ATS Corp (ATS) 2019 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the ATS Automation Fourth Quarter 2019 Earnings -- sorry, Conference Call and Webcast.

I would like to remind you that this call is being recorded on May 16, 2019, at 10 a.m.

Eastern Time.

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

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 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 and 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.

Thank you, Stewart.

Good morning, ladies and gentlemen.

And thank you for joining us.

This morning, I'm going to speak to you about our Q4 performance and outlook.

But first I'm going to provide some comments on our full year performance.

Maria will then provide her report.

Over the last year, we have generated positive momentum, which resulted in solid organic growth, with the addition of new customers and strategic markets and the retention and expansion of some long-term customer relationships.

In addition, we have a made number of important strategic advancements.

In Q4, we completed our acquisition of Comecer, a great addition to ATS that will accelerate our growth and penetration in life sciences.

Comecer is a leader in the radiopharma market, with significant capability and a fast growing aseptic processing and ATMP subsegments.

In Q3, we acquired KMW, a provider of microassembly systems for the EV market.

KMW provides us with additional capability in microassembly and filled a niche that adds to our overall offering.

Both of these acquisitions are well aligned with our stated long-term growth strategy, which targets leading technology in attractive markets.

We have made innovation a key focus area with the goal of driving technology, leadership and expanding our reach and scope of our capabilities to benefit customers to reduce complexity, shorten customer development cycles and improved production efficiencies.

Most recently, we added to our IoT platform, with the launch of Illuminate Manufacturing Intelligence.

Illuminate is a scalable, connected-factory management system that customers can use to maximize overall equipment effectiveness, productivity and quality.

Illuminate is the next generation of our ATS tool kit IoT product and offers subscribers enhanced e-commerce capabilities for service and parts, improved dashboards and data analytics, support of third party equipment and easier integration with customer business systems.

As well during the year, we introduced a number of additions to our SuperTrak linear motion platform.

In Q4, we launched our SuperTrak micro conveyance system.

This product offers unique merge and divert capabilities, which allows manufacturers to minimize cell sizes and offers flexibility for high mix applications for batch manufacturing.

In Q3, we acquired intellectual property for Rapid Speed Matching technology, which provides the ability to link and synchronize movements of devices together allowing for faster and more efficient assembly systems.

These are valuable advantages, particularly in applications where high speed and high precision is required.

Work is well underway to integrate this technology with our best-in-class SuperTrak platform and will continue for the next several quarters.

From an organizational standpoint, we moved our linear motion technology and Illuminate groups in a separate business units, with their own management teams.

I expect this will accelerate innovation and market penetration.

In addition to these important strategic initiatives, I'm very pleased with the continued focus and adoption of the ATS business model.

We have seen the ABM go from a corporate-led initiative to becoming the way we do business.

And importantly, we are realizing benefits from the ABM, all across the organization.

Now moving to our financial value drivers for the year.

Starting with bookings.

For the year, our orders increased 19% to $1.4 billion.

Organic bookings growth of 16% resulted from new customer relationships in both life sciences and EV, along with a number of enterprise program wins from existing customers.

These included programs across all customer verticals.

Revenues for the year were $1.25 billion, up 12% over the last year.

Organic growth in revenues was 11% with the other 1% coming from acquisitions.

On adjusted EBIT margins, we realized a 90 basis points improvement over fiscal 2018.

While I'm pleased with this progress, we still have work to do to achieve our margin expansion goals.

Now our Q4 highlights.

Starting with our Q4 financial value drivers.

Bookings were $298 million, down from $348 million last year, which included significant follow-on program orders and warehousing automation and in life sciences.

We remain focused on driving growth in bookings on an annual basis, recognizing we may see normal course variability from quarter-to-quarter due to our project-based business.

Q4 revenues were $349 million, up 17% over last year.

Excluding acquisitions, our organic revenue was 13%.

Our Q4 adjusted EBIT margin was 11% consistent with last year, its higher stock-based compensation costs offset improved gross margins.

Moving to our outlook.

We ended the quarter with order backlog of $904 million, up 21% over last year.

This provides us with good visibility into the next fiscal year and a very good base of business to continue to generate organic growth.

As I've stated in the past, I expect customers will continue to exercise caution and be thorough in making their capital investment decisions, which could lead to variability in order bookings from quarter-to-quarter.

Looking at our funnel.

Life sciences continues to be strong, and we are seeing good opportunities in both medical devices and pharmaceuticals.

The addition of Comecer provides us with additional exposure to this attractive market.

Over 50% of our backlog is now made up of orders for life sciences customers.

Life sciences has positive dynamics, high barriers to entry, including stringent regulation and high consequence of failure.

These characteristics are complementary to ATS's capabilities, which include high speed, high precision solutions across a number of life sciences applications.

EV activity accounts for the majority of our transportation funnel.

Our proven success in EV applications, including battery module and pack assembly and e-motor assembly as well as the recent addition of KMW, position us well to capitalize on the EV market shift and deliver value to our customers.

Our niche positions in consumer and energy have positively contributed to our business, and we will continue to pursue opportunities where our technologies align well with the value required by our customers.

On after sales services, customer receptivity remains positive.

And we continue to see favorable trends in adjudging service sales to our CapEx business.

Q4 bookings and revenues were up over the last year and our overall funnel for services has grown.

For the last year -- for the year, our service bookings were up double digits and service revenues were up mid-single digits.

And we are focused on the strategic area of our business.

Moving to the ATS business model.

As I noted, we are continuing to embed the ABM and how we do business every day.

During Q4, we continue to implement new tools at our divisions and drive improvements through problem solving and Kaizen Events.

Of note, in Q4, we completed our first President's Kaizen.

This involved the execution of 4 simultaneous Kaizen Events globally, which I and my executive team participated in as team members.

The 4 events focused on engineering efficiency, excess inventory management, supply chain efficiencies and design standardization and reuse.

The events were held in facilities around the world, and I was very pleased by the achievements made by the teams in a relatively short period of time.

Our ABM boot camps and weekly lean training sessions are ongoing and driving the advancement of the ABM throughout the business.

The pace of advancement is encouraging, and we have many opportunities ahead for continued improvement.

The ABM is driving positive change that I expect will continue to support our margin expansion plans.

Moving to Comecer.

To date, front end of the business integration activities are progressing very well.

We have built a pipeline of pursuits with our combined businesses that are working together on specific opportunities in order to capitalize on the strong and positive momentum created in the market since the acquisition.

From a strategic standpoint, activities are well underway to drive medium- and long-term impact.

Specifically work is in process to improve sales capacity in North America.

Aligning the organizations on sales pursuits and capture plans to capitalize on the combined ATS's strong automation capability and Comecer's leading isolator technology.

Implement a roadmap to develop integrated service offerings and develop a joint go-to-market strategy for the aseptic fill-and-finish market.

Customer receptivity has been very positive, with both ATS and Comecer customers, and we are confident that revenue synergies will be achieved.

Integration of administrative activities is well underway and expected to be largely complete over the next few months.

Initial deployment of the ABM with Comecer's leadership team was very well received.

In Q1, we'll be rolling out training on specific ABM tools and facilitating continuous improvement exercises as part of the ongoing ABM deployment.

Joint initiatives between the supply chain groups are well underway to drive cost synergy savings.

Through the initial integration activities, we have identified 200 basis points of savings, which we will target to achieve over the next 12 to 24 months.

Comecer, coupled with the existing ATS life sciences business, creates a new and sizable platform that we expect to grow both organically and inorganically in the coming years.

On KMW, integration of both administrative and operational activities is proceeding as planned.

The business has performed to our expectations.

And I am encouraged that there are prospects for continued growth and improvement.

In summary, I'm pleased with the year's achievements, strategically and financially.

Significant new customer relationships were added.

And we continue to earn repeat business both with new and long-term accounts.

Revenues and order bookings reached record levels.

We've expanded our margins by 180 basis points over the last 2 fiscal years.

We have a strong order backlog, and we are well positioned, going into fiscal 2020.

Importantly, our balance sheet remains strong, which we'll continue to put to work through internal investment, innovation, strategic M&A and share repurchases when appropriate.

As we continue to execute our value-creation strategy, we are focused on driving continuous improvement in all aspects of our business to support the creation of long-term shareholder value.

I want to take a moment to thank our employees for their hard work and dedication over the past year.

I'm proud of what our team has accomplished.

And I look forward to building on this going forward.

Now I will turn the call over to Maria.

Thank you, Andrew.

Fiscal '19 was a year of both organic and inorganic growth.

Our key financial value drivers improved both with and without the addition of acquired companies.

Fiscal '19 includes 5 months of KMW and 1 month of Comecer results.

This morning, I will discuss annual performance, including Q4 and our balance sheet.

When comparing to fiscal '18 and where appropriate, I will also provide some insight into results excluding the acquired companies.

I'll start with the operating performance.

Q4 bookings of $298 million included a strong contribution from Comecer, which booked $27 million of orders in March.

Excluding acquired businesses, Q4 bookings of $269 million were lower than last year's bookings of $348 million.

This is normal variability in our business as we have talked about previously.

From Q4 last year through to Q3 this year, we have benefited from large enterprise-type orders.

Fiscal '19 included several large orders that drove bookings to the $350 million to $400 million range from Q1 to Q3 from both new and existing customers.

Excluding Comecer, our order bookings have averaged $345 million per quarter in fiscal 2019 or a 1.12 book-to-bill ratio for the year, setting us up for continued organic growth.

Looking forward, as Andrew noted, our funnel is significant and contains a range of small to large enterprise opportunities.

For the year, bookings of $1.41 billion were 19% higher than last year, driven by 16% organic growth and 3% from acquisitions.

Bookings from life sciences customers accounted for more than 50% of our orders and was the growth leader among our vertical markets.

With the high double-digit increase in bookings, revenues also increased in fiscal '19, starting at approximately $300 million in Q1 and ending with $340 million in Q4, excluding Comecer.

With the addition of Comecer for 1 month, we generated $348 million of revenues in Q4, a 17% increase over the last year's Q4 revenues of $298 million.

Q4 organic growth was 13%.

For the year, revenues of $1.253 billion grew by 12.4% over fiscal '18.

11% was organic growth due to our order backlog of $746 million at the start of fiscal '19 coupled with strong bookings in the year.

1% came from our acquisitions.

Over the last 2 years, revenues have grown organically by 10% and 11% in fiscal '18 and fiscal '19, respectively.

Q4 revenues, excluding Comecer, were approximately 37% of backlog, were slightly higher than the expected 30% to 35% of backlog.

We ended fiscal '19 with $904 million of order backlog, a 21% increase over the last year, with 13% from organic growth and 9% or $80 million from the acquired businesses.

Based on the composition of our backlog at the end of the quarter and our estimates of in-quarter orders, which may be booked and converted to revenue in the same quarter, Q1 fiscal '20 revenues are estimated to be in the 35% to 40% range of backlog.

For the year, gross margins have improved by 40 basis points to 26.2%.

Our margins have improved from 26% in Q1 to 26.6% in Q4, which is a 30 basis point improvement over Q4 last year.

Throughout the year, some of our key margin improvement areas, including supply chain management, operating leverage and our ABM, all positively impacted gross margins.

These gains were partially offset by investments in innovation, services, infrastructure and ramp up of skilled resources in order to support continued revenue growth and margin expansion.

Moving to SG&A.

On an adjusted basis, which excludes acquisition-related amortization expenses, transaction costs and restructuring incurred last year, SG&A was $48.2 million in Q4 this year, $5.8 million higher than last year.

SG&A from acquisitions was approximately $1.5 million, with the balance of the increase due primarily to higher employee costs to support our growth.

SG&A will increase in Q1 with the inclusion of Comecer for a full quarter.

Fiscal '19 adjusted earnings from operations increased by 22% to $142.8 million or 11.4% of revenue compared to 10.5% of revenue last year.

Q4 adjusted earnings from operations were $38.2 million, up from $32.8 million last year.

For the year, stock compensation expense of $9.8 million or 0.8% of revenue was similar to 0.7% of revenue last year.

However, stock compensation expense vary greatly from quarter-to-quarter, impacting margins by up to 4%.

The quarter-to-quarter variance was due primarily to mark-to-market adjustments.

For Q4 fiscal '19, if we exclude the impact of stock compensation, adjusted earnings from operations margins of 12.7% improved from 12.1% in Q4 last year and 12.5% in Q3.

We are pleased with the margins -- we are pleased with the improvement in our margins and our goal is to drive further gains through the advancement of our ABM, operating leverage, supply chain and program management.

Moving to the balance sheet.

Our noncash working capital as a percentage of revenue remained low in Q4 at 7.1%.

During fiscal '19, we continued to see a decline from 8.3% in Q4 last year.

Along with continuous improvement initiatives, we had the benefit of a portfolio change, namely the life sciences, is now greater than 50% of our business, and this is an end market where we achieve better payment terms.

On this basis, we expect our working capital as a percentage of revenue to be in the range of 10% or less.

But know it can fluctuate up to 50% due to the variability associated with our project-based business.

For the year, we generated cash from operations of $128 million compared to $60 million in the prior year due primarily to increased net earnings.

Although we have quarterly variability in our cash generation due to the size of our programs and significant milestone payments, we've produced good cash flows through the year.

For fiscal '19, we spent $41 million on CapEx and intangible assets, including $10 million on Transformix's Rapid Speed Matching technology.

Next year, we expect to increase our spending by $20 million over this year or up to $60 million in total.

Expansion plans are underway for a few of our locations, which will increase our CapEx relative to recent years.

We continue to have strong liquidity with cash on hand of $225 million and our credit facility, of which approximately $633 million is available.

Fourth quarter EPS was $0.20, up from $0.16 last year.

On an adjusted basis, we generated $0.26 in Q4, up 18% from $0.22 last year.

The EPS increase reflected higher revenues and improved operating margins.

For the year, EPS was $0.76 compared to $0.50 last year.

On an adjusted basis, we generated $0.98 this year, up 32% from $0.74 in fiscal 2018.

Improved earnings per share reflected higher revenues and gross margins, partially offset by increased SG&A.

Our effective tax rate was 26% in the quarter and 25% for the year.

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

Turning to an update on our accounting policies.

In fiscal '20, we will adopt the new IFRS 16 standard leases.

On our balance sheet, we expect to add approximately $68 million to $73 million of long-term right-of-used assets and corresponding lease liabilities.

The impact of these changes to our net income is not expected to be material, but the new standard will increase our earnings from operations by approximately $1.5 million per quarter and EBITDA by approximately $5 million per quarter.

In summary, ATS performed well in fiscal '19.

Our order backlog of $904 million provides a substantial platform for organic growth in fiscal '20.

We will continue to focus on the advancement of the ABM and initiatives to drive continued margin expansion.

Our funnel remains well diversified, with a mix of end markets, programs and Enterprise Solutions.

We have a strong balance sheet with available credit, which will support our strategies.

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

Operator, could you please provide instructions to our listeners?

Thank you.

(Operator Instructions) Your first question comes from Mark Neville with Scotiabank.

Great quarter.

I just want to ask on the bookings.

It's -- this quarter you were off trend.

And I guess just what I'm trying to -- or what I'm struggling or grappling with is, how much of that is, sort of, just normal variability?

Or how much is, maybe, a bit of a weaker macro?

So just be curious to your thoughts on that.

And sort of maybe the evolution of your funnel over the past 4, 5 months as well.

So I'll break that down in a couple of ways.

First, when we look at the funnel, and we said this, we've a very solid funnel going into the year.

And as we look at the different markets that we're involved in, we see opportunity in all markets that we're driving our strategic direction forward on.

Second, as we look at the year, we step back.

We know that on average we booked roughly $346 million per quarter.

And our Q3, as you're aware, was a record bookings quarter for ATS.

And so as we see the macro and micro trends, we view this as normal course variability.

That said and we've often stated this that our customers are going to continue to exercise caution in their investment plans.

Fortunately, I meet with many these customers, and as I've had the discussion with them, there's been no change in their tone to our business.

There has been no change in their approach.

What we are seeing in the EV space is a little bit of -- the European market has been a bit more bullish on making the investments very quickly.

And the North American market is still driving to having the final solution before they pull the trigger.

Fortunately, we're working with both sets of customers, and it's aligned with our funnel moving forward.

So overall, we view, we're entering the year with a solid base of business, fantastic backlog and really solid opportunities in the markets we're driving to pursue.

And just to add a little bit more to that, Mark, you asked about evolution of funnel over the last 4 to 5 months and I'll just go a little further back.

As we've seen in the last -- or throughout the year, we had strong bookings quarter, and we had large enterprise-type programs that we booked and also just large dollar programs.

As we book those, we've replaced them in our funnel.

So the opportunities that are now in our backlog and that we've revenued or are revenuing has also been replaced.

So over the last year, our funnel has remained strong.

That's helpful.

And I was sort of just curious if there was any significant drop off for the -- it doesn't sound like that.

Maybe just on the Comecer, just -- I'm just trying to understand, it look like it added or it came in with roughly $60 million of backlog but then you said you booked $27 million of bookings in 1 quarter which seems quite, quite high.

So I'm just trying to get my head around, sort of, the business, how that would revenue backlog on a quarterly basis?

Sort of, is this -- like the $60 million coming in, was that sort of -- was that a low number?

Or was the booking really high?

I just -- again the numbers seemed quite different, so I'm just, sort of, struggling to understand it.

Yes.

So the $60 million coming in would be a regular number.

That would have been the run rate historically.

Unusual is the large booking in March.

So there they had about a $20 million order and that has increased the backlog.

That $20 million order has a revenue period of about 7 quarters.

So that is unusual.

Also, typically, their backlog revenue similar to what we've talked about for ATS, so that's in the 6- to 8-month range and this is now pushing it out.

The backlog, though, doesn't change our revenue expectations and our plan for Comecer.

Although, it secures fiscal -- it helps to secure the go-forward revenues.

And Mark, I know you didn't ask but I'm going to add something on it.

I was able to meet with this customer, North American customer, and they're both in ATS customer and also a Comecer customer.

And what I can tell you is they were extremely positive of this addition to the team and about what we can do together.

So we're very pleased with the execution of the Comecer to win this order and the ability for ATS to work with them and also continue to provide extra support, as they move forward.

And how did that come about?

The -- again, if it's that significant, I'm just curious, was it customer driven?

Or was it something you guys approached to or Comecer wanted unless?

Yes.

The Comecer team executed this.

And fortunately, I was able to meet with a customer read around their decision process and their decision time.

And they couldn't have been more positive on the technology and the solution that Comecer provides to them.

And secondly, we, ATS, also were working with them and they just -- they had a really positive reaction to us working together and potentially working together in the future.

So it's a good start.

Certainly, we need to continue to execute.

But we're very pleased with the reaction we've seen.

And if I can just maybe sneak one last one.

And just the synergy number.

I think you said 200 basis points.

So that's on a dollar basis.

That's $20 million.

That's on the Comecer revenue number, not your consolidated, correct?

That's correct.

Yes.

Your next question comes from Cherilyn Radbourne with TD Securities.

Wanted to start by asking a question on the order backlog continuity.

As I look at the $60 million coming in from Comecer, it looks like that may have been offset by foreign exchange or some other adjustment.

And I was just hoping, Maria, you could kind of clarify there?

Yes.

So the adjustments typically have foreign exchange, acquired backlog and cancellations.

And the adjustments, in this quarter, were all foreign exchange and Comecer related.

No cancellations.

Okay.

Perfect, that's helpful.

And then just a larger question, as it relates to Comecer.

As I understand, the reasoning behind the acquisition is to combine ATS's expertise in automation and robotics with Comecer's very specialized skill set to deliver more end-to-end production lines.

I know it's still early, is there anything you can say about what that opportunity implies in terms of increasing Comecer's average deal size from, I think, it was EUR 2 million to EUR 3 million on, sort of, a going-in basis?

Yes, Cherilyn.

So let me start with the initial and then I'll go through our view on the market.

So first off, and I said this in my comments, we couldn't be more pleased with the progress we've made.

The Comecer team has been absolutely fantastic on the integration.

The ABM is taking shape.

They align around a continuous improvement mindset.

So far, we're very pleased and they are a base case.

We have, and I talked through the market penetration where we expect to grow the business.

Where, and I mentioned this in the update, the aseptic fill and finishes is a direct alignment to the ability with ATS to provide a potential automation solution with their total ability in isolation and finish and fill.

And what I can state is that, that is part of our upside.

It is -- we view that as fairly decent level upside.

That said, it's too early to tell and our base case is a solid base case.

Your next question comes from Justin Keywood, GMP Securities.

For the Consumer products segment and the large warehouse customer, is there still an opportunity for more orders from this customer?

Or should we maybe expect Q4 to be a normalized run rate going forward?

We do view the potential on more orders from this customer.

And as I've mentioned in the past, we're also looking at strategic areas where we could take niche application in to the other potential customers as well.

So we like our position today.

We like the niche application that we're in.

And so we believe there's more opportunity with this current customer.

And we also believe there's potential more opportunity outside of this core base.

And just on normal run rate going forward in our business because of the large programs that we have and timing of customer requirements, we don't really have a normal go-forward run rate.

So we will continue to see variability from quarter to quarter.

Okay.

Understood.

And then with ATS Illuminate, is this -- the way to look at, is it basically an improved version of the ATS tool kit?

And if so, are there any key differences or new features that could help in advancing the after services sales?

Justin, so thank you for the question on Illuminate.

We are very pleased with the launch and -- we would call this Toolkit 2.0.

And it's really aligned around a scalable IoT platform for machine, cell lines, we got full factories for manufacturing and this does replace our toolkit offering.

So customers will be migrated over.

It has a number of new features, improved integration with customer systems and dashboard capabilities.

And what this is aligning to is, as we think about the full potential is the services and IoT offering where, ultimately, the customer could have full integrated solution, preventative maintenance, order a spare part, drive the spare part and have the person waiting there.

So it's that the customers can drive what they need most, which is their product to be out on time at the highest level of quality and as expected.

And so we're really excited about this launch.

Really excited about the direction and the integrated aspect of the potential with Illuminate, with all ATS businesses is a big potential for us.

And we couldn't be more excited about the future on this.

(Operator Instructions) Your next question comes from Maxim Sytchev with National Bank Financial.

I had a question just in terms of how should we be thinking about your backlog to revenue conversion guide.

Because I think you hosted a call in the February, so you already had a bit of an insight into how Q4 was playing out and you came in at 37% conversion versus sort of the guide of the mid-point being lower.

So I guess the first question, did anything transpire?

Were there any change orders that can mean later than expected?

Or is it part of sort of marginal expectations just to get -- trying to better handicap the guide on a going-forward basis was possible?

We provide the range and it's an estimate.

And as we've said, we try to provide as accurate as an estimate.

We can but the range is there because of our business and what's impacting.

And more specifically, in Q4, what we saw is more of the third-party material coming through in the quarter versus our original expectations.

And we know that, that can happen any quarter.

One of the quarters in the year, we -- some of those third-party materials moved out a couple of weeks and our revenue came in slightly lower.

And then we recovered that in the next quarter.

And now in Q4, we have a bit of the opposite situation where some of those third-party material has come in a bit earlier.

Okay.

That's very helpful.

And then maybe a question for Andrew.

Do you mind maybe commenting just on your comfort level around the opening leverage in the model?

I mean as we've seen in Q4, we had a lot of, obviously, the revenue growth, but EBITDA went up by a very similar amount.

So just maybe your comfort level around the next couple of years and how that relates to the 500 basis point improvement that you talked in the past?

So I'll start.

So what we always do is we ensure that we have the flexibility to be able to manage our cost structure.

And when we talk about the margin improvement plan, margin expansion, 500 basis points over a period of time, we see increased OpEx.

We would not be negatively impacting or decreasing our expectations.

We've talked about increased CapEx and spend.

And should we not require that, we're in a position we will be -- we would be in a position in a couple of years to get out of other phase or short-term leases to offset any increased costs.

Does that answer?

Well, I don't know if Andrew maybe wants to add something to that.

Yes.

I mean -- so Max, I don't have much more to add.

Maria covered the key points.

The biggest item we look at with our investment, and we'll walk through the capital deployment but the first one is internal investment.

We look at each one of these with its own independent view, where -- when we invest in capital and we look at the business platform, we identify where we expect to grow and where we want to drive growth and then we have -- always, we look at what will be the potential if things were to change.

We're confident where we sit today.

And to Maria's point, if things were to changed, we're in a position to be able to mitigate that risk.

So it's a good -- we believe we're in a good spot starting the year.

Your next question comes from Mark Neville with Scotiabank.

Yes.

I just had a couple of follow-ups.

Just first for Maria.

Just on the backlog adjustments, again if Comecer added $60 million, it look like I guess it would have been a negative $30 million offset.

That was -- you said that was all FX.

Is that right?

That's correct, yes.

Okay.

And then just maybe, just on the G&A rate, you said, again, it will step up a bit next quarter guessing, if my math is right, about another $3 million, is that well read?

We're expecting another $2.5 million or so from full quarter of Comecer.

And our run rates are -- that puts us at around a quarterly run rate of about $50 million going forward.

$50 million, okay.

Maybe just one for Andrew then, just on the Illuminate.

I'm just sort of curious sort of who the target customer is?

Is there someone that's sort of fully connected, not connected at all?

And sort of your go-to-market strategy, is this you, sort of, selling as your kind of sell equipments in other solutions?

Or is it something where there's a separate sales force and it's trying to be sold separately?

Just some thought to that.

Yes.

Sure.

So I'll answer the second question then I'll go to the first.

So from a sales management and sales approach, we have both internally trying to drive this when have cap action.

And I talked about this previously but I'll refresh it, when we won that large EV order last year, significant order, the second reason they gave me to why they chose ATS, first was because they felt that ATS can provide them with the ability to execute their plan and deliver the value they need for their production line.

Number two was our IoT platform.

And they truly viewed it as a differentiator, and they viewed it as the ability to not only take the current -- what they're buying with us, their production line and maximize the performance over the life but then also the potential to then take the solution set and go to other parts of their operation.

Great win for the team also, the ability for us to really prove what our IoT platform can do.

And so we're putting this with CapEx, and we're also having a sales force that's going to deliver.

And Illuminate why we really like the brand, like the idea, like the launch is, as we look at, say, Comecer, in the future, we can take that solution set and be able to offer to their customers and integrate their solutions and integrate their business.

And so we have both.

And then the first part of your question around when we look at what customers are our target customers.

We look for businesses that -- if they've already standardized on a certain platform, that might be a second-tier type of discussion.

We offer it.

We market and then we go to customers that we can really drive their value.

Meaning, when they're looking for a solution set to maximize their operating performance, that's a natural fit for us.

And more so in the future, it's about ATS and/or other parts of our business customers as well as other businesses.

And we can take this solution set, but again, it's early days and there's a lot of opportunity.

So maximum value for time put in.

Okay.

Maybe I'm wrong, but is this sort of -- I don't know if I'm -- again, is this sort of something where you're competing a bit with some of your -- maybe some of your suppliers?

So -- okay, we view that we have a very strong solution in the niche application, we're going after.

We're soup to nuts on the machine to operating the manufacturing production line.

And what I mean by that is it's a little bit more customized for what the customers need and when we see that the tools that's offered today, a lot of times what we find is there is good solution in IoT, but it's a little bit last customized.

And that's where we believe we can bring a sizable value to our customers.

Because when they come to us, remember we design this internally, we design this -- because we were operating our equipment and we wanted to maximize our ability to bring the customer the product as fast as possible and then we commercialized it.

And we did that roughly, call it, within the last 2-ish years.

And our customers identified that this is an area where they feel we can add value and the Illuminate is just that next step in really providing that to them.

Does that answer your question?

Yes.

It helped.

Your next question comes from Cherilyn Radbourne with TD Securities.

Just a couple of follow-ups for me.

I was hoping, in relation to the $60 million that you plan to invest next year that we could get a feel for how that breaks down between capacity expansion versus spending on intangibles?

The majority of that increase comes from capacity expansion.

Okay.

And you indicated that within your, sort of, real estate portfolio, you've got leases where you could adjust down in future if necessary?

Yes.

Absolutely.

And in fiscal '19, towards the end of fiscal '18 and fiscal '19, we entered into some of the short-term leases based on our revenue growth expectations.

And as we bring this capacity on, if we don't need it, we would be able to exit.

And if backlog and revenue requires it, we would augment with both the builds that we're doing and then the leases that have.

Okay.

That's helpful.

And then Maria, if you could just remind us on stock-based comps, sort of, how that works between the base expense and then the sensitivity to a $0.50 or $1 move in the share price?

Sure.

We expect that regardless of -- our stock price changes aside that our stock compensation expense will be about $10 million in fiscal '20.

And then for every $1 increase or decrease that would impact by $1 million.

For the year or for the quarter?

For whenever the stock price changes.

I see, okay.

So for the period?

For the period, yes.

Your next question comes from Robert Caldwell with Richardson GMP.

Andrew, as you know in the past we've followed M&A activity quite closely on the automation industry.

And one transaction I want to ask you about is the takeover by Hitachi in Japan of the privately owned U.S. company, JR Automation Group for $1.3 billion, what's intriguing to us is that represents evaluation of 18x EBITDA.

So 2 question, Andrew.

With a transaction of that nature at 18x EBITDA, what made this tell us about the current valuation of ATS at the present time?

And number two, conversely, what might this mean for ATS going forward and making additional acquisitions?

So we start by a little bit about this transaction.

First, we have -- as you're well aware, we've 4 criteria for our M&A approach and M&A process and.

And it starts with market, then strategic rationale and then how we're going to operate the asset and last is ROIC.

And when we talk about this asset, we would largely state that we don't view them as a competitor.

And we view that they're a bit more in the automotive space than we would -- than we are today.

And secondly, we don't view them -- so when we talk about the potential of the price paid, again, back to ATS, we believe, we're in a solid position.

We've got a strong base of business.

Our opportunities are -- our funnel is healthy as we go into the year.

And we believe we've got the ability to continue to execute our plan for shareholder value creation.

And we're very pleased with the year we just performed and the year we delivered on.

And we believe, moving forward, that certainly our business is aligned to deliver that value.

When we step back and look at the funnel for M&A, in our view not much has changed.

The markets that we're going after, the markets that fit our 4, that largely stayed relatively flat in the multiples.

And one of our areas is ROIC and being sure that we align that value and as importantly to long-term value for your prior shareholders.

So to summarize, we -- this acquisition, would not have checked our 4 boxes.

It was certainly announced and something we were aware of.

And we believe we're in a position to continue to execute our value-creation strategy to really deliver that value to our shareholders.

So Andrew, just to be clear, did the price Hitachi paid surprise you?

It was -- so in general, it was not a surprise to us.

And so JR would have been -- you're explaining to us, I think a different valuation than other companies you might be targeting.

To not get into too much specifics on this area, we -- it was not a surprise to us from a valuation perspective, first.

Number two, we are targeting certain aspects.

We like regulated spaces.

And therefore, that's a key focus for our business.

And again back to my initial point, ATS is set up for a solid start to 2020.

We have a very strong backlog.

Our funnel remains healthy.

Comecer is a fantastic add.

KMW's a fantastic add to the organization as well as Transformix.

And we're aligned to truly deliver long-term shareholder value.

And we're going to continue our mission to do that.

Well thanks, Andrew.

I wanted to bring that up, the valuation caught our attention naturally.

And we think it might be indicative of valuations in the automation industry in general.

And of course, if that is the case, it makes acquisitions for ATS fast just a little more costly going forward.

Yes and the only -- the one area that I'll also state, and I've mentioned this in the prior discussions, but we had a statement around ABC, I'll always be cultivating.

And it is about making sure we've got that relationship with the asset and making sure that it's a good fit to the ATS family.

And we believe the additions we have, have been those -- that right fit.

And so when the multiples were there, we certainly can execute to deliver the value.

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

Thanks, operator.

Thank you, everyone, for joining us today.

And I look forward to reporting our first quarter results in August.

Have a safe day.

This concludes today's conference call.

You may now disconnect.