ATS Corporation (ATS) Earnings Call Transcript & Summary

Hello, and welcome to ATS Corporation's Annual Meeting of Shareholders. Please note that today's meeting is being recorded and includes a slide deck, which will also be available on the company's website at atsautomation.com. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of the same. [Operator Instructions] It is now my pleasure to turn today's meeting over to David McAusland, Chairman of the Board and Director of ATS Corporation. Mr. McAusland, please proceed.

Thank you, operator. Good morning, ladies and gentlemen, and welcome to the ATS Annual Meeting of Shareholders for 2024. Note that our remarks today are accompanied by a slide deck which can be viewed via our webcast and is available on our website at atsautomation.com. My name is David McAusland, a proud long-term shareholder of ATS and Chairman of the Board. Andrew Hider, Chief Executive Officer and Director of ATS and Ryan McLeod, Chief Financial Officer, are also participating and will be available to answer your questions later in the meeting. Shareholder engagement is of utmost importance to your Board and executive leadership team. And today, that engagement centers on an agenda that covers important business items. I will begin with a few observations on behalf of the Board. The primary purpose of any annual meeting is to conduct the important annual business of the corporation. And today, we will do that. We also want to update you on recent business developments and execution on our strategies. In fiscal 2024, through the application of the ATS business model, we continued to advance our value creation strategy, delivering the highest revenues and earnings in company history. Our commitment to continuous improvement and focus on strategic markets were reflected in the fiscal 2024 results. The Board and management of ATS have the future in focus. We continually aim to build and drive improvements across all of ATS' value drivers and believe that ATS is indeed well positioned for many years to come. I want to extend my gratitude to our talented team for the contributions of both time and expertise, which have been crucial to your company's growth and development. My thanks to our customers for the opportunity to serve you with ATS' breadth of solutions. And to our shareholders, it has been my privilege to connect directly with many of you recently, and you have very clearly expressed your strong support for our management team. As Chairman, I can tell you that is -- there is nothing better to hear than that. We appreciate your loyalty as we continue to drive our long-term value creation strategy, thank you. Finally, to my fellow directors, thank you for the efforts and contributions you have made and the value that you have brought to ATS. As directors, we understand the importance of environmental, social and governance issues in the eyes of not only shareholders, but our customers, our employees, and the larger environment in which we operate. The Board is responsible for the corporation's approach to ESG matters and ATS has embedded these as a Board priority, including developing well-defined targets with clear lines of accountability for tracking performance. You can read more about the Board's ESG approach in both the Management Information Circular and the Annual ATS Sustainability Report, which I would urge you to read both to understand the work that has been done as well as what we still aim to achieve. Our 2024 Sustainability Report will be released later on this year. This past year, we advanced the Board's mandate on ESG through our Sustainability Committee, now fully active along with our other committees: Audit and Finance, Corporate Governance and Nominating, Human Resources and Strategic Opportunities. Beyond normal course business, recent board activity highlights in 2024 included: Working with management to support them, support our management's human and financial capital allocation strategies, including the pursuit of our normal course issuer bid. Also engaging with management on 4 acquisitions in the fiscal year, all that added to our services digitization and AI capabilities and presence in our strategic markets. This work continued with the addition of Paxiom, very recently in July, and we now look forward to the closing of the Heidolph acquisition, which we announced Wednesday. A final comment on shareholder value creation. Including the first quarter of fiscal '25, ATS has delivered 66 consecutive profitable quarters from continuing operations. This is a great track record, accompanied by record-setting growth in fiscal 2024. In turn, ATS has outperformed the S&P 500 Index over the past 5 years on a total shareholder return basis. With our Q1 results yesterday, management described the actions we are taking to align our cost structure to a lower demand environment in EV and reiterated our strategic focus on expanding ATS's presence in regulated markets, such as food and beverage and life sciences to create ongoing opportunities for both organic and synergistic growth with accretive margin profiles. I want to acknowledge the exceptional efforts of Andrew Hider and the ATS management team who worked relentlessly to achieve results on your behalf. With the ATS business model guiding our activities, we see an opportunity to continue building on our successes. So now we can move on to the real business of the meeting. I now ask that the Annual Meeting of Shareholders of the corporation officially come to order. Once the formal business items of the meeting are complete, I will invite management presentations from Andrew Hider and Ryan McLeod. And then following those presentations, we will address any questions received through the course of the meeting using the instant messaging feature of the virtual interface. I will preside as Chair of this meeting. Sarita Dankner, ATS Corporate Secretary, will act as Secretary of the meeting and David Galison, ATS' Head of Investor Relations, will perform the role of moderator with respect to all questions submitted through the meeting. As matters of business to be conducted today, we have the election of directors, the reappointment of the corporation's auditors for the coming year. And finally, the advisory resolution on the corporation's approach to executive compensation. If there are no objections, I will ask Anup Das and Timothy Lee of Computershare Investor Services to act as scrutineers for the meeting. The Secretary has advised me that the notice calling this meeting, together with the form of proxy and Management Information Circular have been made available to each Director of the corporation, the auditors of the corporation and to each intermediary and registered holder of common shares of the corporation of record as of June 14, 2024, which is the record date for the meeting, all in accordance with applicable laws. These materials are available on the corporation's website at atsautomation.com and on the corporation's profile on SEDAR+ and EDGAR. Our transfer agent, Computershare Investor Services has attested to the proper mailing of the notice calling the meeting, and there has been filed with me the proof of service of such mailing provided by the corporation's transfer agent. The scrutineers have provided me with their preliminary report regarding shareholders' attendance at the meeting. The scrutineers report that there are common shares representing over 86% of all outstanding common shares of the corporation present at this virtual meeting or represented by proxy. Accordingly, I declare that the requisite quorum of shareholders is present, and I declare that the meeting is duly and properly constituted for the purpose of transacting the business ahead. I direct that proof of mailing and the scrutineer's final report on attendance be annexed to the minutes of the meeting. As the meeting is being held virtually via live webcast, we think it is necessary to set out a few rules for orderly conduct. One, questions can be submitted by using the instant messaging service of the Lumi virtual interface. Two, when asking a question, please indicate your name, which entity you represent, if any, and whether you are a shareholder, duly appointed proxy holder or a guest. Three, questions will be addressed during the question period at the end of the meeting, providing any questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the official part of the meeting. Four, for the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. If you have already voted, you do not need to do so again unless you wish to change your vote. If you do vote again using the electronic ballot, your online vote during the meeting will revoke your previously submitted proxy. Five, once discussion on all items of business has concluded, I will give you a minute to register or enter your votes. If you haven't already voted by proxy, I will then declare the voting closed on all resolutions. Six, when you were asked to vote, you will receive a message on the virtual interface requesting you to register your votes. You will only have a certain amount of time to do so when the polls are open. So we will now proceed with the formal portion of today's meeting. I've been advised by Ryan McLeod, that he would be prepared to second each of the motions in respect of the items of business outlined in the Management Information Circular. Accordingly, unless there are any objections, I will take such motions as seconded with no further action needed. The first item of business today is the presentation of the corporation's consolidated financial statements for the year ended March 31, 2024, and the auditor's report thereon. Copies of such documents have been mailed to the shareholders who requested them and are also available on the corporation's website and on SEDAR+ and EDGAR. It is not proposed to read the financial statements to the meeting. Receipt and presentation of the financial statements for the year ended March 31, 2024, are hereby acknowledged. And I direct that the financial statements and the auditor's report thereon be annexed to the minutes of this meeting. Ryan McLeod will review the financial statements of ATS following the formal part of the meeting. Now we will proceed with the election of directors. The number of directors to be elected at the meeting has been fixed at 8. I move to nominate those persons specified in the Management Information Circular for election as directors of the corporation to hold office until the next Annual Meeting of Shareholders or until their successors are duly elected or appointed in accordance with the articles and bylaws of the corporation, and as previously indicated, I take such motion as seconded by Ryan McLeod. To repeat the name of the nominees that are listed in the circular, they are: Dave Cummings, Joanne Ferstman, Andrew Hider, Kirsten Lange, Mike Martino, David McAusland, Sharon Pel and Phil Whitehead. If there are any further remarks with respect to the foregoing, please submit them now through the instant messaging service on the virtual interface. I will pause for a moment.

There is no further discussion with respect to the foregoing.

Thank you very much. As there is no further discussion, I move that the nominations be closed and take such motion as seconded by Ryan McLeod. We will now proceed to the reappointment of the auditors of the corporation. I move that Ernst & Young LLP be reappointed as auditors of the corporation until the next Annual Meeting of Shareholders or until a successor is appointed and that the Board of Directors be authorized to fix the auditor's remuneration and take such motion as duly seconded by Ryan McLeod. Is there any discussion on this motion? I will pause.

There is no discussion at this time.

Thank you. As there's no further discussion, we will move to the next item of business. The next item of business is to consider and if deemed advisable, to pass a nonbinding resolution accepting the corporation's approach to executive compensation, the full text of which is on Page 14 of the Management Information Circular, which I will refer to as the advisory resolution on executive compensation. To provide the context for this resolution, we believe that a shareholder advisory vote forms a useful part of the ongoing process of engagement between shareholders and the Board on executive compensation. We presently intend to conduct such a vote at each Annual Meeting of Shareholders. I, therefore, move to pass the advisory resolution on executive compensation and take such motion as seconded by Ryan McLeod. Is there any discussion on this motion? I will pause.

There is no discussion at this time.

Thank you very much. As there is no further discussion, I will proceed with voting. As we mentioned, voting today will be conducted by electronic ballot. As a reminder, if you have already voted in advance, do not vote again unless you want to change your vote. If you vote again using the online ballot, your online vote will revoke your previously submitted proxy. I will now take a moment to ask that the balloting be opened to registered shareholders and duly appointed proxy holders, so that the balloting is now open. Okay, the polls are open. And at this point, all registered shareholders and duly appointed proxy holders who have properly logged in with their control numbers or user name and who wish to vote will be able to see on the screen all motions being brought before this meeting. Please register your votes by accessing the voting page and selecting the For or Withhold buttons next to the name of each proposed director and next to the resolution with respect to the appointment of Ernst & Young LLP as the corporation's auditors. And the For or Against buttons next to the advisory resolution. Once the electronic balloting closes, the voting page will disappear, and your votes will be automatically submitted. So I'm going to pause just to give everybody the time to register their votes. I'll be back with you in about a minute. [Voting]

All right. So I think that should be pretty much enough time to allow for everybody to vote. So I now declare the polls closed. I've been advised by the scrutineers that a sufficient number of votes have been received to pass all of the resolutions before us today. Accordingly, I am pleased to announce that: one, each of the 8 nominees has been elected as a Director of the corporation to serve until the next Annual Meeting of Shareholders or until his or her successor is elected or appointed; two, the appointment of Ernst & Young LLP as the auditors of the corporation has been approved, and the Board of Directors of the corporation has been authorized to fix their remuneration; and three, the advisory resolution on executive compensation, as more particularly set forth on Page 14 on the Management Information Circular has been approved by a majority. I direct that the results of the poll be included with the minutes of this meeting and that the final results of the voting will be announced in a press release in accordance with the policies of the Toronto Stock Exchange and New York Stock Exchange and filed on SEDAR+ and EDGAR. So ladies and gentlemen, that concludes the formal business to be brought before the meeting today. As there is no further business, formally speaking, I declare that the official or formal part of the meeting is now concluded. So we can now proceed to the management presentations. Before the presentations begin, I will ask David to provide a caution with respect to forward-looking information. David?

Please note that our remarks today are accompanied by a slide deck, which can be viewed via our webcast and is also available at atsautomation.com. We caution that the statements made in our oral and visual presentations may contain forward-looking information and our cautionary statement regarding such information including the material factors that could cause actual results to differ materially from the statements and the material factors or assumptions applied in making the statements are detailed in Slide 9. Slide 10 speaks to the use of non-IFRS measures, which we may refer to in our oral and visual presentation today. Non-IFRS measures such as organic revenue, adjusted earnings from operations, order bookings, order backlog, adjusted EBITDA and free cash flow do not have any standardized meaning under IFRS and are intended to provide information to our shareholders and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Please note all figures referenced today are in Canadian dollars, unless otherwise noted. We will now view a short video and then Andrew will deliver his report. [Presentation]

Good morning, everyone, and thank you for participating in this virtual meeting. Thank you as well to David McAusland for his remarks and for the continued dedication, alignment and support that he and our board members provide to ATS. In fiscal 2024, ATS drove profitable growth, which was supported by the highest revenues and earnings in company history. We completed 4 acquisitions and continued to invest in innovation, increasing our patent portfolio by almost 10% over last year. Our fiscal 2024 results reflect advancement in our value creation strategy, supported by a workforce that applies the ATS business model to drive continuous improvement throughout our organization and across all chosen markets. We successfully focused on on-time delivery and quality, improved our internal fill rate and reduced voluntary turnover in addition to achieving strong results across our financial value drivers. ATS today is a global company with over 7,000 employees serving in more than 20 countries. In fiscal '24, ATS delivered $3 billion in revenue and $398 million of adjusted earnings, both record values. Revenues increased 18% over the prior year and included 11% of organic growth. Order bookings for the fiscal year were $2.9 billion, ending the year with an order backlog of $1.8 billion. Our adjusted EBITDA margin for the year was 15.5%. We remain confident in our capacity to leverage the ABM to drive shareholder value. Our teams are dedicated to serving our customers and shareholders and fulfilling our mission of creating solutions that positively impact lives around the world. I'm proud to be part of ATS' ongoing success and ongoing focus on strategic execution and long-term value creation. Through our build, grow and expand strategy, ATS has purposely grown and transformed our portfolio. This has been achieved through organic growth bolstered by the ABM as well as through a series of strategic acquisitions. Not only have we seen changes in the markets we serve, we have also purposely shifted our business mix towards expanding our recurring revenue, including service and digital offerings, along with products. From a strategic standpoint, we favor high-growth regulated markets with lower cyclicality. In fiscal '24, verticals, which meet these requirements, including life sciences, food and beverage and energy, made up the majority of our business. Our favored markets typically demonstrate strong secular trends, where our unique solutions and capabilities offer substantial strategic value to our customers because of their regulatory requirements, which often involve technology-intensive, complex processes, where quality is critical. For many of our customers, there is a high consequence of failure if their products are not delivered to exact standards and ATS is there to support them in meeting these requirements. By concentrating on these types of markets, supported by the deep relationships we've built with our customers, we're able to grow revenues, focus on margin expansion and leverage our assets and intellectual property. We also serve niche markets where our solutions create value for our customers and provide complementary revenue streams to support our ongoing growth. ATS remains well positioned having strategically targeted markets with favorable tailwinds and appealing long-term secular trends, including the need to address wage and cost inflation, an aging workforce and the resulting loss of skilled talent, mitigate risks in manufacturing and supply chains, fulfill growing demand for safety and reliability, adapt to increasingly complex automation ecosystems, support our customers as their markets continue to evolve and help our customers meet their sustainability targets in areas such as energy efficiency and emissions and productivity targets. As our strategy advances, maintaining a clear market focus remains crucial. We employ a disciplined capital allocation framework to optimize our existing portfolio, balance our mix of offerings and guide our innovation and acquisition initiatives. On innovation, teams across ATS are dedicated to developing and introducing new technologies that set apart and expand our automation portfolio, creating customer solutions that deliver strong returns. On our approach to M&A, we apply specific and consistent criteria to evaluate potential acquisitions, including a thorough analysis of the market, the strategic value of the target, operational capability, including how we will integrate and operate the target, synergistic opportunities and the speed of implementing the ATS business model and the financial return including return on invested capital, EBITDA growth potential, recurring revenues and EPS accretion. In fiscal 2024, we continue to enhance our digital service some product offerings through strategic acquisitions to add value. Turning to the ABM. The ATS business model is now in its seventh year and serves as a common link across our global decentralized business, developed to help our team pursue strategies that outpace market growth and drive continuous improvement. ABM supports our goal of delivering long-term sustainable value. Over the past year, our teams demonstrated strong engagement with the ABM. These efforts are closely monitored to identify opportunities for further development and deployment of ABM tools. Our ABM playbook is a repeatable model for creating solutions centered on our 3 core pillars of people, process and performance. From these pillars, our 8 value drivers are derived. The results ATS achieved in 2024 reflect the strength of the ABM culture within the company and its ongoing evolution is crucial for sustained success, including in our more recently acquired businesses where we have seen strong ABM adoption. In summary, ATS continues to build on its over 45-year history of success as a global automation leader with a blend of experience, robust customer relationships, a skilled team and a strategic framework guiding our efforts. ATS is well positioned to continue generating shareholder value. We help our customers accelerate their time to market and reduce costs through our advanced technology and automation capabilities. We continue to invest in innovation to constantly seek ways to transform streamline and optimize customer operations. We have grown both organically and through acquisition by concentrating on our selected markets. We will continue to apply this approach going forward. We are pleased with our performance and progress in fiscal '24, and I look forward to what we can achieve in fiscal '25. Now I will turn the meeting over to Ryan. Ryan, over to you.

Thank you, Andrew. Good morning, everyone. I'm pleased to have this opportunity to discuss the company's performance. As you know, we have 8 value drivers to measure our global decentralized businesses. These value drivers are key to measure your performance across every ATS business, each individually focused on continuous improvement on these drivers. The ABM has matured across the organization, including at acquired businesses. The first 4 value drivers are an assessment of our financial performance, order bookings, revenues, EBIT margin and working capital. Next two are focused on customer experience by tracking on-time delivery and quality, and the last 2 are focused on our people by measuring internal fill rate and turnover. Looking at results against our 4 financial value drivers. I'll start with revenues where growth over the past 5 years has averaged 19.3%, a compound basis with average annual organic growth of 8.6%. Fiscal 2024 revenues were a record $3 billion, an increase of 17.7% year-over-year, with organic revenue growth of 10.7% and revenues from acquired companies contributing approximately 4%. Moving to order bookings. Over the past 5 years, the compound average growth rate was 15.5% annually. Fiscal 2024 order bookings were $2.9 billion, a decrease of $365 million compared to the prior year when we received large transportation order bookings. In fiscal '24, order bookings increased across life sciences, food and beverage, energy and consumer in part due to acquired companies driving 3% growth. On profitability, adjusted EBITDA has grown 23.7% on a 5-year compound annual basis, in line with our long-term plans to improve profitability. In fiscal '24, adjusted earnings were a record $397.5 million with a margin of 13.1%, and our adjusted earnings per share was $2.61. Our long-term commitment is to achieve a 15% operating margin across all of our businesses by focusing on expanding our higher-margin aftersales service business, optimizing global supply chain management, Increasing the use of standardized platforms and technologies, growing revenues while leveraging our current cost structure and pursuing continuous improvement through the ABM. Our typical rate for CapEx investment in the business is in the range of 2% to 3% of annual revenues. In fiscal '24, our investments in CapEx and intangible assets were in line with this range at approximately $88 million. This spend centered around expansion and improvement of certain facilities, while continuing to invest in innovation. Noncash working capital is our fourth financial value driver with our long-term goal of keeping investment at less than 15% of revenues. Fiscal '24 closed with working capital as a percentage of revenue of 19%. Due to the size and timing of milestone payments for certain large programs, this percentage can vary and exceed the target of 15%. In the short term, we expect working capital to continue to exceed our target. However, we expect a combination of cash flows from operations and credit available are sufficient to fund both requirements for investments in noncash working capital and capital assets as well as certain strategic initiatives. In fiscal '24, we generated cash from operations of $21 million, down from $128 million in fiscal '23 driven by changes in noncash operating working comp. Free cash flow in fiscal '24 was an outflow of $68 million. From a leverage standpoint, our net debt to adjusted EBITDA ratio was 2.4:1 at year-end within our targeted range of 2 to 3x net debt to adjusted EBITDA. We were also active in our share buyback program at the end of fiscal '24 and early fiscal '25 as part of our overall capital deployment strategy, repurchasing approximately 1 million shares. We are committed to maintaining our healthy balance sheet while ensuring flexibility in our financing structure to support and advance our growth strategies. For further information on our financial performance, I encourage you to review our fiscal 2024 Annual Report and our Q1 fiscal '25 update available on the Investor Relations section of our website for more details. In our Q1 report, you will note that our backlog at the end of the quarter was approximately $1.9 billion, which provides us with good revenue visibility. In summary, fiscal '24 was a successful year marked by record revenues and earnings. Our M&A funnel remains strong. Our cultivation activities are progressing, and we are committed to our disciplined capital deployment approach. Our ABM culture continues to be an important part of our ongoing success. Across our decentralized business, we look forward to continuing our focus on serving our regulated diversified strategic markets to deliver long-term value. Now I will turn the meeting back to our Chairman. David?

Thank you, Andrew and Ryan. Now it is time to hear from our shareholders if they have any questions. As explained at the beginning of the meeting, any shareholders, proxy holders or guests who would like to ask a question can use the instant messaging feature of the virtual interface to do so. We will answer as many questions as time reasonably permits. A reminder, when asking your question, please state your name, the entity you represent, if any, and confirm whether you are a shareholder, duly appointed proxyholder or a guest. Please limit your questions to topics relating to today's subject matter. For each question we answer, we will summarize the question and read out loud the name of the person who asked the question. And if applicable, the entity the person represents. We would like to remind you that the questions which were already answered or that are redundant or repetitive will not be addressed. Now I'm not sure there have been any questions I don't think so, but let me just check with our Secretary, Madam Secretary.

There have been no questions at this time.

So there's no questions, but I'll wait just for a minute or so, a short pause to see if anybody wants to chime in with some questions. Otherwise, we'll bring the meeting to an end.

There are no further questions.

All right. Well, I guess that means that everything is crystal clear and everybody is happy. So that's a very good sign. So there being no further questions or any questions we are going to conclude this period. And that concludes the annual meeting of our shareholders. I will sign off by saying thank you very much for participating and reminding you that our door is absolutely always open for shareholder engagement during the year. Have a great day. Thank you for your participation. Goodbye for now.