically for these types of deployments, when it's enterprise wide, since it is a relatively new business to ATA, can you discuss if they're fixed price or are they costs plus? So in terms of assurity of margins that you expect, how probable is that in terms of how you see that going forward?

  • Anthony Caputo - CEO

  • Interestingly, it's not new to ATS in the sense of ATS always -- is very familiar with taking a specification and building a machine that conforms to that specification, and then standing behind it in terms of performance and warranty and so on and so forth. And enterprise system is actually less risk, because ATS does what ATS normally did, but the prime contractor is also ATS.

  • So that the specification and the customer, as far as the ATS divisions are concerned, is ATS itself. So a typical enterprise program would have a small program management group, which could be a special purpose vehicle, which is and ATS company. And it's engaging with the customer ona much, much more equitable basis than a customer that has a specification in his hand and then is actually beating up three suppliers in order to get the best price so to speak.

  • So from the typical ATS division's point of view, it's business as usual. From ATS as a whole point of view it's much, much more controlled, both in terms of purchasing power, more balanced relationship with the customer, and having the ability to deal with it's own divisions and third parties with a position of strength.

  • Daniel Kim - Analyst

  • Great, okay, so you will get a much better handle on costs, so the likelihood of running into problem contracts is significantly lessened over time you believe?

  • Anthony Caputo - CEO

  • I'm 99% sure.

  • Daniel Kim - Analyst

  • Okay. Great. And sorry, one last question just a point of clarity. Maria, you suggested the SG&A costs will likely be flat over time. It was 14% this quarter. Guidance previously was 15% to 16%. Are you suggesting 14% flat going into 2014?

  • Maria Perrella - CFO

  • No. I will use absolute dollars. I think that makes more sense. So I would expect a run rate of between CAD23 million to CAD24 million a quarter, and that could change based on M&A spending if or when the acquisition activity takes place.

  • Daniel Kim - Analyst

  • Oh, I see. So it was just a one time reduction in Q3 with regards to certain marketing activities there.

  • Maria Perrella - CFO

  • Correct.

  • Daniel Kim - Analyst

  • Okay. Thank you very much.

  • Maria Perrella - CFO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Mr. David Tyerman from Canaccord Genuity. Please go ahead, sir.

  • David Tyerman - Analyst

  • Yes. Good morning. I just wanted to go over the enterprise solution and just regular margins versus the SG&A. You specified the margins in the corporate business -- or sorry, in the business excluding enterprise solutions could be in the 10% range for the basic business and up to 15% if it was all enterprise solutions or had a good chunk of it, and all of that's before corporate costs. I guess what I'm trying to ask is, if we think about it from a gross margin standpoint -- is that the way to think about this, that your enterprise solutions would generates a higher gross margin, your base business would generate a lower gross margin, and then we should subtract off CAD23 million or CAD24 million of SG&A to end up at that 10% to 15% range?

  • Anthony Caputo - CEO

  • So I think what we said is 10% to 15% after corporate costs, and we're at 10% or close to 10%. So how do we get from 10% to 15%? And in order to explain that we've talked about how we got to 10%, which is fixing program control and moving from machines to programs.

  • So now we're at the 10%-ish. How do we get to 15%? We get to 15% by moving towards enterprise programs and then of course acquisitions. So we said that our intention is to keep the corporate costs the same -- quote, unquote -- not with standing our desire and plan to buy and integrate companies.

  • So if we can buy a company that's,, whatever, CAD200 million and get it to 15% before corporate costs, then you can do the math and get the impact on ATS's margin after corporate costs. You want to add something?

  • Maria Perrella - CFO

  • I would just add that, David, I guess the way you've laid it out is correct, and on the CAD23 million to CAD24 million, that SG&A, that would be relatively flat, and we would get the benefit of a higher margin with the higher revenues that come from the acquisitions.

  • David Tyerman - Analyst

  • Right. Okay. So if I'm thinking in terms of gross margins, do you -- can you provide any insight into what you would think the gross margins would be normalized for basic business and then what they would be for enterprise solutions?

  • Maria Perrella - CFO

  • Base business, as we have seen, our gross margins have been in the 24% to 26% range.

  • David Tyerman - Analyst

  • Okay.

  • Maria Perrella - CFO

  • And then as we've said, there's -- there could be about 5% -- up to 5% improvement there, but that would take a number of periods or years to get there, and the improvements would come from the enterprise programs. And also growing the top line, because there's a portion of our costs that are fixed. Although a larger part or variable.

  • David Tyerman - Analyst

  • Okay. That's really helpful. Okay. And my second question is just on the demand outlook. If I look at year-to-date orders, you're actually down 9% year-over-year, but I guess you could say, well, the Nigerian happened, so if you add that in, you're up 5%. So we're plus or minus kind of zero year-over-year, depending how you define it. Is there something that would -- and that's going to drive your future sales obviously. Is there something that's going to step this up, or is sales growth in the future right now -- based on current trends, it looks like it's not all that strong. So I was just trying to understand what you're seeing out there.

  • Anthony Caputo - CEO

  • Well, in terms of -- I will speak to bookings, and then we can jump to sales. So in terms of bookings, I described what we're seeing, and in terms of absolute numbers I think what's going to drive it is these bigger programs that we're going after. So we are working to maintain our traditional historical type base in activity, and we're trying to punctuate, accent that with a significant program wins.

  • Then we're trying to increase the frequency of program wins so that they become more normal, and that's what I mean about variability that should dampen over time. If we were successful in winning instead of two enterprise systems a year, three or four enterprise systems a year, then the sawtooth would become like a square wave, and it would be more linear and normal.

  • David Tyerman - Analyst

  • Right. So you think that the enterprise solutions in particular could help you step up the pace of order flow relative to what we have seen, say, this year versus last year?

  • Anthony Caputo - CEO

  • Again, the nature of the program -- yes is the answer to your question. The nature of the programs we're going after, though, are -- in addition to the base, are big and binary. EUR65 million is a big thing, butit takes a year, and we either win it at the end or we don't. And when we win it, then we book whatever the numbers are, CAD70 million when the rest happens, which is very -- which is fairly significant.

  • David Tyerman - Analyst

  • Right. Okay. Thank you.

  • Operator

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

  • David Galison - Analyst

  • Hi. Good morning everyone.

  • Maria Perrella - CFO

  • Good morning.

  • David Galison - Analyst

  • So the first question is just on the CAD40 million project award. Is this with a new customer that I guess could potentially turn into more business based on how the relationship evolves? And then the second part of that is just how many phases of the current award do you expect, and would they be in similar size to the phase one.

  • Anthony Caputo - CEO

  • The answer to the first question is it's not a new customer. It's a new product for this customer in a space that the customer is already a market leader. So it's a market leader.

  • In terms of what does the CAD40 million mean, what it is is the first two lines of the rollout of equipment to produce this new product. And what does it mean in the future potentially is a function of the successful product launch and the traction that the customer's product will get in the market. And ATS is the customer's partner, supplier for all future lines, and so the potential is significantly bigger than the CAD40 million, but subject to successful product launch and the market accepting -- taking the product.

  • David Galison - Analyst

  • Thank you very much. And then the next question is on the -- just looking at your backlog and the lower tax rate, how do you think about -- how should we think about the -- I guess the tax rate going forward here over the next few quarters? Is it still going to be low, or do you expect it to start picking up?

  • Maria Perrella - CFO

  • It's always hard to answer, and there's a lot of uncertainty for the reasons we've talked about, and that's the different tax rates for each of our tax jurisdictions as well as the recognized and unrecognized losses that we have in those jurisdictions. We -- generally I say we expect to be around the Canadian effective tax rate of 27%.

  • However, in the last couple of quarters we've had income -- or more income in those areas where we have under recognized losses, and we have used those, therefore, to reduce the effective tax rates. That could happen going forward, but I would say just for planning or modeling purposes I would use a rate that's similar to our year-to-date rate.

  • David Galison - Analyst

  • The 22% are rate?

  • Maria Perrella - CFO

  • 22% to 24%.

  • David Galison - Analyst

  • Okay. And then just a final one, just on the delayed projects. So you're going to start picking up some of the delays in Q4. Will it be meaningful -- a meaningful improvement, or do you expect it to be back end weighted?

  • Maria Perrella - CFO

  • It would be back end weighted. The Q4 impact would not be material.

  • David Galison - Analyst

  • Thank you very much.

  • Maria Perrella - CFO

  • You're welcome.

  • Operator

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

  • Cherilyn Radbourne - Analyst

  • Thanks very much. Good morning. If I look at the text of your outlook commentary, it's essentially unchanged versus what you provided last quarter so, Anthony, I just wondered if you could comment on whether that's consistent with your view of the state of world based on your customer dialogues.

  • Anthony Caputo - CEO

  • Hi. It is. I think last quarter I talked about a bump in the road, and this quarter that bump is no longer there. And I talked about the funnel, I talked about the activity. Sure, I think there's pluses and minuses that we're looking all the globally, and we do see delays in projects and customers being particular about their CapEx spending.

  • On the other hand, we have very significant backlog, we have very strong funnel and bid activity. We're obviously successful in winning enterprise system type programs, so we hope for the best and plan for the worst.

  • Cherilyn Radbourne - Analyst

  • Okay. I wanted to just ask a question about the gross margin in the quarter and the costs overruns that you mentioned. Can you just give us a bit of detail on exactly what the source of that was and whether you're confident that that's and isolated issue?

  • Anthony Caputo - CEO

  • Maybe I'll start. So, I mean, we bid stuff at a certain costs assumption, and typically we do better than what we bid, and in the quarter we didn't and we did a little worse. I don't -- it's not a trend, and we are estimating every day capital projects in the CAD1 million range that have never been created or invented before, so I think our track record is pretty good. Did you want to add anything?

  • Maria Perrella - CFO

  • With these programs, they were of a good size, in the CAD10 million range or so. And they were -- we -- in Q3 we got to a point where we were nearing completion, and that's where we recognized -- realized that there were some issues, and we had to spend more labor hours and material costs. The good news is that they are substantially done, so going forward we don't expect to incur these types of costs, although as we've always said there's -- sometimes we have misses and -- but we also have upside to our programs, and we expect that the two will offset one another.

  • Cherilyn Radbourne - Analyst

  • Okay. Helpful. I was just looking for some comfort there, and I think that's two for me.

  • Operator

  • Our next question comes from the line of Mr. MacMurray Whalefrom Cormark. Please go ahead.

  • MacMurray Whale - Analyst

  • Hi. Anthony, when you look at these big enterprise programs, is there -- it takes a long time to put them together and there's some proprietary technology. Does that limit your ability to go to the competitors of that customer? And do you factor that into your strategy in who you want to go to and who you might give up, so to speak?

  • Anthony Caputo - CEO

  • It's interesting. In sort of a previous life my experience was competitors work together all the time, and my initial life at ATS that wasn't the case. To answer your question, we have not only the opportunity, but in all probability in both cases we will be working with competitors, quote, unquote. But keep in mind that at the enterprise level there really isn't another competitor that's competing for the enterprise solution.

  • So by definition, the definition of competitor changes as we climb up the enterprise value chain. So by the time we win a Nigeria or and ABC program, the suppliers that used to supply to the competitor are -- to the customer are fair game in terms of us integrating them into our offering, and we do make [versus] buys in that regard for major components of every program that we win.

  • MacMurray Whale - Analyst

  • Okay. So I guess in other words, if they are -- the customer's product is really differentiated by some feature in that product, and it's manufacturing is less important from a competitive point of view? Is that fair? And so like you can go out to other people and offer up what you have kind of created in this one project? Is true?

  • Anthony Caputo - CEO

  • I would say that the customer's product is differentiated in the manner you spoke of, but I would also say that our enterprise solution is equally differentiated. Then within the differentiated solution there's stuff that we can buy from others, including competitors.

  • MacMurray Whale - Analyst

  • Okay. I see. Okay. And I guess maybe that was -- my focus was really just more on this shift. Like it seems -- would you characterize these two wins as -- like if you go back a couple years ago and you started on this whole initiative, is it turning out to be the way you envisioned it to be? Is it better, is it worse? I'm wondering as you gets some successes how you're going to kind of tweak that program going forward, and is there any change in your expectations of how great an opportunity there is?

  • Anthony Caputo - CEO

  • Just two points on the answer. The first point is that what we're trying to do is we're trying to sell machines and projects and enterprise solutions, as opposed to just enterprise solutions. In terms of so how is it going, it is going how we expected, with the exception that we lost like a year and a half of our lives a couple years ago reacting to the macro world economy. Nobody really want the to talk about enterprise systems at that time.

  • So we're getting traction, and the customers really like it, and why wouldn't they? It's like us getting to the and designing a house, where I'm the general contractor and the architect, and you're the people who live in the house. You get what you want, we get what we want.

  • MacMurray Whale - Analyst

  • And just a last issue around -- I think, Maria, you were talking about the costs overruns. As you discussed it, it sounded a lot like the way you -- ATS used to be, which was a cost-plus bid, and then the costs would come in too high. How does it differ? It seems to be an issue that used to happen a lot before. It doesn't happen so often any more, but how -- can you -- is there a difference from what used to go on in terms of missing on the margin of a product -- or on a project?

  • Anthony Caputo - CEO

  • Yes. We used to miss by 10%, and in the quarter we only missed by 0.5%Other than that it's the same, and it's not cost-plus, right?It's like it's supposed to costs CAD100, and the before is actually it costs us whatever, CAD600, and in the quarter it's supposed to costs a CAD100 and it costs us a CAD105 or something.

  • MacMurray Whale - Analyst

  • Okay. Okay. That makes sense. That's all I have. Thanks.

  • Operator

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

  • Mark Neville - Analyst

  • Hi. I just had a follow-up on the SG&A. Maria, when you spoke about it, you spoke the in the absolute dollar terms. You spoke in the range of CAD23 million to CAD24 million. I'm just curious as to how much revenues can you handle with that level of SG&A?

  • Maria Perrella - CFO

  • We could -- and this is really ballparking. We could handle revenues of I would say CAD160 million to CAD180 million, and then over and above that if we acquire something, then that would have it's own SG&A. And, however, the corporate portion of this -- and we've said corporate is in the I think CAD4 million to CAD5 million a quarter range -- or CAD5 million a quarter range. That part would stay the same.

  • Mark Neville - Analyst

  • Perfect. Thank you very much.

  • Maria Perrella - CFO

  • You're welcome.

  • Operator

  • And our next question comes from the line of Mr. David Tyerman from Canaccord Genuity. Please go ahead, sir.

  • David Tyerman - Analyst

  • Yes. I just wanted to follow up on that, too. So that's CAD160 million to CAD180 million is per quarter I assume.

  • Maria Perrella - CFO

  • Yes.

  • David Tyerman - Analyst

  • And then you would expect that to rise proportionate to any increases in sales over that level? With the exception of the corporate piece?

  • Maria Perrella - CFO

  • Yes, thatwould be a good estimate to use.

  • David Tyerman - Analyst

  • Okay. Fair enough. That's -- and I understand it's a ballpark only.

  • Other question I had was on solar. I think you have seven -- I know you have CAD7.3 million of net assets on the balance sheet at this point. When you actually sell the four [ground mount] facilities, I'm assuming a bunch of that comes off and CAD20 million of cash comes on. Is that correct, and then can you give us an idea roughly of how much of gain you're going to record there?

  • Anthony Caputo - CEO

  • Just on the first part. So we sold four projects, and those four projects are closing pursuant to normal core stuff. And the proceeds for those, which is CAD20 million, half is expected fiscal Q1 and the other half fiscal Q3. And then on the accounting --

  • Maria Perrella - CFO

  • On the accounting we have the net book value of the assets of, as you said, around CAD7.5 million. Andjust really in rough terms, half of that is related to the projects and half to the manufacturing assets. And from that then you can determine the gain on the projects, CAD20 million, and then about CAD3.5 million on the book value of related to those projects. So that would get us a gain of CAD16 million to CAD17 million.

  • David Tyerman - Analyst

  • Okay. So half of the half is what that is related to -- isrelated to the four projects? Or the CAD7.3 million or CAD7.5 million roughly is split half and half between the manufacturing and the projects.

  • Maria Perrella - CFO

  • Yes.

  • David Tyerman - Analyst

  • You're only going to sell half the projects or a little bit more than half?

  • Maria Perrella - CFO

  • We're going to sell --

  • David Tyerman - Analyst

  • Four of seven.

  • Maria Perrella - CFO

  • Four of the seven, yes.

  • Anthony Caputo - CEO

  • We've sold four of the seven, subject to regulatory ABC. And we are in the process of selling the other three, whichwe have separated from the manufacturing assets. So we're trying to sell the three and separately the manufacturing assets.

  • David Tyerman - Analyst

  • Right. Right. And presumably you got -- you're obviously going to get cash for both of those, at least hopefully so.

  • Maria Perrella - CFO

  • Yes.

  • David Tyerman - Analyst

  • Yes. Okay. Fair enough. And then the last question I had was, Anthony, you mentioned on last that you have return parameters. Can you provide any insight into the kind of return parameters that you think about when you're thinking about these projects? Potential acquisitions?

  • Anthony Caputo - CEO

  • Yes. Without getting too specific, the primary lens is the filter at the that I talked about, which is market technology, leadership, scale or opportunity. The secondary lens is does it give us a capability that we don't have, so that when we are approaching a customer, let's say on an enterprise basis, do we have another component of capability that the ATS prime contractor part can use to bring to the table?

  • Then on a return basis we look at it on cash on cash return basis, as a private investor would. And then we look at the public company stuff, which is it needs to be accretive to EPS, it needs to fit into our strategy, we need to be able to clearly communicate it, et cetera, et cetera.

  • David Tyerman - Analyst

  • And by cash on cash, do you have a threshold that you use, or --

  • Anthony Caputo - CEO

  • Well, we -- yes, we do. Not that I want to get into, but we look at cash return as well as public company stuff.

  • David Tyerman - Analyst

  • Okay. Thank you.

  • Operator

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

  • Cherilyn Radbourne - Analyst

  • Just one last one for me. So I think this about the strategy that a been pursuing, one of the other aspects that we haven't talked a lot about recently has been building up the back end product support business as opposed to installation business. So I just wonder if you could comment with the two enterprise solutions that you've booked, or in fact in general, you've been making progress on that front as well?

  • Anthony Caputo - CEO

  • I would say that we have made progress. We need to make more progress. And the enterprise solutions pull a lot of services because when you have something in the CAD100 million or CAD40 million range, it's a very significant investment on the part of our customer. Therefore, the customer is more receptive to buying services to make sure that it operates in a manner that it should so he can get his return on capital invested.

  • I think where we need to get better relative to our own plan is our more traditional customers. Although we had very little services, now we have --

  • Maria Perrella - CFO

  • About 10% of our revenues for services.

  • Anthony Caputo - CEO

  • But it should be more.

  • Cherilyn Radbourne - Analyst

  • Okay. That's helpful. Thank you.

  • Operator

  • There are no further questions at this time. I would now turn the conference back over to Mr. Anthony Caputo.

  • Anthony Caputo - CEO

  • Thank you very much everyone. Have a nice day.

  • Operator

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