ATS Corp (ATS) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation second quarter conference call. I would like to remind you that this call is being recorded on November 5, 2014, at 10 a.m. Eastern Time. Following the presentation, we will conduct a question and answer session. (Operator Instructions).

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

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

Before we begin, I'm required to provided 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 the conclusion, forecast, or projections in the forward-looking information.

Certain material factors or assumptions are implied in drawing a conclusion or making a forecasted 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 forecasted projection as reflected in the forward-looking information, are contained in ATS's filings with Canadian provincial securities regulators.

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

Good morning, ladies and gentlemen. I assume you have seen our press release. Maria will review financial highlights in a few minutes.

In the second quarter, bookings, revenue, and margins were strong and we continue to make progress with our value creation plan. We completed the acquisition of the process automation business of the M&W Group, which will be called Process Automation Solutions, or PA.

Today, I will update you on our Q2 performance, conditions in the market, the integration of PA, and M&A activity. I will then make some summary comments.

Q2 bookings were CAD216 million, which included CAD19 million from PA for one month. Excluding PA, bookings were CAD197 million, which was significantly higher than Q1. As I have indicated, we expect variability in our quarterly bookings due to the types of programs we pursue and win. Over time, and with the addition of more follow-on and service related revenues, the volatility should dampen.

On enterprise programs, no change with Nigeria during the quarter. Our customer expects financial close in the short-term and we believe bridge financing will occur before that happens.

On our CAD40 million enterprise program for North American life sciences customer, we have delivered the first line and the second line is on track to be shipped in the coming weeks. In Q2, we received an order for a third line, valued at approximately CAD20 million. And, after the quarter, we received an order for our fourth line. This program is very illustrative of our strategy to pursue enterprise programs and improve the quality of our backlog.

Q2 consolidated EBITDA margin, excluding acquisition costs, was 14%, as we continue to strengthen our operations through program and supply chain management and cost control. Our backlog grew to a record 561 million. Excluding PA, backlog was CAD434 million. We are pleased with the quantity of our backlog.

And, as I have indicated, we are also pleased with the quality of our backlog. By quality, I mean our backlog has improvement improved in terms of diversification of markets, diversification of offering, and in terms of strategic importance to our customers. By segment, 42% is now life sciences; 37% transportation; 21% consumer products and energy.

By offering, our product approximately 25% to 30% is related to engineering and after sales services that are somewhat decoupled from capital cycles. And, finally, like our North American enterprise program, our backlog increasingly includes orders that have a relationship with other orders and/or a link to potential future orders.

Turning to our markets, funnel and proposal activity remain healthy and we continue to see considerable activity across all markets. In life sciences, we have a number of new and follow-on opportunities in both medical devices and pharma. And, in transportation, we have opportunities in both conventional and new technologies.

In terms of outlook, our competitive position is strong. However, the global economy remains uncertain and customers continue to exercise caution with their capital investments.

Turning to PA, PA is a highly strategic addition that expands ATS's markets, customer penetration, capability, and geography, and provides a significant platform to drive organic growth. We completed the acquisition of PA at the end of August and integration is underway. The administrative aspects of the combination should be largely complete by the end of this calendar year.

As I mentioned when we announced the acquisition, I expect the process of getting to know each other will take a few months. After that, I expect we will begin to capitalize on synergy potential.

PA has a strong management team and highly skilled employees. ATS's global presence has expanded by 51 locations and 1000 employees, mostly engineers, in close proximity to customers with real-time visibility into their automation needs, as well as exposure to O&M funding. Generally speaking, 1/3 of the time PA engages with customers before the traditional ATS by providing analysis and developing standards, concepts, and specifications. 1/3 of the time, PA engages with customers after the traditional ATS by providing program management, qualification, and equipment monitoring. And, 1/3 of the time, PA does what the traditional ATS does, but directly on the customers' factory floor and often at a total system level, which might include a machine built by ATS.

Similar to ATS, approximately half of PA's cost of sales are related to third-party costs. Of the third-party costs, half relate to materials which are candidates for supply chain synergies with the rest of ATS. From a revenue standpoint, both PA and ATS have opportunities to engage their respective customers on a more comprehensive and global basis. Early revenue synergy opportunities look very promising as ATS and PA capture teams are working together to develop offerings that will better serve our customers and further differentiate us from others.

By way of example, in life sciences, serialization, which is product tracking and tracing to avoid drug counterfeits, is a significant opportunity where ATS and PA can deliver turnkey end to end solutions that combine equipment, systems, software, and program management integration. This type of comprehensive solution is not currently available in the marketplace, but demand is growing due to compliance requirements. These requirements will impact of the industry and many existing ATS customers in short order.

Another example, for an ATS life sciences customer, PA and ATS are working together on a proposal for an end to end manufacturing solution that will include traditional ATS product assembly, inspection and packaging systems, alongside PA's MES and SCADA and ERP interface capabilities. This would result in an integrated factory for a market leader that ATS does significant business with currently.

And, in the consumer products segment, an existing and global ATS customer is integrating three packaging lines and requires on-site integration of multiple machines into one automated and optimized manufacturing line. This project involves line scheduling, production, monitoring, reporting, and support, which is in the sweet spot of PA's skill set. As I said, we are in the early stages of integration, but I am encouraged by the collaboration and the number of opportunities that are being developed.

Our M&A efforts also remain active as we seek to acquire capability that we deem to be strategic. We are comfortable with paying fair prices for quality companies or opportunistic prices for troubled ones. Both create value. We have a solid balance sheet with significant capacity and the ability to generate strong cash flows to quickly delever.

As I have said previously, we target companies based on their ability to bring market or technology leadership, scale, or opportunity. Our definition of automation includes machines, systems, products, and services. Our intention is to continue to make acquisitions of desired capability, a significant component of our value creation strategy.

In summary, our second-quarter operating performance was strong and market activity is robust. Strategically, the addition of PA is highly complementary and a significant addition that will strengthen our organic growth platform. I expect that we will begin to see front end synergies over the next several quarters.

Organically, our Q2 bookings were strong and we have a significant funnel. We continue to have success with our enterprise programs and we finished the quarter with record backlog. From an M&A perspective, we are engaged and remain focused on this key element of our strategy.

Overall, our vision is to create a best-in-class global company that delivers enabling manufacturing solutions including machines, systems, enterprise solutions and services to global leaders in the markets we serve. Our markets include mission-critical aspects of life sciences, transportation, energy, and consumer products, and now also include biotech, chemicals, food, and oil and gas. We have become a significant company and we will continue to execute on our value creation plan.

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

Thank you, Anthony. ATS had strong operating result in Q2 fiscal 2015, which included PA for one month. As Anthony has said, PA is a highly strategic addition to ATS. It has solid operating performance, generates excellent cash flows, is accretive, and provides the opportunity to generate significant revenue synergies.

This morning, I will start with the accounting impacts of the PA acquisition. I will then move to ASG and our balance sheet. I will also make a few comments on solar.

PA's purchase price was CAD353 million. Based on the current purchase price allocation, which is subject to finalization, intangibles of approximately CAD100 million are expected to be amortized over approximately 10 years. In addition to this, acquired backlog intangible assets of 13 million will be amortized within the next year.

For the next two to three quarters, we expect amortization from PA to be approximately CAD7 million per quarter and then decrease to approximately CAD2.5 million per quarter, depending on foreign exchange rates. Amortization expenses are included in our SG&A line and account for most of the increase in SG&A as a percentage of revenue this Q2 versus last year.

Looking at the acquisition from an operating perspective, during September, PA generated CAD19 million of bookings for the four-week period in Q2 and ended September with a closing backlog of CAD127 million. In July, we had previously stated that PA's May backlog was EUR120 million. The reduction is due to differences in accounting treatment or percentage of completion accounting, and time and material projects. If the same definition were applied in both periods, PA backlog would be essentially the same.

In Q2, PA generated results in line with our expectations, adding revenues of CAD20.5 million and EBITDA of CAD2.4 million or 12%.

Now, I will move to results from continuing operations. As a reminder, Q2 last year did not include IWK. Q2 revenues were CAD207 million including IWK and PA, compared to CAD155 million last year prior to the addition of IWK and PA. The CAD52 million year-over-year revenue increase is primarily due to IWK of CAD36 million and the addition of one month of PA of 21 million.

Without PA, Q2 revenues of CAD187 million were slightly lower than Q1 revenues of CAD191 million, primarily due to low Q1 bookings.

Q2 bookings including PA were CAD216 million. Q2 bookings, excluding PA, improved to CAD197 million compared to CAD110 million in Q2 last year and CAD160 million in Q1. Bookings in our base business increased 56% over last year. We have said our bookings are lumpy and expect variances quarter over quarter. The addition of PA will help to smooth our bookings profile as PA has a large number of smaller dollar programs, which are routinely booked.

With IWK and primarily PA, approximately 25% of total ATS bookings will have the smoother profile. Q2 closing backlog increased to CAD561 million or CAD434 million, excluding PA. Q1 closing backlog was CAD425 million. The conversion of our backlog into quarterly revenue in the last year has ranged from 35% to 45%. With the addition of IWK and PA, the conversion is moving towards 40% to 45%, providing for faster backlog to revenue conversion as the backlog for these businesses includes lower average dollar programs and more services, which have a shorter revenue cycle.

In addition to this conversion, approximately 20% to 25% of PA's business consists of contracts which are booked and revenued in the same period. PA also improved the makeup of our backlog with a higher proportion of service work, exposure to O&M budgets, and therefore, more independence from a capital cycle.

PA's gross margin and SG&A as a percentage of revenue are both lower than ATS's, with overall similar strong EBITDA margins. At PA, salespeople are also engineers embedded in programs on-site at the customers' location and these costs are included in cost of sales. This impacts gross margins. However, the offset is lower SG&A as a percentage of revenue.

ATS's consolidated gross margin in Q2 was 27%, consistent with prior quarters' gross margins, which were in the 26% to 28% range. Q2 last year was 25.8%. The addition of IWK, strong program management, and our continuous review of our cost structure, have resulted in margin improvements compared to the same quarter last year.

SG&A costs were CAD43 million compared to CAD23 million in Q2, fiscal 2014. The increase is due to the addition of IWK of CAD8 million; PA for CAD4 million; and nonrecurring acquisition-related costs for CAD7 million. Our normalized SG&A run rate is expected to be in the range of CAD45 million and will be impacted by acquisition-specific costs and foreign exchange.

This quarter, stock compensation was a recovery of CAD1.2 million, rather than prior quarters, which was an expense in the range of CAD1.5 million to CAD2.6 million. Based on our current outstanding awards, each CAD1 increase in stock price increases stock compensation expense by approximately CAD1 million per quarter.

EBITDA, excluding acquisition-related costs and stock compensation, was 13.8% this quarter compared to 13.6% in Q2 last year, and 13.8% in Q1. Earnings from operations margins, or EBIT margins, are impacted by items not considered to be indicative of the business's ongoing operating performance. Specifically, Q2 of this year now includes significant non-cash amortization of IWK and PA intangible assets, which account for approximately 2% of revenues.

Last quarter, we introduced adjusted EBIT, a non-IFRS measure. Adjusted EBIT, excludes amortization expenses of acquisition-related intangible assets, acquisition-related transaction costs, restructuring charges, and certain other adjustments which are non-cash and/or nonrecurring in nature and, therefore, not considered to be indicative of the ongoing operating performance of the business. Adjusted EBIT was 13% this quarter compared to 10.5% in Q2 last year, and 11% in Q1.

Before moving to the balance sheet, a few comments on solar. Subsequent to quarter end, we received net proceeds of CAD5 million as four of the projects sold reached commercial operation. This resulted in a Q2 gain of CAD7 million with cash to be recorded in Q3. Remaining proceeds are expected to be received this fiscal year.

Moving to the balance sheet, I will review cash and working capital as a percentage of revenue. The acquisition of PA was funded by our CAD750 million credit facility, of which CAD353 million was used. The credit facility was upsized from the CAD600 million I previously spoke of, due to oversubscribed syndication and the resulting incremental capacity it affords us.

At the end of Q2, ATS has a CAD256 million net debt position as compared to CAD75 million net cash last quarter. As we have said, we are comfortable using debt to fund strategic acquisitions, which temporarily increase leverage above our target range of up to three times. At the end of Q2, leverage is approximately 2.9 times EBITDA. Both PA and ATS have strong cash generation, which will be used to reduce debt.

In Q2, we generated approximately CAD17 million in cash from operations as compared to Q1 when we used cash of approximately CAD8 million. Working capital as a percentage of revenue was 16.1% compared to last year Q2 of 15.5%.

Turning to profitability, last quarter we introduced adjusted earnings per share, along with adjusted EBIT, both non-IFRS measures. Adjusted EPS excludes items noted earlier in defining adjusted EBIT. On an adjusted basis, Q2 EPS from continuing operations was CAD0.19 per share compared to CAD0.14 per share in Q2 last year, and CAD0.15 per share in Q1.

The increase in Q2 adjusted EPS versus Q1 last quarter is from the addition of PA and stock comp revaluation. In Q2, earnings per share of CAD0.08 from continuing operations include non-cash amortization of intangibles and increased acquisition-related costs and compares to CAD0.12 last year. Discontinued operations EPS was CAD0.08 this quarter, reflecting gains recorded related to the finalization of the sale of our solar assets compared to CAD0.03 last year Q2.

The effective tax rate for the quarter was 37% and cash taxes were 54% of the income tax expense. There will be variability when there are higher earnings in jurisdictions with higher or lower tax rates and where unrecognized deferred tax assets can be utilized to lower tax expense.

In summary, Q2 performance was strong for both the base business and one month of PA. We are pleased with the acquisition of PA and the additional contribution it is expected to make. We are focused on our growth strategy, both organically and through acquisition. We have both the foundation and resources to grow.

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

(Operator Instructions) Cheryl Radbourne, TD Securities.

Wanted to start by asking the question on the service business. You just made a couple of acquisitions that do interesting things for you. IWK was primarily post-automation and then PA was is kind of pre and post. Anthony, can you just talk in broad terms about how you expect all of those pieces to come together?

Hi Cheryl. So, you said it exactly right, with one modification, which is PA is pre, post and also during or the middle, in other words the same kind of activity that ATS does, but, as I mentioned, on the customer shop floor.

So the idea behind the whole services strategy is to connect us with our customers throughout the entire value chain from the beginning, the middle, and the end, and then back around, to decouple us somewhat from the capital cycle because a lot of the services is not directly tied to CapEx spending, but it is also tied to the O&M side of the business. And, number three, to give us a real time insight into what I call an existing world of automation, which is a world that ATS never traditionally participated in.

Traditionally, ATS would get involved when a customer had a new product that was never invented before, and then ATS would invent the machine to make that product. So that is our overall strategy. We are pleased with the engineering services side at this point, and we intend to grow it.

But our current size and capability and the after sales side is not up to our objectives yet and our intention is to grow that as I said a couple of calls ago, essentially taking the IWK model. And now that we have these additional 50 offices around the world, we can use those 50 offices to embed after sales support service people to support ATS machines as well as other people's machines.

That's helpful. And then, I hate to ask a modeling question. I don't usually, but it has been a little bit more challenging recently. So Maria, you indicated that CAD45 million was not a bad run rate for SG&A. Presumably, that rolls off a little bit once we stop doing the amortization of PA's backlog.

That is correct. So that would be the run rate for the next three quarters or so, and then it would drop by about 5 million so we would have a run rate of about CAD40 million. And that is because of the lower amortization on the intangibles.

Okay, perfect, that's my two. Thank you.

Justin Wu, GMP Securities.

Just in terms of the -- if you could remind us what percentage of PA's revenues are derived from what you would consider to be kind of O&M as opposed to CapEx type spending.

Management's estimate is in the range of 60%.

60% O&M. Okay. And, overall, in terms of -- Maria, can you update us on what service revenues were in the quarter? And -- I think you mentioned in your backlog that service and engineering now represents 25% of your backlog. Is that correct?

Yes, so that is correct. Our services revenue are about CAD38 million. That is what we are reporting in our income statement. And when we will have a full quarter of PA, services as a percentage of our total revenues will be 35%. So that includes the services, sales, parts, and ATS, IWK's portion, and then PA's portion, which is increasing it from where we were at which, was about 15%.

15% to 35%.

That is correct.

Wow, okay. And if I could just ask lastly, in terms of the enterprise solutions contract, I guess you got the orders for line 3 and line 4. What is the timing of those deliveries?

They are about nine months or so.

So the line 3 was -- fell into this quarter bookings or I guess Q2 bookings and line 3 goes into Q3 bookings.

Line 4.

Sorry. Line 4 goes into Q3 bookings.

Correct.

(Operator Instructions) Mark Neville, Scotiabank.

I just want to make sure I understand the revenue guidance that you are giving now. So it is 40% to 45% of backlog in the coming quarter. And then the 20%, 25% of the PA revenues that get booked and revenue in the same quarter, is that incremental to the 40%, 45%?

That is right. That is incremental.

Okay. Okay. So the big jump in services revenue this quarter, and that was PA, correct; the CAD20 million from PA, give or take?

That is right. And you can see it versus last year. That increase is PA.

Okay.

Or versus last quarter, you would see that as PA.

Right. Right. Okay. The CAD20 million PA revenue in the quarter, I mean, I realize it is only one month. But, I guess, just doing the math, it would seem, if there is no seasonality, it would be a flat year-over-year revenue number? So is that right, I guess, one? And then is that times 12 type number? Or how should we expect some ramping in the coming quarters?

In terms of increase or organic growth, we have talked about organic growth and we expect that.

Yes. I can touch on organic growth. So the way I look at it is, over the last several years, ATS -- the old ATS compound annual growth rate, excluding impacts of FX and acquisitions and all that stuff, is about 4.5%. PA, historically, has been more than two times that. So just by bringing them together, then I would expect that our organic growth rate is going to be more than the 4.5%, obviously.

But the real reason why we bought PA is for those revenue synergies. And I talked about the basis for those, which is they have embedded people. They participate in the O&M. They participate at the front end, at the back and also the middle. Together, we are turnkey. They have a max strategy and the rest of ATS can fill the holes of their max strategy.

And ATS can offer more comprehensive enterprise programs and pull PA in. And then I gave three examples that are pretty indicative of what is naturally going on between our companies as we speak. So that is how I look at organic growth.

Okay. Maybe one more, then. You did, I think, 14% or 14.5% adjusted EBITDA margin in the quarter. I believe you were talking previously 12% to 13%. I don't believe PA is going to be dilutive to margins. You also have a growing services business. So is there any reason why margins would come down that much more why we shouldn't expect maybe further improvement there?

Mark, the 14%, or number that you just said, includes stock compensation expense, which in Q2 was a recovery. So typically, we have expense of between CAD1.5 million and CAD2.5 million a quarter and we had a pickup of CAD1.1 million. So that is driving that variance. Therefore, our guidance that we have given or the range of 12% to 13% with a normalized stock comp expense is where we continue to expect to be.

And did you give that? I thought -- I wasn't sure if you said earlier on the call what the normalized margin would have been with stock comp. I mean, I could do the math, but did you mention it earlier?

I didn't mention it. I provided a number without and compared it quarter over quarter. And, just from memory, I believe Q2 this year versus Q1, without stock comp, margins are about the same.

Okay. Okay. But I guess going forward, we should think, again, with PA sort of in the fold, you have a growing services business, there should be room, obviously, for more improvement there, correct, from current levels?

Well, we are always trying to improve our margins, right. Even on the base business, we went from -- I will get the numbers wrong, but 25% to 28% over about a year or so. And I talked about there are some supply chain synergies with PA because 50% of their cost of sales is third-party and 50% of that, like I said in the script, is our candidates for supply chain synergies.

And we are always trying to get better with program management, and from time to time we take the opportunity to do some small restructurings to realign global capacity and everything. So we are definitely not trying to get worse with margins.

Robert Caldwell, Richardson GMP.

Congratulations on a very heartening quarter. Anthony, perhaps you could afford a little more color on M&A activity. Wondering if you have come close on any transactions that you have passed on, whether you are fairly advanced perhaps on a transaction and might conclude either before calendar year-end or in the first quarter.

Just by way of backdrop, we are looking for desired capability. And the way we determine what that is, is we look at our customer's value chain. And then for the industries that we want to participate in, we say what capability is desirable that we can add to our capability in order to enhance our offering and basically mirror our global customers in terms of the requirements that they might have.

And then, for each one of those areas, we say, well, do we buy it, do we make it, or do we align with somebody. Where we would decide to buy it, we go out and we engage with a number of companies that are in that business.

And as it turns out, and I am sure you're well aware, it takes a while to develop those relationships. And sometimes it moves quickly, sometimes it moves slow, sometimes it goes on hold. Sometimes there is a founder situation with an estate planning issue and then something that was dead that comes to life, et cetera, et cetera.

So I would say that, in any one quarter, we are engaged and some things become more probable and some things become less probable. Overall, what I would say is that we started -- we made a couple of acquisitions and the rate of our acquisitions has accelerated for a couple of reasons. Number one, because we have a very good M&A team; number two, because we have credibility; and number three, because we have presence.

So we are recognized, I think, by our customers and by the companies that we approach as being good candidates for an acquirer. We can put up people and companies that we have acquired who speak highly of being part of the ATS family. We are a great public company. So I would say that our M&A activity shouldn't get slower and that is the way I would leave it.

That is very helpful. Thank you, Anthony.

(Operator Instructions) Mac Weill, Cormark Securities.

I just wanted to follow that up with maybe a discussion about the competitive landscape. As you are doing these -- making these acquisitions and you are integrating them, it seems like it is going well.

When you go to your global customers, how -- I'm just trying to get an idea of what their expectation from you is now. Do they still want you to have a bigger presence? Do they want you to be a larger part of their business? Are they just pleased with the changes that you are making in general? I'm just trying to get idea of maybe what your competitors and your customers are thinking about these changes.

So, just in general terms, the way we describe ourselves, of course, is that the world has engineering companies and the world has product companies. And our aspiration is to be a best-in-class, global systems integration company, if I can put it that way. And in that world, I think we are way up there in terms of scope, capability, size, presence, all of those things.

Our divisions are capability based, so what we are trying to do is we are trying to acquire capability that we feel our customers need. Now, there's two ways that we can get to the customer. The first one is if the customer connects the dots. So a global customer that connects the dots and says, I am rolling out this particular product or platform and I want the same system in country A, B, or C, and I want it to comply to the local standards and there is obvious reasons for doing that.

In some cases, the customers are not connected. Then we have the opportunity to connect the dots ourselves. So we might be engaged with a division of a customer in country A, and a division of the same customer in country B. And we connect the dots and we say, hey, if you were to bring these two systems or products or machines together, here would be the benefits to you.

We have only seen receptivity. We have seen no pushback from customers saying, this is not what I want, because after all, it is exactly what they are doing. And you will understand the term impedance match. We are trying to create an impedance match or a parallel capability to what their demands are in their marketplace.

And so when you look at that, where do you think -- in the grand scheme of things, if you were to project this out, sometime in the future, where you want ATS to be? My sense is it is still really early days. Like in terms of where you want to position the Company relative to those -- relative to sort of your biggest global customers, is that the right view to have?

The right view to have is that our desire is to create a best-in-class by having, whether we buy it or whether we grow it over whether we ally, capability that we deem to be strategic. A number of times I have shown a diagram that shows the industry structure. And when we started, when we -- now, the collateral effect of acquiring this capability is this capability is that we become bigger.

So in terms of size, I have often shown a diagram which shows industry structure. When we started, we were a fingernail. Now, we are a CAD2 coin. And our aspiration is to be bigger than that.

Okay. And then, in terms of the competitive landscape, have you seen any -- there is a lot of talk out of Europe about how -- about the difficulties that are being faced there. Do you see a shift at all in the opportunities? Is it Europe still a focus for you in terms of the M&A or is there a bigger stress there than, say, in the US? Or have there been any shifts in the last, say, six months or quarter, in terms of your focus geographically?

No. Our focus is where the companies were born. So they happen to be born in Germany or Austria or Italy or places like that, and some in the US. And in terms of the stress situations, we have not seen any material change in the last six months or a year.

Justin Wu, GMP Securities.

Maria, I sent in a question on the tax situation. A few quarters ago, you guys had talked about some German tax assets that you would be able to utilize with the acquisition of IWK and such. And that you are expecting a much lower cash tax rate than the nominal tax rate that you put on your P&L.

I was wondering -- I guess we didn't quite see that this quarter or any kind of reversal on the cash flow statement. Or in last quarter, in fact, so I was wondering if you can give us some color on how we should think about that tax for the cash tax rate.

For the next few quarters, I would look at it as approximately 50% of the income tax expense. And that has to do with a lot of our expenses. So the amortization of intangibles are deductible on the income statement, but they are not deductible. And we get the income tax expense on that.

But, for cash tax purposes, they are not deductible. So we are getting a bit of a mismatch. And, as I said before, some of that amortization expense will drop off and we would see a bit of an adjustment on our cash tax rate.

Mark Neville, Scotiabank.

I just want to follow-up on some of Mac's questions. I sort of understand -- I hope I understand how PA is living inside their customer's facilities can benefit you and how you can drive synergies there. But, I presume that you would have a whole customer list or a whole bunch of customers that PA might not know or may not be dealing with. So is there sort of a way to introduce them, for lack of better words, to sort of get that embeddedness that maybe you didn't have before?

Yes. Absolutely. So there is a couple of ways. And just in terms of customers, many of our customers are the same customers. But we never meet because we have never met in the market with PA because we don't compete with them. They are just in a different place on the value chain and they are at a different level in the factory, if I can put it that way.

And in terms of how do we, ATS, as the lead, integrate PA, there is three ways. The first one is when we make an offering, and it is our desire anyway to make enterprise offerings, we can say, well, not only can we build a machine or two machines or three machines, but now we can do all of the upfront work. And then we can integrate all those machines with other people's machines, and then we can make them talk to each other and we connect them to the enterprise system.

And not only that, after that we can actually monitor it and make sure that the line is performing at an optimized level. And not only that, then we can embed people inside the factory from a support point of view. And then, not only that, now we have embedded people and we can potentially come with an unsolicited solution when the customer has another problem. So that is the first way to embed them.

The second way to embed them is to communicate to our customers that we have this capability and that this capability lives in PA. But now it also lives in ATS and we have many, many customers that we have excellent relationships with that we are well down the road from building machines to building programs and talking about enterprise solutions. So it is an easy introduction/enhancement of what we are offering.

And the third way is, we have a number of customers where, in fact, ATS has embedded people. And those embedded people, which tend to be after sales support people, now have the opportunity also to raise an opportunity, which could pull in PA.

Okay. And so do you have a ballpark sort of number of the customer overlap? Is it 50%?

I will guess it is about 50%.

(Operator Instructions) Mr. Caputo, there are no further questions at this time. I will turn the call back to you.

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

Ladies and gentlemen, thank you for your participation. This concludes today's conference call and you may now disconnect.