ATS Corp (ATS) 2018 Q1 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen.

  • Welcome to the ATS Automation first quarter conference call.

  • I would like to remind you that this call is being recorded on Wednesday, August 16, 2017, at 10:00 a.m.

  • Eastern time.

  • (Operator Instructions)

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

  • Stewart McCuaig - Corporate VP, General Counsel & Secretary

  • Thanks, operator, and good morning, everyone.

  • Your main hosts today are Andrew Hider, 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 Andrew.

  • Andrew P. Hider - CEO & Director

  • Thank you, Stewart.

  • Good morning, ladies and gentlemen, and thank you for joining us.

  • Our first quarter performance featured year-over-year growth and order bookings and sequential margin improvement.

  • Q1 revenues were down, however, looking ahead, we have a record order backlog following our solid bookings performance.

  • While we are focused on running the business, we have made good progress on our strategic review and have started to implement new processes with the goal of taking ATS's performance to the next level.

  • This morning, I'm going to speak to you about our Q1 financial value drivers, our outlook and progress on our strategic direction.

  • Maria will then provide some more detail on our Q1 financials.

  • Starting with our financial value drivers.

  • Q1 bookings were up 11% over Q1 last year to $266 million.

  • Life sciences led the way with increases in energy and consumer also contributing to growth and more than offsetting lower bookings and transportation.

  • Our Q1 adjusted EBIT margin was 10%, up on a sequential basis.

  • On after-sales services, both bookings and revenue were up over Q1 last year.

  • We have good momentum with our after-sales service offering, and I'm encouraged by the positive feedback I have heard from many customers who recognize the value we can bring to them over the life of their equipment.

  • Moving to our outlook.

  • Our order backlog is up 12% over Q1 last year, which puts us in a strong position for the balance of fiscal 2018.

  • Strength in the life sciences market is more than offsetting lower order backlog in other industrial markets.

  • Looking at a more detailed view of our markets, our life sciences funnel continues to be strong, and we are seeing growth in both medical devices and pharmaceuticals, driven by solid industry fundamentals and ATS technology innovations.

  • This is a core market for ATS, and we are well positioned.

  • The transportation funnel is solid, and we have a number of interesting opportunities and new technologies, such as the EV market.

  • Our niche position in energy continues to positively contribute to our business, and we have significant opportunities, for which we are uniquely qualified and positioned.

  • The consumer market continues to provide an opportunity where ATS has the ability to deliver high value to our customers in selected submarkets.

  • Moving to our strategy.

  • The board and management team are aligned in the pursuit of our goal to drive sustainable, long-term shareholder value.

  • To do this, we have developed a framework for a three-part value-creation strategy: build, grow and expand.

  • Build means build the foundation of ATS.

  • We are focused on improving our core and taking our performance to the next level.

  • This includes the development of the ATS Business Model, implementing our value drivers, KPIs and a revised strategic planning process.

  • Build also means advancing our succession-planning process, talent management and employee engagement and driving autonomy and accountability into our businesses.

  • I am confident that our focus on building a stronger foundation and the development of our people, who are our #1 asset, will enable ATS to provide long-term value to our shareholders.

  • Moving to grow.

  • We are focused on growing organically to the development and implementation of growth tools under our ATS Business Model, providing significant value and innovation to our customers and markets and growing our recurring revenue model.

  • Finally, expand.

  • We will broaden our reach by entering new markets and business platforms, expanding our service offerings, driving innovation, making it a part of our everyday life and making strategic and disciplined acquisitions that strengthen our business.

  • Critical to the advancement of our strategy and our success will be the ATS Business Model, ABM.

  • The ABM is a set of tools that enable us to pursue our strategy, evolve, drive continuous improvement and outpace the markets we choose to participate in.

  • This will be our playbook that all of our businesses globally will use to guide their actions in driving year-over-year continuous improvement.

  • Through the rigorous application of our ABM, we will strengthen our operating core and deliver process improvements in our commercial execution.

  • The ABM will be one of our competitive advantages in how we meet the needs of our customers and drive sustainable, long-term value for our shareholders.

  • Moving to acquisitions.

  • They're an important element of our strategy.

  • As I outlined last quarter, we evaluate acquisitions based on 4 equally important criteria: the market, the strategic value of the target, how we will integrate and operate the target and how quickly can we implement the ATS Business Model and finally, the financial return.

  • Timing will be variable, and we will not acquire for the sake of acquiring.

  • Our approach to deploying our balance sheet will be disciplined and strategic.

  • In summary, our first quarter performance reflected (inaudible) record order backlog and a strong balance sheet.

  • The development and rollout of the ATS Business Model and work on our strategy are well underway, and I am pleased with the progress we've made to date.

  • Looking ahead, we have a solid foundation and a clear strategic framework designed to build on that foundation, grow our core and expand our reach with a goal of creating long-term sustainable shareholder value.

  • We're at the beginning of this journey, and we'll remain focused on running our business while making and realizing upon these improvements in the quarters and years ahead.

  • Now I'll turn the call over to Maria.

  • Maria Perrella - CFO

  • Thank you, Andrew.

  • ATS had a good start to fiscal '18 with solid bookings, improved margin performance and low working capital as a percentage of revenue.

  • Subsequent to our quarter end in July, we extended our $750 million credit facility, which was due to expire 1 year from now for an additional 3 years until August 2021.

  • This morning, I will discuss operating results for the quarter and our balance sheet.

  • I'll start with operating results.

  • Q1 bookings of $266 million improved over last year's Q1 bookings of $239 million.

  • In addition, we were able to increase our order backlog to a record $683 million, putting us in a strong position to generate year-over-year revenue growth.

  • Q1 revenues of $264 million were down slightly from last year's $265 million and Q4 revenues of $266 million.

  • Foreign exchange rates -- foreign exchange rate changes helped offset the decline in revenues.

  • Based on the composition of our backlog at the end of Q1 and our estimates of in-quarter orders, which are booked and converted to revenue in the same quarter, Q2 fiscal '18 revenues are estimated to be in the 40% to 45% range of backlog.

  • In the last 4 quarters, actual backlog to revenue conversion has been just below or at 40%.

  • The expected increase in conversion rate in Q2 is due to the higher backlog, which has, on average, moved from the engineering and design stages into the assembly stage, where a higher portion of revenues are recognized.

  • Our goal is to drive year-over-year revenue growth, however, we do expect to see some volatility on a quarterly basis due to the nature of our project-based business.

  • We expect that the expansion of our services and product offerings will provide some balance to this over the long term.

  • Moving to margins.

  • We improved our Q1 gross margin to 25.3% as compared to 24.4% in Q1 last year and 24.1% in Q4.

  • We have reduced -- we have worked to reduce various program issues, which had negatively impacted results.

  • We work to continuously manage our programs, capacity and third-party material costs in order to drive improved program margins.

  • Moving to SG&A.

  • On an adjusted basis, excluding amortization of acquisition-related intangibles, Q1 SG&A was $39.3 million compared to last year Q1 SG&A of $36 million.

  • SG&A has increased over the prior year due to increased employee costs, including the addition of sales and service headcount and foreign exchange.

  • Compared to Q4, SG&A has increased due to foreign exchange and other various expenses.

  • In Q1, our higher gross margins have more than offset higher SG&A expenses.

  • Q1 adjusted earnings from operations of $26.3 million or 10% of revenue, down slightly from 10.5% a year ago.

  • Sequentially, our margins have improved over Q4 margins of 9.2% and our full year fiscal '17 adjusted earnings from operations margin, which was 9.6%.

  • Moving to the balance sheet.

  • Starting with working capital, recall that in Q4, we had an unusually low working capital as a percentage of revenue of 8%.

  • Last quarter, I had said that we expected to increase our working capital as we work through customer programs.

  • We started to see this in Q1 as our working capital as a percentage of revenue increased to 10%.

  • We expect to further increase going forward, however, still target to be below 15%.

  • In Q1, we used cash from operations of $3.4 million as compared to Q4, where we generated significant cash from operations of $80.7 million due to the timing of milestone billings and payments.

  • Q1 usage was expected as we started to work through customer deposits.

  • At the end of the first quarter fiscal '18, our total net debt position was $41 million or similar to prior quarter net debt and decreased from last year's Q1 net debt position of $99 million.

  • In July, we renewed our existing $750 million credit facility and extended it to August 29, 2021.

  • Terms are substantially the same as the original credit agreement.

  • We continue to have strong liquidity with cash on hand of $279 million and a credit facility of which approximately $638 million is unused.

  • Our capital structure also includes a fixed interest USD 250 million bond that matures in 2023.

  • In Q1, we generated earnings per share of $0.12 compared to $0.08 in Q4 and $0.13 in Q1 last year.

  • On an adjusted earnings per share basis, we generated $0.16 compared to $0.15 in Q4 and $0.17 last year Q1.

  • The increase from Q4 primarily reflects improved operating margins.

  • Our effective tax rate was 24% in Q1, the same as fiscal '17.

  • Going forward, our effective tax rate is expected to continue to be in the range of 25% of pretax earnings.

  • In summary, we had a good start to fiscal '18, and we are well positioned for the balance of the year with our record $683 million backlog.

  • Our funnel remains well diversified with the mix of programs and Enterprise Solutions.

  • We will continue to focus on the implementation of the ABM and improvements in program management, supply chain and utilization of our global footprint to drive margin improvements going forward.

  • And we have a strong balance sheet with available credit, which will support our objective of profitable growth.

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

  • Operator, could you please provide instructions to our listeners?

  • Thank you.

  • Operator

  • (Operator Instructions) Your first question comes from the line of Cherilyn Radbourne from TD Securities.

  • Cherilyn Radbourne - Analyst

  • I wanted to start with, one, about top line growth.

  • I was wondering if you could give us some examples as to how you believe the ATS Business Model will help to drive improved revenue performance at ATS going forward.

  • Andrew P. Hider - CEO & Director

  • Cherilyn, thank you for the question.

  • First, part of the ATS Business Model is wrapped around how do we drive process in our sales and marketing expansion.

  • And when we look at that, we drive continuous improvement in that area, we're going to have KPIs aligned around both the leading and lagging indicators.

  • For instance, our funnel size, health of the funnel, win rate and how do we drive improvements in those areas as we go through the year.

  • Secondly, when we look at growth for the year and we look at future growth, it's about how do we add new customers, how do we expand our current customer base as well as new markets, new technologies and really driving synergies throughout our corporation.

  • Cherilyn Radbourne - Analyst

  • And so within that, maybe you could just comment on how you would measure performance.

  • In other words, how do you differentiate between average performance in a buoyant market versus strong performance in a tepid market?

  • Andrew P. Hider - CEO & Director

  • When you -- when we look at the framework -- and I mentioned KPIs on this, we're going to measure our performance and we're going to set targets, and I will state internally, we have fairly aggressive targets.

  • And those targets are an annual target that gets broken down quarterly and then monthly.

  • And we're going to measure our success towards are we achieving results within those key areas of focus.

  • One of the variables that we're driving to is regardless of performance prior year, how do we continue on a trajectory of continuing to drive increased performance results.

  • Therefore, when we're looking at expanding our markets and expanding our business, how do we achieve greater results in the coming quarters and coming years ahead.

  • Cherilyn Radbourne - Analyst

  • Great.

  • That's helpful.

  • Maria, one for you.

  • The working capital as a percentage of sales has been well below the company's target range for the last 2 quarters.

  • How much of that would you attribute to tighter management of working capital versus planning and mix of projects that are underway?

  • Maria Perrella - CFO

  • Of course, we always try to better manage and working capital as a percentage of revenue is 1 of our 8 value drivers and we're measuring that.

  • So we expect to improve.

  • But I would say just over the last couple of quarters, it really has had a lot to do with programs and timing of milestone payments, customer deposits and receipt of large payments on 90/10 terms, and those programs coming to an end.

  • Operator

  • Your next question comes from Mark Neville from Scotiabank.

  • Mark Neville - Analyst

  • First question just for Maria.

  • Just on SG&A, it was a pretty decent jump year-over-year and quarter-over-quarter.

  • I realized FX played a part.

  • Just maybe help us understand what else was behind this increase.

  • Maria Perrella - CFO

  • Sure.

  • First, I'll talk about year-over-year.

  • And we can see there's a $3 million increase.

  • I would say the comparison isn't a right one.

  • Last year, we had low employee cost, lower employee cost and the increase from last year to this year is about 2/3 employee-related costs, and that's performance-based compensation, and 1/3 or $1 million is foreign exchange.

  • And going forward, I'd say, our starting point is around our Q1, and that's $39.5 million.

  • And we expect to see a little bit of an increase going forward.

  • Typically, I do give a range, I haven't given a range this time, and I'm not going to provide one.

  • The foreign exchange impact even in Q4 versus Q1 foreign exchange impacted by about $1 million, and we know that we expect a slight increase as we continue working on and investing in our strategy.

  • But I'd say, overall, as far as impact to the bottom line goes and margins, we don't expect it to be material.

  • Mark Neville - Analyst

  • Okay.

  • Maybe I misunderstood last quarter, but I thought you were sort of talking about a $37 million-type run rate.

  • So are you now sort of again guiding to $39.5 million rough -- or sort of loosely guiding I guess?

  • Maria Perrella - CFO

  • I did talk about the, I think $37 million, $38 million, and I said that's assuming that foreign exchange didn't impact and we saw about $1 million from Q4 to Q1.

  • And the rest were just small little amounts.

  • Mark Neville - Analyst

  • Okay.

  • And then just on the ATS Business Model.

  • I'm just curious as to internally when you rolled that out and how reception around it has been thus far.

  • Andrew P. Hider - CEO & Director

  • Mark, so far, I would say -- first, let me answer your question.

  • It has been rolled out.

  • And as I stated in my opening remarks, this is a journey.

  • The rollout, the adoption, the training, the alignment around the critical field, that's all part of the process and you'll see this on our website in the future.

  • We're going to be talking more about it at our AGM tomorrow, but it's around people, process and performance, and then there're a lot of variables that go into those.

  • I would say, in general, our employees have been engaged around it, they've aligned around the value drivers, around the KPIs and around this problem-solving process.

  • And I emphasize the problem-solving process because we set targets internally to continue to improve our results.

  • And when we're off on those targets, how do we understand the true root cause and then what's the countermeasure to get back on track.

  • And so it's early days.

  • The team is aligned around driving this within our business, and it's going to be an ever evolving journey as we take this business to the next level.

  • Mark Neville - Analyst

  • Okay.

  • When you talk about building the foundation, growing, expanding, does -- I mean, does the build need to happen first?

  • I mean is the foundation strong enough, I guess to sort of start growing, expanding, entering new markets?

  • I assume that's the case, but I just want to be clear.

  • Andrew P. Hider - CEO & Director

  • So to answer your question directly, it's all 3. And we're driving all 3. And so that's pretty much a fine point on it.

  • Mark Neville - Analyst

  • Okay.

  • And when you talk about -- sorry, just last one, developing new markets' business platforms.

  • I mean is that M&A or is that also internal or organic-type investment and growth?

  • Andrew P. Hider - CEO & Director

  • So one, it's both.

  • Two, when we assess, we look at the strategic area of driving penetration to the market and then we determine the best avenue to get there fastest.

  • And again from a strategic perspective, we have to like the market and their variables first and then its alignment around organic or inorganic approach to get there.

  • Operator

  • Your next question comes from David Tyerman from Cormark Securities.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • My first question is on the operating improvement plan, I guess the ABM.

  • So I'm just wondering from a financial standpoint, how fast we should see changes?

  • What areas we should see them in, whether it's sales or margins or both?

  • And if you can give us any kind of metrics in terms of size that you'd expect to see in changes.

  • Andrew P. Hider - CEO & Director

  • So David, thank you for the question.

  • When we rolled this out, and I stated this in my early remarks, this is a journey.

  • And I emphasize that because these areas of initiatives take time and it's ever evolving.

  • So our expectation as a corporation is yes, we'll see improvements in the quarters ahead, but it's also around the years ahead as well.

  • And it's that continuous improvement mindset that once we achieve the result, how do we continue to focus on improving and making the success at a greater pace.

  • And so the rollout is in its early stages.

  • We have implemented several processes in several areas for impact.

  • We're going to continue rolling this out over the quarters and years ahead.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • So is there any way that you can give us sort of a road map that we can gauge and investors can try and get an idea of what they should expect from this in terms of margins or sales growth?

  • Maria Perrella - CFO

  • I'll talk about margins.

  • I'll start there.

  • The margins, in the past, we've talked about 5%, that we could see 5%, and I don't think that part has changed.

  • With the ATS Business Model, we -- and our more structured approach to goal setting KPIs, problem solving and continuous improvement, the goal or objective is to see and start to see the sequential improvement.

  • And that sequential improvement may not necessarily be quarter-over-quarter, but it should be year-over-year, and that's what we're targeting.

  • On the elements of it, I'd bring in the ABM and that should impact positively, along with the other areas that we've talked about before.

  • And some of those things are the same.

  • We've put a finer point on supply chain or third-party materials as an example, and we talk about PPV.

  • But other areas like standardization, better use of our global footprint, services, et cetera, those will all impact.

  • Over what period of time will we get the 5%?

  • We've always said -- we've never really said, but I think I would just close off by saying we are driving towards the year-over-year improvement, and that's what -- and we expect to see that in the year ahead.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • So just to clarify.

  • You think you can improve the margins 5%, that's what you're saying?

  • Maria Perrella - CFO

  • Over?

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Some period of time?

  • Maria Perrella - CFO

  • Over some period of time.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • Because that's a huge improvement, obviously.

  • Operator

  • Your next question comes from Justin Keywood from GMP Securities.

  • Justin Keywood - Analyst

  • (inaudible) with my questions.

  • Just -- the life sciences unit had strong growth again.

  • I'm just wondering if you could comment on what are the market drivers there leading to that growth?

  • And how sustainable is the strength?

  • Andrew P. Hider - CEO & Director

  • So -- and I stated this early on, this is a core focus area for our business, and we believe our strength in this area and our ability to provide both smaller and larger program scale is a strategic advantage.

  • And when we look at the growth and we look at how we've achieved it, it's been with customers, both new and also existing.

  • And for example, I recently visited a customer that is onshoring a product and they're moving it out of a low-cost region based on quality issues.

  • And I'll come to why this matters here in a minute.

  • But they brought it onshore because of quality issues, and they looked to ATS because we could help them ensure that they meet the same cost standards that they have in the low-cost region and improve their quality through the development of their product.

  • And that matters because when risk of failure is high, that's an area that ATS can help provide significant value to our customers.

  • And as you look at the life sciences space, that's a key area that customers are concerned with.

  • Therefore, we believe it's going to continue.

  • The trend is going to continue, and it's going to be a key piece of our foundation moving forward.

  • Justin Keywood - Analyst

  • Okay, that's very helpful.

  • And then just as a follow-up question, just given the greater growth prospects, do you feel there's enough capacity to deal with that?

  • Andrew P. Hider - CEO & Director

  • So the question on capacity is going to be an ever-evolving question.

  • And the reason I state it way is we believe we have significant capacity.

  • That said, it is not something that we're going to state we're done reviewing or done improving upon.

  • We have to look at it from a standpoint of global capacity and regional capacity.

  • And I'll tell you, it's one of the areas -- and when we talk about our ABM, it's about continuous improvement and it's about driving how we become more efficient in our operations but then also how do we meet the needs of our customers tomorrow.

  • And so it's an ever-evolving story because our customers might have a product today in North America and then they need to move it to Europe or they need to move it in Asia.

  • We have a footprint, and we need to ensure we have alignment around their growth as well.

  • Justin Keywood - Analyst

  • Okay.

  • And then just on the electric vehicles segment, you mentioned this being a driver in your opening remarks.

  • I'm just wondering if this is a more near-term scenario or a longer term?

  • And if you're able to break down what this business is currently contributing.

  • Andrew P. Hider - CEO & Director

  • So our view on this market is -- and it's shared, you can read the articles we read, that it's a longer-term view.

  • And as we look at our funnel, which is healthy for the transportation business, the e-vehicle piece of that funnel is a significant piece of the funnel today.

  • Therefore, we view it as an area of growth for our business.

  • And as customers look to automate their process, we believe we're well positioned to provide that value to our customers.

  • Operator

  • Your next question comes from Jeremy Klein from IP Funds.

  • Jeremy Klein

  • Just wondering, given the competitive landscape, when you look at players like ABB, Siemens, KUKA and the numerous Japanese producers, where does ATS fit within this competitive landscape?

  • And what is ATS's edge?

  • Andrew P. Hider - CEO & Director

  • So it's -- when we look at those names, we directly don't typically compete against those businesses.

  • And if you look at where ATS plays, we are the integrator of technology.

  • And so you're talking about a lot of businesses that provide a product set.

  • So we don't necessarily view them as a key competitor.

  • We integrate a lot of their products, and we bring the total value to our customers.

  • Therefore, when you look at the relationship, it tends to be a solid relationship where we are in strategic alignment with where the customers are going and how we can continue to bring that value to our customer base.

  • Jeremy Klein

  • Okay.

  • That helps.

  • Just one last question.

  • Could you comment a little bit on the electronic space, the sector in general and your view on where that's going and where ATS will be within that?

  • Andrew P. Hider - CEO & Director

  • Just so I understand your question, specifically in what part of the electronics space?

  • Jeremy Klein

  • Well, I know you group consumer products and electronics into one group.

  • So I mean, I don't -- I wasn't referring to any specific part of the electronics space, but whether it's, say in mobile phones or -- I mean, is that an example of a sector that you're in?

  • Andrew P. Hider - CEO & Director

  • Got it.

  • Understand your question.

  • So this is an area of our business -- and I talked to it -- we are opportunistic in this space, so where we can provide value and our customers look at that value and see it in alignment to where they need to be is where we play.

  • That said, it is not as -- it is -- from a standpoint of size in our organization, it's not as large as, say, the life sciences area.

  • But when our customers view the value that ATS can bring, it's a clear alignment as to how we can deliver to the customers.

  • We are in -- some of the key players in that space, and we do provide systems to them, but it is an opportunistic space within our organization.

  • Operator

  • (Operator Instructions) Your next question comes from Robert Caldwell from Richardson GMP.

  • Robert Caldwell

  • Andrew, congratulations on this heartening quarterly report.

  • Sounds very encouraging indeed.

  • Questions come up from time to time on these calls over the last number of years.

  • I've asked, and others have as well.

  • Just a little more color on the M&A activity.

  • Are there potentially some projects that were held back over the last 1.5 years because of the change in management?

  • And number 2, can you give us some idea of the number of investment bankers who are directly involved with ATS on these projects, both here in Canada and perhaps some in Europe as well?

  • Andrew P. Hider - CEO & Director

  • Robert, when -- I'm not going to talk about the transition period.

  • What I am going to talk about is when I joined ATS, when we looked at the funnel, the funnel is a sizable funnel for M&A activity.

  • And in the past, we were asked if we're going to delay M&A based on the rollout of the strategic plan.

  • And the answer is we're going to do both.

  • That said, we're not going to acquire for the sake of acquiring.

  • We're going to be strategic in our focus and disciplined in our approach to ensure it's the right value for the organization.

  • Our funnel has grown, and we continue to challenge ourselves to ensure that we're going to be aligned around M&A activity, and we have grown the team.

  • So it's our commitment and our focus to drive this aspect, but I do want to emphasize the point that we're not going to deploy capital just to deploy capital in M&A.

  • It needs to be the right strategic fit for the organization.

  • Operator

  • Your next question comes from David Tyerman from Cormark Securities.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Just a few follow-ups.

  • So Maria, the SG&A, if I understood you correctly then, it sounds like you give a quarterly rate, going forward, should be 39.5% or maybe even a little bit higher than that, is that correct, per quarter?

  • Maria Perrella - CFO

  • Based on what I said -- and what I said was, I think starting with the 39.5%, I see a slight increase as we continue working on and investing in our strategy.

  • So I would start with 40-ish, but I'm kind of hesitating on providing a range.

  • And as we've talked about before and as we've seen, foreign exchange impacts also.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Right.

  • And that 40-ish excludes FX, right?

  • Maria Perrella - CFO

  • Correct.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • Super.

  • And then second question, maybe another clarification.

  • You said the backlog turnover over the last 12 months has been around 40%.

  • So is that kind of what you think is a normal rate at the current nature of the business?

  • Maria Perrella - CFO

  • I don't.

  • I would maybe just start by saying that we've ranged between 35% and 45%.

  • As I always talk about in the upcoming quarter, we look at what's in our backlog and looking at our backlog at the end of Q1, for Q2, we're seeing a conversion somewhere in the range of 40% to 45%.

  • So it will be higher than what we've seen over the last few quarters.

  • And that's because some of the large programs that we won in the last 2 or 3 quarters, they are moving into the assembly stage and that's where a lot of third-party material comes in.

  • So the last couple of quarters, we've had the design and engineering and that's labor only and lower revenues.

  • And as I said, we're moving into the assembly and build stage.

  • And we can see that, for example, on 3 or 4 of the larger programs, about $20 million or so of materials are coming in.

  • So that's why I'm guiding in the 40% to 45% range.

  • Going forward, will it still be 40% to 45%?

  • Difficult to tell right now just based on exactly what will happen in the quarter.

  • When I look at what is in backlog and what's going on, it's easy to have a 3% to 4% swing just on, say, $10 million.

  • So if $10 million more of material comes in, Q2, then my 40% to 45% might not be totally accurate, and that could move it to the next quarter.

  • So because of these large programs and where they're at, a lot of different things going on, but we are guiding higher.

  • And then looking at Q3, when we talk next quarter, we'll reassess and see where we're at.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • Fair enough.

  • And then just on a broader sense, could you give us your views on the market right now?

  • I get the impression the global economies may be doing a little better, although, I'm not sure your [tax] would be in agreement with that.

  • So I'm just wondering if you're seeing better market opportunities right now?

  • Or worse?

  • Or what you're seeing out there in the market?

  • Andrew P. Hider - CEO & Director

  • On a -- David, on a macro level, we view it as slightly better.

  • When you piece that down, it certainly is by segment.

  • But as a macro level for ATS, we view it as slightly better.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Okay.

  • Okay.

  • And then the final question I had was on M&A.

  • Are there any metrics that you can help us think about when you're looking at M&A?

  • Like is there a return on invested capital target that you'd like to see the acquisitions have or any other key metrics?

  • Andrew P. Hider - CEO & Director

  • We do look at ROIC as a key fundamental for the financial return on the acquisition.

  • And again, it's variable based on the 4 areas that we focused and it's going to be variable based on the strategic fit as well as the market, and we might expect higher or lower based on the other variables.

  • David Bruce Tyerman - Analyst of Institutional Equity Research

  • Is there a range you can provide that you would be looking at?

  • Andrew P. Hider - CEO & Director

  • At this time, I'm not going to specify on a range.

  • What I can tell you is our aspirations are high, but the market rate now is, as you have seen, the market is demanding high multiples in the market space, so we do look at strategic fit as one of the areas that is aligned with ATS and where we need to go.

  • Operator

  • Your next question comes from Mark Neville from Scotiabank.

  • Mark Neville - Analyst

  • Maybe just to follow up on David's question.

  • When you talk about financial or look at financial metrics in terms of M&A, I mean, is ROIC the primary metric?

  • Or is there something else in terms of just financial?

  • Maria Perrella - CFO

  • We look at also, is it accretive?

  • And I'd say that's one of the -- well, everything is important, but is it accretive?

  • That's important.

  • And from a cash perspective also, is it accretive?

  • And then we also look at our return on invested -- return on investments and ensure that, that's where we want it to be.

  • As Andrew has said, we're not providing ranges or targets right now, but, of course, we want our ROIC to be greater than our weighted average cost of capital.

  • And based on what we're seeing, we know that because of the higher multiples, perhaps getting there won't be as quickly as we would like, but we would have a certain target in mind.

  • Mark Neville - Analyst

  • Okay.

  • And Maria, the -- when you mentioned 5% margin improvements, were you talking gross margin or EBIT?

  • And maybe what's the starting point?

  • Maria Perrella - CFO

  • I was talking EBIT because in that number, I was thinking about cost of sales and how we could reduce our cost of sales and improve gross margins and then also use the cost structure that we have to cover organic growth, i.e.

  • on the SG&A side, we expect that we wouldn't have to invest that much more, if or when -- not if, when we do drive organic growth.

  • Mark Neville - Analyst

  • Okay.

  • And I guess we're around 10% now, so that's, I guess, that's your starting point, roughly?

  • Maria Perrella - CFO

  • Yes.

  • Mark Neville - Analyst

  • Okay.

  • And Andrew, maybe you can just talk about some of the things I guess with the business model, what you're doing within the aftermarket business to drive growth, maybe some targets or how big you think this business could be or how big it should be, just to help us sort of think about that.

  • Andrew P. Hider - CEO & Director

  • Sure.

  • So Mark, as I mentioned in the prepared remarks, we did see growth.

  • So we both -- from a standpoint of off on the right foot for this year, we are seeing the growth that we expected.

  • That said, we have high aspirations for the year on after-sales service and support.

  • So I would state a couple of items here.

  • First, internal targets are fairly significant.

  • Second, our work is not done.

  • We need to continue to expand both our network for service as well as ensuring that we've got capability and capacity as we expect that growth trajectory to take off.

  • But we are seeing early signs of a positive light in our service -- services initiative and providing that value to our customers.

  • And so it's off on the right foot for the year.

  • Mark Neville - Analyst

  • Maybe correct me if I'm wrong, that's about -- it's roughly 15% of your business now?

  • Maria Perrella - CFO

  • That's correct.

  • Yes.

  • Mark Neville - Analyst

  • And do you have longer-term targets that you could share with us for the size of how big that should be?

  • Andrew P. Hider - CEO & Director

  • So I can give you a range, let's say, between 20% to 30%.

  • Mark Neville - Analyst

  • Okay.

  • When you talked about -- I mean, there seems to be a lot of client focus that's sort of driving this improvement and growth as well.

  • I'm just curious, is there any -- do you see any value in maybe sort of going back or partnering with some of the -- some of your -- or maybe the products that you talked about earlier to drive growth outlay?

  • Andrew P. Hider - CEO & Director

  • To make sure I understand your question correctly, it's -- are we planning to partner to drive additional growth for the organization?

  • Mark Neville - Analyst

  • Well, maybe I'd say I guess, sort of looking back at some of the bigger product companies you mentioned earlier, if there was any value in -- when you try to partner with them, strategic partnerships, anything of that sort that could help drive growth or any value to doing that?

  • Andrew P. Hider - CEO & Director

  • So absolutely.

  • And we are in process right now.

  • I can't mention the name or the business, but we are in process right now to actually partner with a business to drive growth on a certain area of our business.

  • A fairly large organization that's aligned around our strategic value.

  • Operator

  • Your next question comes from Cherilyn Radbourne from TD Securities.

  • Cherilyn Radbourne - Analyst

  • You took the couple of follow-ups from me.

  • And the first one is on performance evaluation again.

  • And I think one of the things that make performance evaluation challenging at ATS is just the inherent variability or lumpiness, whatever word you prefer, in the business.

  • So maybe you can talk a little bit about how your performance evaluation allows for that variability without letting lumpiness become an excuse.

  • Andrew P. Hider - CEO & Director

  • Cherilyn, I think I like the word lumpiness.

  • Cherilyn, that's one of the challenges, right?

  • And that's why the ATS Business Model is core to ATS.

  • And it's about that year look because quarter-to-quarter doesn't necessarily define success.

  • What I can tell you is we look at both leading and lagging indicators and those are aligned around our KPIs that then will generate into the value drivers.

  • And ensuring we're improving on those leading indicators that ultimately will improve our lagging indicators is going to be that foundational view as to are we making the right strides to improve our business over the year and the years ahead.

  • And so you're bringing up a point that's a very valid point for our business.

  • The lumpiness is going to be a factor, but it is year-over-year performance improvement and it's how we're performing to that trajectory and achieving our aspirations as we set out for the year.

  • Cherilyn Radbourne - Analyst

  • Okay.

  • And then the last one is a quick one.

  • Maria, can you just indicate whether foreign exchange had a material impact at the EBIT line in the quarter?

  • Maria Perrella - CFO

  • No, not a material impact.

  • And I calculated at the EPS level, and I think it's less than 0.2 of $0.01.

  • So not material.

  • Operator

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

  • I will turn the call over to you.

  • Andrew P. Hider - CEO & Director

  • Thanks, everyone, for joining us today.

  • We look forward to reporting our second quarter results in November.

  • Have a great day.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.