Lionheart Holdings (CUB) Q3 2016 Earnings Report, Transcript and Summary

Welcome to Cubic Corporation's Third Quarter Fiscal Year 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Today’s webcast includes a slide presentation as part of the formal presentation, followed by a question-and-answer session. You can advance the slides by using the left and right arrows, located in the right-hand corner of the slide window. [Operator Instructions] Now I would like to turn the call over to Diane Dyer, Cubic’s Director of Investor Relations. Please go ahead.

Thank you, operator. Hello everyone and thank you for joining Cubic's webcast. Today, during market hours, we reported our Third Quarter Fiscal Year 2016 Results. We encourage you to refer to the Company's press release and most recent reports filed with the SEC as well as today's presentation slides. You can access these documents on the Investor Relations tab of Cubic's Web site at www.cubic.com or on the SEC's Web site. On today's call, Brad Feldmann, Cubic's President and CEO, and Jay Thomas, Executive Vice President and CFO, will comment on Cubic's third quarter 2016 results. Mark Harrison, Cubic's Senior Vice President and Corporate Controller, will join us for the Q&A session. Please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. I caution listeners that during this call Cubic management will be making forward-looking statements about future events or Cubic's future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. These forward-looking statements should be considered in conjunction with and are qualified by the cautionary statements contained in Cubic's earnings press release and SEC filings including its annual report on Form 10-K and quarterly reports on Form 10-Q. This conference call contains time-sensitive information that is accurate only as of the date of this broadcast, August 3, 2016. Cubic undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Cubic believes this information is useful to investors because it provides a basis for measuring the Company's available capital resources, the actual and forecasted operating performance of the Company's business, and the Company's cash flows. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures. With that said, I'll turn the call over to Brad Feldmann, our President and CEO.

Thank you, Diane. Thanks for joining us on the call. Today, I'll review our third quarter and year-to-date results for fiscal year 2016, as well as provide segment and strategy updates. Jay will cover our consolidated operating highlights, segment financial results and discuss key balance sheet items and cash flows in more detail. He will also discuss a modification to our 2016 guidance. On Slide 3, you will find an overview of our third quarter operating results. Sales in the third quarter for fiscal 2016 were $375.2 million, up 8% from the third quarter of last year, despite currency headwinds of $9.2 million. Adjusted EBITDA for the quarter was $40.7 million, up by 54% from last year, driven by good margins in transportation, partially offset by currency headwinds of $2.1 million. Operating cash flow for the third quarter was particularly good, at $43.1 million compared to -$14.6 million last year. We are very pleased with the third quarter results, except for the lower EPS, which is due to higher non-cash tax expense and cost growth on some defense system training contracts that we are working to recoup with our customers. Jay will discuss this in detail after my remarks. Consistent with what we’ve discussed in prior calls, we will have a very strong fourth quarter, due to higher-margin shipments in our defense business. Key revenue next quarter will include international air combat shipments, laser engagement simulation systems for the United States Army individual weapons systems, shipments from both GATR Technologies and DTECH for special operations, Army, and Air Force customers. Of particular note is the delivery of the low-rate initial production units on the TD2C2, or transportable tactical command communications program to the Unites States Army’s project manager warfighter information network tactical, or PMWINT, program. We anticipate full-rate production in fiscal year 2017. The year-to-date results compared to last year were mixed. Sales were up, 5% higher, at $1.0551 billion, despite currency headwinds of $26.4 million. Adjusted EBITDA was $82.3 million, 5% lower than last year, but about flat after including currency headwinds of $3.5 million. As we have previously communicated, fiscal year 2016 is a transition year for Cubic, as we continue to implement structural and cultural changes throughout our organization. We are very excited about our leadership team. We believe we have the team to grow the company and greatly advance shareholder value. I'd like to take a moment to just briefly describe each of our operating unit presidents. David Buss the president of Cubic global defense or CGD is a retired Vice Admiral in the U.S. navy's former and our boss. They joined Cubic after more than 36 years in the navy. Here's what -- complex organizations and has great end user perspective on training and [indiscernible]. Davis leading our next training strategy to develop performance space training solutions that was a premium on measuring an assassin human performance in developing critical military skills. A concept valued by our customers. Mike Twyman, the President of Cubic mission solutions or CMS. There's more than 30 years of experience as an industry C4ISR leader. Mike architected our C4ISR strategy and led the acquisitions of DTECH and GATR and TeraLogics allowing us to create a powerful mission chain serving our soldiers on the edge of the battlefield. These acquisitions combined with legacy secure communications products have created a business that will drive strong profitable growth in the years to come. Matt Cole the president of Cuba transportation systems or CTS is a 13 year veteran of Cubic. Just over half of which is international experience in Europe and Asia Pacific. As the architect of our next city strategy Matt was recently recognized by the ENO Center for Transportation as one of the top 10 private sector disruptors in transportation. These disruptors which include the likes of Tesla's Founder and CEO, Elon Musk and Uber CEO, Travis Kalanick, were selected for their new and groundbreaking efforts to address our country's most present transportation challenges. Matt and his team are working hard to implement Next City. And are transforming the business most notably moving us to a product orientation that will ensure we serve our customers and wide margin expansion. Our entire management team is very committed to Cubic success. In the past year management and the board have showed their commitment to the company, through inside their buys of Cubic -- We believe we have a superb team that will drive the growth of our business and create enhance shareholder value. Another part of our transition is an enterprise is our ERP upgrade implementation. This effort is on track with our next phase rollout coming in October. We continue to expect increase efficiency year's results. Overall, we expect fiscal year 2016 have higher sales in adjusted EBITDA compared to fiscal 2015 and we continue to expect what performance in fiscal year 2017. During next earnings call will provide guidance for fiscal year 2017 and provide our five year targets. With the presidential election on the horizon we're optimistic that defense spending will continue to remain steady more increased no matter who takes office. We expect the government will operate under a continuing resolution in the fiscal year 2017 to at least the New Year which may delay some DOD contract award. None the less, we expect good organic growth next year. Moving to Slide 4; I'd like to reiterate our strategy in providing an update. As we shared on the last call for overall corporate strategic objective is embedded by 2020. We believe that by continuously winning [ph] the customer we will grow the company's top line at 10% or more annually in line with our historically performance. We will achieve superior returns in our strategic focus areas of Next City, C4ISR next training. Then we will grow our bottom line at a faster rate to our One Cubic efficiency initiatives. I’d to walk you through an update for each of our strategically objectives. Our first strategic objective winning the customer; is absolutely paramount to our success, it's an idea centered on providing superior solutions to our customers -- by innovation and an ultimate focus on the end customer. In CTS we announce that along with our Chicago regions transit partners we achieved the milestone of 1 billion centric or transactions in Chicago. This award winning system delivers customer’s greater flexibility, with account based open limit travel. In Cubic mission solutions or CMS are superior business we are continuing to innovate with an intense focus on our customer’s most challenging needs. Last month we announce that [ph] will provide the industry's first two year warranty on all of that small form ruggedized network communications products at no additional charge, effective immediately. Product realizability is paramount to our customers. And therefore it is extremely important to Cubic. In CDP where are able to increase joint transit effectiveness for Canadian customers. With the successful integration of Cubic Air and ground train systems, during exercise medical resolve [ph]. This helped to increase the value and effectiveness of joint training and set the stage for soldiers to sharpen their skills within a realistic conquest, in challenging operating environment. We're also working several other innovations that we believe will change that game in our markets. We are proud of our team across the globe that works hard every single day, that winning the customer. Our second strategic objective is our Next City vision for the future of our transportation segment. We intend to build Next City globally. We're expanding for providing mass transit fair collection, to the point smart mobility information and payments, across all modes of transportation in cities and metropolitan regions. A key pillar of our Next City vision is one account, which enables to use of a single account for all transportation payments no matter the move. We are currently leveraging our One Account Technology, which includes open payments for several upcoming pursuits from around the globe including; Brisbane, San Francisco, Boston, Seattle, New York City and Sydney. We have recently submitted our New York City bid, and have an exclusive teaming agreement which transports for London along with the recently announced license agreement. This license agreement enables us to incorporate elements of their proven world class, open payments back office system; into one account is part of our proposal to New York and other customers. This is the start of enhancements cycle across our customer base that will transition fare collection systems from store value to open payments. Similar to what we have delivered in London and Chicago. In Sydney we have completed negotiations of tentative final requirements for the systems and a host of change orders. And we are now working to confirm to open payments to the entire system. Vancouver has transitioned well the services. And last week we announced that more than 1 million Cubus [ph] cars have now been issued in Vancouver since its launch in 2015. More recently won a $33 million contract to upgrade Miami Beach transit -- system to include mobile in open payments. In 10 years of all this cloud computing and support services. According to our Next City strategy is to expand the other modes of urban transport. One of which is tolling. Things are progressing well in our tolling project in New Hampshire. And we are currently working on tolling proposals in North America, the Middle East and Europe. We're also working exciting innovations such as check-in be-out of payment system. That we are co-developing with the German government and several Germany customers. Next stage, a virtual ticketing machine, which is in the pilot in both Germany and the United Kingdom. A future ticketing project involving fast-track gates, for the railway network in the United Kingdom. Upgrading mobile functionality across our customer base, and adding real time passenger trip planning. So the Chicago bench for application. We are thrilled with our progress toward achieving our Next City version and the value we were delivering to our customers and their customers. Our third strategic objective is to grow our C4ISR business by expanding from secure communications to a leader of expeditionary communications. We are on-track to achieve our goal of creating a niche $200 million plus communications business with high-teen margins by the end of this fiscal year, a goal that we set for ourselves only last year. In the quarter we won a small order for 13 tactical two weight data transport chips or T2STC that demonstrates the synergy intrinsic towards C4 our strategy. This order would not have been possible without DTECH, TeraLogics and GATR; our three acquisitions over the past three years that are being successfully integrated in Cubic. We are integrating their capability into a tactical video dissemination solution that will be rapidly deployed to our war fighters. The Cubic mission solutions train was selected because of the unmatched performance and load size-weight and power attributes our solution. This is a great example of retaining the agility of our acquisitions, and innovating at the next level. As previously mentioned today GATR received a low rate initial production order to support the United States army's transport tactical command communications, T2C2 [ph] program as a major element of programs. We are excited about our products pipeline and our ability to accelerate profitable growth in our C4ISR business. The forward strategic objective is to build our next training capabilities globally, with innovative integrated wide virtually constructive gaming solutions, for the year round in Cyber domains. By implementing LECG solutions across all domains of warfare, we will enable our customers to enhance their training readiness efficiently and effectively. Cubic global defense is a member of the warfighter breaking this research division contractor team, selected to develop new training methodologies. We believe that -- our market leadership 40 plus years of domain expertise and commitment to winning the customer. We won a major air combat maneuvering instrumentation -- development contracts. To provide our Key 5 combat training system to non-United States combat aircraft, production contracts will follow from multiple international customers. We also want a $73 million United States Marine Corps aircrew training simulator we compete in services contracts. We are working several exciting innovations in the Next trainings phase including, immersive gaming for the petrol [ph] combat ship program. A next generation non-laser indirect fire solution in conjunction with our Canadian customer, a next generation home station training solution with the United States Army. A next generation -- constructive ACMI solution with the air force research lab and multiple efforts to create synthetic cyber ISR social media threats on touch spreads for the future squad size unit by implementing our final strategic objective, One Cubic, we are rebuilding our infrastructure so that it is scalable, efficient, and effective, and we are starting to share our technology, processes and people. The second phase of our enterprise resource planning system implementation is on budget and on schedule. Our next rollout is in October fiscal year 2017. In the third quarter, we launched workday worldwide, which greatly increased our recruiting functionality and talent management capabilities. We’re also making great progress on reducing our supply chain and centralizing manufacturing. We are starting to see cost savings and have already reduced the number of suppliers by 50%. In the past year, we’ve made great progress in combining the worldwide processes across the company, including in business development, program management and estimating. We are very excited by this progress as we begin work now to streamline our worldwide engineering processes. We are committed to improving our margins by 2% to 2.5% through these One Cubic efficiency initiatives. We believe our Goal 2020 strategy, and its five supporting objectives of winning the customer, training and One Cubic will achieve significant value for our customers and shareholders. We are pleased with the progress to date and our team is excited about the future. I will now like to turn the call over to Jay Thomas, our CFO, to discuss our detailed financial results and an update to our EPS guidance.

Please turn to Slide 5 for our consolidated operating highlights. Sales in the quarter were up 8% compared to last year and up $15 million, to $1,055,100,000, or up about 5% year-to-date, despite excess headwinds, which slowed sales by $9.2 million in the quarter and $26.4 million year-to-date. Most of the excess headwinds we have seen this year are related to the British pound, where we’ve seen the average rate drop about 6% through the June quarter. The Brexit vote happened near the end of the June quarter and, since then, we’ve seen the pound drop in value another 9% to 10%. This continued weakness in the pound will continue until we have negative impact on prepared results and see rates stabilize, which generates 18% to 20% of our annual sales from our operations in U.K., primarily in the transportation and defense segments. Recent acquisitions in the C4ISR stage contributed $20.5 million and $43.4 million for the three-and nine-month periods, respectively, this year, compared to $10.8 and $22.6 million in the comparable periods last year. Adjusted EBITDA was very strong, increasing 54% to $40.7 million or 10.9% on sales compared to $26.4 million, or 7.6% of our sales last year for the third quarter. Year-to-date adjusted EBITDA was $82.3 million or 7.8% of sales, compared to $86.6 million or 8.6% of sales last year. The primary reason for the decline year-to-date was lower profits as a result of the transition to our follow-on transportation contract in London and excess headwinds. Excess headwinds lowered the adjusted EBITDA by $2.1 million in the third quarter and $3.5 million for the year. GAAP EPS was $0.17 for the quarter and $0.34 year-to-date, compared to $33 million and $0.11 last year. Cost growth on ground training systems contracts had an impact on EPS of approximately $0.05. Costs related to One Cubic initiatives impacted EPS by $0.19. Accounting related expense on a recent acquisition had an $0.08 impact and a higher tax changes in our deferred tax valuation allowance had $0.06 impact from the quarter. We'll discuss our division to our guidance later in the call. Now turn to Slide 6 and we’ll talk about our transportation segment. CTS sales were $156 million in the quarter, up 17% over last year and were $430.5 million year-to-date, up 5% despite severe headwinds of $18.5 million in the quarter and $21.9 million year-to-date. Increase in sales was attributable to higher activity in North America, despite lower sales in the U.K. Adjusted EBITDA was very strong on the quarter, up 55% over last year, to $22.5 million, or 14.4% of sales and year-to-date was $50.9 or 11.8% of sales compared to $59.7 million last year, or 14.5% of sales. The year-over-year decline in profitability is related to transition to our follow-on London contract, where we no longer get usage somewhat offset by higher profits in North America and Australia. The higher profits in Australia resulted from resolution of a contract change for work we completed related to knowing build, as well as improved profitability on services contract in Sydney. CPS ended the quarter with a total backlog of $1.689 billion, year-to-date CPS backlog has been negatively impacted by approximately $82.2 related to FX rates. CPS has had positive operating cash flow. Now please turn to Slide 7. I’m going to talk about Cubic Defense Systems. Business. Defense system sales were up 16% to $119 million in the quarter compared to last year. We're up 12% year-to-date to $331 million. The sales increase was due to organic growth and higher sales from recent acquisitions. We're expecting defense systems will have a record fourth quarter for sale to disrupt shipments from air ground and sea freight, so our product lines. Adjusted EBITDA was up 88% over last year to $13.7 million in the quarter or 11.5% on sale despite cost growth on ground training contracts where we are seeking the companies for contract changes. Year-to-date adjusted EBITDA was $23.2 million, up slightly over last year and $22.5 half million again for aforementioned cost growth on ground training contracts. The higher margins in the quarter reflects sales of higher margin air combat training systems. Operating profits in defense systems have been negatively impacted by purchase accounting related charges on a recent acquisition, Steve CVS, a company in appendix and earnings release and earnings call slide which provide a reconciliation of GAAP operating income to adjusted EBITDA. We considered adjusted EBITDA to be more reflective of true core earnings power. Defense systems backlog was $542.5 million at the end of June compared to $595.7 million at year end. As we've noted on prior call, the sea for ASI business that we've acquired on workbook and ship, therefore they have lot of backlog and shorter cycle between contracted work and delivery. Defense system has been a user cash during the year but didn't have operating cash flow. The primary reason for the use of cash has been the purchase accounting related charges for compensation expense on the GATR and TeraLogics acquisitions. Now turning to Slide 8, defense services sales for $122 million in the quarter, down 10% from last year, sales year-to-date were $293.3 million, down 2% from last year's comparable period. The decrease resulted from lower training activity supporting U.S. Army and the JRGC in Special Forces. We felt that our defense services business had bottomed out in fiscal year 2014 and we're now concerned with the market remained soft given the likelihood of a continuing resolution that could slow your contract awards. Services adjusted EBITDA was very strong at $6.9 million in the quarter, up 30% over last year, even after taking a small restructuring charge. Year-to-date adjusted EBITDA was $14.6 million or 5% of sales, up 30% over the last year. Service total backlog was $440.4 million at quarter-end down from $485.6 million at year-end -- at the end of my last fiscal year-end. We had received notice that of a recompete on the JRGC contract but this has been postponed and we're rewarded contract extension for yet 2017. We expect we will see a number of contract awards in the fourth quarter and both recompete in our new business and our pipeline for opportunities for these robust. Services had positive operating cash flows in the quarter and year-to-date. Now turning to Slide 9, I will discuss the balance sheet and cash flow. During the quarter, we reduced total debt by $10 million due to a strong operating cash flow installing $43.1 million in the quarter. Year-to-date total debt increased due to GATR and TeraLogics acquisitions. Year-to-date we capitalized $19 million of cost related to our new ERP system and expense $17.1 million. In the quarter, we started amortize the cost of the newly ERP system over seven years as we started to use it in April. We will continue to roll out the implementation to the operating business throughout the fiscal year and into fiscal year 2017. Operating cash flow was strong in the quarter from both the transportation and defense system segments. Finally, turning to Slide 10, we are revising our fiscal year and 2016 guidance for certain impacts to our GAAP EPS. On our Q2 update for guidance, there ranges for sales EBITDA and adjusted EBITDA remain unchanged. We are however, allowing our GAAP EPS range for the fiscal year to $0.85 to $1 from the range of $1.20 to $1.40. The decrease in the EPS range is related to anticipated charges for a partial pension settlement plan for our U.S. pension plan in the fourth quarter, higher interest and financing costs for our new credit facility, and a higher non-cash charge for tax expense due to an increase in the deferred tax valuation allowance this quarter. And with that I'll turn it back to Brad.

Thank you, Jay. Now turning to Slide 11, our summary slide. The third quarter saw improvements in sales, adjusted EBITDA and operating cash flow compared to the same period last year. We expect a very strong fourth quarter due to high margin defense system shipments leading to a good fiscal year '16 performance overall. We are thrilled with the success of the first phase of our one Cubic ERP implementation and that the second release is on-track for October. We are excited about large opportunities such as New York City and the Sydney upgrade; as well as leveraging our One Account Edge with other current and future customers. We're also excited by the strong growth potential of our C4ISR business as we are making great progress toward the integration of our recent acquisitions, GATR Technologies and TeraLogics. We believe our goal 2020 strategy is sound and we are making great progress on winning the customer, next city, C4ISR, next training and one Cubic. As we have stated on previous calls, fiscal year '16 is a pivotal transition year for us during which we will improve our performance, as well as our overall growth prospects and set a foundation for fiscal year '17. Together our team continues its intense focus on implementing our strategy and providing superior value to our shareholders and customers. We are very excited for the future and appreciate your partnership in the company. Now let's proceed to the Q&A session.

[Operator Instructions] The first question comes from Jim Ricchiuti with Needham & Company.

Hi, thank you. The question I have is just with respect to the implied fiscal Q4 revenue guidance. Can you talk a little bit about the wide delta and what might be some of the variables in that swing factor from the low-end to the high end of the revenue range?

Jim, thank you. I'll have Jay initially address that and I'll add some color following.

So we have -- Jim, in the fourth quarter the biggest you will see is a large shipments in defense, we've got air combat, ground combat and a number of C4ISR, so it's really stuff that's been -- you'll see an inventory will be going in and transforming into ship itself. We've said the fourth quarter is going to be a record, so I think it's -- it's just the bunch of shipments getting those done by the end of the quarter. Transportation is going to pass a little bit of an uptick and services will be relatively steady.

Jim, just to add on; the acquisitions that we've done in the last couple of years have some products that are in very high demand and have great margins, and our team is on-track to get those to our customers in the fourth quarter.

So it sounds like this is a case of -- getting the orders early enough which sounds you like you already have. So is it a case of just being able to get product out the door to get to the, again looking at that wide range of revenues you're providing in terms of your guidance.

Yes, it's just a matter of getting the orders out the door, and our team is working very, very hard to exceed our expectations.

Okay, and one additional question for me and I'll jump back in the queue. Brad, I'm wondering if you could talk a little bit about the potential risk there is to the next stage of the ERP release in October. It sounds like you're meeting your milestones, but just how challenging is this next milestone?

It's getting harder because we're adding three pieces of important functionality in our defense company, domestically. Our legacy company is there. There is order to cash functionality, full ERP too, so that will involve our factory and our supply chain and then the third piece broadly is program management. We've gone through three tests already internally where we have a few bugs, but the team is working very hard and we're working very hard to have the reports for our team. Jim, we will get there and we will be successful, but it is a little bit harder.

Okay, thanks a lot. I'll jump back in the queue.

Thank you. Our next question comes from Brian Gesuale with Raymond James. Please state your question.

Hey, guys, quick question maybe for you, Brad. You've really put some nice pieces together in the C4ISR space and you've mentioned it's going to run at about $200 million a year. How would you frame that market size and opportunity and maybe how should we look at some of these LRIP and other programs ramping up with some of the acquisitions over the next two to three years.

So the market size, obviously, this is for overall C4ISR. It's in the low single-digit billions market size. In terms of the specific on the GATR with them winning the LRIP contract on the T2C2, as you know LRIP, you're doing very little; the number of terminals that can happen is a result of full rate production will be hundreds. And the question is how much the total demand is. I've heard things from a few hundred to almost nearly 1,000. So we expect great growth with that product.

Great, thank you for the color. And I just wanted to ask a similar question in the transportation unit. And that's a business, it's running a little bit over $600 million a year and it's historically been in fair collection. Its strike me that there is a major technology evolution there in your core, fair collection business. But the expansion in the toll and the unified back office and Smart City initiatives really expand your addressable market as well. Can you maybe think of how big you see the pool that you're swimming in in that market as well?

So you brought up a couple of great points. One is there's inflection point we think in terms of technology for our legacy fair collection business where we're going from stored value to open payment, and we've been successful of course in implementing that in both Chicago and London, and there's a bunch of cities that want that, and we think we have a technological edge as being the only ones on the planet that have delivered that today. As you know the automated fair collection business was small single-digit billion dollar market. We think that with NextCity strategy where we're moving from automated fair collection to payments and information technology in the city across all modes and more geographies. It gets us to an addressable market north of $10 billion, so quite an increase and addressable market.

Right, thanks very much. I'll jump back into the queue.

Thank you. Our next question comes from Julian Mitchell with Credit Suisse. Please state your question.

Hi, this is Lisam [ph] on for Julian Mitchell. With the re-compete in London, it was my understanding that you had to take a little bit of a hit on pricing to win the contract. Have you noticed similar pricing measure with new emerging contracts and proposals within CTS?

What happened in London is our customer changed the requirement in the contract with regard to some variable pricing, variable usage pricing. In general we have not seen that kind of behavior around the world and we think we, as I stated earlier have a non-recurring cost advantage on this procurements going forward because their open payments is in demand. So I would guess going forward that we will drive margin expansion as we'll have an edge on the non-recurring cost.

Great, thank you. And then sticking with the CTS; in the slides you mentioned of lower sales here to-date in the U.K. Is this related to Brexit? And if so, how should we think about this impact moving forward? Thank you.

I'll let Jay address that.

Yes, I mean you could really, its two things. One is we have lower revenues in London because we no longer get a usage bonus. That was probably $10 million to $15 million per year and then the other change of course is, when I talked about the call, it's the lower exchange rate. So we kind of giving kind of the headwinds from the lower Pound rate, but effectively the Pound's down say 10% year-over-year, 10% to 12%. We don't see any operating changes as far as the subway goes or anything like that because of Brexit.

Thank you.

Thank you. Our next question comes from Ken Herbert with Canaccord Genuity. Please state your question.

Hi, good morning. Jay or Brad, can you just provide an update on the New York City opportunity and when we might be looking for any news there, and just again the potential impact of this into perhaps '16 or specifically 2017, within CTS.

This is Brad. I'll address where the solicitation stands and Jay can talk about the economics. So we've turned in our proposal. We did a great job on our proposal and as you might have noted we teamed up exclusively with our customer transport for London. They had provided some EMV open payment technology that we believe the New York customer really like. So we feel very fortunate with the teaming agreement that we have in place. As you know we've been there for a long time and have done a great job there [indiscernible] are coming up towards the latter end of this month and both Cubic and Transport for London will be at the table with our customer in New York. We expect they'll be down select to a few, post -- and then we expect, the customers told us to expect an award before the end of the New Year. Some of our team is a little skeptical that that may slide a little bit. I would guess that it will be somewhere in the first quarter of the next calendar year.

Yes, I'll just add, Ken is the contract to do the system would be done over say two to three years. From what we can determine right now is going to be percentage completion and accounting, so our revenue would start to show on three, kind of cost-on-cost. So it will have some positive incremental revenue impact in '17 and then we would see full year benefits in '18, '19 and '20, and then they also are going to procure services as well. So this will have a long-term tale.

Okay, that's helpful. And just I wanted to follow up on Transport for London. I know with some of the recent acquisitions and some other opportunities, whether it'd be the bike program or other potential opportunities there. How much, can you think about how the opportunity in that market is expanding with work you've won or in the next maybe couple of quarters highlight any specific opportunities to expand work specifically with CFL or there within London or Broadway.

This is Brad. We've intended to see change orders overtime. We have a number of change orders that we're working on. So I would expect modest growth in London in the near term. Jay may have more to add.

Yes, I think we are seeing some expansion on the roadwork that we've been doing with our ITMS business, the fair collection business. We've rolled out the open payments, so I think that would be further add-ons there. And then another part of what we're doing in the U.K. is I think we've got about an 80% market share with all the train-operating companies where we have put gated systems. And so there's kind of a movement to put some Oyster application into the train operating company's systems.

Okay, and then just finally on the recent, the C4ISR business, it sounds like things are tracking to plan from a topline standpoint. There's a lot of opportunity and clearly the fourth quarter here should be, we should see a lot of that pull through. Is there any risk to the margin assumptions as well, new outline, as part of these acquisitions, are those tracking as planned, or are you seeing any incremental pressure from a margin standpoint in that business? And is the margin opportunity really just volume-dependent or is there anything else there in that business? If you don't win or the volume perhaps disappoints, are you still able to generate the margin you've talked about in these businesses?

Let's say its quick shored, you get an order and you ship it pretty quickly. So volume does matter. Fortunately, these products are in very, very high demand and we're providing very innovative solutions to show common alike, and they're deploying them very quickly. So we expect nothing but demand to grow. That program -- we won with the United States Army. We're in the LRIP phase, low rate initial production phase, where they bought a few terminals and that will expand to hundreds to maybe 1,000. Our team continually working on new innovations. A lot of products in that business are commercially priced, so they have less margin pressure. So we would expect very good margins in that business.

And just to add when you're in LRIP, obviously you start to get a lot better efficiencies with your suppliers once you kind of go into steady state. I don't see, actually I see our margin profile probably getting better as the programs mature.

Okay, that's helpful. Thank you very much.

Thank you. Our next question comes from Josephine Millward with Benchmark. Please state your question.

Hi, guys. I have a question on defense systems. Can we see this business return to normalized margin next year? You have over $30 million in operating losses related to the acquisitions here today. How much of that is recurring?

Yes, let me address that. Most of that Josephine would have been compensation related purchase accounting. So when we bought the companies because they had options for the employees. And Mark [ph], you can jump in but I believe that was throughout $45 million at a 30. So I think on an ongoing basis, just the kind of purchase accounting stuff that's probably about $5 million to $6 million per year on a go forward basis on the recent acquisition, I believe the earn outs primarily.

Okay, that helps. So can you help us quantify the Sydney upgrade and give us an update on your transportation pipeline? Do you have any news on Melbourne, Brisbane, Washington and Philly?

This is Brad. So in Sydney we're in process of rolling out a pilot to bring open payments there. We think that that pilot will turn into a job across the enterprise there that will be worth north of $100 million to us. We're seeing a bunch of procurements potentially coming out in Boston and in the like of course there's New York City. The system in Washington as you know, a competitor received the pilot and fortunately or unfortunately depending on who you are, it didn't work out so well, so they were cancelled. We're starting to see some demand there. I would expect just to get upgrades in Washington DC. As you know there's a competitor who did the system in Philadelphia. I've heard mix things so we'll see how that plays out. In Melbourne, as you know we we're not the incumbent. There was another outfit that was the incumbent and they had a cost advantages on us being the incumbent of running their system, and the customer didn't want to pay premium to select us, so the incumbent won. In terms of the overall pipeline of opportunities going forward, Josephine, there's plenty to bid on to grow this company. Our team is, when we get New York and Sydney I think there will be eight instead of a six in front of hundreds of millions and there's a lot more opportunities to bid on. The CTS team is working to get through a billion dollars in the mid-term, so we see plenty of growth there.

That's very helpful. Thank you.

I might just add, Josephine, today we announced an upgrade for Miami to basically take them from stored value to open payments, and also to put some of their system in what we call the cloud. I think that's going to be indicative of what we're going to see kind of across our installed base, is that we're going to see a lot of upgrades.

Great, sounds good.

Thank you. Our next question comes from Mark Strouse with JP Morgan. Please state your question.

Yes, hey, guys thanks for sneaking me in at the end here. So just following up on Josephine's question there; so I mean do you see that your pipeline seems very robust. Just thinking about the last time we had a flurry of activity with Chicago, Vancouver, Sydney, there were some delays, there were some cost over runs. Just wondering if you could maybe talk about the lessons that you learn during that experience and what should give investors comfort that there won't be similar kind of issues if you were to win several of these awards. It's a good problem to have winning these awards, but just want to see if you can comment on that. Thank you.

So, this is Brad. How are you?

Hi, Brad.

I'd say a couple of things. The first is that we have greatly improved our estimating system in the company and we are really looking at the underlying metrics that drive non-recurring engineering and really honing that and getting multiple estimates, and making sure and doing risk-adjusted cost estimates when we think about how to price these opportunities. And so, and we're working very hard and have been working at improving basic program management, blocking and tackling execution. More fundamentally, we're changing the business in the sense that we're going to have reusability of code from one system to another. Matt has hired a product Vice President that if you will is creating Legos for the various pieces of functionality and we're going to have high reusability of the software going forward, and that will reduce the risk inherently going forward. So we absolutely have been learning and intend not to have non-recurring [ph] going forward.

Okay, that's great. Thanks, Brad.

[Operator Instructions] There appears to be no additional questions at this time. I will turn the conference back over to Mr. Feldmann for closing remarks.