ATS Corp (ATS) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the ATS Automation third-quarter conference call.

I would like to remind you that this call is being recorded on February the 3rd, 2016 at 10 a.m.

Eastern Time.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions.

(Operator Instructions)

I'd 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 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.

Good morning, ladies and gentlemen.

I assume you've seen our press release.

Maria will review financial highlights in a few minutes.

In the third quarter, market conditions challenged the front end of our business, with some customers delaying significant investment decisions.

Notwithstanding that, bookings were CAD228 million, and proposal activity, revenue, and margins were strong.

Today, I'll update you on our performance, after-sales service, M&A, and conditions in the market.

I'll then make some summary comments.

Starting with Q3, as I indicated, bookings were CAD228 million.

We have had a number of customer delays relating to large opportunities which have added to our normal quarterly volatility.

Of note, if we look at the average size of our last three orders over the past five quarters, this last Q3 was CAD11 million, Q2 CAD11 million, Q1 CAD8 million, Q4 CAD25 million, and Q3 last year CAD17 million.

Despite this, our overall funnel remains strong and proposal activity robust.

We have several large proposals pending, and subject to customer decisions on these opportunities, I'm optimistic that we will return to a more normal large-program booking rate.

Our ending backlog was CAD546 million, down 9% from a year ago.

The quality of our backlog is strong, both in terms of strategic importance to our customers and in terms of diversification.

As I've indicated before, our backlog includes a growing number of programs that have a relationship with other orders and/or a link to potential future orders.

Q3 revenues were CAD275 million, and adjusted earnings margin, excluding restructuring costs and amortization of intangibles, was 12%.

From an operations perspective, we are pleased with the third-quarter performance.

We have continued to make good progress in closing off the programs discussed last quarter and some lower as-bid margin programs.

We remain focused on improving our program management, enhancing the utilization of our global footprint, and improving our cost structure.

On PA, as I've said previously, PA is a highly strategic addition that expands ATS's markets, customer penetration, capability, geography, and provides a significant platform to drive organic growth.

PA continues to perform to our pre-synergy expectations.

The degree of collaboration is high, and we remain focused on capitalizing on the sales synergy potential of the combined businesses.

As we typically do, and especially given the lower booking run rate, we continue to adjust our global capacity and incurred restructuring costs of approximately CAD3.4 million, with a projected 12-month payback.

We initiated the closure of a small plant in India, completed the previously announced closure of a manufacturing facility on the US West Coast, and sold the building.

The gain on the building sale offset the restructuring charges.

We expect to continue to adjust our global capacity in the fourth quarter, which I expect will result in restructuring charges of approximately CAD2 million.

Moving to after-sales service, as I've noted, our after-sales service offering provides a meaningful organic growth opportunity that we intend to exploit on a proactive and reactive basis beyond its current percentage of sales.

We have a standard product offering which includes spares, maintenance, training and upgrades, and channels to take our offering to existing and new customers, including ATS's installed base, new agreement sales, and strategic customer relationships.

Our after-sales service organization, which now includes corporate-level leadership, approximately 90 full-time employees, and 75 existing ATS locations to deliver, from is advancing as planned.

We have been engaged in a number of customer site assessments and delivered comprehensive service proposals which incorporate spares, maintenance, embedded resources, and remote support.

We have a number of long-term service contracts in place with more under consideration by our customers.

Customer receptivity has been very positive, and we will continue to focus on this growing aspect of our business.

On M&A, our efforts remain active as we seek to acquire capability that we deem to be strategic and at the appropriate price.

We will continue to make acquisitions of desired capability a significant component of our value creation plan.

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.

We have a strong balance sheet with significant borrowing capacity and the ability to generate good cash flows to quickly deliver.

We remain active in this regard, and I will continue to update you as things develop.

Turning to our markets, our funnel remains significant despite some customer delays relating to large programs.

We are continuing to build our funnel, including a number of synergistic opportunities between PA and ATS.

As I've noted previously, 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 full-on and service-related revenues, the volatility should dampen as we continue to trend in the right direction.

In terms of outlook, our competitive position is strong.

However, the global economy remains uncertain, and customers are exercising additional caution with their capital investments.

Going forward, our lower backlog will present some challenges for operations.

But as I noted, we will continue to take necessary actions.

In summary, our third-quarter performance reflected our strong operating foundation.

Customer delays relating to a number of large programs has challenged the front end of our business.

But as I noted, funnel and proposal activity are strong.

Overall, our vision is to be a best-in-class global company that delivers enabling manufacturing solutions to our global customers.

Our markets include mission-critical aspects of life sciences, transportation, energy, consumer products, and also now biotech chemicals, food, and oil and gas.

ATS is a significant company, and management is committed to executing our value creation plan.

At this point, I'd like to turn it over to Maria.

Thank you, Anthony.

In Q3, our key financial metrics, revenue, adjusted earnings, and cash generation improved both over Q3 last year and Q2 this year.

Bookings continue to be soft.

Regarding the balance sheet, working capital as a percentage of revenues did not decrease to targeted levels.

However, progress was made.

We continue to address the right programs with some work remaining.

As a reminder, both Q3 fiscal 2016 and Q3 last year include PA.

Year-to-date figures are not comparable as fiscal 2016 has nine months of PA, whereas last year had four months.

I'll start with results from operations.

Q3 revenues were CAD275 million, up 10% from CAD249 million in Q3 last year and up 4% from CAD264 million in Q2.

Foreign exchange rates positively impacted our absolute revenue dollars.

Higher revenues also reflected the timing of project activities related to the large amounts of business booked in Q3 and Q4 of last year amounting to CAD287 million and CAD317 million, respectively.

Regarding foreign exchange, the stronger US dollar and euro provided for increased absolute dollar revenues and increased earnings due to the translation of our foreign entities' revenues and earnings into Canadian dollars.

However, foreign exchange did not materially impact margins.

Bookings in Q3 of CAD228 million are similar to Q2 bookings of CAD230 million and lower than bookings of CAD287 million in Q3 last year.

We have spoken of our expectation and quarterly variability due to the types and sizes of programs we pursue.

Our objective is to drive bookings higher than revenue so as to avoid backlog deterioration and to support organic growth.

We are below our objective.

Backlog has decreased to CAD546 million as compared to approximately CAD600 million over the last four quarters.

This is expected to have a negative impact on Q4 revenues.

Opportunities are significant.

However, they have not yet translated into bookings.

Similar to the first two quarters of the fiscal year, in Q3 we did not book larger-dollar orders as some customers have continued to delay investment decisions.

However, as Anthony said, our funnel continues to be strong in our key end markets.

We have new and repeat opportunities ranging in size across all segments, which is encouraging.

As mentioned, Q3 closing backlog decreased by approximately CAD40 million from prior quarters to CAD546 million.

Based on the composition of our Q3 backlog and our estimates of in-quarter orders, which are booked and revenued in the same quarter, Q4 revenues are expected to be at the higher end of the 40% to 45% range of backlog.

Gross margins improved slightly over the last three quarters as well as last year Q3, which was the first full quarter of PA's contribution.

Last year Q3, gross margins were 25.2%.

This year Q3, they were 25.5%.

Read programs that impacted Q1 and Q2 have either come to an end or are nearing the end.

The cash collection cycle from the completion of these programs lags due to milestones and payment terms.

Q3 SG&A expenses of CAD42.8 million were the same year over year when adjusted for restructuring costs and the gain on the sale of a US facility this year and when adjusted for acquisition costs last year.

Lower amortization costs were offset by higher employee-related costs and foreign exchange rate changes, which increased the translation of SG&A expenses.

In Q3, we accrued approximately CAD3.4 million in restructuring costs due to the wind-down of a small facility in India and other reductions implemented throughout the business.

All of this cost was offset by a gain on sale of land and buildings that housed that redundant US facility.

We continue to review our global footprint, variable costs, and our cost structure, given our lower backlog.

Further restructuring charges in the range of CAD2 million are expected to be incurred in Q4.

Despite these actions, Q4 earnings are expected to be negatively impacted.

We continuously manage our cost structure and take action where appropriate.

But given our lower order backlog going into the fourth quarter, we do not expect to be able to offset the full impact of lower volumes on our earnings and margins.

Q3 stock compensation expense was CAD800,000.

As a reminder, our stock compensation expense can be volatile and is impacted by our share price.

Adjusted earnings from operations were CAD32.1 million in Q3 compared to CAD31.7 million in Q2 and CAD27.4 million in Q1.

Last year Q3, adjusted earnings were CAD27.2 million.

The absolute-dollar increase in Q3 adjusted earnings from operations is primarily due to higher revenue volumes with improved gross margins and lower stock compensation expense also positively impacting adjusted earnings.

Q3 adjusted earnings per share of CAD0.21 increased over Q2 earnings per share of CAD0.19 and last year's Q3 EPS of CAD0.18.

EPS of CAD0.16 this Q3 was significantly higher than last year Q3 of CAD0.09 as last year included material PA acquisition costs.

The Q3 effective tax rate was 22% and 24% on a year-to-date basis.

We expect to continue to be in the range of 25% due to work we have done to improve our tax structure.

There may 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.

Moving to the balance sheet, in Q3 we generated cash from operations of approximately CAD32 million compared to cash usage of CAD20 million in Q2 and CAD9 million in Q1.

Last quarter, I indicated that our investment in working capital increased due to timing of milestone payments and the residual effect of read programs and delayed deliveries.

In Q3, our working capital as a percentage of revenue decreased to 15.4% from 17% at the end of Q2.

Although we did make progress in the quarter towards reducing our investment in working capital, we did not reach our target of below 15% of revenues.

We are continuing work to reduce this.

Cash generation and working capital as a percentage of revenue both experienced quarter-over-quarter variability due to timing of milestone payments, where programs are in their lifecycle, payment terms of programs in progress, and new orders and their payment terms.

Overall, our balance sheet remains strong, and we have the flexibility to pursue our value creation strategy and persevere in difficult market conditions.

In summary, our Q3 financial results represented an improvement over Q1 and Q2, but we have further work to do to get performance back to our expectations.

Due to lower backlog, we expect a softer Q4 with lower revenues and operating margins than the last three quarters.

We will continue to work on our front-end and delivery initiatives with the objective of improving organic growth and delivering strong operating results.

Now we'd like to open the call to your questions.

Operator, could you please provide instructions to our listeners?

Thank you.

(Operator Instructions) Cherilyn Radbourne, TD Securities.

You're maybe not going to want to give me a numeric answer to this question, but I guess what I'm wondering is whether the dollar value of outstanding proposals currently looks different than what is typical, given your comment that customers' decisions are taking longer?

Or I guess said another way, has your six-month sales cycle lengthened, in effect?

Good morning.

Do you want me to start, Maria?

The quality, nature, and size of the bids -- big bids outstanding are comparable to previous ones.

So in that regard, the quality, the size of the bids outstanding is not worse and maybe better than what it has historically been.

What's different is the time that some customers are taking to consider those bids.

And in the grand scheme of things, it takes quite a while to bring those bids to customers, because it's a very collaborative effort and the bids are bigger, as I indicated when I gave that five-quarter summary of averages.

So, what's happening is they are taking longer in a number of cases.

Okay.

And then obviously your global footprint is a competitive asset.

You want to keep your intellectual capital intact, I would assume.

So can you just talk about how much flexibility you have to adjust capacity in light of market conditions?

Quantitatively, we have a significant amount because we have centers in our footprint where the cognizance, the know-how, the IP is concentrated and holistic or general, quite capable.

And so the adjustments that we're making are more in terms of delivery capacity than they are eroding the fabric or the essence or the DNA of the Company.

And we are able to do more of that if we needed to do more of that without impacting the DNA of the Company.

Okay.

That's my two.

Thank you.

Mark Neville, Scotiabank.

I'm just curious, just given you are mentioning market conditions affecting your front end but proposals that are in the funnel are robust, are you also seeing less opportunities coming to market in recent months, or is it strictly sort of these delays?

It's the latter, not the former.

Interestingly, our funnel has never been bigger.

Our proposal activity has never been bigger.

And if we could continue to book the smaller opportunities at the rate that we are, which is actually good, in my view, and from time to time the bigger opportunities, then I'd be pretty happy.

Okay.

Have you seen any cancellations at this point?

And then I guess also, I'm just curious as to what the conversations are like with the customers on these delays or what they may not be like, just if you can help us with that.

I'll say no to the cancellations as I look at Maria because I'm sure we have a little cancellation now and then.

No?

No cancellations.

No cancellations, she says.

The conversations on the smaller orders to medium orders, which are in the millions of dollars or CAD10 million, are as they were.

And on the larger orders, I think what's happened in a number of cases, our customers and said, oh gee, there's issues in the world, everything from China to currencies to other things.

And it's given them cause to pause.

We haven't heard of major customer initiatives being terminated, changed, canceled, etc., etc.

And I just reiterate, in the grand scheme of things in terms of the cycle, that it takes to bring a fairly large opportunity in front of the customer and the time that the customer takes to give consideration, a number of months in that cycle is not material except in a public company on a quarter-over-quarter basis.

Well, last quarter was this, last quarter was that, last quarter was that.

But some of these projects take a year or year and a half to get them to a proposal stage.

So they don't see it as a big delay, if I can put it that way.

Okay.

Just sort of given where the backlog is now, I assume -- can the business run at the high end of that guidance or the 40%, 45% for sort of an indefinite period?

I mean, there's no reason, I guess my question, why you can't just continue to run there, just given the lower backlog.

You are referring to the revenues?

Yes, the 40%, 45%.

I assume there is no reason why you couldn't stay at the high end of that range for a long period of time, just with the lower backlog?

No reason except that, as we say every quarter, in the longer term it depends on what orders are coming in and how long it would take to revenue them.

So, for example, if we maintain that level of backlog, but in this quarter we get a couple of 24-month programs, then we would be at the lower end of the 40% to 45% range.

Okay.

And on the restructuring that you've done so far, I guess CAD9.3 million if we include what's coming in Q4, how much of that has sort of already flown through the P&L or the benefit that we've seen?

So, about two-thirds of that benefit has flown through the P&L, and we can see that benefit.

And if you look at the margins, you might not see that benefit because it's been offset by a couple of other things.

And the couple of other things are the lower margin -- or the lower-margin work that we've had in our backlog as a result of the large Q4 orders that were more -- or had a larger material component to them.

So that's one factor.

And then the other factor is just completing these read programs, although they've had in the quarter less of an impact than Q1 and Q2, but that's offsetting the benefit of the restructuring actions we've taken.

Okay, thank you.

Deepak Kaushal, GMP Securities.

Thank you for taking my questions.

The first question, I wanted to actually dig in more on the pipeline.

In terms of the large orders that are seeing delays, how many -- or if any of these orders are integrated or synergistic opportunities with PA and how many are just core ATS opportunities?

I would say that they are mostly core ATS.

I would also say that between PA and the old ATS, there have been a number of smaller synergy-related wins.

And I would say between the old ATS and PA, there is a number of bigger opportunities that are progressing through the funnel.

Okay.

And then in terms of the large orders that are being delayed, how long can your customers delay these?

Or put in other words, how many of these would you consider mission-critical for the businesses of your customers that they can't delay them for too long?

Well, that's a good question.

I hate to speak on behalf of the customers, but my assessment is that these are quality opportunities.

Otherwise we wouldn't be referring to them in our call.

Okay, that's helpful.

Thank you.

And my second question, I guess it's more of a big-picture question, as I'm relatively new to the story.

You mentioned also now that you are looking at the biotech, chemicals, and oil and gas verticals.

When you look at your business out five years, what vertical markets do you expect to be driving the business, and what new vertical market opportunities are out there for ATS?

Generally speaking, the biotech and the rest of what you said, that exposure was brought to the old ATS through the acquisition of PA.

And so we are in those markets, not in a very significant way, and we are evaluating the extent to which we should be through market analysis and key account plans and synergies with existing customers and all that kind of stuff.

The answer to the second part of your question is the common denominator in all of the markets we pursue is their mission-critical aspect.

So if they are highly regulated, if the customer would suffer significant negative consequences if the program doesn't go forward, if it's a global program, if it's highly punitive, if it has a tight regulatory environment, which sometimes is synonymous for a high barrier to entry, if it takes a lot of applications engineering and engineering, if it has the flavor of a new product launch or a global rollout, if it's very strategic for the customer, if it's not a garage-door-opener type automation but rather a rollout of a global product that has never been invented before, that's where ATS plays.

And so, markets like parts of transportation, parts of food, parts of energy, biotech, life sciences, and parts of consumer devices and some markets that we are not in like aerospace/defense, for example, share those characteristics, and that's our sweet spot.

Thank you.

That was comprehensive, and I appreciate it and the opportunity to ask questions.

(Operator Instructions).

David Tyerman, Canaccord Genuity.

First question is on the sales side.

One of the challenges I've had trying to figure out ATS is what is your order flow potential?

Is there some way you can help us understand what we should be thinking?

Is there sort of a core base -- I don't know, CAD225 million, that's the average of the last three quarters, I think, which is mostly smaller type orders, that seems pretty reliable.

And then we get some amount over that from larger orders, or is it really just not possible to really get a sense of what the order flow could look like?

I would say that it's difficult to (technical difficulty) order flow would look like.

However, having said that, we have talked about what PA and services has done for our business, and that is more recurring or smooth.

And that accounts for -- and those types of activities I'd say account for about 30% of our business.

So, based on that, around 30% could be the smooth or recurring and 70% is just unknown and it depends on opportunities in our funnel and pipeline and average values or bid values of those and how large and how small they are.

And then that results in the variability that we always talk about.

And the way to think about the 70% is machines, programs, and enterprise solutions, and machines are, let's say, CAD1 million or CAD2 million, and programs are CAD3 million, CAD4 million, CAD5 million, whatever, and enterprise are bigger.

So, those larger programs tend to be much more strategic.

Therefore, the process that the customer has to go through in order to get his capital appropriated and then deployed is a longer cycle and different levels of decision-making and criteria than perhaps, let's say, a $1 million program -- and I'm making this up -- where the machine broke and they need another one for CAD1 million.

Okay, fair enough.

And the recurring, the 30% roughly, so in dollar figures, is that sort of like CAD300 million maybe, roughly?

Per annum, yes, roughly.

Okay, fair enough.

My second question is of the backlog you have right now, you talked about the margins coming down.

Is it that the gross margin backlog is relatively steady and it's really just the lower sales causing the margins to come down because your SG&A is relatively fixed?

Or is there something in the gross margins that also would be coming down?

It's primarily your first comment, David.

Okay, great, that's my two.

Thank you.

Robert Caldwell, Richardson GMP.

We've had an ongoing dialogue here over the last four or five calls on M&A activity, and I'd just like to touch on that again, if I may.

Anthony, on the last call you mentioned to a deep dive you and the Company had made on an opportunity.

Question is, are there any other deep dives in process?

And number two, have there been any target companies you've dialogued with who have gone on and been taken over by other competitors?

On the second part of your question, there are a number of opportunities that we looked at to varying degrees that were then sold to others.

And in none of those cases did we go all the way, so to speak, and then lost.

It was more a case of exited early or wasn't for us, or the terms under which we were willing to move forward the counterparty wasn't.

On the first part of your question, I would say that our level of engagement on M&A has been and is more than casual or tire-kicking.

I mean, I don't -- I intentionally don't want to answer your question specifically.

But I would say we are not sort of waiting for something to come to us and we are engaged on a number of fronts.

And I'm pretty optimistic that that continues to be an element of our strategy that we can execute on.

And we're pretty clear about what we're looking for and the terms under which we want them.

And we haven't seen those terms in the market, from a market point of view, change unfavorably in terms of our ability to execute our strategy.

That's very helpful.

And Anthony, perhaps one closing question: Is the current economic environment, especially perhaps in Europe, holding back a few of these discussions?

Not that we've seen, and I guess I continue to look for it in a couple of ways.

One is the point that you're making.

And the second way is there is some point where some companies, because of their situation and their commercial arrangements with their bank, they may be in a position where they come to us.

So I'm looking for both, but we really haven't seen a lot of either yet.

Thanks very much.

That's helpful.

Cherilyn Radbourne, TD Securities.

Just one quick follow-up from me.

With the renewed downturn in the Canadian dollar, certainly there has become more investor interest in your sensitivity to foreign exchange.

Can you just be a bit more specific about the impact of foreign exchange on revenue and EPS in the quarter?

Sure.

Quarter over quarter, foreign exchange had a significant impact.

And we talked about Q3 last year versus this Q3 revenues increasing, and increasing primarily due to foreign exchange and the timing of program activities.

And those program activities are due to the high order bookings in Q3 and Q4 of last year.

And, on a year-to-date basis, foreign exchange is driving -- and PA.

But apart from PA, foreign exchange is driving the absolute dollar increase, and therefore, no organic growth.

And I calculated the EPS impact this Q3 versus last year Q3, and our EPS increased by about CAD0.03, and about CAD0.015 to CAD0.02 is FX related.

Okay.

That's very helpful, thank you.

That's all for me.

Chris Bowes, National Bank Financial.

Just referring to the more constant portion of your order bookings, I'm looking at order volatility.

And it's actually very low over the last three quarters.

And I guess my question is, is this a reasonable run rate level in the absence of large enterprise orders?

Or is it just really a coincidence that it's stuck there?

I think it's a coincidence.

Because the jobs are smaller, the standard deviation is smaller.

So, like, I think that's where the lack of volatility comes in.

But what we are trying to get, like Maria said, is maybe the way to think about it is layers of volatility.

One layer which we are trying to create, which is not, and that's stuff like PA and services and that kind of activity, and Maria spoke to it.

The second layer, which is the kind of stuff inside the CAD200 million or CAD228 million, which is smaller jobs, and again, because they are smaller, they -- back to the standard deviation comment.

And then the third layer is with a longer cycle, we are pursuing these larger jobs, which, when we win them, I guess it's a good thing that they create volatility.

Right.

So I guess we're just waiting for a return to greater levels of volatility, then.

(laughter) That would be well said.

As long as it's in the right direction, yes.

Okay.

For my second question, just on gross margins, you guys flagged that mix helped the gross margin in this quarter.

And I'm just wondering if there's anything in the backlog that would suggest that mix would get worse in the near term.

No, there's nothing that would suggest that.

Okay, thank you.

(Operator Instructions) Mark Neville, Scotiabank.

On the delays, I guess it's been two or three quarters now where bookings have been weaker, and then you've talked about lumpiness in timing.

So have these delays -- is this a Q3 phenomenon, or is this something you've been seeing, again, the last two or three quarters?

Yes, that's an interesting question, and I ask myself that every day.

I guess there is normal the delay and then there is more delay.

And then at some point, that normal delay, we refrain as a delay, if that makes any sense, right?

So just because the cycle is so long and so -- a big job, let's say, takes a year or year and a half to get it to an award.

So if the delay is one quarter, maybe we don't think it's a delay.

And then if it delays two quarters, then still not a delay.

And then when it delays three quarters, then we say, oh gee, we have a delay.

So it's a fuzzy -- it's a very fuzzy line, because the customers' process, and the process to get to a decision point, has never been fixed in the first place, so that we could have a yardstick to measure and report against.

So we're really just trying to make the best judgment as to what's going on.

Okay.

I guess if I understand it, there's been -- I guess just based on your definition up to this point -- there's been delays.

And just at this point, maybe there is more, or the accumulation of delays is getting bigger?

Yes, I guess I'm -- sorry if I'm not explaining it too well.

I guess I'm saying that the yardstick to measure against on these programs is not really set in the first place.

So we go through a process of a year or year and a half that leads to a significant proposal.

And then we engage with the customer.

And on that point, on anything big, there's always back and forth.

So is that a delay or is that normal?

Well, that's normal.

And then that goes on for two quarters.

Well, is that a delay or normal?

It could be either.

And then it goes for three quarters.

And then I call it a delay.

But categorizing it is a little bit arbitrary, if I can put it that way, because there was no preestablished timeline to measure progress or lack of progress against.

Okay.

That helps.

And maybe just one follow-up, just housekeeping.

I guess on the SG&A, you've been guiding CAD34 million to CAD35 million.

Just given FX where it's at, I assume we should be thinking something north of that now?

Yes.

So, based on FX impact in the quarter, we are looking at around CAD36 million.

I think I would guide CAD35 million to CAD37 million.

Okay, all right.

Thank you.

(Operator Instructions) Mr. Caputo, there are no further questions at this time.

Thank you, everyone.

Have a nice day.

This concludes today's conference call.

You may now disconnect.