ATS Corporation Common Shares

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 has been recorded on May 16th, 2019 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. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I'd now like to turn the call over to Stuart McQuaig, Vice President, General Counsel of ATS.

Thanks, Operator, and good morning, everyone. Your main hosts today are Andrew Hyder, 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 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.

Thank you, Stuart. 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 at a full year performance. Marie will then provide her report. Over the last year, we have generated positive momentum, which resulted in solid organic growth to the addition of new customers in strategic markets and the retention and expansion of some long-term customer relationships. In addition, we have made a number of important strategic advancements. In Q4, we completed our acquisition of ComaChair, a great addition to ATS that will accelerate our growth and penetration in life sciences. ComaChair is a leader in the radiopharma market with significant capability in the 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 fills 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 a goal of driving technology leadership and expanding the reach and scope of our capabilities to benefit customers through reduced complexity, shortened 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 Toolkit 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 SuperTrac linear motion platform. In Q4, we launched our SuperTrac 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 the 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 SuperTrac platform, and will continue for the next several quarters. From an organizational standpoint, we moved our linear motion technology and Illuminate groups into separate business units with our 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 and 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 last year. Organic growth in revenues was 11%, with the other 1% coming from acquisitions. On adjusted EBIT margins, we realized a 90 basis point 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 in 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 is 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 Coma Chair 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, We continue to see favorable trends in attaching service sales to our CapEx business. Q4 bookings and revenues were up over 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. 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 in 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 four simultaneous Kaizen events globally, which I and my executive team participated in as team members. The four events focused on engineering efficiencies, access 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 Comichaire. To date, front end of the business integration activities are progressing very well. We have built a pipeline of pursuits where the combined businesses 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. Align the organizations on sales pursuits and capture plans to capitalize on the combined ATS's strong automation capability and ComaChair'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 ComiChair 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 ComiChair'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. ComiChair, 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 with their prospects for continued growth and improvement. In summary, I am 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 two 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 will 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 five months of KMW and one month of Coma Chair 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 operating performance. Q4 bookings of $298 million included a strong contribution from Comacher, 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 Comet Chair, 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 Comichair. With the addition of Comichair for one month, we generated $348 million of revenues in Q4, a 17% increase over 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 two years, revenues have grown organically by 10% and 11% in fiscal 18 and fiscal 19, respectively. Q4 revenues, excluding common share, were approximately 37% of backlog or slightly higher than the expected 30 to 35% of backlog. We ended fiscal 19 with $904 million of order backlog, a 21% increase over 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 ComiChair 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 varied 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 2019, 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 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 non-cash 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 that 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 15% 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 produced good cash flows for the year. In 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 20 cents, up from 16 cents 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 pre-tax 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 use 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.

Ladies and gentlemen, we will now conduct a question and answer session. To allow as many voices to be heard as possible, please limit yourself to two questions per turn. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order that they are received. Please ensure you lift your handset if you are using a speakerphone before pressing any keys. Your first question comes from Mark Neville with Scotiabank. Your line is open.

Hi, good morning. Great quarter. I just want to ask in the bookings, this quarter you were off trend. And I guess just 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 get your thoughts on that and sort of maybe the evolution of your funnel over the past four or five months as well.

Good morning, Mark. So I'll break that down in a couple ways. First, when we look at the funnel, and we said this, we have 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 of these customers, and as I've had the discussion with them, there has 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'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 four to five 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 quarters and we had large enterprise type programs that we booked and also just large dollar programs. As we booked 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, have also been replaced. So over the last year, our funnel has remained strong.

You know, that's helpful. I was sort of just curious if there was any significant drop-off. It doesn't sound like that. Maybe just on the Coleman Chair, just trying to understand, it looked like it added or came in with roughly $60 million of backlogged. But then you said you booked $27 million of bookings in one 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? Again, the numbers seem quite different, so I'm sort of struggling to understand it.

Yeah, so the $60 million coming in would be a regular number. That would have been their run rate historically. Unusual is the large booking in March. So they had about a $20 million order, and that has increased their backlog. That $20 million order has a revenue period of about seven quarters. So that is unusual also. Typically, their backlog revenue is similar to what we've talked about for ATS. So that's in the six- to eight-month range, and this is now pushing it out. The backlog, though, doesn't change our revenue expectations and our plan for ComiChair. 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 an ATS customer and also a Coma Chair customer. And what I can tell you is that 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 Coma Chair 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? Again, if it's that significant, I'm just curious, was it customer driven or was it something you guys approached or Comature went to them with?

Yeah, the Comature team executed this. Okay. Fortunately, I was able to meet with the customer right around their decision process and their decision time. They couldn't have been more positive on the technology and the solution that Comatara provides to them. Secondly, we ATS also were working with them and they had a really positive reaction to us working together and potentially working together in the future. You know, it's a good start. Certainly, we need to continue to execute, but we're very pleased with the reaction we've seen.

If I can just maybe seek 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 Coma Chair revenue number, not your consolidated, correct?

That's correct, yes.

Yeah, okay. Okay, thanks. We'll get back to you. Thank you.

Thanks.

Your next question comes from Sherilyn Radborn with TD Securities. Your line is open.

Thanks very much and good morning. I wanted to start by asking a question on the order backlog continuity. As I look at the $60 million coming in from ComiChair, it looks like that may have been offset by foreign exchange or some other adjustment. 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 ComiChair related, no cancellations.

Okay, perfect. That's helpful. And then just a larger question as it relates to ComiChair. As I understand, you know, the reasoning behind the acquisition, it's to combine ATS's expertise in automation and robotics with ComiChair'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 ComiChair's average deal size from, I think it was 2 to 3 million euros on sort of a going-in basis?

Yes, Sherilyn.

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 Coma Chair team has been absolutely fantastic on the integration. The ABM is taking shape. They align around a continuous improvement mindset. So, so far, we're very pleased. And in our 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 finish 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 as part of our upside, we view that as a fairly decent level upside. That said, it's too early to tell, and our base case is a solid base case.

Thank you. That's my two.

Thank you, Sherilyn.

Your next question comes from Justin Key with GMP Securities. Your line is open.

Good morning, and thanks for taking my questions. For the consumer product 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?

Good morning, Justin. 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 a niche application into 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. We also believe there's potential more opportunity outside of this core base.

And just on the 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, the way to look at it, is it basically an improved version of the ATS toolkit? 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 machines, cell lines, full factory floor manufacturing. And this does replace our toolkit offering, so customers will be migrated over. It adds 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 a services and and IoT offering where ultimately the customer could have a full integrated solution. Preventative maintenance, order a spare part, drive the spare part, and have the person waiting there such that the customer 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.

Okay, thank you. That's very helpful.

Again, to ask a question, please press star 1 on your telephone keypad. Your next question comes from Maxim Sitchin with National Bank Financial. Your line is open.

Hi, good morning. good morning I had a question just in terms of how should be thinking about your backlog to revenue conversion guide because I think you know you host the call in February so you already had a bit of an insight into how Q4 was playing out and you came in at 37 percent conversion versus sort of the guide of you know the midpoint being lower so I guess the first question did anything transpire with any change orders that can mean later than expected, or is it part of sort of management of expectations just to get a, you know, trying to better handicap the guide on a going-forward basis if it's 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 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 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 the 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 operating leverage in the model? I mean, as we've seen in Q4, we had a lot of, obviously, 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. Thanks.

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 with the increased off X 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 would be in a position in a couple of years to get out of other space 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.

Yeah, I mean, so, Max, I don't have much more to add. Maria covered the key points. The biggest item we look at with every investment, and, you know, 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 are the potential if things were to change. We're confident where we sit today, and to Maria's point, if things were to change, 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.

Okay. Thank you very much.

You bet.

Our next question comes from Mark Neville with Scotiabank. Your line is open.

I just had a couple of follow-ups. Just first for Maria, just on the backlog adjustments, again, if Coma Chair added $60 million – It looked like I guess it would have been a negative 30 million offset. You said that was all FX, is that right?

That's correct, yes.

Okay. And then maybe just on the G&A rate, you said, again, it will step up a bit next quarter. I'm guessing, if my math is right, by about another 3 million. Is that about right?

We're expecting another 2.5 million or so from a full quarter of Comet share. And our run rate, that puts us at around a quarterly run rate of about 50 million going forward.

50, okay. And maybe just one for Andrew then, just something to illuminate. I'm just sort of curious sort of who the target customer is. Is this someone that's sort of fully connected, not connected at all? And sort of your go-to-market strategy, is this each sort of selling this as you're trying to sell equipment? and other solutions, or is it something where there's a separate sales force and it's trying to be sold separately? Just some thoughts on that. Thanks.

Yeah, 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 we 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 could 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 their 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, at Coma Chair in the future, we can take that solution set and be able to offer it 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, you know, 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 the 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 the 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 feel, I don't know, 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 are 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 tool sets offered today, a lot of times what we find is they're a good solution in IoT, but it's a little bit less customized. And that's where we believe we can bring the highest level of value to our customers and Because when they come to us, remember, we designed this internally. We designed 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 within the last two-ish years. And our customers identified that this is an area where they feel we can add value and illuminate just that next step in really providing that to them. Did that answer your question?

Yeah, yeah, no, it helped. Thanks.

Your next question comes from Sherilyn Radborn with TD Securities. Your line is open.

Thanks very much. Just a couple of follow-ups from 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 these 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 we have.

Okay. That's helpful. And then, Maria, if you could just remind us on stock-based comp, 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 stock price changes aside, that our stock compensation expense will be about $10 million in fiscal 2020. And then for every dollar increase or decrease, that would impact by a million dollars.

For the year or for the quarter?

For whenever the stock price changes.

I see. Okay. So for the period. For the period, yes. Okay. Thank you. That's all from me. You're welcome. Thank you.

Your next question comes from Robert Caldwell with Richardson GMP. Your line is open.

Hello, everyone. Good morning. Andrew, as you know, in the past, we've followed M&A activity quite closely in the automation industry. And one transaction I want to ask you about is the takeover by Hitoshi 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 18 times EBITDA. So two questions, Andrew. With a transaction of that nature at 18 times EBITDA, what might 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?

Good morning, Robert. So let me start by a little bit about this transaction. First, as we're well aware, we have four criteria for our M&A approach and M&A process. 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 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 four, have 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 our shareholders. To summarize, this acquisition would not have checked our four 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 that Tasha paid surprise you?

You know... So in general, it was not a surprise to us.

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, 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, you know, 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. ComaShare is a fantastic ad. KMW is a fantastic ad to the organization as well as Transformix. And we are 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 perhaps just a little more costly going forward.

Yeah, and the one area that I'll also state, and I've mentioned this in prior discussions, but we have a statement around ABC, always be cultivating. And it's 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 that right fit. And so when the multiples are there, we certainly can execute and deliver the value.

Well, I appreciate the comments, Andrew. Thanks very much.

Thank you, Robert.

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

Thanks, Operator. Thank you, everyone, for joining us today. 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.