Good morning, ladies and gentlemen, and welcome to ATS Automation Conference Call and Webcast. This call is being recorded on November 8, 2021 at 8:30 A.M. Eastern Time. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for any questions. If anyone has any difficulties hearing the conference, please press star zero for the operator. I will now turn the conference over to Shereen Zahawi, Director of Investor Relations at ATS. Please go ahead.
Thank you operator, and good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS; Ryan McLeod, Chief Financial Officer; and Chris Hart, President of ATS Life Sciences. For those who joined us by phone, our remarks are accompanied by a slide deck, which is available at atsautomation.com. Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all its representatives on this call. You are cautioned that the oral statements made on this call will contain forward-looking information that involves risks and uncertainties, including those introduced by the COVID-19 pandemic. The actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS's filings with the Canadian Provincial Securities Regulators. Now it's my pleasure to turn the call over to Andrew.
Thank you, Shereen. Good morning, and thank you for joining us. Today, we are pleased to announce the acquisition of SP Industries, a leading supplier of lyophilization equipment, aseptic fill finish solutions, and consumable labware products used in the pharmaceutical drug development and production process. The addition of SP expands our life sciences offerings in the attractive and high-growth lyo and fill finish pharma markets, and is aligned with our strategy of targeting acquisitions with proven technologies and strong market position. From a financial perspective, the transaction offers robust synergies, earnings accretion, and a compelling return on invested capital. We're excited about the possibilities we're unlocking for ATS and SP through this transaction, including strengthening our capabilities in biopharma and life sciences, enabling us to offer integrated end-to-end solutions for our customers and expanding our recurring revenue streams while creating significant synergies and shareholder value.
In terms of the financial profile of the transaction, the total purchase price is $445 million or approximately CAD 550 million. This implies a transaction multiple of 11.9x SP's adjusted EBITDA after factoring in estimated year three synergies under ATS's ownership, making the transaction accretive to ATS. The acquisition is expected to close in calendar Q4 of this year, pending the completion of customary regulatory filings. During our extensive due diligence process, we identified synergies that would allow us to realize additional financial upside from the acquisition. Over the next three years, we anticipate cost synergies of approximately $3.5 million, resulting from material cost savings and operational efficiencies. We expect to generate another $5 million of EBITDA through revenue synergies resulting from cross-selling and joint innovation.
The transaction will be accretive to ATS's earnings and cash flow per share metrics in our first year of ownership, and we expect ROIC to reach double-digit return on invested capital by our fourth year of ownership. SP offers a differentiated platform in life sciences given its scale, global footprint, and breadth of products and capabilities. The company is a leading designer and manufacturer of high-grade biopharma processing equipment, laboratory bench top equipment, and labware and glassware products. SP serves a diverse blue chip and long-tenured customer base in pharmaceuticals, biotech, as well as academic, commercial, and environmental laboratories. Headquartered in Philadelphia, SP has a highly skilled workforce of approximately 700 employees across 9 facilities in the U.S., U.K., and Spain. SP's products are used throughout the life cycle of pharmaceutical development and production, as well as in diagnostics, broader life sciences, and applied sciences applications.
With a strong market position in lab and pilot scale lyophilizers, evaporators and labware, and a fast-growing position within the lyo and fill finish markets, SP enjoys solid brand recognition and is one of few companies globally capable of offering end-to-end aseptic fill finish processing and lyo solutions. The company generated $179 million in revenues over the last 12 months. Biopharma processing equipment and systems comprise 50% of sales, with life sciences equipment making up another 14%, and labware and aftermarket services contributing the balance. Over the last 3 years, SP grew revenue by 9% CAGR, with strong sales presence in the U.S. and global sales coverage in over 150 countries. Moving to the addressable market opportunity. SP's exposure spans a number of attractive areas.
The largest is biopharma processing, a market that is projected to achieve low double-digit CAGR over the next five years. Its life sciences equipment market is expected to grow in the mid- to high single-digit range, and its labware market is forecasted to grow in the low single-digit range. Growth in the industry is driven by strong trends, which we see continuing. These include lyo capacity gap, coupled with a growing biologics pipeline and higher demand for small batch therapeutics. Customer shift towards integrated and complete fill-finish solutions and growth of drug development applications, including new drug modalities, which is expected to drive demand for benchtop instruments, including evaporators. One space that we really liked is lyo and fill-finish. This is a well-established market with growth driven by robust pharma drug pipeline, rising use of biologics and increasing lyo of injectable drugs.
The process of lyo helps improve shelf life, product stability, and makes it easier to transport products. Pharma customers see value in solution providers capable of delivering end-to-end lyo and fill finish systems. There's also an opportunity to add further differentiation in the level of automation around handling, inspection and packaging with strengths of the value proposition for the customer. Turning to the strategic rationale. SP has established itself as a trusted partner, capable of supporting biopharma customers from the lab bench all the way through full-scale production in the drug discovery and production process. The company has a long track record of innovation and product technology with a dedicated R&D team and numerous patents, including patent protection for its Line of Sight suite of products, which reduces time to market and improves process yield.
We also like the recurring nature of SP's labware business and see opportunities to grow aftermarket services by leveraging our services platform. In line with our M&A playbook, we see multiple avenues to create meaningful synergies by sharing technologies across the combined portfolio and utilizing the ATS business model to drive commercial and operational efficiencies. Some examples include leveraging our Comecer sales organization to generate incremental sales of fill finish systems, providing additional value to customers by integrating ATS's capabilities in inspection, packaging, and assembly automation. Deploying Illuminate, ATS's IoT platform on SP products to enable continuous monitoring of process quality to anticipate servicing needs, and to leverage the ATS service organization to expand after sales support and service, and realizing cost reductions due to material cost savings and operational efficiencies. This transaction meets our four key acquisition criteria, market, value, fit, and financial returns.
SP operates in a large and growing market underpinned by strict industry and government regulations. It possesses several differentiated technologies and brands that are globally recognized and trusted in an industry that gives high value to these attributes. It is a strong operational fit with an experienced and motivated management team, and the potential to apply the ABM playbook to further improve operations and realize synergies. It is a financially attractive acquisition with strong profitability, high recurring revenue potential, EPS and cash flow accretion in year one, and attractive return on invested capital by year four. The acquisition of SP is aligned with our strategy of evolving the ATS portfolio towards high value and growth end markets. We remain focused on highly regulated sectors where ATS can add substantial value to its customers through the application of automation technology.
Since 2013, ATS has completed several acquisitions in these chosen markets and more than tripled its LS business. On a pro forma basis, our exposure to regulated markets, which includes life sciences, but also food and nuclear, is now close to 80% of our revenue. Going forward, we'll continue to explore opportunities to acquire assets in key targeted areas. With our focus remaining on transactions that are strategic for ATS and provide a solid return on our investment. In summary, we're excited about the addition of SP to the ATS family. SP operates in an industry with attractive fundamentals and holds a leading position in its key end markets. The transaction broadens ATS's life sciences offerings and grows our equipment portfolio.
SP enjoys strong profitability and offers a compelling opportunity to grow our recurring revenue stream. This is an attractive transaction from a financial perspective that is accretive to our earnings and cash flow and generates a compelling return on our capital. With that, I will turn the call over to the operator for questions. Operator, over to you.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt indicating your request, and your questions will be queued in the order they are received. Should you wish to decline from the queuing process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. Your first question comes from David Ocampo with Cormark Securities. Please go ahead.
Good morning, everyone.
Good morning.
Andrew, I guess my first question here is kind of on your comments on your expectation to continue M&A. When we think about your leverage, it's up to 3x on a pro forma basis, and you guys have talked about a comfort level of 2x to 2.5x. How should we think about, you know, the pace of acquisitions going forward? Is this something where you guys need to integrate SP and see where that goes before being comfortable deploying more capital? Or should we expect the pace to continue here?
Yeah. Good morning. Let me start by first stating that we're very excited to have SP as part of our team moving forward. The technology and focus on the spaces that they have been targeting are very attractive to ATS and our journey as we're targeting this area to expand. First and foremost, we're gonna be laser-focused on ensuring that we have an integration process that's successful and we maximize our value into the market and then ultimately for our shareholders. In addition to that, we have several areas within our funnel that we're continuing to look at from a standpoint of small, medium, and large, and we're going to continue to cultivate those.
We're gonna be very focused on this acquisition to ensure that we deliver the value that we perceive in the market and then ultimately the return to our shareholders. Ryan, would there be anything you'd wanna add on top of that?
Yeah. Good morning, David. With respect to leverage, we've talked about this in the past that we're comfortable to move into the 3-3.5 times range for the right acquisitions, and SP certainly ticks that box. This is a good cash-generating company similar to ATS, and we will focus on deleveraging from here. We're typically gonna delever about one turn per year. That would give you a bit of insight on timing into back down to that 2-2.5 range.
Okay. That's perfect. When we think about the growth opportunities that are ahead of you guys, and I look at where SP is, revenue is predominantly coming from, which is North America. Is there any opportunities for you guys to expand more into other regions, and would that require any additional CapEx, or is there still, you know, unused capacity in some of the facilities that you guys are operating in?
Good morning. It's Chris speaking. Certainly SP strong in North America. With the i-Dositecno offering in Europe combined with ATS's presence in Europe, I think there's good opportunity to expand in that region, amongst others.
David, from a CapEx perspective, there's capacity within SP. From an ATS Life Sciences perspective, that is something that we continue to monitor. I've talked in the past about how we manage capacity, and some of it's through investment like we've done here in Cambridge over the last year and a half. Then there's other opportunities for temporary space. We'll continue to monitor that and adjust as we go forward.
Okay. That's my two. I'll hop back in the queue. Thank you.
Your next question comes from Mark Neville with Scotiabank. Please go ahead.
Hey, good morning, guys. Congratulations. First, I mean, Andrew, this is a very large sort of products acquisition for ATS, and I don't wanna call it new, for sure, but is this sort of the direction you wanna go with future M&A?
Yeah. So Mark, I guess I'll start and then certainly if there's other areas, Chris can jump in to continue to add on. But you know, if I step back and look, this is right in line with our strategy, and it targets attractive markets with strong long-term trends around growth profile. Secondly, it continues to diversify our capability. When we look at the products and their technology and you know, this is a space that brand and experience really matter. SP has done an excellent job here.
When we think about what we can do from a full breadth of solution and really lay out from a standpoint of automation to Lyoscan, which we do here at ATS Life Sciences, to the Comecer, how they do isolation and capability within this to even IWK around packaging, really it starts to frame up a strong solution set to support this market growth. We like the dynamics of this business. We like what it does from a financial return. We really like the long-term aspects of how this is gonna position ATS to win. Chris, would there be anything you'd wanna add on top of that? I think the only thing would be, you know, part of our due diligence was a very active voice of customer exercise.
You know, what we learned is SP is known as a very respected, credible partner to many of ATS's current customers, albeit in sometimes different areas. Those customers indicated they would like us to be in this space in a much more comprehensive way. I think in concert with what Andrew said, that yeah, this is where we wanna be.
Yeah. Great. EBITDA margin looks strong. Cash generation looks super healthy. I'm just curious, what are the gross margins in this type of business?
Mark, their gross margins, it's slightly accretive to where ATS is today. It's in the low 30s%.
Okay, if I could ask just one last one, could maybe just talk about the opportunity to expand the service business sort of separate from the consumables?
Absolutely. You know, as you broke it down, it shows 9%, but if you take that as a total equipment, it's, call it, mid-teens%. You know, we view this as right in line with our progression on ATS service. When we look at the ATS service footprint, as well as aligning this to Illuminate and our digital capability, we view that there is obvious opportunity to expand and grow this piece in line with what we're setting as a target for total ATS.
Sorry, Andrew, what was that? The 15, the mid-teens?
If you break it down in their segment, you're gonna look at their business that's equipment-based services is roughly around, call it, mid-teens of that. When you look at the labware glassware, it's obviously not gonna have a services element to it because that's more a recurring revenue stream. We look at that equipment piece and say, "This is that opportunity," and then how do we expand it?
Right. You said the target should be sort of roughly in line with ATS consolidated, the 20%?
We would put this right in line with that target and look to drive that growth.
All right. All right, thanks a lot. I'll get back to you. Again, congrats.
Thank you.
Your next question comes from Maxim Sytchev with National Bank. Please go ahead.
Hi. Good morning.
Good morning, Max.
Andrew, maybe just from a strategic perspective question. In terms of the importance to have exposure to the biologics market, do you mind maybe going in a bit more detail, sort of, describing why that's the case and why pharma companies are moving in that direction? Thanks.
Max, just so we understand the nature of your question, you're just trying to understand the growth in this space, the new launches, the expansion, or the solution that SP offers, and how we, ATS, can really maximize that return?
Well, I guess it's a bit of both because you know, based on our understanding, biologics manufacturing is different relative to you know, other verticals. That's it feels that that's kind of where the future of the pharma industry is going to. I mean, from my perspective, I mean, that seems like a very critical piece of exposure from that market perspective. I'm just trying to see if you sort of see it the same way.
I guess I'll start and then certainly I'll walk through with Chris. We do. When you look, there's a couple of key attributes that we really like about this business. First and foremost, the longer term trends on lyo and what that enables drug manufacturers to do around this, you know, think stability, think length of time a product can last. That really helps them go there. When you go down to this area, they're going into more the customized solutions for certain markets. You know, we often talk about small and mid-batch processing. This is right in line with that mid batch processing, which allows them to have a certain threshold of production quantities that enables the solution set to meet multiple customer demands.
When we shift and look at the growth profile of that, we really like that profile, call it mid and small, as the growth over the next three to five years we view as larger than the high production process. This business is right in line with that capability, and we view that is a growing area that customers are gonna continue to expand on, especially as they go more and more custom type of medicines. Chris, would there be anything you'd wanna add on?
Yeah. So as Andrew mentioned, the personalized nature of medicine is changing. The pandemic, I think, and the response to it really highlighted the art of the possible in terms of taking a solution from the lab to full commercialization.
Speed of delivery, time to market. SP is recognized as a leader in supporting customers from that lab to commercialization phase. Yeah, I think that's the key pieces.
Right. Okay. No, we're super bullish on the space as well, so that's helpful. Then, Andrew, do you mind maybe providing any commentary in terms of, you know, the client overlap? Obviously, the revenue synergies suggest that, there's not a huge amount, or maybe there is and it's all about sort of product extension into these clients. Maybe any color you can provide on that point?
You know what? I'm gonna have Chris walk through it. We've done, as he mentioned, a lot of insight around our customer overlap and/or areas we think we can expand. Chris, why don't you walk and then I'll add on if needed.
Yeah. I think, as mentioned earlier, just a lot of voice of customer work that yielded great intel on SP from the customer's perspective. Throughout the due diligence, just understanding that many of the current customers of SP are current customers of ATS, and sometimes in different areas. I think there's Andrew touched a little bit on this in his opening comments, but really there's seven pieces here that provide just excellent linkage to ATS and starts with Comecer here through that sale of incremental fill-finish lines and the integration of their containment solutions to the fill-finish portfolio. It extends into ATS Life Sciences through our pharma assembly automation, our SuperTrak Pharma offering, lyo handling, Lyoscan inspection solutions. To IWK through the integration of secondary packaging solutions to the lyo portfolio.
We get into the ATS Digital and Global Services, where Illuminate provides the diagnostics tool and capabilities for that commercial lyo product. That then enhances the quality of the aftermarket sales and services offering. There's PA involved in some of these customers from a pharma plant SCADA recipe management infrastructure perspective. Downstream to our previous acquisition in BioDot and the lyo bead processing, which utilizes a lot of the same processing technologies. Finally, just the discussions we had with SP from a leadership perspective, just the strong cultural alignment to ATS, to LS, and that's always keeping that ultimate customer being the patient at front and center. Strong alignment there from a meaning and purpose perspective.
Maxim, I think in simple terms, there is some overlap. We view that there's a significant opportunity to expand. You know, even in the overlap, might have the same logo on the outside, but different buying decision, and this allows us to really bring that full breadth of solution, as Chris outlined, to a customer. I have first hand experience around the opportunity there with customers wanting us to engage and move into this space.
Yeah. Makes a lot of sense. Maybe just last question. In terms of, was this a competitive process, sole source? Maybe any color on the deal?
We've, as you're well aware, targeted this area for growth. You know, we really like the aseptic fill finish area and market. We really like the lyo as well, it's been an area we've targeted for some time. We engaged with SP, call it nine months ago-ish. It was a competitive process. We were able to build out a strong relationship with the team, the management team as well as the selling entity, and we were able to move into the ability to execute. This is why we're here today.
Okay, wonderful. Thank you and congrats.
Thank you so much, Max.
Ladies and gentlemen, as a reminder, should you have any questions, please press star one. Your next question comes from Justin Keywood with Stifel GMP. Please go ahead.
Hi. Good morning. Thanks for taking my call. I just had a question of clarification on the revenue makeup. Is the labware and glassware at 27%, is that all consumable in nature? If it is it consumable over a year or a number of years? If you could provide any additional context on that, it would be appreciated.
Yeah, a large portion of it would be. I would say half to maybe just over half would be consumable in nature. There is some reuse of some of those products within lab or research settings, but the majority, you know, just, again, call it just over half would be more consumable in nature.
Okay. Also just on the aftermarket services, I'm just trying to clarify. I heard two different figures, 9% and 14%. If you could just clarify what that business segment is doing right now, and then if the opportunity is to expand it to 20%, if I heard correctly.
Yeah. Justin, it's 9% of total revenues, but that includes the labware glassware business, which does not have a service component to it. As we look at the opportunity as in the equipment business, it's mid-teens, call it 14% of that business.
Okay.
With the opportunity to, as you said, to expand to ATS, in line with ATS.
Got it. Just on the synergies, we saw the identified cost synergies, $ 3.5 million, and then the revenue synergies of $5 million. I'm wondering, though, if there's an opportunity to expand margins. Like at Comecer, I believe the operating margins expanded by 300 basis points. Is that an opportunity at SP?
It is. The synergies we've laid out, I mean, if you work through the
Work through the model that will result in margin expansion. As we talked about or as we announced, it's in the 16% range today, their EBITDA margin, and this would get it into the high teens.
Okay. Just on the broader margin expansion goals, I know there was 200 basis points identified just in the quarterly results last week. Does that goal change at all with SP?
Well, yeah, this will change the overall mix. I'm not gonna commit to a new goal at this point, but this certainly changes the overall mix.
Okay. If I could just slip in one more. The CapEx is relatively pretty small. It's negligible at SP, less than 2% of sales. Are you able just to explain that dynamic there and why that's lower than, you know, ATS's just broader working capital target of less than 15% of sales?
To clarify, are you asking about CapEx intensity or working capital percentage?
Oh, sorry. Yes. Yeah, well, if you can comment on both. I guess the CapEx is less than 2% of sales. I didn't see a working capital, but I note the high free cash flow conversion of 90%.
Yeah, yeah, that's right. The CapEx is about 2%, and majority of that is maintenance. As I said earlier, they do have capacity within their operations to continue to grow and scale from a current footprint perspective. Working capital is similar to ATS. It's a little bit higher than where we are today. They're in the low double-digit range as a percentage of revenues.
Okay. All right. That's helpful. Thank you very much.
You're welcome.
Your next question is a follow-up from Mark Neville with Scotiabank. Please go ahead.
Hey, guys. I'm just curious, does this business come with any backlog or is it more project?
Yeah, it does have a backlog. But as we talked about with the product revenue, it's a lower percentage of their annualized revenues. It's been in the CAD 70 million range over the last several months.
Just in terms of the sort of aftermarkets, you mentioned Illuminate, but does SP have anything sort of similar on its equipment or is it sort of relying on the customer sort of calling SP for service or spare parts?
SP has an offering as we talked through with them during due diligence. I think we recognized that the ATS offering with Illuminate and surrounding plugins to Illuminate are quite attractive to SP. I think that's an early quick strike opportunity.
Okay. Okay. Maybe just one last one. Just, Andrew, on the comments around M&A. I mean, was the comment that you're sort of slowing down to focus on integration or no? Am I not reading that right?
Yeah. Mark, to be very specific, we're going to be laser-focused on ensuring the success of SP into the ATS organization. We have a healthy funnel. We're going to continue to cultivate that funnel.
Yeah. All right. Thanks a lot. Thanks again. Appreciate it.
There are no further questions at this time. Mr. Hider, please proceed.
Great. Thanks everyone for attending today. We look forward to speaking to you on our Q3 earnings call in February. Stay safe and goodbye for now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.