ATS Corporation (ATS) Earnings Call Transcript & Summary

Welcome to the ATS Automation Conference Call and Webcast. This call is being recorded on December 2020 at 8:30 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 Ryan McLeod, Chief Financial Officer. Before I begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all its representatives on this call. You are cautioned that the oral statements made on this call will contain forward-looking information that could involve risks and uncertainties including those introduced by the COVID-19 pandemic. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS' filings with Canadian Provincial Securities Regulators. Now it's my pleasure to turn the call over to Andrew.

Thank you, Stewart. Good morning, and thank you for joining us. Today, we're pleased to announce the launch of a tender offer to acquire CFT Group, a global supplier of automated processing and packaging equipment for EUR 166 million. CFT is a platform acquisition for ATS and the food and beverage industry. It is well aligned with our strategy to target acquisitions in attractive and growing markets with differentiated technologies and strong positions. It adds complementary technologies that can be combined with our existing capabilities to create unique market offerings. This transaction is financially attractive for ATS, offering strong synergies, earnings accretion and an attractive return on invested capital. The tender offer values CFT at EUR 166 million or approximately 266 -- CAD 260 million. Note that this includes the multi voting shares owned by the controlling shareholders who are supportive of the deal. This implies a transaction multiple of 9.5x CFT's 2019 stand alone EBITDA. After factoring in estimated year 3 synergies and operating improvements under ATS' ownership, this multiple falls to 5.3x EBITDA, making the transaction highly accretive to ATS. We will finance the acquisition by using cash on our balance sheet and drawing on the company's revolving credit facility, which will result in pro forma leverage of 2.3x net debt to EBITDA. The transaction is expected to close in the first quarter of 2021, subject to achieving a 90% take up on voluntary takeover and customary regulatory approvals and closing commissions. In terms of the strategic rationale for the acquisition, we believe CFT is a strong fit for ATS that offers us a platform through which to fully enter the growing and highly regulated food and beverage machinery and market. CFT is a strong player in this space with innovative products, differentiated technologies, and strong brands that serve attractive niche markets. It has a significant portfolio of intellectual property with approximately 140 patents. Through our ownership of CFT, we expect to create substantial shareholder value. This shareholder value will be created in part to the significant synergies we have identified and plan to realize following the closing of the acquisition. Over the next 3 years, we anticipate cost synergies of approximately EUR 7 million through the elimination of public company costs, purchasing and supply chain optimization and reduction of both direct and overhead expenses through the application of the ATS business model, our playbook. We also expect to create another EUR 7 million of EBITDA over the same time period through revenue synergies resulting from cross-selling and initiatives to grow CFT's aftermarket business. From a financial perspective, the transaction will be accretive to ATS' earnings and cash flow per share metrics and our first year of ownership, and we are targeting a double-digit return on invested capital by our third year of ownership. To provide a bit of additional detail regarding CFT. Based in Parma, Italy, CFT is a technology leader in sorting, processing and packaging. Serving the fresh produce, liquid food and beverage and beer processing end markets. You will find CFT's equipment and systems in plants around the world that produce sauces, fruit purees beverages to name a few examples. The company serves its markets through a portfolio of well regarded, market-leading brands and a global footprint of 8 facilities in Italy, Spain, Germany and the Ukraine. CFT has a blue-chip customer base diversified across Europe, North America and Asia. The company has demonstrated strong revenue growth profile over the last several years, achieving EUR 254 million of sales in 2019. Revenue is diversified across the sales of complete lines, single machines and the aftermarket, with complete lines making up approximately half of the total mix. The acquisition of CFT enables ATS to further penetrate the strong growth of the food and beverage automation market. This is a highly attractive market for ATS. It is regulated, which plays to our strength in delivering high-precision automation solutions. It is also a market with lower cyclicality given the nondiscretionary nature of food and beverage offering stable and robust earnings potential for ATS. The overall market is expected to grow at a 5% CAGR with CFT's specific core and end markets growing in the range of 5% to 8%. Growth in the industry is driven by strong trends, which we see continuing. These include increased demand for food safety and increased regulations. The need of producers and processors to manage higher labor costs and labor shortages. Higher demand for better quality products, ready-made meals and faster processing times. And this market is highly fragmented offering the potential for future acquisitions to bolster ATS' market position. This is a highly strategic transaction for ATS that establishes a new platform in the food and beverage sector. The addition of CFT will build on our earlier acquisition of MARCO and enable us to serve multiple elements of the food and beverage value chain in packaging, processing and sorting. Of special interest to us is CFT's technology leadership in certain niche areas of the food and beverage market. As mentioned earlier, the company possesses 140 patents, demonstrating the depth of its technology. As examples, it is a global leader in tomato processing technologies and optical sorting for tomatoes and fresh-cut fruits and vegetables. It is also one of the recognized suppliers of brewing technologies and linear blow-molding technology for primary packaging. There are multiple avenues to create meaningful synergies by leveraging technologies across the portfolio of ATS and CFT. Some examples are in the area of material handling, we can utilize our automation expertise and our SuperTrak technologies to accelerate CFT's robotics development. In optical sorting and inspection, there is significant commercial overlap between CFT's Raytec optical brand and MARCO, creating new customer opportunities. In liquid filling, CFT's market-leading aseptic filling technology that we can apply across multiple ATS platforms, including ATS Life Sciences and Comecer. These are just a few examples of the broad and substantial opportunities to create synergies through the addition of CFT to our portfolio. We believe we can create significant value through the application of the ATS business model to CFT. We can drive the business toward expanded EBITDA margins by applying lean methodologies and realizing supply chain and operational cost savings. This acquisition meets all of the key criteria for ATS in terms of market, value, fit and financial returns. As mentioned, CFT operates in a large and growing market, underpinned by strict industry and government regulations. It possesses several differentiated technologies and a brand that is globally recognized in an industry that gives high-value to these attributes, while having invested heavily in developing technologies for attractive markets. It is a strong operational fit to ATS and the potential to apply the ABM playbook to improve operations and realize synergies. It is a financially attractive acquisition with synergies that will enable us to significantly improve EBITDA margins and generate an attractive return on invested capital. And on the topic of M&A., we thought it'd be a good time to provide an update on the Comecer integration. As a reminder, we acquired Comecer in February of 2019. And they're a leader of manufacturing of shielding equipment for radiopharmaceutical and aseptic production. Through cross selling activities, the application of the ATS business model and expansion of aftermarket services, we have been able to enhance the performance of the business. We have improved operating margins by 300 basis points. We have grown the book-to-bill ratio by 20% and relative to Comecer's pre-acquisition 5-year average and grown aftermarket sales by 200 basis points as a percent of sales, pre COVID. Overall, Comecer demonstrates us the strength of the ATS business model and gives us confidence that we will be able to realize significant value through CFT. The acquisition of CFT is another major step in the ongoing evolution of the company towards high-value and growth end markets. As previously mentioned, these are highly regulated sectors where ATS can have substantial value to the customers through the application of automation technology. Since 2013, ATS has completed several acquisition in those markets. And has more than doubled its LS business. With the addition of CFT, we're establishing food and beverage as a key pillar of the business, representing over 20% of our total pro forma revenue. Together with Life Sciences, these 2 segments will represent 64% of our pro forma revenue. Going forward, we'll continue to explore opportunities to acquire assets in key targeted markets. With focus remaining on transactions that are strategic for ATS and provide a solid return on our investment. In summary, we're excited about CFT group and the potential it offers to ATS going forward. CFT operates in an industry with attractive fundamentals and holds a leading position in its key end markets. The transaction enhances ATS' food and beverage capabilities and provides access to new parts of the value chain. It offers an opportunity to deploy the ATS business model to drive operating improvements, realized synergies and enhanced margins. It is a highly attractive deal from a financial perspective that is accretive to our earnings and cash flow while maintaining conservative pro forma leverage and realize an attractive return on our capital. The tender offer is supported by the controlling shareholders who collectively control 61% of the controlling ownership of CFT. Thank you. We will now open the line for questions.

[Operator Instructions] Our first question comes from Mark Neville from Scotiabank.

First off, congratulations, looks like an excellent deal. Just first question, can you just sort of give us an indication of how the business performed this year through the pandemic?

Yes. Mark, I'll start. So I guess, first of all, we can really only comment on what has been publicly disclosed by the CFT Group. And so they released their first half results in September. And I think they reported sales down about 16%. So they were impacted by COVID, and it was both in their processing and packaging businesses. I think the one bright spot for them was their after sales services was up in the first half of the year.

Okay. Maybe just on the synergies, just to clarify, when you say within 3 years, is that -- you mean within 24 months or 36, I'm just not sure?

So within 36 months.

Okay. And just, I guess, I can appreciate sort of the cost synergies and what the margin might look like. But again, it looks like about a 7% EBITDA margin sort of over time, sort of what sort of do you sort of think this should look like?

Yes. So as you mentioned, we see considerable area to add value here. And as I talked through, the ABM is going to serve this business well. So within the first 3 years, we've got a targeted area to go to really enable and drive this business to being able to get to double-digit return on invested capital. And we view getting -- so some time ago, this business was in low double digits, and we view we can get back there and then continue to really drive and enhance it.

Thanks. I'll jump back in queue. Congratulations.

[Operator Instructions] Justin Keywood from Stifel.

Just on the aftermarket sales. You mentioned it was 20% of the overall business. I'm wondering if there's an opportunity to still further expand that and if there's anything that CFT is doing perhaps ATS can leverage in their aftermarket sales and business? Did I understand it's a lower proportion of the overall sales?

Yes. Justin, so they were in the first half of this year, they've gone to 26%, their numbers reported. And we do view that this is an area we can continue to really enable and help them drive across their platform globally. And as you're well aware, we'll be able to then take some of the key learnings here and be able to support ATS' expansion in this key area of focus for us.

Okay. And I know with ATS, there was some selling challenges just with the COVID-19 restrictions. And accessing customer sites? Is there something that CFT is doing specifically and kind of navigating that obstacle because 26% of total sales is pretty impressive for the after market business?

Yes. So a couple -- I mean, first, Justin, one of the items that, as you're well aware, we can't comment on items that have been disclosed within the business. What we can state is they have a strong technology that enables them to really have that ability to continue to support customers through it. But again, with respect to their business, we're mindful that we can't disclose what's already been publicly announced.

Okay. Understood. And if I could just slip one more question in. You mentioned some of the key drivers of the business. And I think I heard the meal kits area. Are you able to disclose the percentage of what that business represents for CFT?

Sorry, Justin, did you say meal kits?

Yes, the automation for the meal kits and premade meals, I assume?

Yes. Justin, I don't have that information.

Mac Whale from Cormark.

Could you speak a bit about how the operations themselves compare to ATS in the sense of those -- are they 8 discrete units focused on the market? Or is it structured more like ATS with sort of expertise in certain verticals at different locations. Can you just speak a little bit about to that?

Yes, it's a bit more about expertise in certain key locations and really driving the technology. Now they do have a couple of key sites where they've got multiple technologies within the businesses, having a specific units that they're able to really drive some of the key locations like we would have at Cambridge, where we can have multiple technologies being produced and developed here.

So when you look at the ABM, then where do you think the hardest part of the integration lies? And is that something you addressed early on in this 3 year, 36-month period? Or is it something that the greater part of the savings happens in the first 12 months because of the similarities in structure?

Yes. So a couple of things. First and foremost, upon completion, you're going to have natural synergies, but reducing the cost of being a public business. So we'll be able to drive that very quickly. And we've also identified some other key areas that we view we can impact fairly quickly with the business being a part of ATS. One is supply chain optimization. We have a strong network that we're going to be able to maximize and utilize with this team. And then it's really the ramp around the business and operational synergies and really providing efficiencies over that 3-year period. And so you're going to have some read in the beginning, and you're going to have some throughout the 3-year period.

And when you look -- just my last question, sorry, I know there's limited to 2, but it seems like I can ask another one. But when you look at your team leaders on the ABM, are you -- are your other operations in Italy as [indiscernible] is competent, I guess is why I am asking as the guys in Cambridge are? And is there barriers on from translating that in down right on to the shop for, because it really is the bottom-up type of arrangement, do you have, I guess you have experience in that. I wonder if you could comment.

Yes. So a couple of things here. First, this is going to be very aligned with the ABM and our approach on the rollout. And I would just -- we provided an update on Comecer for a reason. One, really proud of how that business operated and embrace the ABM through the process and really drove their operational efficiencies. And the ABM, it's a set of tools. It's common sense, rigorously applied. It's training. It's enabling the business, as you said, and I agree with it's a bottoms up. It's enabling everyone from the shop forward or all the way up to senior leadership to identify the key areas of focus and to really have a drive to improve. And we view this business to really have that -- those potentials. And it's one of the reasons why we view -- it's a perfect -- it's a good fit for ATS moving forward.

Maxim Sytchev from National Bank.

I was wondering, if you don't mind commenting, please, because I mean, obviously, it was a public company. And when we look at their financials, it was around 9% EBITDA margin in calendar 2017. So just curious in terms of why is the margin compression, has anything changed in the marketplace? Anything company-specific? Maybe just any commentary on that side?

Yes. So Max, as you would have seen, so this was a privately held business up until mid-2018. And so at that time, prior to that, they did achieve low double digit EBITDA. I think they were just over 10% in 2017. So we -- Andrew has talked a little bit about some of the cost and revenue synergies. And one of the important areas is taking out some of the public company costs we believe there's cost structure improvements that can be made and as well as supply chain improvement. So those cost synergies will help improve the margins. In terms of market, there's been nothing that has changed that would impact or negatively impact their ability to get back to double-digit EBITDA margins.

And just if I add on one minor point is that -- this business has invested heavily in technology to get to its position today, and we view we can continue to maximize that and obviously improve the return over time.

Right. But I guess -- I mean, the public company costs, I mean, on a like-for-like basis, like, I mean, the margin decline did not -- just because they become public or am I missing something here?

No. So I think they've invested as they understood. They've also invested in other parts of the business. And I think their focus has been on growth rather than margin expansion. And as part of ATS, and this is something that we've aligned with the management team there that we will be focused on expanding margins and getting back to double-digit EBITDA margins.

Okay. Fair enough. And I'm sorry, because I joined the call a bit later, but in terms of kind of like retention thought process of key personnel and things like that. Can you share anything with us?

Yes. So large part, the management team is staying on and just to prove out, we've had nice success with having folks join ATS around really aligning to where we're going within the business. And we view this organization having a team that's going to come over and really, and people embrace the ABM and be a part of the growth story -- profitable growth story moving forward.

Right. Okay. And maybe just last question for Andrew. I mean, it looks like it's a bit more sort of a turnaround transaction to sort of make it work on a going-forward basis. Maybe kind of just the level of comfort right now being able to do this while you're still kind of in the tail end of the restructuring on the transport side of things, just in terms of the internal capacity to be able to manage these things?

Yes. So first and foremost we're confident in this aspect. This business is right in line. And we've even outlined with their management team on where we see the opportunities, and it's aligned with their thinking. Second, the transportation is largely done, and therefore, this is a focus, and we view this as a very strong business. When we did diligence and we look -- we spoke to customers, many things resonate, but first and foremost, is technology, second is their serviceability. And third is the flexibility and really aligning to enabling solutions with customers. And we like all those aspects. So again, we view this business as a strong fit. We like the space that they serve. We like the position that it will have within ATS and our future portfolio.

[Operator Instructions] Mark Neville from Scotiabank.

Just a few follow-ups. Just maybe on about last question it seems, maybe how the deal came together just in terms of doing due diligence and restrictions around travel? How the deal actually came together?

Yes. So Mark, stepping back, we've outlined this market for the last couple of years as an attractive space for ATS. And areas that we wanted to target and expand on. And so we've really been monitoring and cultivating in this space for a period of time. This specific target was really aligned closer, call it, within the last 6 months and working with their team and building a relationship over that period of time and then, call it the last several months going into real deep, deep assessment and ensuring that we knew exactly where we wanted to drive the business and develop our plan for integration. We have been -- we have met with the team. We've actually met in person, and we've been able to continue. And that's one of the strengths of our organization is we're a global business. We're in many of the spaces that we want to develop and cultivate. And we view that as a key strength and a key reason why this business really was a strong fit that we aligned with their management, and we got to really understand how they wanted to also enhance and improve the business.

Maybe just a point of clarification. The 10.6% revenue CAGR. Was there any M&A? Is that [ organic funded]?

So CFT part of their growth has been through expansion. Their organic CAGR over the last couple of years has been mid-single digit, 5% or 6%.

There are no further questions at this time. I'll turn the call back to Mr. Hider for closing comments.

Great. Thank you, operator, and thank you, everyone, for joining us this morning. Have a safe day.

This concludes today's conference call. You may now disconnect.