ATS Corporation (ATS) Earnings Call Transcript & Summary

[Audio Gap] I'm with the Citi Investment Banking team. It's my pleasure to welcome Andrew Hider, CEO of ATS. As you all know, CEO -- ATS is a leading global automation technology and solutions provider for a variety of end markets, life science, food and beverage, consumer electronics, nuclear energy, electric vehicle, you name it. Andrew, you have been CEO since 8 years ago that you have to grow the business from $1 billion revenue today, $3 billion sales; margin expansion, 500 bps; market cap now, 4x of when you took over, now you're listed on Toronto and NYSE.

First of all, thank you for joining us this afternoon. Maybe for the audience here and remotely, who is not too familiar with ATS, maybe give them a little bit sense of what do you do? What's your competitive advantage? What are the key things you're focused on?

Well, first and foremost, thank you for having me. So ATS Corporation, the easiest way to think about us is we make the equipment and the process that makes the product. So when we talk about things like GLP-1 drugs, like an auto-injector, we make the equipment that makes the product. So you can imagine me, this is a new injectable device or this is a medical device. And you just got FDA approval. 70% gross margin. Your demand is through the roof, become to ATS. And we would design all the equipment that makes this product. We also have acquired companies that do the filling that do the moving, that does the inspection to ensure that you get the product on time, on quality, on budget. Because what matters to you is this is an injectable device. And, therefore, if you've got a defect or contamination, you got a real problem. This is what ATS does very well. We enable our customers to bring their products to market to meet their demand, and then we serve and support over the life of the equipment because one thing that COVID had taught us, because it's not just about the first time, it's about meeting that demand every time. And so we've launched services, we've launched digital, we've launched tools that truly help our customers take that capability to the next level. And so we're in end markets like life sciences, and that's broken into 2 major categories with laboratory and manufacturing. We're in food safety. We're in nuclear energy. We're in consumer products, and we're also in the EV shift.

So life sciences is about what 50% of the revenue for you guys. It is obviously, has been a growth driver, especially under your leadership where you talk about the GLP-1, where are the opportunities more specifically in health care, life science for you -- for ATS to grow over the next sort of 2, 3 years?

So if you look at our business, and we announced our results a couple of weeks ago. It was the second largest bookings quarter in company history. It's growing 12 months, 1.18 book-to-bill ratio and life science is being the largest piece of that equation. And we're in many areas. And one of the things are, when we talk through with our investors to make sure they understand is, we're in many attractive end markets. So whether it's GLP-1 drug launches with the auto injector that we've got a very strategic product within this to help manufacture and help bring these solutions to market to radiopharmaceuticals, which is radioisotopes, identification treatment of cancer to wearable devices in the treatment of diabetes. We're also in things like pharmacy automation, as well as -- and people miss these quite often, contact lenses, which has an ongoing repeat cycle. So we've got this core capability and this niche capability that's high value for our customers. So when we engage on a radioisotope, whether it's actinium 225 or lutetium, customers come to us while ensuring that they can bring that product to market, ensuring that they can meet the demands that they have today and tomorrow. And with every dating going out in the world, that's getting more and more critical. Now, we'd talk about things like onshoring supply chain derisking. Whenever you're shifting or building and what our customers look at is they're building capability where they've got demand. Well, the 1 trick you got to make sure that you identify is the labor. And oftentimes, that's the challenge. And so automation truly helps our customers bring that product to life. In ATS, and you asked earlier around our competitive advantage. Well, we have technology, IP, know-how, experience, but also, if our customers want to bring their product to market starting in North America and then Europe and then Asia, we're in all those places. Not only can we build and manufacture, we can also service, we can support. We launched digital capabilities. We utilized AI to improve your process output to truly enable and drive that product forward. So we're oftentimes very strategic with our customers. While we might not see a huge increase during a supply chain derisking or onshoring, we will see over long periods of time that as an advantage for automation.

Great. You talked about services. I think that's a very important part of the growth story. I remember when a couple of years ago, it was 80%, 90% of revenue are systems integration and now really a large part of the revenue is both bespoke equipment with higher margins and services, right? So that has been a very important part of the story. Can you talk a little bit about -- more about how do you penetrate your customers with services and making that a sticking recurring revenue for you guys?

Yes. And [ Shane ], you've known the story. But for the group in the room and for those watching online, our business used to be 80%, 90% integration. And while that's a core strength of ATS and gives us the ability to have very strong relationships with our customers, we've built out our portfolio of standard machine, standard products as well as services. So fast forward to today, remember, that was 80% to 90% of our business. Our integration is now a little over 40%. Now, it's continued to grow, but we've grown the other aspects of the business at a faster pace. We've done that through organic growth as well as M&A. So it's now a little bit over 40% integration. Standard machine, standard products is roughly around 30 and our services in digital is roughly around 30%. And the reason why that matters is because not only are we with the CapEx cycle, so we can be with our customers as they invest for the future. We're also on the OpEx side. We're also in a higher technology, higher penetration as well as when a customer is producing a product, they want to ensure that their product to meet demand over the life of the equipment. So we not only do services around break fix, reduce spare parts management, we have digital capabilities, predictive maintenance as well as ongoing process improvements. So we've launched solutions like Connected Care Hub, where we now monitor the systems online. We can work with our customers to ensure they have the right level of output, to ensure they don't have downtime. We can assess if something is going wrong, to improve it before it becomes an issue. I know while this is early in its journey, it's not only helping us increase that value for our customers, but it improves our revenue stream for services and digital. So 30% today, we've talked about our reoccurring revenue getting to close to 40%. Now, many things need to fall in place. We need to continue to invest and we need to continue to expand our penetration, but we've seen the growth, and we've seen the value creation that has for our customers.

And how would that impact your margin? Because I assume that's a much higher margin business than the integration side of things.

Very leading question, I like. So it is higher margin. And when we talk about margin. When I first came on, we talked about getting to a 15% EBIT and our base business got there. Now, we've acquired some businesses that we saw we could have improvements on. One of them was our business called CFT. We acquired that business, it was a low single-digit EBIT, was done over a 500 basis point improvement. Well, services helps through that expansion. It's one of the key levers we pull around really expanding that value, really expanding that penetration with customers as well as what we like to call stickiness. When your customer has a great experience on your services, when they have a great experience on the overall effectiveness of the equipment, they want to buy more. And so it truly helps with that overall cycle. It helps both OpEx and CapEx and helps with our ability to bring higher value for our customer base.

On the EV side of things, I know transportation auto has been gradually decreasing in terms of its share of the revenue at ATS. But EV was a driver during the COVID years for ATS and in recent times that you have -- saw a little bit headwind there. Can you talk about how are you addressing the challenges and what's the strategy of addressing the EV market? Or if there is -- you do see that as attractive market for your EV?

Yes. So let's walk through this dynamic a little bit. So EV to us, when we -- when I first came on 8 years ago, we saw that we had core capability here, but it was early in its journey. And we looked at Automotive is 2 key themes. One, there is the EV shift, and then 2, there was ICE, internal combustion engine. And what we found with ICE was we're pretty much a me-too player. And so medium to high risk, low profitability. That really doesn't add up over long periods of time. So we largely exited that. We closed it down. We pivoted it and we sold even divisions around it. . And then we took the other capability, and we saw EV had a pretty strong tailwind. Now, we didn't really see that it was going to be at that level, and it moved at a very fast pace. So we won work in Europe quickly. And then we started winning work in North America. And for us, it was always a harvest strategy, very little investment, we took the return and redeployed it in other areas externally, like life sciences, like food safety and built out those platforms. And so when we got to earlier or in the beginning of last year, we saw the market start to slow down. Now we assessed what was going on with our customers. We took action throughout the year to rightsize the business and so as we see the market today, it's going to be between 8% to 10% of ATS moving forward. We're okay with that. Remember, it's a harvest strategy. Therefore, we look to maximize our impact. Additionally, the business has now been rightsized to meet that, and we've seen the bookings and expansion with customers that we've won work in the past, but it's going to be a smaller piece of ATS moving forward. And overall, we're okay with that.

Okay. And when we talk about life science EV, maybe we just talk about the rest of the 30% of the business, which is food consumer energy, right? I think energy, I just didn't know you guys were spending time in nuclear, which is super cool, seems to have seen some macro trends there. Maybe talk a little bit about what you're seeing in these end markets.

Yes. So let's start with nuclear. So there's, call it, 4 main areas in nuclear. First one, and this is really one of our key focus areas for our business is called candy reactors and candy reactors is multi-tube and what we do is we do refurbishment. So if a reactor reaches its end of life, what they, they can do 1 of 2 things. They can either shut it down or they can refurbish it. And why it reaches its end of life is you've got a nuclear core, and it's going to sag over time and then it gets to the tube and they either, and really call it a hotspot in the market, but they had to replace that tube with the new tube that then extends the life for, call it, 30 years, 40 years, and allows you to have green low-cost energy for that period of time. We do the automation equipment around that. So it severs the end of pulls the nuclear core out, pulverize it, puts a new one back in and allows the extension. Key market for us, key penetration. We have partnerships with the likes of Bruce Power, which is a major player in the area. Well, Then we looked and said, okay, traditional reactors have a normal life cycle. And we have solutions that we can bring to market in that space. So we've now won work in the traditional nuclear energy space, a smaller, smaller opportunity, but still niche and high value around what they're going to perform and how they're going to drive it. We've also won work in the small module reactors space. And we do the fuels channel replacement. We do the automation around that. Now that market, our view is it's, call it, 3 to 5 years out before they fully test out fully launch. We're low single digit of what the overall expense would be, but high impact for customers. And then because of the demand of nuclear, they're seeing an increased level of focus on the ability to do the nuclear course. So building out the actual fuel source, and we've started to win work in that space. So this market, highly regulated niche applications that are high value for customers. So we like our position. We don't think it's going to be double or triple, but it's going to have a nice growth profile. We have the ability to support, we have the ability to expand, but it's a niche application that's high value for our customers. Food safety. This margin -- this business for us started with a company by the name of Marco, roughly $20 million in revenue. We then bought CFT, and we continue to add businesses to this to where it's now several hundred million in revenue. Specifically tied to around primary and secondary processing. So if you think about primary processing, I think tomato from the vine to pureed, that's primary processing. And then second area is the pureed to baby food. Now to do that, you need to make sure you're not harboring bacteria. You need to make sure that the product is safe. You need to make sure there's no contamination or defects in the product. Again, back to our focus on regulated end markets with what we call high consequence of failure. And by the way, fast forward to today, but 80% of ATS is concentrated in these regulated high-consequence of failure end markets. And then we're also in consumer products. And we do a niche solution for warehouse automation that we continue to win work. It's aligned with a special packaging process for if you ever see the paper-based packaging, where it allows our customers to meet their sustainability targets as well as you can package multiproducts within the solution. And one of the reasons why we continue to win work, we initially launched it in North America with a full services arm and spare parts and capability to support. And then when this customer wanted to move to Europe, we could bring that capability to Europe, we can bring that capability to Asia. We can be where they want to be. And we also do other certain applications within consumer products that are very high value, but niche solutions.

Great. I really love the trend. The theme you have around addressing these mission-critical end market applications. So what would be -- what would you say is your biggest competitive advantage against your peers who also offer automation, integration engineering design, right? Is that your reputation? Is it a unique technology you have? What is that core competitive strength against your peers in these mission-critical applications?

Yes. So -- and it's not defined by 1 item. So I'm going to walk through this. So first and foremost, when you're going to launch a product with 70% gross margin, and this goes into your bloodstream, you're going to be very selective on who you pick. And we have a lot of experience around this space. This is what we do really well and we are 1 of the leaders in this area. But additionally, we've developed, launched and continue to invest in innovation and core technology development. For instance, Again, back to the GLP-1. We've been in the auto-injector space for 2 decades. The auto-injector is what delivers the GLP-1 drug. And 1 of the products that we've launched with this is called Symphony. Now why Symphony matters? We acquired a company called Transformix 6 years ago, didn't really work, but we brought our engineering group in and help bring this product to market. And what it effectively does, it allows you, while in motion to assemble a product? And the reason why that matters is because you can be about half the footprint and twice the output. I'll repeat that. You can be half the footprint and twice the output. That's big for our customers. Because when they're looking at this, their demand is through the roof and they're looking at ATS saying, one, we want more a standard product because we need to build many of these, and we got to meet the market demand we have today and tomorrow. Number two, footprint matters to me. Output matters to me. I'm sure there's other competitors out there. What our drive for innovation, technology and really utilizing that is a key differentiator. Number three, Services. Services has gone from a nice to have to mission-critical. And COVID really helped with us. When -- and I'll never forget a conversation I had. I was on with the CEO out of the UK. She has honored me and she was saying, Andrew, I did it. We're not in the fight against COVID, but our product makes people's lives better. And as the solution that they had was a around a device that after a certain surgery, the pain would be a long time, but their device actually limited the pain and really cut it in half for the time period. So it's very important to the people that are going through that surgery. And because we built our services arm, we get supported. Now that customer became a customer for life, because we could be there on site because we have the core capability regardless of location to be able to help them with the output. So services has become a key differentiator, and we're offering digital capability, digital solutions, we're offering the ability to train, support -- remember, you've got turnover. You've got people that don't understand the equipment, we do all of that and help you improve that. And lastly, when we think about where we are today and what's going on in the global environment, footprint matters. And our core spaces and our core niches, we are 1 of the larger players. So when our customers look to us, whether it's in America, whether it's in Canada, whether it's in Europe, in Germany or wherever in the region or Asia, we can be with them. because they look to ATS to provide not only that manufacturing support, but also support for the life of the equipment, and we have the ability to do both.

Right. I think one of the misconception people have sometimes about integrators or systems engineers as you just buy stuff, put it together. But it sounds like there is really differentiated software capability, right, that assists within ATS because the way you talked about that ability to do twice as fast with the same footprint, that seems a lot of software control that goes into it. Does your -- you now have the ability to basically charge your customer for the software, whether it's particularly if it's a recurring base, is that something that's going to drive -- continue to drive the margin expansion for you guys?

So we do develop our software. Typically, our revenue stream around reoccurring or recurring within that matter is going to be more the digital side. And the reason is because back to my point around, we know it goes into making this product. So we know all the automation that goes in. We know the level that this needs to be. So then when we launch a digital solution, we can extract all the information off, bring up to the cloud. We have our own process around that. We've acquired businesses that allows us to do this. And then we take that data and we understand what it's telling us. . So then when we bring the data back to our customers, because a dashboard just isn't enough anymore. Our customers want actionable insights. And we have the ability to take the data and either give them the insights so they can drive the improvement or we can give an easy bond, so go ahead and push this and we can do it for you. And what we found with our customer base is the more that we can help them with the output, the ROI is there because if you're doing 70% gross margin and you can improve your output. It allows you to truly see that improvement on your investment. And so we're expanding more and more around that digital side. We have a mantra called on the floor, extracting the information off, utilizing it, understanding it and then helping drive impact with it.

It sounds like you were doing AI before AI is cool. That's great. So -- and then I want to talk a little bit about M&A because there has been a very important part of the ATS story over the last couple of years, right? So you've deployed $2 billion of capital since 2018. It's a key focus. Can you talk about how do you think about M&A strategy overall? Is that in terms of how do you evaluate targets, whether it's you apply some sort of ROIC, some sort of return metric, how do you think about different end markets or different segments of the business where you prioritize capital or not? Just give us a sense of how you think about M&A in general?

It's a couple of questions there.

Yes.

I I'd like to share my -- so if you join my team, you get 2. One is called the outsiders. And the reason why I want you to have that book is I want you to know how we think about capital allocation. And I'll tell you, our #1 return to investors is internal investment. When we do that right, whether it's innovation, whether it's margin expansion, whether it's training the ABM, developing our people, that is our greatest strength. #2 is M&A. And when we look, we've done -- I think the number now is 28 deals in the last 5 years. And these are varying sizes. But oftentimes, and there's 4 criteria that we put every business through. First is the market. We're going to truly understand the market that, that asset that targets plays in. And we'll oftentimes look at the spaces and say, we want to be in this area so who are the major players that we want to develop relationships with. Number two, the strategic rationale. Is this a technology? Is this a geographic expansion? Is this a services arm? Is this a digital capability that we need to add? Number three, how we're going to operate, how we're going to manage the asset, how quickly we can launch the ABM? Is this a culture around continuous improvement? Or is it foreign? And what does that mean for the management style? And lastly, is financial return, and we start with ROIC. Our stated target is double digit within 5 years. We often do that much earlier on smaller deals, we do it very quickly. But we also look at things like margin accretion. We look at reoccurring revenue. Like how are we going to do EPS accretion? And so while there's multiple areas, no one is more important than the other. We truly drill in and understand the market, understand the space before we deploy capital. And around this, we spend a lot of time cultivating the right deals, the right targets. And what we found is when we do it right, they're the greatest return. And when I look back on this past quarter or 2 quarters ago, we announced 3 deals. One of them was a company by the name of Heidolph and this business is in the laboratory space. In Heidolph, we have been talking or trying to get hold for 3 years. And finally, the opportunity came. We had known the business, we knew the market, we knew the space, and we could pounce. And now they're starting their ABM, their continuous improvement journey. They will be profitable year 1. By year 2 or 3, they'll be accretive to ATS. And when you think about that impact, they went from really low profitability to the ability to actually drive and be a leader within ATS. We also bought a company by the name of Paxiom. We've been cultivating this business for over 2 years. So the message is, the best deals we do are cultivated deals. And our funnel remains healthy. And so while we're looking at our leverage right now and how we're going to continue to buy to leverage, we're still cultivating because we know, deals take time. And so we're going to be reducing our leverage point. We're going to be getting in a position that when the right deals are available, we can add those and then effectively bring them into ATS. And just a couple of proof points. We acquired Comecer, call it, 5, 6 years ago. That business has doubled in revenue, and they've outpaced in their profitability. So they're actually growing even faster in profitability. CFT over 500 basis point improvement on their bottom line. And so proof point after proof point of how we can add, enable, help support and really allow these companies to achieve their aspirations. And what you'll find, I get asked on this all the time, ABM is that really hard on new acquisitions? Is that really hard to add? What we find usually, a company that comes in, they want to learn. They want to understand how ATS operates. And once the ball gets rolling, once they see the success, it's almost like a flywheel effect. We see more and more leaders engaged more and more operators engaged. And if you take CFT just as 1 example, they went up to almost 20% turnover in their business. And now they're less than 5%. And the team is hungry. They want to make a mark. They want to drive greater improvement. And so not only have they reduced their turnover, we're getting leaders want to come back. They want to be a part of the future. And we see that with businesses when we add them and they truly line around how we think about the world.

Right. Before I continue, maybe I'll open up questions to the room. Questions? All right. I'll continue. Maybe now the most pleasant topic, tariffs or uncertainty of the tariffs, right? How -- I know you do have a presence in manufacturing lines in Canada, how are you taking steps to address some of the uncertainties that potentially come?

Yes. So I'm going to draw on. When we -- when COVID happened, right, it was -- we didn't really know what's going on in the world. And so the core team came together, and we built on a process. And that process was a perfect note. Did we get a lot of stuff wrong? Sure. But did we get a lot of things right? Absolutely. Same with tariffs. And I would say our team went into -- as soon as it started being announced, we went into what's the process look like? What do we need to assess, what do we need together and insight and data, how do we start to operate in this environment? What do we need to address if this goes into effect? And to give you some headlines, Canada to U.S., it's about 15%. So roughly mid-teens number, rough number. Now short term, it would be choppy. If all of a sudden, we have to do it. Now our customers would be the 1 bearing the tariff, but it would be up mid- to long term, we actually view this as an area that we could help. We see it as an opportunity. And the reason is, we could move that production in region. Because we've got capability, remember, I said we're oftentimes niche providers or we're going up against an independent business that doesn't maybe have the resources to move their solution or doesn't have the capability to build in multi-location, we can be there. And so when we think about tariffs and whether they go or not, yes, short term, it's going to be choppy. But mid- to long term, we do view this as an area that ATS can truly help our customers and we can truly drive expansion within the regions that we want to continue to participate in. And lastly on that, when you look at where markets are moving. So if you've got a government that favors business and favors building production in region, it usually leads to automation, and the reason is because labor shortage. And I mentioned that earlier. But if this goes to a situation where now things are going to be all in region, usually that leads to a more, call it, drive to having automation as your solution, as your capability. So we do view that as a longer-term trend that would be favorable. But again, we're very strategic with our customers, so we don't see it as a short-term item.

Great. So my last question is on a macro level, right. Last 2 years, industrial automation, generally speaking, in ATS, has not been sort of the greatest year, right, despite what's going on geopolitically. It seems Industrial Automation in the last few years, particularly big players has been challenging. Are you seeing with sort of the refocus around manufacturing the U.S., reshoring and some people are developing parallel manufacturing for local markets as a global trend. Are you seeing that being an inflection point on people's CapEx, customers' CapEx spending on industrial automation?

So it's hard not to answer this without using data points. And when we look our year -- our trailing 12-month book-to-bill ratio is 1.18. That's a pretty good number. Number 2, last quarter was our second largest bookings quarter in company history. And so while there's a lot of dynamics going on, our customers are focused on launching their strategic products. We're focused on continuing to improve their processes. We're focused on technology development, utilizing areas where they can drive efficiency, where they can drive improvements in their operation. That's what we do. And so when we go out and we acquire businesses like Heidolph, and now it can bring a solution with Avidity, we can drive synergy sales with this. We can bring more impact to the lab space. So when our customers need a bigger solution set, we have the ability to do this. And so while there's a lot of dynamics going definitely on in the world, we do view this as an area that we're seeing success, and we're continuing to see a good opportunity to expand our business.

Great. We have 2 minutes left. Any other last-minute questions from the audience? All right. Thank you.

Thank you.