Good morning, everyone. My name is Patrick Baumann. I'm on the multi-industry and electrical equipment team at J.P. Morgan. Cover a bunch of industrial stocks, including ATS Corp. Pleased to have with us today Andrew Hider, CEO, and Ryan McLeod, CFO of the company. I'm going to let Andrew, for a few minutes here, just give kind of a quick overview for those that are new to the story. Then we're going to jump into Q&A and take some Q&A from the audience if there is any. With that.
Appreciate it. Good morning, everyone. The simplest way to think about ATS is we help our customers bring their product to life. Our largest market is life sciences. My example is going to be a life sciences example. This is an injectable device. You got to use your imagination for a second. It treats something. It treats cancer. You just got FDA approval. Your demand is through the roof. You are 70% gross margin. Time matters to you. Also what matters is because this is an injectable device, quality has to be perfect. You are going to be looking at defects to ensure that you do not have any. You do not have any contamination. You come to ATS. We build the entire production process around getting this product to market.
Because you've built 1,000 prototypes, but now you need to go to 1,000 a minute. We now have the ability to bring the whole suite of production. We build it in our facility. We prove it out that we can build it. Then we tear it down and rebuild it at your facility. We have acquired companies that do the filling, that do the movement, that do the vision. We have also wrapped the services and support for the life of the equipment. We continue to offer digital capability. As you have seen, you want to ensure you can meet the demand over the long haul of the equipment. That is our sweet spot. Our business now is the largest segment is life sciences. We are in areas like GLP-1 drugs. We are doing the auto injector, wearable device in the treatment of diabetes.
We're in radiopharmaceuticals. So that's cancer identification, cancer treatment. We're also in contact lens manufacturing. We're enabling our customers to constantly meet their demand. Our second largest is we're also involved in food safety. Think about the next time you have food, ensuring that it meets the quality requirements of that market space. Again, regulated area, regulated space. We're in nuclear energy, helping our customers bring clean energy to the market. We do a lot of the automation around that space. We're also involved in the automotive space with EVs. Now, that's less than 10% of our total corporation moving forward. It's been a bigger piece in the past. Lastly, we're in consumer products. We do niche applications and warehouse automation. We're also involved in high areas like creams and solutions where we're filling the product to help our customers bring their product to light.
Our trailing 12-month book-to-bill ratio is 1.18. We last quarter announced that we had our second largest bookings quarter in company history. Certainly these times are choppy. We will walk through that. Our customers continue to look to ATS to bring value and bring solutions to their market.
Great. Thanks for the intro. Obviously, we'll get to the topic of the conference around tariffs at some point. Maybe we'll start with kind of the order environment. Last quarter for ATS, I think, was one of the best orders quarters in the company's history, if not the best. You could clarify that. Maybe talk to what you're seeing across the different end markets that's driving that, sustainability of the recent orders activity, particularly in life sciences, and whether there was any kind of large bookings that influenced recent results.
Yeah. As I mentioned, it was the second largest bookings quarter in company history. The prior largest was when we had a significant EV order. We're very proud of that performance. I step back. As a CEO, one of the things I focus on is standard work. One of my processes is voice of customer. I meet with customers on a constant basis. One of the things they're telling us is they're not taking their eyesight off of launching their critical products to meet their demand. They might be looking at their global footprint differently. That's an area where ATS has strength. We can help you in North America and the U.S. and Canada. We can help you in Europe and any place you want to play or in Asia.
Where you want to build capability, we have the flexibility and capability to build that product set in that region. Wherever you have demand, building out process. All of our markets actually saw a book-to-bill ratio over one last quarter. While we understand that the short-term choppiness will be taking some shape when we look at tariffs, and we're going to talk a little bit about that, automation is a continued focus for our customer base. When we go through, I get often asked around if there's a benefit, if there is a tax advantage, do customers change their buying behaviors? What I can tell you is, and I've been CEO now for eight years, it really doesn't change their behavior on a strategic product.
Over a long period of time, when you look at building capability in a region like the U.S., generally, there's labor shortages. There's areas that you have to get right. When you have a turnover in your workforce, it creates a potential challenge. Automation helps that. Our view is from a long-term perspective, it's generally a tailwind. The markets we're in are more attractive. They're more resilient. We constantly stay focused on innovation and technology to bring higher level of value for our customers over a period of time. Last quarter, second largest bookings quarter in company history. I mentioned on the call, our funnel remains healthy. Our dialogue remains constructive with our customers. Their focus on product launches continues.
Obviously, with a 1.35 book-to-bill last quarter, the backlog is looking really good, exiting your fiscal year, which ends this month. As you think about how that sets you up for the next fiscal year, the visibility it gives you, what's your confidence in the organic growth rate inflecting to, I mean, consensus is assuming 10% organic sales growth next year after a tough fiscal 2025, I suppose. What's your confidence in delivering that backlog? On top of that, are there any watch items for things? Obviously, EV has had a tough couple of years here. Are there any watch items for things in life sciences, whether it's drug approvals or reimbursements or things like that that are kind of on the dashboard for you, either that could drive upside to orders or could present some risk for orders that are already in backlog?
Anything that you're watching in life sciences? I know there's a lot there. Sorry.
Maybe I'll start on the backlog piece. Yeah, our trailing 12-month book-to-bill ratio was 1.18, which is a bit better indicator of growth versus the single quarter being at 1.35. A number of years ago, I would have said, Patrick, that's a pretty good indicator of forward growth. The reality is some of those programs that we have in our backlog today, they do go beyond one year. There are some longer-term programs. A lot of that is driven by customer delivery schedules. They've ordered multiple lines. Two are going to go into North America that have a certain timing. Two are going to go into Europe that have a certain timing. We've seen some of that extend out. Prior to this year, our average organic growth rate over the prior five years was 8.6%.
I think that's a reasonable ballpark that we expect to operate in. I think if demand continues to be strong, like we've seen it over the last couple of quarters, then certainly we could get into double digits. That's going to depend on a lot of the shorter-term book-to-bill business that we have, whether it's in services, which historically for us has been a growth area regardless of what happens in the economy. If people aren't investing in CapEx, they are typically looking to get more out of their existing asset base. Services is typically pretty resilient. Overall, like I said, I think we're thinking about it in that high single digit. If the markets keep up, certainly low double digits would be reasonable as well.
That's helpful. In terms of dashboard and life sciences, things you might be looking at for upsides or downsides or what have you.
We operate very decentralized. If you know my background, you know I started my career at GE. Then I went to Danaher Corporation. I was at Danaher for 10 years. I say that because we operate in a decentralized fashion. There is no one specific answer. It depends on the business. Usually, you're going to look at drug approvals. You're going to look at product launches. You're going to look at where they are in their cycle on their product. For instance, a company, and by the way, we've been in inhalers for decades. We are also in the auto injector space for 20+ years. Auto injector is the enablement for the GLP-1 drugs. We look at not only at the current, but then also how they're modifying that product over time.
Because if they're going to take this and they're always modifying, they're always improving and looking at how to make it a more effective platform, they're going to change the clip. They got to come back to us. We're going to walk through whether it's a modification to the actual process or you need full pieces of equipment. While we look at, and you think about radiopharmaceutical manufacturing, they're now looking at drugs like Actinium-225 or Lutetium-177. There are many more that they're looking to launch in the fight against cancer. That's all good for us. When I use that, of course, we track that. We also look at the cycle and the buying process for multiple industries. I referenced contact lenses because a couple of quarters ago, it was two quarters in a row. They were the single largest booking in our quarter.
While we might have things that trail off, we're constantly looking with our customers on how they're going to expand their penetration, how they're going to drive their key products to get them to market. ATS is a trusted partner there. One last one, which is fascinating for us, is we've been investing in our services in digital for years before my time. It just continued on. We've seen nice progress there. What COVID did to that segment has been truly instrumental in kind of pivoting our business for the future. The reason is it has taken services from a nice-to-have to mission-critical. Our customers now look at continuity, the ability to continue to build their product without issue as one of the enablers. Our footprint, our layout for services and digital has been a key driver there.
That becomes an equal weight as well as getting their product to market. It is an area that ATS has a strong position in. We continue to grow and build our capability in that area.
Maybe taking a step back just very quickly. I often get asked questions about what's the right comp for ATS? Who does ATS compete with? Maybe if you could give a little bit of context around who globally the competitors are, maybe if you want to do it by end market or what have you, how you think about your business and the peerset.
Yeah. This is probably the hardest question because everyone wants to throw Rockwell out there. We do not compete against Rockwell. They are actually a supplier to us. When you look, our competition is usually regional and by market. For instance, we acquired a business by the name of Comecer. Comecer does radioisotope filling. That is that whole process around cancer identification and treatment. Their largest competitor is right down the street in Italy. Now, we have the lead position, lead market share in that area. It is a local business. Niche market, high value, high position. We look at having a big share position in the markets we support.
The interesting thing is, as we look at this whole tariff process, it puts us in a unique spot because not only, well, short term, it's going to be choppy, and we're going to figure that out. As our customers look to have their manufacturing process close to where they're going to build capability, we can do that. We have the process and the capability to move production in the region. Whereas our competition oftentimes is in a region and in a market. It makes it slightly more challenging. It is a more fragmented space, and we're okay with that. Our aspirational peers are going to be the likes of businesses that operate decentralized that drive strategic, profitable growth. That is what we're continuing to move towards.
Okay. You brought up tariffs just now.
I did.
Yeah. So.
I was waiting for the question.
Maybe we'll touch on that because, obviously, as a company that's headquartered in Canada, I have substantial operations up there. You also probably do some sourcing between Mexico and the U.S. and what have you. Maybe touch on kind of your exposures to sourcing from Canada, Mexico, and then also the playbook that you guys are executing to manage through this.
Yeah. Maybe I'll start on the revenue side. About 15% of our revenues go from Canada into the U.S.. Equipment that we're producing in Canada moves into the U.S.. For that revenue stream, I mean, first of all, we haven't seen any changes from a customer perspective in terms of buying behavior or anything like that. Certainly, that's an area we're staying very close with customers. Typically, the responsibility for tariffs falls to the customers. Contractually, that's where it goes. We've got equipment that's very far along in the build cycle, some of which we've shipped early for customers to get ahead of now. Dates have clearly moved around, but to get ahead of some of the dates that had previously been announced. Customers are looking at it from potentially relocating equipment, not into the U.S..
We have a customer where we shipped a line early for them, a second line that's in production for them. They're looking at putting that into a European location. Each of the projects or customer engagements we have in place, these are the types of discussions we're having with them. Another example, a customer that's earlier on, just ordered within the last couple of months, for them, we're producing equipment that's going to go all over the world. Some of it in the U.S., some in Canada, some in Europe, and some in Asia. We have shifted the build of some of that equipment into the U.S. There's some cost impact of that, which, again, the customers in this case are happy to bear because it's a more efficient cost than a 25% tariff.
That's very much how we're approaching it from the customer side. It's a lot of discussions, a lot of engagement with customers around what do you guys want to do to mitigate this. We're helping as best we can there. From a supply chain side, a lot of what there's a couple of things. We're looking and working with our suppliers the same way our customers are working with us to understand their mitigation plans, how they could be impacted, what specific materials. In some cases, there are things that are sourced from Mexico. It's not a big percentage of our spend. It's very much supplier by supplier understanding their supply chain and where things are moving. We're looking at alternative sources of supply where there are components that will be caught. We don't expect it's going to be a material impact.
It is something that our supply chain team is very actively engaged on.
So 25% goes through in April. The impact to you is what next year? How do I think about that?
I expect from a sales perspective, not much of an impact. Like I said, because we have flexibility from a supply chain standpoint, we expect we'll be able to pass the majority along or find alternate supply.
Helpful. Maybe let's talk about margins then. Because obviously, you guys have some aspirational targets over the midterm that provide very good runway for the company to drive profitable growth for a number of years here. I think margins are kind of in the low double digits right now. And your goal is to get them up to the mid-teens, right?
Yeah. We have a 15% EBIT target. Correct.
EBIT target, yeah. Maybe talk through the levers. I think it would be helpful, the levers to get there. How much is under your control? How much is market-based improvements? Gross margin, SG&A leverage, all the kind of moving parts.
Yeah. It's a bit of a mix at this point. We've lost some operating leverage this year with headwinds that have impacted our transportation business. If you'd asked me that question a year ago, most of the improvement that we're targeting would affect our gross margins. It's areas like our supply chain where we've seen a lot of benefit over the years and continue to see opportunity around consolidating our supply base. Andrew talked a bit about the decentralized model. We have a global supply chain group that sits at the corporate level effectively. They work with all the local supply chains in putting together global agreements, rebate programs, and then working with our divisions to expand that addressable spend. That's a big lever that we've seen a lot of impact from and continue to see a lot of opportunity. Number two, standardization.
Standardization, excuse me. A lot of people think about our business, and rightly so, as custom automation. We are designing and building equipment, products, manufacturing lines for our customers. We are very focused on standardizing a lot of that. The GLP-1 example, or for us, that is auto injectors. We have got nine or 10 different customers in that space today. While all of their products are a little bit different, we apply a very standardized approach in building that equipment for them. The same core technology is based on our Symphoni platform. It uses our SuperTrak linear motion conveyance system. That standardization drives efficiency in the engineering process. It drives efficiency in the assembly process and is a margin lever that, again, we are very focused on. The third one I would highlight is the mix. We talked about after-sale services. It is a higher margin business.
It's an area that we're very focused on growing. We've invested in that to grow, to build out our regional capability. Those are all areas. You'll see them mostly in gross margin. From where we sit today, operating leverage is part of getting to that 15% target as well from where we sit today.
If you grow 8% organically for a few years, is that kind of the timeline to get to that margin? Or is it a little bit longer than that?
Yeah. We've talked about this as you use the term mid-range target. I think that's fair. We've thought about it in three to five years. I think given where we sit today, it's likely a four to five-year timeframe.
Helpful. I want to see if there's any questions from the audience. Otherwise, I'll keep asking.
Oh, hold on one second.
That's left you now with a little more leverage than you've had historically. This is the first time you're sort of referencing that. How do you think about capital allocation now, given where you are with your leverage?
Yeah. Our focus is on delivering. We're high threes today and likely be in that range again next quarter, just given we have some higher historical earning periods dropping off. Our focus is on delivering back to the two to three times range, which puts us in a much better position from a strategic standpoint.
Capital allocation. Sorry. It's an area I'd love to get into. If you join my team, you get two books. One book is The Outsiders. The reason why I want you to have that book is I want you to understand how Ryan and I think about capital allocation. It's not just new M&A. It's ongoing. The greatest return to our shareholders, internal investment. We've continued to increase that investment.
We've launched new products, new solutions, like the Symphoni platform that Ryan mentioned, that really enabled us to bring a more capable solution to the auto injector space to support the GLP-1 launches. M&A is a key piece of that. Now, when you look at M&A, we did two quarters ago, three deals, Paxiom, Heidolph, and a smaller asset for our digital solution. Those are all cultivated deals. I would say, if we look at our funnel for the future, it's about cultivation. The best deals we do are cultivated deals. They take time. While we're going to focus on delivering, we're still cultivating. Our funnel is healthy around M&A. When we get back to it, we have the ability and certainly built out relationships that we can continue to add in areas where we see have the greatest advantage for the business.
We're going to be focused on driving this down and then getting back to basics on adding and then helping achieve greater success and achieve aspirations on those targets.
You sound like you're pretty committed to stepping it down and then going back out.
We have a, and we've talked, candidly, in the automotive space, we have an outstanding item that we're looking to clear up and in discussions on clearing up. That would get us a good way there. Just continuing to drive execution in the business, improve profitability by down lever, and then ultimately continue to deploy capital internally and externally.
Thank you.
The only thing I would add to that too is, and you kind of, I think, hinted at this, but we listed it in New York. It is coming up on two years now. Part of the reason we did that was our shares as a currency in an M&A deal are a lot more attractive with a U.S. listing than just the Canadian listing. That is something that could be a possibility, again, from where we sit with higher leverage today. It still has to make sense and tick all the right boxes from an ROIC standpoint and, of course, strategically as well.
You have not done that. You have not used equities.
Correct. We have not.
Correct. Some of the, there's the outside equity preferred, PE preferred, that kind of thing as an option too.
Yes.
Maybe continue on the auto discussion. My understanding, and correct me if I'm wrong, the equipment's delivered, it's operational, good companies have contracts. What are the scenarios? I don't know that I've ever seen anything like this. Maybe just spend a second. What has to happen and what are the different scenarios that could happen? Because that payment solves the leverage issue and reaccelerates the organic M&A. It is fairly significant.
Yeah. It definitely helps with the leverage, obviously. You are correct. The equipment's delivered. It's in production. It's been in production for a while. Where it's been fully commissioned, it exceeds contractual requirements. The market changed for our customer. The equipment that we've built and delivered was designed for, call it a million vehicles a year. Their forecast for this year is about 300,000, so they don't need the capacity. That's not normally our problem.
In this case, it's become our problem. In terms of where does it go from here, I mean, we're trying to reach a commercial resolution with the customer. Our leverage, in this case, primarily is contracts. The unfortunate situation is the only way to enforce a contract, if you have a disagreement, is through litigation. Our goal is not to have to do that. Our goal is to get it settled, which, to put a timeframe on it, is several months, the next several months. Failing that, we go down an alternate path, which, again, the unfortunate thing around that is it's years to resolve.
Just to follow up on that, is there a way to think about, I think it's a few hundred million dollars. Is there a way to think about, in the past, precedents around haircuts that suppliers have had to take to come to resolution on something like this?
Of course. We assess all that. This is a known challenge in this space.
Andrew, you mentioned a few times choppiness at the start. Patrick asked you about orders, and you cited good environment for that. Is the choppiness more sort of on the products and equipment, like the short cycle side? Where are you seeing choppiness on the demand side?
Yeah. How I walk through it is, if we continue to build in regions where it's a 25% tariff, that becomes, at times, a challenge in the end market. We would then work with our customers on moving that product to region. I'm going to take Comecer, for instance. Out of Italy, primary build is out of Italy. They've already started their process of having capability to build in the U.S.. What I mean by choppiness is it takes time to move a product over. Any standard product, if you think it's going to happen overnight, I'm here to tell you, I've done it many times. It doesn't happen overnight. There's usually a length of time. Our view is it can be done. We have the capability to do so. We have the footprint to do so.
We have the relationship with our customers around being able to have the process in region. That is what I mean when I say choppiness. What does that mean in a result? Typically, it does not impact bookings. You look at your margin to make sure you can cover that during that period of time.
I've got another question if there's no more from the audience. You guys are listed in the U.S.. I guess I'm just wondering, is there a next step in terms of the evolution of the company, whether that be reporting in U.S. currency at some point or the headquarters or anything like that? The other question I always get from investors is, can ATS provide some annual guidance, like some official annual guidance? Because no one, I guess, is ever really sure what the bogey is in a given year. I'm not asking for quarterly, but some kind of a framework on an annual basis. What holds you back from doing something like that? A lot of U.S. listed companies do provide that guidance, which is why we get the question from U.S. investors.
Maybe, I guess I'm going to take this one. We don't have, at this point, an intention to issue formal guidance. We have, I think we talked about the midterm targets out there. We typically provide kind of a next quarter view on revenues and some more qualitative discussion around margins. I acknowledge the question and the request. In terms of re-domiciling, no intention at this point. I mean, we're always looking at what makes sense from a shareholder perspective. Is there some sort of value that could be realized by doing something like that? At this point, no intention. I mean, our executive team is very global. Across North America, across Europe, we have leaders all over the world.
In terms of reporting currency, I'd say that's something that, in terms of likeliness, is probably the most likely of the three things you asked me. No short-term decisions there. I think a lot of our business is U.S.-based. That is something that we are looking at and could be within the realm.
Helpful. We got a minute left. Just wanted to follow up on the use of equity capital for M&A. Can you walk through kind of how you think about the trade-offs, how we should think about it? What are the parameters around when you would use equity capital?
Yeah. I mean, our number one financial criteria when we're looking at M&A is return on invested capital. We have a double-digit target that kind of aligns with our cost of capital and exceeding that within five years. Smaller deals, we get a little bit more aggressive and want to make sure we're ticking that box, typically within three years. That's the number one criteria. I mean, we look at accretion. We'll look at, of course, the margin profile, the level of recurring revenue. There are lots of other financial considerations. Number one is ROIC. In the context of using equity, something could work as long as it ticks that ROIC box. It is more complicated from an investor standpoint if the multiples do not line up. There are complications to using equity. Those are things we're certainly conscious of.
As I said, our number one criteria is ROIC.
Great. Thanks so much for the time and for joining us. Really appreciate it. Thanks, everyone, for participating.
Appreciate it. Thank you.