ATS Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 12 speakers on the call.

Operator

Welcome to the ATS Corporation Third Quarter Conference This call is being recorded on February 7, 2024 at 8:30 am Eastern Time. Following the presentation, we will conduct a question and answer session. I'll now turn the call over to David Galison, Head of Investor Relations at ATS.

Speaker 1

Thank you, operator, and good morning, everyone. On the call today are Andrew Hyder, Chief Executive Officer of ATS and Ryan McLeod, Chief Financial Officer. Please note that our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available atatsautomation.com. We caution that the statements made on the webcast and conference call may contain forward looking information and our cautionary statement regarding such information, including the material factors that could cause actual results to differ from the statements and the material factors or assumptions applied in making the statements are detailed on Slide 2 of the slide deck. Now, it's my pleasure to turn the call over to Andrew.

Speaker 2

Thank you, David. Good morning, everyone, and thank you for joining us. Today, we reported strong 3rd quarter organic revenue growth, good contributions from recent acquisitions adjusted earnings in line with our expectations as we built on the momentum achieved in the first half of the year. We completed the acquisition of Avidity, which further expands our life sciences products and services offerings. It's complementary to our existing businesses.

Speaker 2

At the beginning of Q4, our PA Solutions Group completed the acquisition Vitaka, an Italian based automation integrator with a focus on primary processing and pharmaceuticals. Avedity and Ataka are the most recent examples of how we use acquisitions to drive our strategy and evolve our portfolio. We are pleased to welcome both teams to ATS. Now, I will update you on the business and our markets, and then Ryan will provide his financial report. Starting with our financial value drivers.

Speaker 2

Order bookings for the quarter were $668,000,000 supported by organic growth in life sciences and strong performance in food and beverage. The underlying trends driving demand for ATS solutions remain favorable. Q3 revenues were $752,000,000 up 16% from Q3 last year, including organic growth of 9%. Adjusted earnings from operations in Q3 were $101,000,000 up 17% versus Q3 last year. Moving to our outlook.

Speaker 2

Our backlog held strong at over $1,900,000,000 By market, Our Life Sciences backlog is up 10% compared to Q3 last year at a record 875,000,000 Supported by wins in key areas, including auto injectors and contact lenses, we remain focused on opportunities to provide expanded or integrated solutions to our customers. For example, We secured a new order as a result of an innovative offering that includes BioDots dispensing technology and SuperTrak smart conveyance technology as part of a diagnostic cartridge assembly system. Our life sciences opportunity funnel remains strong, supported by market growth, including increased consumer demand for auto injectors driven by GLP-one drugs. In Transportation, Backlog was $564,000,000 down 36% compared to Q3 last year, reflecting ongoing execution of large programs won in the last fiscal year along with expected variability in program awards in this market. We are working with one of our OEM customers to support their revised timing on a portion of their existing program.

Speaker 2

While the near term market for electric vehicles remains dynamic, as OEMs look to lower platform costs and align capacity to end market demand, The long term fundamentals remain intact and support demand for our solutions. Our transportation funnel is strong and reflects diversified long term opportunities to support our customers. With ATS' proven ability to partner with customers by providing flexible solutions, we are well positioned as the EV market continues to evolve. In food and beverage, Q3 bookings were strong as expected, And our ending backlog was $207,000,000 Notably, we successfully secured our first IoT order For tomato processing line, our food and beverage businesses are focused on innovation and customer experience, including aftermarket service as we expand our offerings to our customers. In energy, Our funnel remains strong and is expected to provide opportunities for both refurbishment of existing nuclear reactors an investment in new reactors providing sustainable clean energy.

Speaker 2

ATS has the experience, specialized skills and proven track record to support customers with their energy initiatives. In consumer products, our funnel is stable. However, customers are continuing to evaluate their investments in the current economic climate, which may impact the timing of some opportunities. On after sales services, our consistent investment in the strategic area has included developing our digital solutions. As these solutions evolve, we are putting ourselves in a position to provide performance insights through our connected asset value chain and support our shift towards providing higher value services on both ATS and non ATS equipment.

Speaker 2

During the quarter, we also secured a synergy win with Triad and our life sciences business to identify OEE improvement opportunities for a key customer. On our digital offerings across the automation value chain, our funnel is strong and we remain focused on developing our capabilities, utilizing an integrated architecture to help our customers collect and analyze data in an efficient manner to drive performance. During the quarter, a global pharma customer warned ATS to contract to build their IoT platform For data exchange with one of their major clients. On supply chain, Lead times and material cost pressures continue to challenge in some areas of the business, which our teams consistently work to offset to the use of our supply chain levers and ABM tools, while increasingly leveraging digital tools to drive insights and opportunities. ABM activity and engagement remains strong and we measure and monitor our success to identify areas for ongoing improvement and deployment of our tools across the organization.

Speaker 2

During the quarter, we hosted our ABM Global Conference with a focus on ATS business model principles, processes and tools to achieve impact on our value drivers. On M and A, we continue to expand our portfolio and our integration efforts with Avidity and Nataka are underway and progressing according to plan. Our M and A funnel remains active, healthy and diversified across all target sizes. We remain disciplined in our approach an assessment of each target. On ESG, ATS Scientific Products earned a silver medal As part of the EcoVadis Sustainability Program, an improvement from bronze last year.

Speaker 2

This award is a testament to the SP team's commitment to promoting sustainable practices and reducing our environmental impact. Additionally, Avidity recently launched the world's first water platform system with reusable cartridges that helps customers reduce their environmental footprint. We consistently work to identify ways to demonstrate our commitment to ESG principles and priorities across the organization as well for our customers. On innovation, We remain focused on strategically investing capital to create solutions that drive returns for our customers and a few highlights for the quarter. In life sciences, our Comecer team developed a new software product for use by customers in the therapeutic radiopharma market, Specifically, to allow nuclear medicine departments to link dose preparation information directly to central hospital data systems.

Speaker 2

On Symphony, our ATS Innovation Center continues to develop new solutions for auto injector device assembly, allowing for threaded components to be connected together at very high speeds and accuracy. In food and beverage, Comec announced the launch of a 3 d scanning vision system that helps to automate and speed up the inspection and sorting of kegs prior to them being filled. And to drive our effort, ATS hosted Its first ever Global Innovation Summit in November, which included over 50 of ATS' top innovators With the purpose of sharing technologies, innovation trends and opportunities to accelerate technology development, including incorporating AI into our innovation approach and how we operate daily. In summary, Our Q3 performance included strong revenue and earnings growth. Our opportunity funnel is well diversified.

Speaker 2

Our strategic acquisitions are performing to plan, and we remain confident in our ability to continue our trajectory and creating shareholder value. We are pleased to see ATS recognized once again As one of Waterloo region's top employers, ATS was founded in the Waterloo, Ontario region over 45 years ago. And today, Our team members continue to bring their best every day to serve our customers and grow our business. We remain guided by the ABM as our playbook, as we deliver on our shared purpose to create solutions that positively impact lives around the world. Now, I will turn the call over to Ryan.

Speaker 2

Ryan, over to you.

Speaker 3

Thank you, Andrew, and good morning, everyone. ATS delivered strong financial results this quarter with organic revenue growth, margin improvement, and we finished the quarter with a strong balance sheet. Starting with our operating results for the quarter, order bookings were $668,000,000 down 31.8% compared to Q3 last year. As a reminder, Q3 last year included $300,000,000 of orders from an EV customer, which were not expected to repeat this quarter. Of note in Q3 this year, we drove year over year bookings growth in Life Sciences, including strong organic growth, In addition to contributions from recently acquired companies, including Avidity, our trailing 12 month book to bill ratio at the end of Q3 was 0.95:one.

Speaker 3

By market vertical, our trailing 12 month book to bill at the end of Q3 was at or greater than 1 in all markets with the exception of transportation. We have previously noted that as we continue to execute on our large programs in the EV market, we do expect to see longer periods between ordering cycles. On revenues, Q3 revenues were $752,000,000 up 16.2% over Q3 last year. Organic revenue growth was 9.1% in the quarter. Recently acquired companies added approximately 5% to revenue growth And foreign exchange translation had a positive impact of 2.5% compared to Q3 last year.

Speaker 3

We finished Q3 with just over $1,900,000,000 of order backlog. Looking ahead, our revenue conversion for Q4 is estimated to be in the 36 percent to 39% range of order backlog. As a reminder, this assessment is updated every quarter based on revenue expectations from existing backlog and new orders booked and billed within the quarter. This conversion range also factors in the impact of approximately $200,000,000 of transportation order backlog with 1 of our EV customers that has been delayed. Moving to earnings.

Speaker 3

Q3 adjusted earnings from operations were $101,200,000 up 17% from Q3 last year, primarily due to revenue growth. Adjusted earnings from operations margin was 13.5% in the quarter, up 13 basis points compared to last year, reflecting improved operating leverage. Our Q3 gross margin, excluding acquisition related inventory fair value charges, was 28.5%, up 12 basis points from Q3 last year, reflecting higher volumes and acquisitions. Going forward, with an EV customer realigning its production schedule, resulting in a delay of ATS' execution on this contract in our backlog, We expect to see some near term margin pressure in this part of our business. We are actively mitigating this utilization pressure by redeploying resources onto other programs, including in our life sciences business.

Speaker 3

Our expectation is for this program to restart the Q1 of our fiscal 2025. On supply chain, material cost pressure is still present for some categories of spend, most notably for electrical and mechanical parts where lead times remain a challenge. Lead times have generally improved in other areas. As we previously noted, short term inefficiencies caused by extended lead times in our supply chain impact our ability to drive margin expansion. Despite these ongoing challenges, our teams are well equipped to drive performance and mitigate these impacts for our customers.

Speaker 3

Moving to SG and A. Expenses were $6,900,000 higher than Q3 last year and included $17,100,000 of acquisition related amortization and $900,000 of acquisition related transaction costs, partially offset by an $11,700,000 gain on the sale of 2 redundant facilities. Excluding these items, Q3's SG and A was $107,900,000 $14,700,000 higher than last year, primarily due to increased employee costs, incremental SG and A expenses from acquisitions and foreign exchange translation impacts. Stock based compensation expense for Q3 was $4,700,000 Excluding the mark to market impact related to changes in our share price, Stock based compensation expense was $5,300,000 in Q3 compared to an expense of $4,300,000 last year. On earnings per share, our EPS was $0.48 in Q3, up 50% over last year.

Speaker 3

Our adjusted EPS was up 16.1 percent to $0.65 in Q3, primarily reflecting growth in revenues. We've begun to implement our previously announced reorganization plan. In Q3, we incurred $16,200,000 of costs, with total expected costs of approximately $20,000,000 The majority of the remaining costs are expected to be incurred in the 4th quarter. We anticipate that these targeted cost reductions will allow us to invest further into accelerating growth in areas of the business to provide opportunity for higher returns in support of our strategic growth plans. Next, moving to the balance sheet.

Speaker 3

In Q3, cash flows generated by operating activities were $110,500,000 reflecting the timing of project progress and milestone billings and payments, primarily on our large EV programs. Non cash working capital as a percentage of revenue was 17.8% at the end of Q3, down from 18.4% at the end of Q2, again primarily reflecting a reduction in working capital investments in our large DB programs. In the short term, we continue to expect working capital to remain variable. Total year to date investments CapEx and intangible assets were $62,500,000 which included $17,700,000 in Q3. Our planned fiscal 'twenty four CapEx investment of $80,000,000 to $100,000,000 has flexibility, and we expect to be in the lower end of this range for the year.

Speaker 3

On leverage, our net debt to adjusted EBITDA ratio was 2.3:one as of the end of Q3, in line with our target leverage range of 2 to 3 times net debt to adjusted EBITDA. In the quarter, we funded the acquisition of Avidity with cash on hand and by drawing on our credit facility. It's early days and integration efforts are progressing as planned. We look forward to our continued work with the Avidity team along with Ataco. In summary, our quarterly performance once again highlighted the strength of our diversified and evolving portfolio and positions in strategic end markets.

Speaker 3

Going forward, we will continue applying measures to combat challenges, including those still lingering in our supply chain. Strong order backlog in our key markets once again provides good revenue visibility over the next several quarters. We remain confident in our team's ability to drive our strategy supported by the ABM, which will continue to unite our people across ATS as we remain focused on our employees, our customers and long term value creation for our shareholders. Now, we will open the call to questions from our analysts. Operator, could you please provide instructions?

Speaker 3

Thank you.

Operator

Certainly. Your first question comes from Cherilyn Radbourne with TD Cowen. Please go ahead.

Speaker 4

Good morning, everyone. Thank you for taking my questions. This is Pat Sullivan on the line on the AbbVie Show. And I think last quarter you were able to give us a breakdown on auto injector bookings. I'm wondering if you have a little comment on the level of auto injector bookings this quarter.

Speaker 4

And then if you're able to provide a breakdown with respect to the composition of those bookings by customers, I guess, what is the level of competition you're seeing in that end market?

Speaker 2

Yes, good morning. We actually won a key award within the quarter. And while it's an existing customer, it's a new production line for this customer. And we continue to see this as a real area of opportunity. And to walk this a bit more specific and to give you some guidance as to ATS' position because it will help As we talk about competition in the competitive landscape, ATS invested in a technology with Symphony.

Speaker 2

And it's our platform that allows us to do when you're building a process, you can do it in motion. And why that matters is when you look at output, it allows us to actually be up to almost 3 times the output at roughly half the footprint. And it's a real key enabler. And it's just one of the areas that we look at from a standpoint of how innovation allows us to differentiate and really offer high value for our customers as they continue to look at maximizing their launch and maximize their impact. And to give you a bit more context on the market, and certainly there's multiple reports out about this space, Whether it's the JPMorgan structure around going from $18,000,000,000 to 100,000,000,000 Or even Morgan Stanley in significant level of increase.

Speaker 2

Our mission has always been really enabling our customers To maximize their launch and with our solution set, with our capability on a global scale, It affords us the ability to be a leader in that space. So, pleased with the progress, pleased with the performance and we do view this as a market that's going to continue to evolve.

Speaker 3

And Patrick, just the specifics. So it was a low single This was a low single digit percentage of our bookings in the quarter.

Speaker 4

Okay. Thank you very much. If I could ask one more. There have been a lot of recent announcements in the Canadian nuclear energy sector, capital power and OBG assessing liability SMRs And then the more recent announcement of the refurbishment retrofitting at Pickering Nuclear Generating Station.

Speaker 3

So I guess, can you comment

Speaker 4

on what you're seeing in your funnel To opportunities like this, are there any opportunities for ATS with respect to those 2 mentioned developments? And NADA, I guess, what kind of timeframes you'd be looking at from an RFP to actual execution perspective?

Speaker 2

Yes, absolutely. So Headline market is favorable. And to give you some context, our trailing 12 months is 1.16 on this space. And so we're not only seeing really favorable end market trends and dynamics, we're also performing and continuing to execute and offer high value to the markets. As far as SMR, our funnel remains healthy.

Speaker 2

This is still early in its journey. And ATS is, our view is we're a high value provider and we're staying close with the opportunities as they unfold. As far as the CANDU reactor and refurbishment programs, look, this is early. That said, It is very in line with what ATS offers for high value for this type of work and we're staying very close. We're In early days of review of the application, and we do view this as something that will be right in line with what we can offer and have high contribution towards.

Speaker 2

So to get back to your initial, there is favorable market dynamics On a global scale, this is a green energy that ATS supports and really one that we offer high value for in our niche capability and we continue to launch technology and solutions that enable us a strong position.

Speaker 4

Okay. Thank you very much.

Operator

Your next question comes from David Ocampo with Cormark Securities. Please go ahead.

Speaker 5

Thanks. Good morning, everyone. On the $200,000,000 of EV order backlog that got delayed, Curious if you guys see any risks if that portion get pushed out further to the right. And ultimately, when that program does restart in fiscal Q1, Will that be at the normal run rate or lower than your initial projections of order deliveries and order execution?

Speaker 3

Good morning, David. It's Ryan. So I mean, our expectation is this, as we Laid out in our prepared remarks and disclosure materials, our expectation is this resumes in Q1 of fiscal 2025. Customers have the ability to certainly change that dynamic, but that's not our expectation. In terms of run rate, at this point, we would expect it to resume as it had been originally and wouldn't see any ongoing impact.

Speaker 3

I mean, that's our expectations.

Speaker 5

Okay, got it. And then my last one is just on the supply chain issues. I mean, this is something that's been Hurting you guys at least for the last several quarters. Are you guys seeing any positive indicators relating to electrical components and those issues easing? And what are your expectations on the timing of margin improvement once supply chain begins to normalize?

Speaker 3

Yes. So again, David, it's Ryan. This is interesting. I mean, the suppliers are talking about improvements. I would say we've seen some incremental improvements.

Speaker 3

But when we look at data around quoted lead times, Particularly in electrical and mechanical components, we have not seen a material improvement. So that really when we talk about the challenges, that's really it. Lead time is a primary challenge and That has an impact on our ability to reduce costs and supply chain and offset some of those dynamics. In terms of when it shifts, certainly this is something we stay very close to, But it will take 1 to 2 quarters for it to work its way through our programs and until we see a benefit in terms of what we can do from a margin perspective.

Speaker 5

And if I could just follow-up on that, if you To put a number on it, how much do you think supply chain has negatively impacted your gross margins because you guys have been in that 28% to 29% range for

Speaker 3

6 to 7 quarters. Yes. I mean, it's not as much. I mean, we've been able to offset a lot of it through pricing and other areas. So it's not a headwind, but it's a barrier from us expanding margins.

Speaker 3

So our typical playbook is when we get an order in, We do the design work and we look for efficiencies in one of those areas is through supply chain. So whether it's Finding alternative suppliers, whether it's reengineering to find cheaper components, sometimes they have less features, but They do the job that we need. Sometimes it's pulling Similar, there are same components across multiple programs, and with extended lead times That really limits our ability to exercise all of those levers. So it's not as much A headwind today is or a negative impact on our margins as something that is limiting our ability to expand margins when we do get programs in house.

Speaker 5

That makes sense. I'll hand the call over.

Operator

Your next question comes from Michael Doumet with Scotiabank. Please go ahead.

Speaker 6

Hey, good morning guys. Wondering if you could just elaborate on the margin pressure as it relates to the delayed EV program. Is this strictly a result of operating deleveraging due to the deferral?

Speaker 2

And then I guess longer term, the question is, how

Speaker 6

do you manage Potentially, what could be some lumpiness in transportation and the overall capacity in that business?

Speaker 3

Yes. Good morning, Michael. So I mean, I'll give you so the answer to your question is, yes, it's primarily deleveraging and I'll give you a bit of context. So We've been converting approximately 25% to 30% of our backlog and I'm excluding orders that get booked and billed within the quarter. So that provides you with a sense of the revenue challenge.

Speaker 3

And with EV, it's more towards the lower end of That range. So in terms of what we're doing to mitigate, I talked about repurposing capacity where we can, including into some life science programs. We've scaled back on contractors, But we are maintaining our cost structure as our expectation is for this program to restart as we talked about in the Q1 of fiscal 2025. So that's going to drive the temporary inefficiencies and call it utilization, but That's where we're going to see the negative impact on margins in the Q4.

Speaker 2

And Ryan, can you maybe just give

Speaker 6

us a sense The magnitude of the margin pressure in Q4 based on the lower utilization?

Speaker 3

Yes. So I mean, I kind of laid out the revenue headwind. And so if I mean, If you think about our typical cost structure or cost structure, it's roughly half labor and half materials. So the materials doesn't have an impact and what we're dealing with is the labor inefficiency. And then Like I said, we're able to offset some of that, but there's going to be an impact.

Speaker 6

Okay, that's helpful. And then just maybe more broadly on Life Sciences. Organic growth, it was still negative in the quarter, which is a little bit of surprise given some of The bookings that you called out last quarter, what is the visibility on an acceleration in organic growth in that end market? And where really are you just in terms of the ramp overall for GLP-1? Just trying to get a sense for how much GLP-1s can really move the needle

Speaker 2

going forward?

Speaker 3

Yes. Sorry, Michael, you're asking about revenue growth in Life Sciences? Yes, exactly. Yes. So we did have positive organic growth in Life Science revenues in the quarter.

Speaker 3

It was low single digit, but there was positive revenue growth.

Speaker 2

Ben? All right. As we look at, but just thought. So your question is more around where are we in this GLP-one progression or what would you like to understand from a context around that space, that market?

Speaker 3

Yes. So sorry for the confusion there

Speaker 2

on the organic growth, but the question in terms of where you are on the ramp

Speaker 6

and overall GLP, The ability to move the needle overall for life sciences.

Speaker 2

Look, and there are multiple reports out there and I cited a little bit earlier on in the discussion around whether it's Morgan Stanley or whether it's JPMorgan, the net result is this is a significant growth area for this solution. And whether it's going from $18,800,000,000 in 2023 to $100,000,000,000 in 2,030 or a different magnitude, The growth profile is real and it's really tied to U. S. Obesity and the market there is also in a significant growth profile. So net net, it's an opportunity, a significant opportunity for ATS to drive high impact.

Speaker 2

And as we look at where it is in its journey, we view it's still early in its journey. And while it's made progress and to give you some context around progress, last year approvals, it was the 2nd highest approval year in the last 10 years of Nova drugs, basically new molecules. And so We're seeing continued approval in areas to support growth. We're seeing that auto injector is an area that offers high value for end customers or end patients. And ATS has a strong play in the ability to support.

Speaker 2

That said, It's only one piece of our life sciences offering and we have multiple offerings that we like. And as a reminder, Last quarter, our contact lenses was one of the largest orders within the space. So while we like this area, We're also involved in radiopharmaceuticals, which is identification and treatment of cancer. We're involved in wearables and the treatment of diabetes, we're involved in many areas that offer high value for customers and very strategic for customers and product launches.

Speaker 6

Super helpful. Thank you, Andrew.

Operator

Your next comes from Patrick Baumann with JPMorgan. Please go ahead.

Speaker 7

Hi, good morning. Thanks for queuing me in. Just had a wondering if you can give an update on the funnel for orders across EVs and food and beverage. I think you just talked about life sciences, but really specifically about calendar year 2024, not so much your fiscal year. I'm curious how to think about orders over the next year.

Speaker 7

And then more near term, You do have you had a really tough comp in the Q3 here. So obviously, orders being down shouldn't be a surprise to people. But the Q4 looks like the comp is a little bit easier. Do you have line of sight to some growth there or should we expect book to bill to remain below 1 kind of in the short term?

Speaker 2

Multiple questions on that and we'll see if I can answer all of

Speaker 3

them, but I'll go in

Speaker 1

Okay.

Speaker 2

And I'll walk EV first to kind of get line of sight and then I'll go into regulated food and Then we can talk a bit more around other areas. But look, our and I said this in my prepared remarks, our funnel in the mid to long term remains strong. And we're staying very close with customers, while our certainly near term will be impacted by current market dynamics. And the customers are faced with many areas, whether it's technology, are faced with many areas, whether it's technology and technology development or cost structure that they're looking to offset Or even just matching capacity to consumer demand, we're staying close. And when we look at areas ATS has differentiated ourselves.

Speaker 2

We put ourselves in a position that when our customers come out and they get back to a more measured pace, We're in a position to offer high value. And you think of the solutions like the digital twin that we've launched really enable us to maximize their impact to launch their product. And the discussions we've had with our customers is they're focused on EV being a key piece of their investment for CapEx and ATS offers high value for this space. One more area just as a reference, While we certainly still have a large customer, we are working with roughly 10 customers in this space right now. And so varying degrees of where they are in their journey for EV launch, it continues to be an opportunity and strategic for the value we can create for our customer base.

Speaker 2

Moving on to regulated food. Look, this was a strong quarter. We are pleased with the performance of the business. And yes, last year was a big comp to kind of reference against or comp against. It had a large order of roughly, call it, dollars 20,000,000 last year in Q3.

Speaker 2

The team continues to execute. And we are aligned around Technology, innovation and really bringing our customer solutions to market, an example of Just the way that we think about and utilize innovation, our business worked with AI and utilizing AI with vision and with our Raytech business and we're providing the capability To really do an assessment to understand tomatoes when they're peeled, to look for areas that maybe had been missed and then kick out. So it offers higher yield, higher ability and energy continues to be a discussion point. Pleased with the progress on that group, pleased with the performance and one that we view we can continue to really offer high value for our customers.

Speaker 7

And then the I guess, in the Q4, should we expect some growth there or is it or should Do you think book to bill can kind of be around 1 in the 4th quarter?

Speaker 3

Yes, Patrick. So this is Ryan. We don't typically provide forward looking on our bookings. And with some of these large programs, there's variability. And if something comes in The last 2 weeks of March or the 1st 2 weeks of April, that can drive some a different discussion.

Speaker 3

And That's why when we're looking at bookings, we're looking at trailing 12 month and over a longer period to understand directionally where businesses is trending and Our funnel our backlog rather typically goes out about 3 quarters. So it's a little bit longer given the duration of those programs. And then we have some shorter cycle businesses that have been added in. But that is really how we look at the business from a quarter to quarter perspective.

Speaker 2

And just to add on a little bit to there. Yes. We've been very focused on strategic end markets and being well positioned in those areas. And You think of areas like and we talked a bit about life sciences around and our focus on key issues that offer high value. Our addition with Avidity and the value that, that brings and by the way, think about it from a standpoint of now we're in the lab, so you can almost follow the molecule We're in the lab all the way to production to energy and the ability and resurgence of nuclear being a green energy Really the energy challenges on a global scale.

Speaker 2

So while we don't provide that, we have been very strategic in the markets we support and I've been very focused. So not immune to end market. Our target has always been to out execute and really drive performance in the business through our ABM and our playbook.

Speaker 7

Okay, great. Makes a ton of sense. Thanks for bearing with me with that short term question. I'm kind of new to this new to the call. So, we'll keep that in mind going forward.

Speaker 7

Thanks so much. Best of luck.

Speaker 2

Great. Thanks, Patrick.

Operator

Your next question comes from Michael Glen with Raymond James. Please go ahead.

Speaker 8

Hey, good morning. So over the past 2 days, we've seen some pretty strong indications from 2 of the largest players in the obesity drug market regarding these capacity constraints they're facing. So can you help us draw the connection between what they are referencing specifically and how this plays into your auto injector product offering? Like can You often reference these order funnels. Can you say whether the order funnel has grown in that market sequentially from Last quarter to this quarter, can you give some indication like when should we think about timing of these orders coming into play?

Speaker 2

Yes. So, Michael, just to kind of give you some Real walk down approach here. As I mentioned in my prepared remarks, the life sciences funnel is strong and our is very strong. The growth of our funnel continues to build and I would say has grown in our opportunities. We view the big moves really as generally favorable and it's an area that we can offer high value and when And oftentimes, and I talk about strategic end markets and strategic products for our customers.

Speaker 2

When our customers are launching a solution And their demand is significant. They're looking to folks like ATS to really help them provide that value to the market. And I walked through excuse me, I walked through our Symphony technology and really the impact that this has, but also what it allows us to do is to take a more standard approach to a customized solution. And let me pull a little more meat on the bones there. This allows us to really take this standard product set, this standard capability and bring it to multiple customers.

Speaker 2

And As customers ramp, they want to go with the provider that offers them the highest capability and highest ability to launch their solution on time, on quality, on budget and, oh, by the way, to be able to continue to increase as their demand increases. So while I mentioned earlier in the discussion and call that this is earlier in its journey, we do view we are well positioned to really maximize our impact, to maximize our customers' ability to meet the market demands.

Speaker 8

Okay. And then if we think about last quarter, the indication you provided was something in the ballpark of $100,000,000 of orders for auto injectors in this quarter, it was down, it was low single digit. If we think about that number in the context of what you're talking about market size, the $18,000,000,000 going to $100,000,000,000 What's your piece of the pie in those numbers? Are you able to give some type of assessment on that? What's the size of the piece you're going for in that market?

Speaker 3

So Michael, I'll start. Just on orders, I mean, the numbers you referenced are Directionally accurate. But keep in mind, with orders, they are lumpy regardless of market. They're going The size of them, the timing, those aren't going to be a steady straight line up into the right. It's going to be more lumpy, just or call it variable.

Speaker 2

And we're talking dollar versus percent, but as you look at the ramp And it's not always a one for one as far as an increase in percent of the business, But the general growth profile will follow the profile of the investment. And so Not my information to be very clear, and I did mention that, that was a JPMorganMorgan Stanley estimate on the market. Regardless, Whether you read it from those banks or others, the market growth profile is very strong and ATS is well positioned to support That space. Timing will be variable. Customers will be looking at their launches when they get approval.

Speaker 2

So it will certainly be variable. We are in a position and we're working with customers to ensure that they're successful in the launch. And one last minor one here. We've been in this space for over 2 decades. And while it's new and exciting and an area that we can support the drive, We've also been in this market and we have a strong reputation in the space to really help our customers execute.

Speaker 8

Okay. Thanks for taking the questions.

Operator

Your next question comes from Justin Keywood with Stifel. Please go ahead.

Speaker 9

Good morning. We saw some deleveraging in the quarter, balance sheets at 2.3 times. That could suggest a reasonable capacity for further M and A. Are you able to update us on the pipeline, target verticals and potential size of deals that you're looking at?

Speaker 2

Good morning, Justin. Look, We are in a position and I'll just say, if I just step back and I did mention this, our funnel remains healthy. And when we look at our funnel, it is a mixture of sizes, small, medium and large, aligned around very strategic Products and technologies for end markets that we view are strong end markets and strategic end markets. And so We're pleased with where we sit. We've added now Avidity.

Speaker 2

We've added Ataka, 2 very good additions to the family. Our position in the ability to continue to cultivate is strong and We continue to have very strong or very good dialogues with potential targets. That said, we're patient. And when we find high value For our customers and shareholders, we're in a position to move quickly.

Speaker 9

Understood. And then a follow-up to GLP-1. We saw Novo announce an acquisition of Catalent to shore up manufacturing capacity for fill finish. One question is if ATS offers fill finish and does that take away the opportunity? And then also just on the GLP-1 back clog, if we're able to characterize the percentage, I know it was at a record level in the current quarter.

Speaker 2

To walk through the acquisition, we generally view that as positive for ATS. And it's just one more proof point of The constraint to get product to market and exciting times for our ability to support, but also when I referenced this On the call as a highlight for innovation, we launched an IoT solution set for customer. And it was around a pharma customer to work with a contract manufacturer, to really do data processing. And it's just How we can continue to evolve and really support customers as they move in these directions to really bring their products to market and understand All the data variables to support those launches. Ryan will touch upon the second part of the question.

Speaker 3

Yes. So it's low double digits as a percentage of our backlog.

Speaker 9

So just to clarify, low single digits for bookings, but double digits for backlog? Correct. Thank you.

Speaker 3

So and Justin, just to clarify, so to keep in mind, These programs are in the range of 12 months from timing of order to execution and delivery. So The orders that we booked last quarter, sorry, back in our fiscal Q2 are still in relatively early stages. And so most of that is still in our backlog.

Speaker 9

Understood. Thank you for taking my call.

Speaker 2

Thank you, Justin.

Operator

Your next question comes from Maxim Sytchev with National Bank. Please go ahead.

Speaker 2

Hi, good morning gentlemen. Good morning, Madam.

Speaker 10

Andrew, maybe just one kind of Methodologyphilosophical question for you. When we think about kind of return on invested capital by vertical, When you look at transports, obviously, more lumpiness, more working capital intensity. Like when you look across the portfolio, how does it stack versus other verticals within ATS? And over the long term, should we assume that kind of the preferred route would be to get to, I don't know, like 80% healthcare in 10 years? Or how should we think about that Level of composition maybe any comments from me would be super helpful.

Speaker 10

Thanks.

Speaker 2

Yes. So, Max, As you're well aware, we're we have a very focused strategy around capital allocation and it is very aligned to return on invested capital. And if you just take a step back and look at our M and A pipeline and what we've announced, it really aligns around Just take the last few digital, life sciences, regulated food and areas that we offer high impact on an external perspective. When we look internally, we look at investment to return and ensure that the Return on where we're focused is at the level and threshold we would expect. And so while every market is going to have an opportunity, certain markets are higher returns.

Speaker 2

And that's how we align for innovation, that's how we align for technology development. And there's no shortage of opportunity for Life Sciences and our continued expansion. And I referenced a few of these on the call. We Invested and launched a new life sciences system around auto injectors, around capability building within the space To even continue to improve our output, we talked about a capability development in radiopharmaceutical around dose calibration and utilizing IoT as a support structure. And we talked about, really the launch of IoT solution within the pharma space.

Speaker 2

So as we look at our investments, we expect a strong return. We also expect strong penetration to support our growth in strategic end markets.

Speaker 3

Max, just to add on a little bit here, too. The transport and EV business is primarily an organic play for us. So from a return perspective and we've talked about this, Look at return on investment, typically internal investments generate a higher return and reach our thresholds more quickly. So even though this is a higher investment in working capital in this business from a return on invested capital, the fact that it's organic really puts it at a similar playing field with the rest of the verticals.

Speaker 10

Okay. That's super helpful. Actually you might have had one more. I think last quarter, you mentioned that you had some pilot programs with other auto OEMs. Just curious to see if there is any potential directional update you can provide on those?

Speaker 10

That would be helpful. Thanks.

Speaker 2

Yes. I mean, so they're progressing to plan and we have no other delays in our programs. So they're progressing to plan and we're staying close with our customers around their investment and their long term view on the market. And so it's I would just say it's ongoing progress and one more aligned around.

Speaker 10

Okay. Okay, excellent. That's it for me. Thanks so much.

Speaker 2

Thank you, Max.

Operator

Your next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Speaker 11

Great. Thanks and good morning. Just a clarification question. I think I just want Tayo, the comment in the press release about the $200,000,000 of delayed backlog. I guess, should we assume that if the delay hadn't because the revenue would have been higher by $2,000,000 for this next quarter or is that $200,000,000 revenue impact maybe going to be split somewhat in this upcoming quarter and maybe a bit after that?

Speaker 11

Thanks.

Speaker 3

Yes. Good morning, Saba. It's Ryan. So the $200,000,000 backlog, So like the rest of our projects would be executed over a period of time and call it roughly 12 months what would have been remaining on that program. So I mentioned this earlier, but from our backlog, we typically revenue in the range of 25% to 30%.

Speaker 3

And in this case, with EV being longer duration programs, It would have been more towards the lower end of that.

Speaker 11

Okay, Great. And then there's a little bit of discussion earlier on your participation in kind of the nuclear space. I'm just wondering, I guess, Given the role that you're playing in some of the elements of what is refurbishment or things like that, kind of are you working on becoming more involved in other Parts of it like new builds were to start tomorrow morning, do you have kind of the capacity and the capabilities get involved or is there some R and D and other capabilities that you're looking to add to maybe partake in this or what seems to be more of like a 5, 10, 15 year type runway here for that side of the business. Just curious what capabilities or where you can play today versus 3, 5 years from now?

Speaker 2

So a couple of things. First, we like our niche position And we like the value it creates. We are continuing to expand that value creation. And you look at the SMR space that we're supporting, You look at what we can do on refurbishment, you look at what we can do on decommissioning and even in areas around new and identifying. So it is an area that says, when we step back, we like the strategic position we are today.

Speaker 2

We like the opportunities that we can build into and we can do that both from an innovation perspective as well as really supporting our customers through different technologies. So, it's an area that I would say we're going to continue to highlight and continue to drive.

Speaker 11

Great. And then just one last one, I guess, on the EV side. Given some of the discussions you're having with kind of your larger customer here, Are some of the other I guess OEMs that were in the pipeline that were doing some test runs or trying out your capabilities, I guess how are The discussion is progressing there. Any update on the timelines that those other potential customers are thinking about?

Speaker 2

I would say the mid to long term narrative Has it changed dramatically? What I can tell you is what we do view is that the net result will be customers are going to be a bit measured in their pace of investment and really looking at this over long periods of time. That said, when we talk about CapEx spend and focus for CapEx spend, EV is a key priority. And so while the near term we do view is impacted and we've talked a bit about that, so I don't need to dwell further. Our customers focused around technology, innovation, profitability being a key focus and then matching capacity.

Speaker 2

These are areas or ATS does well and supports in a strong way as far as our capability through digital twin, through making modifications, To really testing and to give you context, digital twin, what it allows us to do, and there's an old adage of it, measure twice, cut once. Well, with Digital Twin, we can measure 50, 100,000 times cut once. And it allows us to do really real time view of what these changes will impact, how it will align around their production launch And then support their ability to modify change and really minimize impact on their launch. And so Our view is we continue to offer high value in this space. And while it's certainly going to have some dynamics over the next short term, quarter 2, We're going to be very focused on offering customers high value through that cycle.

Operator

Mr. Hider, there are no other questions. Back to you for closing remarks.

Speaker 2

Thank you, operator. We look forward to continuing to execute on our goal of creating value for our customers and shareholders. Thanks for joining us today. I look forward to speaking to you on our year end call in May. Stay safe and goodbye for now.

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Earnings Conference Call
ATS Q3 2024
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