All right. Good morning, everyone. I'm Justin Keywood, an analyst at Stifel, and pleased to be hosting a fireside chat with ATS Corporation. ATS is the largest end-to-end automation provider, so that's designing, building, and servicing automation lines. They operate in some pretty valuable verticals, including life sciences at about 50% of the business. Food and beverage, consumer, and nuclear make up about 25%, and then the remaining 25% is related to electric vehicle and rapid battery pack assembly automation. Joining us from ATS is the Chief Executive Officer, Andrew Hider. Thank you very much for making time.
Thanks, Justin. Good morning.
So Andrew, I thought just to kick it off, we go through a bit of the evolution since you joined, I think just a bit over seven years ago at ATS. Some of the key pivot in strategic focus, the implementation of the ATS Business Model, and how you see the business positioned today.
Yeah, and there's a lot there in that question-
Yeah.
So I'll unpack it a little bit. You know, to give context of our business, I'll walk through two kind of major areas. First, our ATS Business Model is at the core of everything we do. It's our continuous improvement program. It's that constant drive to always make things better and to identify ways to really out execute and outperform in the markets we serve. The other piece that we've walked through is really aligned around attractive end markets and really driving in and utilizing our capital allocation strategy to reposition the portfolio. And to give you some context, when I took over call it a little over seven years ago, we were less than $1 billion. We just announced we're over $3 billion in revenue, strong growth profile.
But as importantly, our life sciences business, which is roughly half of our corporation today, is bigger than the ATS that we started at. We're now in areas like radiopharmaceuticals, which is identification and treatment of cancer. We're in the lab water space around biopharma. We're in areas like lyophilization, so niche applications that are very highly valued within our markets. Our business continues to evolve and continues to grow. So our portfolio has shifted, our execution has also shifted. I'll tell you just some kind of data points. Our last five-year CAGR has been roughly 18% total growth. Our bottom line has been greater than 20%, and our team continues to evolve. We continue to drive and execute in the markets we serve.
We're now in food safety, we're in life sciences, and we're in nuclear, which are heavily regulated markets, and over long periods of time, hold up and continue to support. And so we've executed our M&A plan, our organic strategy, and the team has evolved to really executing and continuing to add value for our customers.
Great. I want to touch on R&D because I know that's been a big focus, and the technology within these automation lines are pretty impressive, the speed and precision. How has that evolved, since you joined, and what proportion of proprietary technology is embedded within ATS's automation line versus third party?
Yeah, you know, and normally I have a pen, but I don't have that right now. But to think about us effectively, when you were to launch an injectable device, if you were to go forward with an injectable device and say it treats something, say it treats cancer, and it's 70% market share, and your demand is through the roof, and you just got FDA approval, you would come to ATS, and we would do the full end-to-end production line, as Justin alluded to.
But we also have acquired companies in that value chain, like inspection, and we have our own vision platform, like filling, with our ability to fill a vial or an application, like lyophilization, which is taking a liquid and turning it into a powder, allows you to have the drug last a lot longer, to even the ability to serve and support over the life of the equipment. So our portfolio not only has shifted to regulated spaces, also within the markets, we've shifted and looked at continuing to build our capability in high value, high IP within our customers. Our total business was roughly a little over 80% integration. Now it's a little over 40% because we've acquired more and more technology and IP.
Our focus on this has been really driving in to ensure that it's high value, high applications for our customers. To give you a little context, everybody talks about this GLP-1 drug, and it is a big piece of our business. We invested in a technology, it's called Symphony, and what it effectively does, it allows you, while you're building the product, to add value in the chain. Think about a train that's running on a track. You can fill the train while it's in motion. We can build the product while it's in motion, and why that matters is you're able to reduce the footprint by roughly half, so the size, and you can increase the output by almost 2x. Let me repeat that.
You can increase the output based on a standard machine by almost 2x, and it's half the footprint. So huge value for our customers. We look at innovation, we look at core IP, is at the foundation of what we do and how we offer it to customers. And if you look at our capital allocation, the number one return to our shareholders when we invest in technology, when we invest in IP, has the highest return. And so over my seven years, we've not only, you know, we started our investment, we've doubled it every year. During COVID, we roughly held it flat, but we've continued to invest because it's high value and offers us the ability to continue to expand at our customer base. So IP is at the core of everything we do.
I wanna touch on GLP a bit more-
Yep.
But just as we're on the topic of innovation and R&D, artificial intelligence, we get this asked a lot, more recently on our companies. Is there an opportunity to incorporate AI within the design, build, or service at ATS?
So first, to answer your question: absolutely. And I'll just say our business, because we're a leader in integration, we understand what makes the product and how to make the product. We can utilize that data, that insight, on digital capability and also AI. And how we think about AI is, it's cheap prediction. It allows you to do many type of models to understand potential output. And I'll tell you, it is in the core of how we operate now. So if you were to walk our production floor, you would see AI being utilized with our vision platform, 'cause vision is a key application here. To offer higher value in GLP-1, one of the solutions we've offered now is we look for defect pattern recognition.
So whenever you're assembling a product, at times you'll have a defect in that product, and if you wait to the end, you've added a lot of value, and it's non-value added because it's a product that you're gonna ultimately kick out. We find it much earlier in the process. We kick it out earlier in the process, and then we can bring another solution in. So you don't miss your output, and you don't continue to add value to something that you're ultimately gonna fail. And we use it in, in that application. We also use it in things like tomato processing, where when you're peeling a tomato, oftentimes there's peel left on the tomato. We do a 360 scan, we do pattern recognition around that, and we kick out the tomatoes that are bad, so then you're only processing good tomatoes.
Why that matters to you is you normally have 4-6 people on a production line doing that application. So this is millions dollars saved every year by running these types of processes. And so AI, you know, in our view, it's early in this journey, but it is one that is a powerful tool, and I'm only talking about examples with customers. We're also taking AI and how we process internally, non-value added. So our legal team now looks at NDAs or looks at contracts, and they'll run it through an AI application so they can identify where they need to focus their time on. This is going to be an area that we can drive true change and positive change. But how we think about it, just like everything we do, it's about the impact and about the relevancy.
So if it doesn't drive impact for our customers, our employees, or our shareholders, then it really is just a tool. And so we look for the impact, and we've seen the impact, and we continue to invest and drive the impact across the portfolio.
Where does that data analysis lie? Is it at the customer site? Does ATS have visibility in that?
Yeah, so we have two applications. We have one called Illuminate, and Illuminate is on-prem. So think about a machine that's gonna be on-site, that's gonna be collecting its own data, utilizing it for output, that maybe is in a very high-risk area where customers need to keep their data on-site. So we would have a solution here. And then we have something called PA- FACTS, which brings it to the cloud, and so we would do both. And so the data collection is gonna be actually in both areas.
We understand it, and then we bring value into the data output. 'Cause, you know, and being here seven years, right, I've talked par t of my standard work as a CEO is to talk to customers on a frequent basis and, you know, meeting with them, and customers don't want just a dashboard anymore. Many people can do a dashboard. Sure, customers, they value that, but it's not just—they don't need just a dashboard. They need actionable insight, or they want the easy button. They want you to tell them: "How do I improve my output?" Or, "In this part of the world, I'm 80% OEE, and this part, I'm 60%. Why?" And we now, because of our data insight, can really drive that impact. And, you know, I use a reference. One of our customers did not utilize our data processing tools.
They decided to do their own, and they were running a system that was running at about 80% output, which is about normal. That is everything running properly, that's about where they were supposed to be. And then all of a sudden, they started running at 60%. And they were looking at the operator, they were looking at all these different things, and they're saying: "What is going on?" So they call ATS up, and our service tech goes on-site, turns the key, 'cause it's a digital key, to drive Illuminate, which is an on-prem, every machine now that leaves has it, and identifies that the fork truck ran over an air hose, so then the piston wasn't properly producing. Had nothing to do with the operators. It was the piston that wasn't working properly.
They went, they cut the hose, they replaced it, and lo and behold, the machine was right back to 80%. Immediately, that customer turned on all keys, paid for all data support, because they saw the impact and the ability to drive output at a much higher level. And so when I talk to that journey of integration and being a leader in integration, it affords us the ability to understand what makes the product.
We know what goes into making this application, and because we've got different data sets and controls throughout, we can draw that data, and we can start to utilize that in services and support, and ultimately get to even an output-based discussion, where we can go into the ability to say, "We can guarantee a certain level of output, and we can extract value from that." And so as we're shifting, we're really seeing that opportunity, but it's early in its journey.
Some very impressive technology, and I know there has been an impact in increasing the services component of revenue. Are you able to describe how that has evolved?
Yeah, I mean, so when, when I took over, and, and you remember this, we were caught low to mid-teens, and, and services has been a real driver and focus for us. And, you know, there, there's many applications within services. There's break fix, there's spare parts management, all the above. We've continued to launch tools, and services has become fascinating because during COVID, our customers looked at service as a much different area of impact, and they basically said to us, "Andrew," or the team, "We're in the U.K., and nobody can fly in and out, but we still need to produce our product. How do you serve and support us?" And we were able to do it because we've built out this expansive, capability.
Now, what then happened after COVID is, customers look at service now as instead of a nice-to-have, as mission-critical. 'Cause you can have the best machines, but if you can't produce the product, then it really is just dead weight. And so they really look at us to say: How do you guys have continuity and services? And, oh, by the way, our customers are faced with high turnover. One of our customers in the U.S. was 25% turnover. 25% turnover. They would train somebody, and then they would leave. So they need us to be able to do on-demand training. They need the machines to be more simple. They need to understand when they're off in their production output, 'cause their demand is through the roof. They come to ATS, and so our services has gone from mid- to low-teens to now mid-twenties.
And everyone asks the question: Is that the end? Well, no, that's not the end. This is just the start. And when we think about the applications that we can now do, because we've got the data management, our teams just launched something called the North America Operating Center, and we're starting in North America. We'll go to Europe and then global. We wanna try it with certain customers where we can now monitor your machines on your site, so we know exactly what's going on in your facility. We know exactly what's going on in the machine. And not only that, when it's off or having issues, because we've got cameras on site, we've got the ability to understand those, we can drive impact very quickly.
So we know you need to produce 1,000 a minute, you dip to 900, we know, and then we can start to impact that. So we've already had customers place orders as an output-based discussion, and it's just in one area that we're gonna continue to evolve and build out our services network to really maximize that impact. So while we say mid-20s, we're not slowing down. We have companies that are in the 40% range of services. We have companies that are still in the 10%. And when we acquire businesses, it's one of the best things because as soon as we acquire them, we bring in supply chain management, 'cause we know what we can buy products for, and we bring in services, 'cause that company can now have a global scale of services. They can take on the ATS network.
I do wanna get to capital allocation-
Yeah
- and M&A. But life sciences, about half your business, serving some very valuable customers. I'll name a few: Pfizer, Becton Dickinson, Abbott, of course, the GLP-1 companies. Are you able to speak to some of the competitive dynamics in that vertical, and is ATS insulated enough from potential new threats?
Yeah, so look, I mean, any growing market is gonna be competitive. And one of the areas that I would say we have a strong position in is just our investment in the technology and the value it creates for customers. And you know, I referenced the Symphony platform. That allows us to be twice the output of a standard machine. That's a fairly sizable impact for customers that are chasing a very strong growth profile. And we view this market as, you know, it's the next five years around growth and their prediction of growth. But I'll tell you, everyone talks GLP-1, we're also in wearable devices, and more specifically, wearable devices in the treatment of diabetes.
One of the customers I met with a few weeks ago, their output is 25%-40% increase every year. They lean into automation. It's not a if, it's a how fast can we build production lines? And so when you look at these, these areas that we support, strong growth profile, but ATS is a very strong brand in the space. We've done the market. We know the customers. We've been in the market oftentimes decades. So auto-injector, we were back when it was an EpiPen, 20 years ago. So we know the market, we know the space. We're in things like wearable device in the treatment of diabetes. We're in things like radiopharmaceuticals. Guess what? Boring old contact lenses. 2 quarters ago, we announced it was our largest single award. We still love those spaces.
And so we're in areas that it's high value, high niche, where customers are gonna really align to bring value into their market, and ATS is a trusted brand name and has strong technology to support.
On GLP-1, it's become a big part of ATS's business, and I believe it was mentioned to be high single digits of overall revenue for the next several years. What gives the confidence in that outlook? And, at the same area, we have seen compounded versions of GLP-1s hit the market. Does that change the TAM at all?
So, and I'll address this along, but, but, you know, if you know me, and you know ATS, we generally are more conservative in our approach to end markets. And, and, we always will have that mindset of we want to undercommit and overdeliver and, and constantly drive the business. And, we've continued to put points on the board, but our mission has always been aligned around attractive markets and then outpacing our competition in the markets we serve. And so GLP-1, it was high single-digit bookings, you know, call it mid-single digit on revenue. It's going to get to high single digit on revenue, and we see that for the next, call it, 5+ years as being a bigger piece of our business.
And what gives us confidence is we're working with some of the major players in this space, and their outlook, regardless of other solutions and other capabilities, which we would be involved in, is very strong around this. So the demand, the simple demand of obesity, is continuing to increase. It's sizable numbers, and they're just scratching the surface on ability to maximize that output. But also, as new drugs launch, as new solutions launch, whether it's in, you know, a new capability for getting a GLP-1, or even if you're gonna look at, call it, heart disease or an area to perform in that space, we would have the capability to help our customers get there faster. Oh, and if it goes to pill form, we're also in pharmacy automation.
Our focus has always been areas of high value, high impact, where we have differentiated capabilities and ability to drive real value for our customers, and when we don't see that, we move into a new area.
Any challenges in capacity in meeting that demand?
So, it was... I was at a conference one time, probably about two months ago, where an investor walked in the room, and they said, "I just met with a GLP-1 drug manufacturer, and they came and said, 'Can we get more product from you?'" And I've never had that experience. So, customers are looking to us for that capability. We built out a global network on our footprint, and so we've got strong ability to meet this demand, but it is a very sizable demand. So, we're seeing customers come in at a very fast pace around building out their manufacturing process. And even if they go to a contract manufacturer, that contract manufacturer will come to us to build out process and capability.
So it is a sizable demand right now, and one that we do make sure that we've got the level to meet, but then also we don't get over our ski tips in the process.
Yeah, definitely a wide opportunity. I wanna shift to the EV segment that has tripled in two years, so not three, four, or five, in two years, but it has been moderating recently, and the uncertainty has been weighing on the shares. How do you see the EV segment as far as the overall strategic importance to ATS, and how do you see it positioned today?
Yeah, so, you know, to walk through this, and I'll be quick. We've been in this market. When I first took over, we did a very deep strategic review of the business. We looked at the transportation segment with an extreme critical eye, and one of the reasons was, if you looked at our ICE, which is internal combustion engine, it was medium to high risk, low profitability, which doesn't really add up. And so we largely exited and sold that business, and we pivoted what was left to EV, and we'd been in the market for decade, a little over a decade.
It started in Europe, and if you recall, 'cause you were on those discussions, Justin, we saw a sizable increase in Europe, and then the questions were: When is North America gonna catch up? We said, "It's gonna come, it's gonna come, but it's gonna be a bit more of an anomaly 'cause it's gonna be a catch-up." And we saw that. It was a massive order. We kept saying it's, "This is a non-normal process because they're playing catch-up," and we saw that a couple customers place fairly sizable awards. Well, it's now a bit more moderated, and we would say customers are a bit more balanced in their approach. They're looking at their end market demand. It is an organic play for us, so it's typically very high return on our investment.
So when we talk about capital allocation, we always look at return on investment, and this is a higher return on investment 'cause it's, it's organic. We've seen it be a bit more balanced now, and so we're working with, call it, between six and eight customers around this market, around this space. We think this is gonna be, rough numbers, call it 20% of our corporation, and if it were to go to a situation where it doesn't add value for our shareholders, we would look at it in a different light. So right now, we harvest it. We maximize, we take that investment, we put it into buying businesses like Paxiom or Avidity or others, where we see strong value over long periods of time, and it's added a significant value.
So, our view of the market, we're in a good space to provide high value for customers, challenging end space. It's transportation, and if this were to be in a situation where it doesn't add that value, we would then look to do something different with that, either capacity or that business unit.
Would a divestiture ever be on the table for the EV segment?
You know, I can't say future. What I can tell you is, when we saw that the ICE business not really aligning to that value, we knew the amount we had to invest to get to a certain return, and it didn't equate to the rest of the business. We exited, and we sold. And so, you know, I would just say, you know, past performance is an indicator of future performance. We would look at it under a critical eye.
Understood. Capital allocation, ATS has been very acquisitive, I think, around 24 deals in the past seven years. What is the near term capital allocation focus? Because we also have seen the share buyback activated, and maybe you can describe the pipeline for M&A as well.
Yeah, so if you join my leadership team, you get two books, and I talk pretty candidly about this 'cause one of them is The Outsiders. The reason why you get that is I want my leaders to understand how we think about capital allocation, and we're very strict on that strategy as well. The five points, the number one return to our shareholders is internal investment. Number one return. We constantly look to drive margin performance, new technology and innovation, training around the ABM to really drive impact and continue to drive impact. Number two, M&A, and deployment of capital on M&A, and it more. I can get a lot of details around this, but cultivated deals. We look to cultivate targets, cultivate assets.
The best deals we do are cultivated deals. Number three is share buybacks, and we're a bit opportunistic. When we see it as an opportunity, we buy back. We've deployed, call it $45 million, bought almost a million dollars or a million shares back. We continue to look at this as an area where it's opportunistic and be able to to deploy. And then four and five would be debt repayment and dividend. We're not at a point where dividend is a higher value, so we don't do that. Debt repayment, we look at as well, and we have a leverage point that we try to get to and try to manage. So then, if you look at M&A, our funnel and pipeline is healthy.
And when we started this journey, it was really around me, my direct M&A team that was doing the cultivation. Lot of visits, a lot of meetings, and I still cultivate. We have a statement, ABC, Always Be Cultivating. But now it's gone to the presidents, so the leaders of our divisions are now cultivating. So when we talk about Paxiom, the business we just announced, that was cultivated by our packaging and food technology leader, Jeremy Patton, and he's built a relationship. We targeted this business a couple years ago. He built out the relationship with the management team. So when that team, that owner, decided he wanted to retire and didn't hand it down in the family, we were the first phone call, and we constantly drive that mindset. So we want to cultivate. And why do we want to cultivate?
Two reasons: 1, it's usually the greatest return to our shareholders. Number 2, when we enter into an auction, we lose the majority of the time, 'cause we don't typically pay the highest point. So when we go into an auction, we know we're gonna lose 90% of the time. So we constantly try to cultivate, we constantly try to drive relationships to be in a position when those companies decide to sell, we're the first phone call, and if we can get that, usually it's a very high return to our shareholders.
We've seen the benefits of that in the rising ROIC. I just wanna pause for a second here just to see if there's any audience Q&A. Okay, maybe just one final question on margins. There's still an adjusted EBIT target out there of 15%. Maybe you can describe some of the levers to get there.
Yeah, we started. So when I started, we were about 9.6%. We said on our base business, we see the ability to get to 15%. We actually achieved that, so we got to 15%. We then bought some businesses that were dilutive, and one being CFT, that was, by the way, 3% EBIT, and they have now driven a 500 basis point improvement on their bottom line, and they're continuing that trajectory, but they're still a little dilutive. And I would say when we step back, the key levers, the key focus areas, first, supply chain. You know, this is not a great example, but let's say this is a part that goes into making something. We buy 1 million of these every year. When we acquire a company like Paxiom, they buy 1,000.
Our discount's 50%, theirs is 10%. Day 2 of that acquisition, we bring that pricing in. So we see bottom line impact typically very quickly. So supply chain management and that constant drive to always make it better. Number two, standardizing and really looking at how to standardize our equipment, like Symphony and our ability to meet the demand of the GLP-1 drugs, but taking a more standard approach on when we're building out capability and building out a solution set for a market, how do we build that into our thinking? How do we build that into our process? Number three, services. Services generally is a higher margin, higher area of penetration. With our services growth, we know we can continue to expand margin. Number four, our ability to leverage our cost structure.
So as we continue to grow, you don't need more of me, you don't need more of Ryan. We can take the ability to manage our overhead, manage our SG&A around our ability to grow and not have to add at the top level. And then lastly, I'll just say this is becoming more how we manage the full approach, is our ATS Business Model, our ABM. It's our continuous improvement focus. It's our drive to always make tomorrow better than today. And if you don't. I'm on LinkedIn. I don't do any social media except LinkedIn, and I post on certain things. One of them is a President's Kaizen. We do it once a year.
It's to start the year, and it's huge impact areas, so, so big areas for Kaizen events that we drive across the business. And we do that to set the tone that nobody's above continuous improvement, that constant drive to always make it better for our customers, our employees, and our shareholders. And if you've gone through this journey, and I have a, a, a few times, having been at Danaher and then, then taking over a different business as CEO, one of the things you get challenged with is not everybody's wants to be part of that journey. Well, we measure turnover, and our turnover is less than 5%, and our engagement scores are very high. And so it's an empowerment tool. It's the ability to take the ABM and identify where you've got gaps and hammer it to improve.
That gives us the confidence that when we go into new markets or we acquire new companies, we can help them achieve greater success, and that's what we've been able to show and prove out.
I know the industry average turnover is double than that.
Yes.
So congrats.
Thank you.
We're gonna have to stop it there. Thank you very much.
Thank you. Appreciate it.