ATS Corporation (ATS) Earnings Call Transcript & Summary

All right. Welcome. I'm [ Shelly Xu ], I'm Managing Director and Industrials Investment Banking here at Citi. It's my pleasure to welcome Andrew Hider, CEO of ATS to join us for a fireside chat this morning. As you all know, ATS is a global automation technology solution provider for various end markets such as life science -- all right. ATS is a global automation technology provider for various end markets such as life science, food and beverage, nuclear energy, electric vehicle, consumer products and other industrial end markets. Andrew has been the CEO for 7 years. Under his leadership, he's grew the company from $1 billion revenue to almost $3 billion revenue today. And the company is today listed both in Toronto Exchange and New York Stock Exchange. Andrew, welcome.

Thank you very much for having us.

And for those who may not have followed you closely, maybe give us a little bit of overview of who ATS is and also the key value driver that's behind this incredible growth and transformation.

Well, I appreciate it. I appreciate the warm welcome. Look, looking back on 7 years, when we started off this journey, it really was aligned around understanding the strategic focus and where we wanted to really identify markets that we view are more resilient. And my background, I've been with a central company and I've been with a decentralized corporation. And we've aligned ATS to be a decentralized corporation, all with a central operating system. So we have markets that we view are more resilient, and we have an operating system in how we operate the business. And no secret life sciences is our largest market segment to think about us effectively, if you have a pen that can be considered an injectable device, we would be the ones you would come to, to go from 1,000 prototypes to 1,000 a minute. And if you're looking at that because it's direct in your bloodstream, you're going to be looking at quality, you're going to be looking at risk, you're going to be looking at how do you get your product to market on time and meeting your targets for margin profile because usually, these are higher-margin products. You come to ATS. And we not only do the full integration, but we've also acquired businesses with strong IP, strong support to utilize, to really bring that product to life and then support you over the life of the equipment. Because one of the things that's changed in the last several years is customers don't just look at today, they also look at where are we going to be a year, 2, 3 down the road, to make sure we've got that capability. And so our business has evolved to life sciences and not just integration, we're integration, standard machines, standard products. We're also now in regulated food. We're in nuclear energy, green energy supporting that trend. We're in the EV shift, and we're also in consumer products focused on really higher-end niche areas for that space. And so 7 years has gone quick. But while we talk about the business and how we've evolved, we're early in that journey. We're early in that migration to having high value for our customers and our shareholders. And to give you a couple of reference points, our business has grown, call it, a little over 18%, and our profitability has grown a little over 24%. And so strong performance, but yet still early in the journey.

Great. And I think one of the things you talked about is moving away -- well, when you started there's a lot of custom integration projects, right? You're adding a lot more custom products, reoccurring service businesses. What was the transformation look like? And how do you expect the mix to change going forward?

Yes. So looking back, one of the areas we identified quickly was we were in traditional eyes and we were in a me-too space, medium to high risk, low profitability. We largely exited that. We also looked and said, "We want to be on the integration piece, " so high value for customers really identifying that value creation. And then how do we continue to expand our value through not only the integration piece, but then also through products, standard machines and then ultimate services. And this has been obviously a 7-year of evolution, but it fast forward to today, any given rough area of segment, our recurring revenue is between 25% and 35% and that's been an intentional drive and intentional shift. And how do we get there? We continued to invest on innovation. We continued to enable the team to launch solutions and capabilities for our customers. Why do we like that? Number one, because if you look at return on invested capital, it's one of the greatest returns to our shareholders. Number 2, we've acquired companies that have added strong capabilities really businesses that are the leader in their niche space. An example, Comecer, it sort of belonged to Italy. They do aseptic filling for the radiopharmaceutical space. Radiopharmaceuticals is identification and treatment of cancer. Very strong ability for our impact for customers and their ability to support the end market and support the treatment of cancer. That business has grown since we've acquired them or roughly, call it, over the 5-year mark to almost double the revenue. And so we've been very focused on key end markets that we view are attractive and then really enabling that through technology and value creation for customers.

Right. So you talked about Life Science being a growth driver in ATS over the last couple of years. And obviously, you have a very strong unique capabilities in radiopharma, you talked about auto injector, stuff like that, really the COVID testing, you've done a bunch of stuff. Where do you see the businesses going from this point out, right? Life science being 50% of the business, where are the specific areas within life science that you're deploying capital, you had deployed human resources to drive growth going forward?

And I'll take them by segment. But if you look at life sciences, and I'll tell you, it's an exciting area. The GLP-1 expansion, we are a key enabler for the manufacturing of that actual product. And by the way, just for reference point, we've been in this space for almost 2 decades. We were with the EpiPen back in the day. And we've not only been in the space, but we've constantly driven to have high technology, high capability. And through that, we've acquired a company. It was a business by the name of Transformix. We've rebranded it because we had to enable the technology, and it's now called Symphoni that has put us in a lead position. So what this effectively does in the market that we serve is we can be up to 2x the speed in output and half the size. And some models like could get us to 3, but if you think about 2x the output, half the size, huge impact on the market. And the business, I mean, when we look at that space and we look at the growth profile, we view this as the next 5-plus years growth. It is rough numbers, low single digits of our total revenue. We think this is going to get up into high single digits of our total revenue, and it's going to be a key enabler. That said, our single largest order last quarter in life sciences was contact lenses and the quarter before that was contact lenses. So we like the spaces that we've supported for years, we like the markets that we serve, the niche capabilities like wearable devices in the treatment of diabetes, radiopharmaceuticals, identification and treatment of cancer as well as where we are in diagnostics, where we are in support for lab automation and with our new addition of Avidity, really getting into that following the molecule, understanding the lab space from the molecules that are effective to really helping bring it to life and the expansion. And so it really is around not only organic but then inorganic to support that growth profile.

Great. And then you talked about Symphoni, the Symphoni platform. And the way kind of I looked at it, it's a very unique or not unique, it's a very modular, standardized approach, digitized approach to automation, which is the holy grail in automation in my mind. How -- can you talk about customer adoption of this technology? And how does that improve your margin because it's more modular than standardized?

Yes. I mean so easy answer, right? Modular solutions use the equate to better margin profile. And it's there. And it allows us to have a standard application that can be customized per customer. But the real power and when a customer sees what they can do with this technology and capability, it's a game changer. And they look at it and they understand not only have we been in the space, and you're launching a solution that's an injectable device, high-margin profile and your demands through the roof. You have confidence that ATS can help you bring that to life. And so not only Symphoni, but then our experience, and we're using now AI in the solution loop to identify defect recognition earlier on. So you kick it out earlier and you don't add value. And so it allows you to improve your output. All these factors really go into the customer looking to ATS being a leader in that space. And you could take that exact example and go to wearable device in the treatment of diabetes. You could take that example and go to where we are in injectables and the constant drive for value creation for customers and utilizing not only our know-how, but our technology and IP to bring that value to life. And then ultimately, reward to our shareholders. And that drive to expanding our margins, having higher recurring revenue into our business cycle and that drive to being in the markets that we view are more resilient over long periods of time.

Great. So you talked about AI, which is obviously a big focus for a lot of investors over the last, call it, 12, 18-month or so. Maybe we take that and expand on that part. Can you talk a little bit about ATS' digital strategy around AI, around software. I think you have a great machine vision offering, right, then I think going to preventive maintenance. And then you also talked about a couple of IoT type of project wins last quarter. I think these are very advanced technology. I don't -- I think it's beyond a typical integrated capabilities. It would be great to talk about that and expand on your capability, educating investors on what you have to offer?

Yes. And so pretty mini topic. And I'll just walk through. So we have a bit of a mantra and it's owned the floor. And how we think about it is the days of customers just getting a dashboard. Those are limited. They want to have actionable insights. They want to drive impact on their solution. And so we've consented -- we're a leader in integration for the markets we serve. So we understand what goes into building the equipment. We know when you're building that product, the threshold that you have to meet. We know the quality applications. We know the amount of PSI that the specific holes needs to go into making that solution set. So we have that capability. We've also, over time, acquired a company called PA Solutions, which their whole niche was collecting data of the existing manufacturing footprints. And so they could go into a brownfield site, and they could actually pull the data to understand it. And now they built out capabilities to not only pull the data, but then to bring it into the cloud and drive actionable insight back into the solution. And so we've got capability through our services, through our automation arm as well as our ability with PA to collect the information and bring that back into improving process because what customers ultimately want, they want to improve their output. They want to know, if I'm going to invest in this, what can I do to drive actionable insight? And we have now created the ability for an easy buy. We can provide that action mantra or we can even go to the next phase, which is we can also help you implement this. And so I tell you all that because we've made nice progress, but we're early in this journey. And when I think about tools like AI and AI as a tool, it is changing the way we view internal processes. It's changing the way we bring the value to market with our customers, and I can cite different technologies like the way we look at fruit with AI and understand the defect characterization and kick out. So we know when you're producing something, you're going to have the highest output as well as even more recently when I was walking the production floor and a young engineer, she took me aside, she showed me how she was using our vision system with AI to identify defects earlier in the process for the auto-ejector space, huge value for our customers. And so when we look at digital, digital is -- we are looking at that as an enabling direction. When we look at AI, that's a tool. And our business and our leaders understand the magnitude and impact of what AI can do. It's cheap predictive analytics and really utilizing that to drive insight. And we're now using it in our legal process and our HR process to maximize the value creation that we can have across ATS.

Are your customers paying for the AI and software in a recurring revenue stream right now?

So typically, what they would do is they will pay for an upfront and then the recurring. And ultimately, I mean, our mission is to get to that recurring and that value creation for our customers. But as I've said, we're still early in this journey. We really -- we've acquired a few businesses like Yazzoom, like IPCOS, Triad and other areas where we're bringing more value for those customers but it's early in our journey. And because we know the impact that constant drive to create value is something that we can really line around.

Great. And before I continue, I'd like to check on the floor if the audience has any questions.

So I would like to start. So can you help us make a little bit more concrete how you are innovating? Because my understanding is that you are an integrator of technology, you're going to get the best technology and going to pull it together to help the client, but you talk a lot about innovation. So in doing things that are unique, can you just give us some examples for us.

Absolutely. So and to give you a little bit more data to support this, when -- call it, go back 7 years, I think we were roughly around 80% integration. So big integration. Today, it's less than 50%. So we've not only shifted that and by the way, we didn't really go down. We've just grown the other pieces of the business to fill that in with standard machines, standard products. But now as an innovation, we do this on a global scale. So every business is going to have an innovation agenda. And what they're going to look at? So let's take Comecer, for example. That business understands in the radiopharmaceutical space, that there's going to be new drugs launched like lutetium or Actinium-225. And they're going to be working on the IP to really align their business. So when the customers launch these drugs, they're in a position to be able to produce that product set. And so they're already going through that IP. They're already lining up their technology so that they can enable that drug to be launched, launched on time and to be safely launched. They're also doing simple things like if we're going to take certain products and use vision with application of digital, they're going to invest in it to show the output and show the improvement on performance of the business. If you went to our facility in Cambridge, you'd see of an innovation center where Symphoni was initially a product that had good IP, but didn't work in the application that we knew would get at high value, and we worked on it for 2 years around investing to ensure that it could meet the application requirements. So then when auto-injectors started going, it fit that application very well. And that's just one of many, many, many solutions that we launch. We just held our -- late last year, we held our Innovation Summit, where we brought in the leaders of innovation across ATS and focus on key themes like digital transformation, AI enablement, enabling your tools to create capabilities for your customers and using it in your everyday life. An engineer, there was a curing process that was taking longer than expected. They identified an area for a light capability to be able to reduce, that's how we want to think about innovation. It's that drive to constantly make tomorrow better than today and add high value for your customers. What are they willing to pay for? And how do we maximize that value creation.

Any other questions?

What does your business look like 3 to 5 years out?

Like to be careful on this one because everyone wants to say it's growth. But when we talk in our organization, if you join my leadership team, we talk about culture and people, by the way, very candidly and you get 2 bugs. One is the outsiders because you want -- I want you to know how we think about capital allocation. So our view is value and that constant drive for value. So our business, we're focused on areas where we call high differentiation, high consequence of failure. Life sciences is very aligned around that. You're going to see us continuing to drive into key applications. We've just acquired Avidity. Now you can follow the molecule, so you understand the molecule to actually going to process. That's going to be a key theme for us over a long period of time, you're going to see us continuing to evolve and grow that area of business. Resiliency. If you look at markets that are more resilient over long periods, it's life sciences and regulated food. And you're going to see us continue to evolve in regulated food. We're in more primary processing, which is think that tomato from the vine to puree. We want to move into the secondary, which is pureed to baby food. And we like those markets because they're regulated. It's ensuring you've got a safe product to market. And so you're going to see a shifting in our mix and continuing to drive down that path of very resilient, very high consequence of failure markets, and you're also going to see a shift to more recurring revenue. And our business has been really driving in. So Avidity is 40% recurring. You're going to see us continue to launch solutions that are going to increase our recurring revenue and ultimately margin profile.

So the key themes I hear is mission-critical, highly regulated market. If you get it wrong, severe consequences could happen, right? So that itself act us, call it, barrier of entry and competitive advantage against other integrators and with the technology you're adding that gives you the technology advantage over other people that's why your customers keep coming back to you, if that's...

Yes. And when you step back and we look, I mean, we're in life sciences. We're in regulated food. We're in energy with nuclear. We like our EV position. Now that market is a little bit more choppy right now. We do view it's going to be a measured recovery around that space. We're in a high consequence of failure area where customers look to our technology, look to our innovation, look to our solutions to really enable their capability. And so we've been specific and focused around organic growth in that area. And we've deployed capital externally inorganically in life sciences, in regulated food and in digital and services.

Great. And on the EV topic, I know last couple of years, you have seen quite a bit of growth in that sector. Obviously, right now, you have seen a couple of project delays and so on and so forth. Any perspective in terms of how do you see that market recovers?

Yes. So we did -- we announced a project that has basically been on hold, and our view is next quarter we'll be coming off it. And to be clear, the fascinating thing about this space is the technology is changing so fast that customers look at their current capability, and they want to know, are we at the greatest level for their battery technology, their solution set. And so while we announced it, it's not the first time this has happened in this area. And it's something that we've worked with customers on because they look at cost structure, they look at output, they look at their ability to drive further on a single charge. And so all that to be said, we do view that the short term is going to be a bit choppy. Our mid- to longer term, our funnel is healthy. We've working with right now, today, we're working with call it, 7 to 10 customers in this space, and we see opportunities for our continued expansion. That said, we do view it's going to be a bit more measured over long periods of time. where we saw a fairly significant uptick. We think investment is going to be measured and customers are going to continue to look to expand their capability.

Great. So one question I always curious about is, how does the technology and know-how transfer between the different parts of the group right between life science and electric vehicle. Obviously, they're very different technology requirements. But clearly, there is a benefit of having all that under one roof. Can you talk about kind of the technology transfer know-how transfer between the various different groups, various end markets? And how does that benefit the group as a whole?

There are advantages and disadvantages to be decentralized. And I would say this is an area being decentralized, you have to really enable and what we don't do is, we don't force companies to work together. Because what you find is then they're going to short change and they go look and say it's not in my best interest to make this successful. And so we do a lot of work around really bringing the teams together to create or learn from their solutions. And I say that because you don't have to reinvent the wheel all the time. We have launched a digital capability when we held a digital symposium, our teams learned that they have the ability to launch this in a short order. And all they have to do is just line up their data flow to really walk that process. And then they've got full capability to offer it in their markets. And so we do things like a digital solution set where we'll bring the teams together. We will do things like innovation or we'll do innovation workshops to enable to support and help companies on bringing that solution set or that capability to market. But it really does take a coordinated effort. And what you'll find is the best technology usually wins and the best capability usually wins because if people can utilize that and bring that to market, they can bring high value for their customers.

Great. And are you continuing to see the tailwind in your business driven from sort of onshoring and nearshoring efforts? I remember you talked about previously there was a pharmaceutical manufacturing plant move from China to Boston area, you build a fully automated facility for them. Can you talk about any continued tailwind you're seeing in that area?

So and there's a few here. And I'll start with labor. And this is really one that's kind of a general theme across. And whether you're onshore and reshoring, you're doing supply chain derisking or your labor costs are increasing. This is a real challenge and a real opportunity for ATS. And when you look at automation enabling that area, that gap it is often customers are leaning into really enabling that. And you use an example is actually a company that spoke at our Investor Day call it, 4, 5 years ago where they moved the product from China to Boston, low-cost region to high-cost region. And they were able to reduce the operator requirement from over 2,000 to less than 200, and they improved their gross margin by 20%. So they not only moved it but they're able to improve their output. They're able to prove their margin profile and they're able to bring it to an area where their leadership, their engineers could really learn and continue to drive technology advancements on their product at their core location. And we see that with many companies around their ability to bring solution sets, whether it's the auto-injector space or even contact lenses where they want to have capability in the markets where they have demand. And because we built out our services arm, because we built up our ability to support in region, they look to ATS for that solution set. And so labor is a big one. And one of our customers that I was visiting with a few years ago, leaned into me and said, Andrew, we're 66,000 people, 1/3 of our workforce is going to retire in the next 3 to 5 years. 1/3, you have to help us. And the new generation they don't understand dials. They understand swipes. And they don't get how to run this equipment. So you have to help us. And so that's enabled services, that's enabled our ability to support from a digital capability that's also led into how do we restructure our view of true solution sets, true products that are going to enable their success. And we're seeing that in many areas of the business.

Great. And then part of your overall strategy, I would say, is M&A, right? So ATS is a compounder consolidated in this space. I think you have deployed like $1.7 billion of capital since 2018. Can you talk about your M&A or capital deployment strategy going forward? Where -- which area are you going to deploy more capital or less capital? How do you think about that?

No. To answer that, I'll just walk through. So we have 4 major criteria for any deal we look at. First one is the markets they serve. We really deeply understand the niche, the solution set. So not just, okay, life sciences. We'll get very specific on. So with a bit, we want to understand in biopharmaceutical, which is their core space. What is their position and what is their value of brand and their value of technology and we get to know that really well. And so we look at markets, number one. Number 2, we look at the strategic rationale really, where does this -- is this a services place? Is this a technology advancement? How are we going to extract the strategic rationale and value from that. Number 3, how we're going to operate it. How quickly can we launch the ATS business model? What's the management team look like? Do we need to bring in a new leader? Do we need to look at their structure and understand. And the more that we've built out our leadership journey, the more we don't want to pay up for management teams. So do we have leaders ready to help out in that journey? And then last is the financial return. And the number one here is we look at return on invested capital. And in our target that we say externally is double digit within 5 years, we've often done it much earlier than that, and it all depends on the deal for the business. But then we're now looking at things like recurring revenue, margin accretion, really understanding what we can do to drive value for this business. And so we look at every deal under those 4. Then, if you look at the targets that we've gone after and we built out cultivation capability, the best deals we do, we've cultivated, not by auction, they're not 50 people in it in bidding process. It's we've gotten to know the leadership team. We've gotten to know the owner. We've got to know the management structure. We understand the business. And not to say we don't do that but we get to know the teams really deeply to know is, they're a fit. To know the value we have and also oftentimes, when you build that relationship, you can know really where it is in the process. And so cultivation, the criteria and then if you look at the areas we've targeted, Life Sciences has been an area we've targeted. We're going to continue to target. There's high value creation, usually because of our integration arm, when we acquire a technology, we can bring that in and create that value very quickly for the customers. Regulated food is one we continue to like and liked over long periods of time and then I would say, digital and services as being an enabling technology across the platform. And we've announced a few deals, but you look at what we've done with Yazzoom, with IPCOS. We acquired a company called BLSG, which does -- they actually drive the improvement to the business. So once things have been identified, they help them drive impact. So it's almost a closed loop approach to customers around not only can we identify it, but we can also drive the impact to support you in making sure you see that value.

Great. So you talked about double-digit ROIC being the financial hurdle at least. Does that hurdle change depend on sort of the rate environment or depending on which area you're deploying capital? Is there flexibility or is that kind of fixed?

Yes. I mean we always want to -- we want to outpace our weighted cost of capital. And so we're -- of course, we're going to look at that in its totality. That said, the things we look at, I mean, we're going to look at making sure it fits the business long term, the value creation is there. And you think about, we talk about CFT. Here's a business that we really like the end market space, but we look at their margin profile as a challenge. And we said, okay, all right. What's the brand like, what's the loyalty from customers? What's the technology? What's their IP? And to give you a case in point, they were low single digits EBIT. Low single-digit EBIT. And we knew what the market serve. So we knew what the competitive landscape look like. We knew what people were performing to. We knew what the services look like. And fast forward today, that business has done a 500 basis point improvement on their EBIT, they're just getting started in their journey. The team is really maximizing impact. Their turnover by the way, has gone from double digits to now less than 5%. Their leadership is engaged in the journey. They're expanding their organization. And so we know we can do. That said, we want to understand the market first because at the end, we can build great leaders and great culture. But we also want to be in really good markets for long periods of time, and that's why we're very much focused on that.

Great. Any -- yes.

When I hear your story, remind me a lot of Danaher. Is that how we should think about your company? Is that your model?

So if you don't know me, I am an ex Danaher person.

That was not rehearsed.

I would say we don't -- I don't like to use that in our narrative. I would say our aspirational peers are going to be decentralized businesses and I can write off a few off like IDEXX or AMETEK. I mean they've done a really nice job. We're building the ATS model. And I would say the fortunate thing in these conversations is we've made nice progress, but we're early in this journey. The shift to the products and standard machines and that capability on integration, and now what we can do in digital, it's the business of course, there's going to be bumps in the road. We can't predict markets, but we are very laser-focused on areas over long periods of time that we know we can out-execute and we built the team. We have the culture aligned and we're constant driver for execution.

What percentage of your business is recurring? You talk a lot about services.

So if you look at any given moment across different segments where we're between 25% and 35% reoccurring revenue. And if we say reoccurring, and there's a lot of dynamics around recurring versus reoccurring, but services is a piece of that. Digital is a piece of that. Replacement componentry is a piece of that. And so we do look at those across. And you're going to see us continuing to expand that.

Great. And my final question, and I should know that in the last 7 years, the market cap has increased 4x to almost $4 billion today. What's your vision for the next 5 years? And what do you need to get there from a technology, human capital perspective from a financial capital perspective.

Yes. I mean, look, if you ask me what I -- what keeps me up at night, it's people. It's leadership. We're going to build and continue to build the corporation. Our team is hungry. If you came to our leadership conference, we do it every year in June, it's the strongest leadership team we've had. And we're only getting better. And so it really is around maximizing that value that our teams can drive impact on. And so we're laser-focused on making this our run. And the team is strong, and we have the operating plan. We've got the playbook but it's that constant drive to have the best team and win as a team and aligning around the markets and technologies that are going to create value for our customers.

Great. Thank you, Andrew.

Appreciate it.