ATS Corporation (ATS) Earnings Call Transcript & Summary

Well, good morning, everyone. First and foremost, welcome to the UBS Industrials and Transportation Conference [indiscernible] Moscow. I'm for co-heading our investors practice here, and very pleased to be kicking the conference off with ATS Automation. I'm joined by Andrew Hider. Andrew is the CEO of the company. And I think [ what's here ] today is ATS' leadership within the broadly defined category of integrated, complete automation solutions, products, software and services to address a range of capabilities in the automation of manufacturing assembly solutions for life sciences, transportation, industrial, paper and packaging, consumer goods, among others.

So without further ado, why don't we kick things off? We'll do this as a fireside chat this morning. I mean, Andrew, I guess maybe state obviously, congratulations. The biggest news this last quarter was your listing on the U.S. Stock Exchange. Maybe if you can articulate a little bit of the underlying drivers that led you to tactically make that move and some of the things that you'll see the note to your benefit?

Great. And thank you, Eric, for the warm welcome. Good morning, everyone. So ATS, and I've now been here a little over 6 years. Let's continue to evolve and grow. And part of that was also looking at -- [ is my mic ] -- can you guys hear me? Maybe not. Sure you can hear me, but, are they...

Yes, you may want to check this mic to be live for the online.

All right. We're doing a microphone.

No worries.

So part of our evolution has really been around growth and our continued expansion on areas of focus. And this has been something we've looked at for some time. And so we're really excited about this next progression. And with this listing, there's a lot of areas that we focused on for benefit. The obvious by being in the New York Stock Exchange, greater exposure, both with financial as well as other future investors, also M&A. When you talk to international companies that might want to be a part of the family for the future, you recognize that. And they understand that. So if we were to want to utilize our stock price as potential equity, it gives it a bigger platform for that. Additional benefits when we think about the evolution in our progress, this is around our ability to continue to evolve, our ability to continue to grow. And part of that growth is also through accessing investors and accessing investors that really understand the narrative and understand where we're trying to drive certain groups in the U.S. on a very hard around investing in Canada because they would -- part of their funds could only do U.S. And so we really aligned around that. Lastly, when we think about this, not a driving force, but certainly a benefit is also the coverage that we get [indiscernible] and that really understanding of where ATS fits, understanding of what we bring to market. And so when we look at the potential of that, it really does align around that continued value creation for our shareholders. And part of this was the liquidity, the ability to have additional trading, new investors into the story as well as our current investors and their ability to see the continued appreciation of ATS. So overall, very pleased with the progress. A lot of work went into getting to where we are. But as we like to say, it's just getting started in our journey.

Andrew, pivoting to the top, you touched on growth. When we met last year, we talked a lot about the concept of U.S. reshoring. And certainly, given the events of this last year and certainly coming [ through COVID ], I think thematically, not only has it picked up in momentum, but you're really starting to see some tangible real investments being made and also certainly some stimulus actions that have helped that. I mean, how do you see that shaping your own views around strategy and capital allocation in both the near term and the longer term?

So our capital allocation, and we have -- when we think about strategy at ATS, we look at a couple of key items. And we have our build, grow and expand as a total corporate strategy. We also looked at capital and capital deployment as its own strategic focus. And side note, if you join our team as a leader, you get 2 [ books ]; one is called extreme ownership and one is called the outsiders. And the reason we want our leaders to understand the outsiders is we want them to know about capital allocation about the true drive to shareholders value. And so of the 5 points, internal investment, M&A, share buybacks, dividend or debt repayment, really, our top 2 is internal investment and M&A. And we've deployed capital in both, we've driven both strategically from an ROIC perspective. And the third is share buybacks when they present themselves as an opportunity. And so our real focus hasn't changed. We've continued to be very disciplined in our approach. And when we look at internal investment, we also look at areas that we want to fuel to continue to drive into, but also not to get over our ski tips. And so I would say it hasn't changed, but the opportunity for deployment, we do view that there is real opportunity today and over the kind of foreseeable future.

I guess on the M&A topic, since you joined Andrew, last 5 years, and almost less count, [ 1.5 billion ] deployed, 15 transactions really beginning to extend the reach into [ 3 ] additional life science, food, bev, et cetera. I mean, how do you think about that relevancy now given where we are in the cycle? And then I'll have a follow-up question thereafter.

Yes. So -- and Eric, you touched on it. I mean, I was asked a question, I think 2 weeks ago, the last time we did a quarterly call where we didn't announce a transaction. And I actually can't remember the last time. And the evolution of ATS has really gone from myself being the key [indiscernible] to now our leaders cultivating and identifying areas for expansion. And if you look at the core, and we started this, call it, 6 years ago in our strategic review of the markets, the business has really been aligned on markets that we view are more resilient. And what do I mean by that? We will look back when possible 20 years and out 10, to really want to look to understand areas and markets that are more resilient and how they operate. So life sciences continues to be an area of focus for us continues to be an area we drive into, and we deploy capital both internally and externally in that area. And regulated food has almost similar market dynamics around when the cycle is not an increase does well and a decrease usually holds up. And so those have been really 2 key focus areas for us. So to get back to your question around deployment and our focus, we're not going to take our eye off the ball. We've continued to cultivate our funnel remains strong. And if you recall, 3 years ago or a little over -- actually, probably 4 years now, we added a board member, Phil Whitehead, who leads our strategic committees or Strategic Deployment Committee and really aligned around this cultivation topic, around continuing to build out relationships [ of markets, of ] spaces that we want to have as part of our family for the future. And then our teams are aligned around this. And so while the market is certainly dynamic today, where -- our funnel remains healthy and strong and the best deals we do are cultivated deals.

And then follow-up question on that topic. You become a bit of a compounder in some cases, which I think is a good thing. And we've seen markets over the last several years, respond generally positively to companies who have had that compounding redeployment to free cash flow to M&A. I think more recently, though, you've seen some companies without going to names of so a meaningful negative impact when they've announced deals. And I think in some cases, that's maybe been instructed by the perception of late cycle deals, parallels economic backdrop and full multiples or all the above. I mean, how do you look at that backdrop today, Andrew, given your balance sheet capacity, given your own multiple, given the way you have to think about return on invested capital.

So, as you're well aware, Eric, when we listed, we also raised equity. And that builds a bit of our coffers, builds some of our dry powder. So it's nice in our ability to have that to lean into. But additionally, we're extremely disciplined in our M&A approach. There's 4 criteria that we align around. It's the market, its strategic rationale. It's how we're going to operate, how we're going to launch the ABM. That's our continuous improvement focus and the financial return. And that alignment to ROIC is really that drive and that hasn't changed. Now our cost of capital has gone up slightly, and I would say, call it 1%. The ROIC thresholds have not changed. And so our expectation because that doesn't change throughout this. There are good targets. And the prices are actually -- and I wouldn't say [ getting holistic ] better, but getting slightly better over time. And again, back to my point of cultivation, it often puts us in a lead position. And so we will look at businesses and markets and technologies and spaces that we want as part of our narrative, part of our story for the future, and that becomes our target. And then because of the whole approach around our global automation and scale with relationships with customers globally, service as a global footprint and a global coverage really matters with customers. So when we do add a technology, we do add a business to our portfolio, we can quickly bring in these services like digital like services and maximize that synergy. And so we haven't slowed down. Now we're disciplined, we're patient because the right deals might not be available today, but we're working on them for the future. And when they become available, we're in a position to be able to move fast and be swift. And we'll use everything available to make that happen to maximize shareholder return as we add this.

I'll go a little off script, Andrew. One of the things that I was just thinking about, just given the events this past couple of weeks, this amazing chase around opportunities in AI, opportunities in all world of industrials would go into industrial IoT. Rockwell has done some deals with the digital transformation platform, trying to add additional capabilities, applications and deep learning. How do you see this impacting ATS, positive negative benefit risk factor, et cetera?

I mean this is -- net-net, this is a real opportunity for us. And when you step back, so we have a mantra that's really around on the floor. And it's -- and if you look at our businesses, and it's a really interesting question for us because of the evolution of our portfolio, we had a business called Process Automation Solutions. And this business really aligned with customers and their ability to get data from the equipment that's on the floor. So they were the best at really going in and helping our customers extract and utilize that data. So if you're making something you could actually maximize the process. They've really driven our digital solution capability. Now it's early. So I want to be very clear, this is early in our journey. But as you have the ability to draw data out, you have the ability to really bring digital capability in, you have the ability to start to help because customers -- they'll talk AI, but they'll talk digital. But what they really want is for you to have actionable insights that they can drive into their process. Because at the end of the day, if you give them a dashboard that really does nothing. If you don't then close the loop to help them impact their production process. And that's what we've really aligned on. So we've acquired companies like IPCOS. We've driven businesses like BLG and we acquired them, call it less than 2 years ago, where when we do have actionable insights, we can bring that and help them implement or identify where you can implement to improve your process. And so AI today, while it's early, is a fantastic opportunity. We own the automation. We do integration. We are one of the largest integrators for life sciences equipment in the world. So we know what goes into making the product. So as you continue to identify areas for improvement, we can really maximize that for customers. And that's the value. So our view is this is a net real benefit, but it's early in our journey. And we're figuring this out as we go along. So while we get excited about the opportunity, there's a lot of wood to chop here between today and call it the next 2 to 3 years, but we do view this as a real opportunity for us.

I think on that note, I'd like to open it up to the audience for any questions that you might have before I go through a couple of additional topics I want to cover off with Andrew. I think we may have an iPad floating around as well as somewhere, which I didn't see up on stage. Oh, there it is. [indiscernible] Anyone in the room? Otherwise, I'll press on. Maybe I'll pivot, Andrew, to what was a real core objective of yours when you joined, which is really the margin enhancement of the business, trying to view through a variety of mechanisms, additional 500 basis points of uplift. You've essentially gotten through most of that journey. If you stand here now, how do you think about the go forward? And I recognize we will touch on inflation in a second. It's been an idiosyncratic backdrop puts and takes. But if you look at the business going forward, what is maybe if you could share with your audience the next period, perhaps a financial milestones, if you want to tempt us a little bit with where the business may continue to evolve.

I just like it, Eric. When you frame up margin as a discussion. And -- so this was a key focus for us. And what Eric is talking about is, and he's known this story is, we set out a 500 basis point improvement when I first came on. And it was in the base business. We did about [ 9.6% kind of ] EBIT when I joined and the base business largely got to the 15% March. And so we have navigated this. We have driven and we launched our ATS business model, which is our continuous improvement focus. We shifted the business to areas we view are more aligned to customer value. So our traditional ICE business, we largely have exited and pivoted to EV, and I can walk through that journey. And we've really leaned in on our supply chain execution. And so as we think about scale and we continue to drive scale, it gives us buying opportunity. And I would say -- and I end on that one, because [ well, that's ] been a key lever for us and got us to where we are, it's also been of recent, probably the bigger challenge to minimize impact. And so we've mitigated largely through this supply chain challenging environment, but it hasn't become an area that we can really maximize today. And so before we set new threshold, new targets, and there will be new targets coming out. We want to see the supply chain aspects start to stabilize. And our view is -- we view that we're going to be dealing with for the remainder of the year and into potentially next year. We've seen some movement on raw material. So that's a net benefit for us. But when you look at electrical components continue to be a challenge and not only from a standpoint of pricing, but more importantly, lead time. Because when we look at lead time, that often gives us a lot of levers. So when it's short lead time, you can move things around, you can maximize or minimize the impact and the lead times have pushed out that which creates a big challenge. And so our teams quickly about 1.5 years ago, implemented what we call daily visual management, on a global scale. So every site, every business, every division has the ability to understand on a daily basis where they've got challenges. And it's oftentimes in a predictive manner. So they can know, okay, things need to be here by x, if it's not, what do I need to do? Can I draw an internal inventory? Do I have distributor networks that can go to? And so we've largely minimized it through that process and that approach, which is great. It's taken us 5 years to build this out in this capability. But we look forward to the days where we can really start to utilize that to drive cost control, drive continued expansion through supply chain management. Now one of the things on the flip side that we've also done is we're often a price leader. And so while we've seen inflationary pressures and labor as a part of that, we've largely also taken the flip side and looked at pricing as a lever to continue to really align the value for customers because it really does go back to the ultimate value you provide, and it's one that we have a significant value creation for customers.

Maybe continuing that topic, Andrew. Clearly, you've done a great job on what is called the broadly defined supply chain. The piece of the puzzle, I think a lot of our clients are scratching our head about now is just where our labor force is going, both in terms of availability and pricing. And I know in your ecosystem, it's been an area where getting talent, engineers, R&D, software has really been tough. I mean, are we starting to see that pivot a bit? Or is that still a relative constraint, if not headwind over the coming quarters?

I'll take this in -- to the way you asked, I'll take it in 2 areas: 1, our customers are what they're faced with; and then 2, ATS. And I guess I will take ATS first. I'm very proud of this aspect. And if you look, we have 8 value drivers. And those are the critical [ 8 ]. So if this team were to go to our facility in Cambridge, Ontario, in Chicago or Ohio, you every division, every business starts with those 8 value drivers and top 4 financial, 2 customer-facing, 2 people. And the 2 people are turnover, key area focus and internal fill rate. An internal fill rate is really a lagging indicator that says, are you building your talent to get better to take on bigger jobs. So are you actually promoting from within? And I say that as a frame up because our turnover globally, our target is 5%. We expect we actually are okay with some turnover, 5% is that number, and we're actually at 6%. And so we're over our target. So our teams in those areas are driving countermeasures. Now as a global scale, 6% is world-class. And when we look at versus the competitive landscape, that's a very good number. But yet our teams are saying not good enough. And we have businesses like our SP business that came on to the ATS family. They were close to 30% turnover, 30, and now they're closer to 10. Our CFT business was also high numbers and turnover and now they're mid-single digits. And so we've continued to drive the ability for our employees to really be empowered to be part of that journey. And that's contagious. We recently, last year were on that -- or earlier this year announced that we're on Forbes top 100 places to work in Canada, Proofpoint. Again, the engagement scores remain high. So all those items really add up to having an engaged workforce, and that also helps us when we have time to fill. And we measure time to fill. So internally, we're very pleased with our progress on how we performed. Now on to the customer side. What customers are faced with and when you look at the world that they're in today, we'll talk about onshoring. They'll talk about supply chain derisking. They'll also talk about their labor as the equal amount of passion, both in a cost discussion, turnover, as well as retirement. We have one customer, and it's not often talked about in the headline, they have [ 60-plus-thousand ] employees, 1/3 of them are going to retire over the next 3 to 5 years. 1/3 and they come to ATS and they look to us for helping them through this process. And so regardless of the dynamic that brings them there, whether it's supply chain derisk as the discussion or labor shortage or their ability to continue to keep up with the regulation of the space they're in. Automation is an enabler. And so they won't actually talk about. They'll say, "We want to build capability where we've got demand." And oh, by the way, we want to do it in the U.S., then we want to do it in Europe, and then, oh, by the way, we want to move in Asia. And we want the exact same thing, the exact same product, and it has to be at the highest level of quality. They lean into automation for that, because I don't know about you -- if I were to stick a needle in my arm or anything, a treatment, et cetera, I want it to be built on a machine that built a trillion of them, not somebody with a file actually outdoing it. And so they look for repeatability. They look for consistency. They look for a high level of quality and automation is often enabler. So to answer that very simple question, we do view it as a tailwind but it takes time. And we're a strategic enabler. And we have one work in this past quarter. We actually worked with a customer that was expanding their footprint into a new region, exact same footprint moving into a new region. And so we do view this as a real area that we can help over time.

I have one from the audience now.

Okay.

So question is, Andrew, if we move late cycle and see a potential recession in the near future, how should we think about ATS positioning, a little bit of an [indiscernible] that countercyclical customers invest to automate on the back of a customer advance slowdown? Or do you see CapEx budgets freezing and a slowdown in the backlog? What kind of visibility do you have so far in these regards.

Couple of things here. And I referenced this earlier, but when I first came on, we did a very deep assessment of the [indiscernible]. We walked into the value we have with customers and the markets. And our target is really to be around more resilient market. That's not to say you can predict everything, but more resilient markets. And what do I mean by that, we look back [ 20 and out 10 ]. We look for a period of time when possible to understand what the markets do. And long story short, life sciences generally does very well. Generally, it's more resilient. Regulated food, if you don't know, is up there with life sciences. It usually does very well in an economic cycle. Nuclear, same discussion. And so 3 markets that we serve generally do very well. Then we looked at transportation. And in large part, we were in ICE, internal combustion engine. And we largely exited that space. And there's a whole host of reasons: 1, the market dynamics; 2, we were a me-too provider, and it was medium to high risk, and that doesn't work out. And so we sold some divisions, we exited some and we pivoted to EV. And we don't just do EV. We do the battery pack assembly and pack out, which is mission critical if you're going to launch a vehicle in the EV space. And when you have to get right. And if you don't -- headline is, that's been a very big growth engine. It's early in its investment cycle. And so we do view this as a 5- to 10-plus year investment. And as battery technologies changes, they need to come back and retrofit. And we've already seen customers doing that. And so we do view that as being a longer cycle area. The one that would be impacted for us is our consumer product space. And more specifically is our personal care area. And so this is high-cost lotions, fragrance, et cetera. That is less than 5%, call it, 3% to 4% of our business. So while it is a concern, and it is an area of focus for us, minimal impact. And so we are watching that. And we are continuing to assess what the markets are doing. And while we haven't seen a marked shift today, we do watch it with a critical eye to make sure when things go in the wrong direction, we can act and be in a position to act and outpace even in a situation that might be challenging. And lastly, what I'll say is the team with Ryan being a lead behind us, really also make sure that we set the parameters. We invest, but we also leave some room for areas around whether it's we lease facilities versus build or we utilize contracted labor versus adding. And so while we might add 200, we might use another 100 on contracted labor because it gives us a buffer and it allows us to really buffer any type of area that we might see. So because we have a strong backlog, because we have a strong funnel, we often can see when things shift, and we will react accordingly.

Maybe going another [ quick ] lower on to the EV front. And when we were here last year, Andrew, you were chatting about the expansion of the existing footprint. There's a new facility. I know you were in the process of greenfielding. And it took me some time with adding up all the contract wins just for the last 12 months, it's almost $600 million. [indiscernible] a great 12- to 24-month backlog and backdrop for revenue conversion, hadn't see that evolving? I mean you've said this early days. I mean it's now over 1/4 of your business as you've grown from ICE and away from that or [ shrunk might I should say ], now to EV. I mean is there a circumstance that actually accretes even a larger percentage of the platform? And how do you derisk that from not becoming too much and arguably then becoming more cyclical than you articulated?

It's an interesting question because while we don't limit awards, we are focused on customers that we create and have high value for. And we've aligned with those customers, and we'll continue to align. And so let's talk about the EV space for a minute, and I will get to your answer. But when we look, we've won big awards in the space. We've been a part of this area for over a decade. We have strong experience, strong technology, really aligned with enabling customers as they make that shift. And so we have continued to win here. We've posted some very nice results in this space, and it's built a significant backlog for us as we look to continue. But if you look at the market and you look at the need versus where it is in its cycle today, it's early. And whether -- and I'm going to get this wrong, no matter what I say on it, because we've underestimated the amount of potential in this space. We generally look at markets with conservative views. It has outpaced everything we've seen. And one of the reasons is the technology of batteries continues to evolve. And so if a vehicle can go 200 miles per charge and now 300, they're going to come back in before a model year change and change out the technology, and they often come back to the initial providers of that production line. And so we've seen the shift we've seen this grow, but it's early in its journey and the ability to meet the demand is the capacity to demand is still really low. And so our view is you're right that this is an area of the business is going to get there, but it is a 5- to 10-year journey. And as technology changes and it's rapidly changing in this space, they come back to the OEM that really enabled and help them through their process. And so ATS is well positioned to really maximize that value for the foreseeable future. And as far as portfolio management, look, we're going to continue our drive high-value creation for EV, deployment of capital internally and externally for life sciences and regulated food. And if you look at the EV space, we've deployed capital internally with buildings, but we're very laser-focused on our niche that is high value for customers and our niche that's defendable from a position where we have strength.

You maybe check with the audience, again, I didn't see any additional iPad questions. Any audibles that somebody would like to call in terms of question for Andrew? If not, talk about portfolio balance, Andrew. I would almost say [ as an outstart ] looking in, you've seen discernibly light in terms of footprint in the Far East. I'm curious, obviously, you've got a ton of automotive content related there. Is that a conscious decision? Or is that something that has been just because of a lack of perhaps extension of that region? Obviously, in some cases, quite insular, lack of targets, et cetera.

I would say it's a little bit of both. And let me walk through our current [ problem ]. So we've got a footprint in Thailand. Our IWK business has a nice footprint over there. We recently acquired a business with the name of Zi-Argus that also has a footprint there in Australia. And ATS as a whole has footprints in many of the areas, many of the regions and China being one of them. But we had -- when I first came out, we had a real targeted approach around in China for China. And the business was often a -- it was a feeder business for other divisions, and it didn't work. And so we've really pivoted that and we pivoted at a moment where -- we were looking at the business on how it could create value for the region. And I'll tell you, we slimmed it down for that value. And it's played to our benefit today because we're a lower penetration in China. That said, when customers move, they look for us to serve, support and really enable in the region, and we've got the capability to do so. So overall, I would say we're okay with our footprint today. We're going to continue to look for strategic ability to expand in the region, but we're going to be very mindful to ensure we protect IP, protect really what creates value for our customers, and that's been a key focus for us.

Probably have time for one last question, Andrew. I'll go back to a favorite topic that I know I've addressed with you before, and that's the area that you don't have a significant presence in, i.e., Warehouse Automation. Now it's interesting, just looking back and reflected on last year, we had a little bit of debate about this is when many of these companies in that ecosystem are still growing at 15%, 20% plus. There's been a huge air pocket there just given the post-COVID wave now being arguably deployed, obviously, high publicized things in terms of Amazon and others cutting back on CapEx. Is that category if it starts to come back to earth, so to speak, start to become more interesting if there's an appropriate inflection point and/or there are some pretty interesting attendant really robotic-driven technologies there, whether it's driven by storage or retrieval, degrees of automated vehicle, et cetera. Is that a category that it all repeats your interest? Or are you kind of feeling pretty good you didn't dive into it?

So Eric, when we first looked at the space, we actually liked -- we looked at it and said, the growth is there, and this is 5-plus years ago. And if you recall, it was significant double-digit growth over that period. And so we started really looking at the need that covers and digging into what the growth looked like. And headline for us when we started to really go down a few layers was the growth was real. So it was there, but the profitability was limited. And our challenge is around if you're going to grow into something and it's growing at, call it, high teens and your profitability. So what happens when things go in a different direction. Oftentimes, that's not good because if you're only getting x amount of profitability out of that amount of growth, it's going to not equate to a downside that's going to cost you a lot in the business. So we largely stop looking at that space. And we have a niche product and niche area that helps customers or helps a specific customer that is what we align to. And so while we have a limited piece of that business, we're going to continue that limited piece of business. And really, the investment to return around the opportunity in life sciences, regulated food and 1 or 2 other markets that are regulated that we like really have the highest return for our shareholders. And so at the end, the fortunate piece is there's a lot of opportunity in areas that we view have high return in areas that we view we can really maximize that impact with customers, maximize that value creation. And so that's going to be our focus.

Consistent with what I would think, what I think you'd say, interest in closing, anything we didn't cover off that upon reflection is an interesting one to close on?

So the one item that people are starting to see more, but we're talking a bit more about is our -- when you look, we're also -- so we're focused on markets, and we've got our capital allocation strategy. But within markets, we're also looking at really CapEx versus OpEx. And what does that look like? And so I talked about integrated machines. That is a -- was a big piece of our business. It's now 40 -- so it was about 80%. Now it's about 40% to 50%. And we've built out that standard machine standard product. And then we also have the services piece, which includes digital, and that's grown to close to 20%. So we have also shifted our portfolio and are going to continue to look at that, because at the end, we have the footprint of services. We have built out the capability to bring value as soon as we acquire a technology as soon as we bring a new product in, and you're going to hear us continue to talk about that reoccurring revenue that we can really drive with customers. And so while we've made nice progress with our ABM, with our journey and our leaders and our ability to continue to expand, it's early days in our journey. And our business is really aligned around maximizing the value for our customers, our employees and ultimately, our shareholders through this. So that will be my closing remarks, Eric.

Look, on that, I'm happy UBS. Thank you very much, Andrew, for kicking off the conference, and I appreciate everyone's attention. Thank you.

Appreciate it.