Thank you everyone for joining here at the Jefferies twenty twenty five Industrials Conference. I'm joined by Ryan McLead, CEO of ATS Corporation. We appreciate your time today. Changing the format a little bit, we're going to make it more intimate than standing behind a podium. We have a a desk we're going to stand behind today.
And I have a couple questions for you, but maybe Ryan, I'll pass it to you with maybe some opening remarks and we'll dig in.
Great. Thanks, Stephen. And happy to be here and appreciate the invitation and you guys hosting us as always. I'll kick off just a little bit about ATS because I think there's some newer folks in the audience here. So, we're an automation company.
And what does that mean? That means we do automation integration, we have products and we have services. So, the way to think about us is companies launching a new product and I'll use the GLP-one example that's very relevant and topical for us today. A company is going to come to us and they're going to say, we have this new product, we want to bring it to market. And there's no standard way to manufacture that product today.
You can't go ahead and buy an auto injector machine. So what we do is we take the customer's specs or requirements, how many they want, their output, and we design and we build that solution for them. And so effectively, what we're doing is we're providing a turnkey solution for our customer to bring their products to market. And we do that in life sciences. It's about half of our business.
We do that in food. We do that in energy, which for us is primarily in the nuclear space today. We do that in certain consumer applications and we do that in transportation. About 40% of our business today is that custom automation and integration. The about 30 ish percent and I'm rounding a little bit here, but about 30% is products and standard equipment.
So think about packaging equipment as an example where it's less customized, it's more of a standard solution. And then about 30% of our business is services. So after sales services, break fix, spare parts, digital consumables. And as I said, we do that across a number of industries. Half our business is life sciences, and we've really positioned the business to be in what we call markets that have higher consequence of failure.
So markets where there's regulation, customers really care about quality, time to market. So think about life sciences as an example. These are typically very high margin products for our customers. Quality really matters. They have a defect in their market that can be very impactful for them.
And so they're looking for a solution provider who can who's got a great track record of quality on time delivery and somebody who can partner and support them as they go through years of production. And so that's what we do.
That's great. And for the benefit of the audience, I'm Steve Gavallis. I lead industrial technology at Jefferies on the IB side. And Ryan and I have had a great dialogue over the years. Think incredibly highly of ATS and what you guys do in particular, and I think you're a bellwether and have a really good finger on the pulse of what's happening in the broader automation landscape in thematic.
I would benefit and I think the audience would too if you waxed poetic a little bit on what you're seeing in automation in the coming years and months off a couple of years that have been a little bit softer than what they were in early COVID and prior?
Yes. So I mean within our business well, so I'll address the latter part of your question. So we had went through a pretty big cycle in our transportation business. Outside of transportation, our revenue growth CAGR has been about 17.5% over the last five years. So and that's there's M and A and there's organic in that, but we've been very pleased with the growth of the business.
But to speak a little bit more generally around what's happening, we, for a number of years, have seen customers looking to derisk their supply chain. And so that means different reasons for that. Some of it's been companies who would have produced in a single site in what would be traditionally a low cost region like Asia. And customers have recognized that there's risk and risk to being in a single site, risk the geopolitical risk around China and Asia. Other customers going through COVID and some of the supply chain disruptions have recognized that having a single site or not having alternatives within their own supply chain and their own production, that carries its own risk.
So this trend towards, again, I'll use it in near quotes, onshoring but producing into different regions, customers are typically now looking to be closer to their customer, so producing in region. And what that means is customers are building capacity and adding capacity in more industrialized areas. So North America, The U. S, into Europe at times. And the challenge with that is the cost and the availability of labor.
So automation becomes a natural enabler to help offset some of those challenges. And we're seeing it across all industries that we serve. We're seeing it in life sciences. I mean very few life science companies today are going to even consider a non automated solution. It really is the default.
Transportation, it's been the default for a long time. But automation is becoming more complex, more software driven and really continuing to take away repetitive tasks and make those more efficient and safer. In the nuclear space, what we do is wherever you're dealing with radiated components and want to limit human exposure and interaction, that's where automation can play a role. So there's a large human safety aspect to automation as well. But generally, we're seeing tailwinds that are supportive of automation and it comes down to, as I said, labor availability and looking to derisk supply chains for customers.
That's great. You got ahead of my questions a little bit because I felt like when you think about automation, many ways you can talk about it, discrete, process, hybrid, end market dynamic. Obviously there's been a concerted effort to move the business to higher value markets, expansion in life science and medical, and we've all seen the advertisements of Charles Barkley and Serena Williams for the GLP-1s. We know that's in vogue, but your business is a lot more than just that in life science and health care. So maybe a couple of words on what else you do in that sector and what you're seeing.
Yeah, GLP-one has been a big growth driver for us over the last two, three years. And so what we do in that space is auto injector assembly. So an auto injector, it's not a new product. It's been around for years and years. I mean, people have folks in their life who have allergies, it's an EpiPen.
But it is the drug delivery mechanism of choice for GLP-1s. So that has been a big growth driver for us, and we continue to expect it to be an important and big piece of our business. Aside from that, we do a lot of work in wearables, so blood glucose monitors as an example. There was some thought that GLP-1s would displace some of that demand. It's been the opposite.
People as they want is if they're getting on GLP-1s or even if they're not monitoring their blood sugar level, blood glucose, it's become a big area and another growth driver. Radiopharmaceuticals, so that is drugs that are used in the treatment or detection cancer. Those have become that's been a very steady growth driver for our business over the last five years. And I mean to give a bit of context there, this theme of personalized medicine and customized medicines, what does that mean? Twenty, thirty years ago, if you were being treated for cancer, there was a handful of drugs that or treatments that would be utilized.
Today, it's very specific as to the type of cancer, where it is in your body, some of the other aspects of the individual, other conditions they might be. And so the amount of research and development activity happening in that space and driving investment has been a very strong growth driver for our business. We do other medical devices. We do pharmacy automation. We do work in lab automation.
We do work things like contact lenses, products that are used in surgical settings. Like I said, our Life Science business is very diverse, and there's a lot across medical device, pharma, radio pharma and in the lab that we offer for customers.
That's great. You spent a second on what's happening on nuclear, but maybe we can double click there for a second. From my perch, what's happening with artificial intelligence, AI, ML, the data center, they restarted 3 Mile Island on the nuclear front to feed all this power consumption and demand. You have the proliferation of the SMR, small modular reactors that are coming. And this industry that has been fairly sleepy for quite some time feels like it's coming into its own.
It's interesting that you guys spent a lot of time there. Maybe touch on what you're seeing a bit.
Yes. So we've been in the nuclear space for well over ten years. And our work has been primarily to date in the CANDU reactor space. So CANDU, Canadian based technology, it's the reactor design that's predominant in Canada and then certain parts of Eastern Europe and Asia. So it's a global technology.
And what we do in that space has been life extension work, so nuclear reactor refurbishment. So our equipment is going in and automating the retubing process. So taking out old nuclear fuel rods, pulverizing them, putting in new ones. And these life extension programs for each reactor and one of the world's largest nuclear sites is in Ontario. There's eight reactors there.
But each reactor is a multiyear project to do the refurbishment project. And at the end of it, you extend the life of the reactor for another thirty ish years. And so that's been a big piece of our nuclear business over the past number of years is that refurbishment activity. We have also expanded into decommissioning. Decommissioning is at the end of a reactor's life, you have to take it apart and safely dispose of all the radiated equipment.
And again, that's we provide automation that does lot of that process. Where we are expanding into today is into those new builds. So both SMR and in your more traditional reactor technology. And again, what automation enables is the safe handling of radiated components. So whether that's fuel handling and the refueling process of these reactors, But their processes were, again, you want to limit human interaction and provide a safe way to do these activities.
And so for us, this is again, it's a newer part of the business. It's a lot of this work is still in the development phase around new reactor builds. We view it as more of a kind of a five year time line. So some of these projects are going through regulatory approvals and so forth. Our opportunity, the way to think about it is we are a low single digit percentage.
What we provide would be a low single digit percentage of the overall cost of a reactor. So it's a significant opportunity for us, but I'll characterize it as somewhat niche from the reactor the total cost of the reactor. But as I said, it's an exciting area. We're working with a number of different companies in the space on the development work, and it's an area that we're very excited about within our nuclear business.
So we've touched on some of the bigger picture drivers of automation and those that your business is particularly levered to. In a minute, we'll I'll pivot this to growth and backlog that you see through '26 and beyond in your business, but the observing the the meditated evolution you've had in increasing that holy grail aperture of automation, which is more recurring revenue, the mix shift on the integration work, but also adding technology and product. Maybe spend some time on that before we get to growth going forward.
Yes. So strategically, we've been very intentional around broadening out our capability and technology, and that's been both through internal innovation and M and A. And in taking what I mean, ATS started out as just a pure automation integrator. And where we've been successful is and what's differentiated us from other automation integrators is that focus on innovation and technology. And so strategically, that's where and so with that comes more shorter cycle revenue, so less exposure to capital budgets of our customers, more exposure to operational budgets.
And the ability to win and have exposure to more of that customer spend on equipment. With that, we've also if you think about it from a customer perspective, they're launching a GLP-one product or it doesn't matter what product. And this is kind of an industry agnostic comment, but downtime is expensive for customers, whether it's life sciences, automotive, nuclear. What they care about is getting their product out to market, having whatever their target overall equipment effectiveness rate is, 90%, 95%, doesn't matter. That's what they're focused on.
So our ability to provide equipment that meets that spec and then provide services, whether it's, as I said, break fix, spare parts, consumables, digital services where we're remotely monitoring equipment for our customers. If we can help them sustain that productivity level, that's ultimately what they care about. So that's been a big focus of us of what we do from a customer offering and a development of our technology in some of our digital solutions.
I'm sure everyone is curious if you could look into your crystal ball and anticipate the next six to nine to twelve months. What do you see? Obviously, we're one tweet or one X away from breaking news at any point. Where do you see the next six to twelve months for ATS?
Well, we've got a very strong backlog. So our outlook for the year is high single digit growth, and that hasn't changed. That continues to be our expectation. The environment is dynamic. That's how I guess the best way to characterize it.
But we do feel really good about the markets we're in. Customers are in general are continuing to invest. They're launching products. They're looking to get capacity up and running. And so we feel very good in general about where we sit for the year.
Thinking about the business a little bit longer term, again, we've positioned ourselves into markets that are less cyclical. So half the business is life sciences, food is going to be about 20% and energy, nuclear is going to be about 10%. So these high consequence of failure markets regulated generally less cyclical, that's, call it, 80% of the business roughly 80% of the business today. And so our objective has been and continues to be to outpace the general automation market. General automation globally, process, discrete, hybrid, all that, it's a mid single digit growth market.
And our objective is to outpace that. And given our offerings, our market position, we're quite comfortable with that being able to meet that objective. Good.
I'm sure it's a favorite topic that you get asked all the time, the CEO transition topic. Maybe you can update me and the audience here on where you stand in that process and how that's going.
Yes. So obviously, high priority for the Board. They're very focused on getting that resolved and they're motivated to do it quickly. At the same time, we've got a structure. We operate very decentralized, which means that customer relationships really are at the business unit level.
Supplier relationships, same thing. Even a lot of the strategic activities we do around M and A, a lot of that cultivation happens at the business unit level. So all that means is while the search is recently kicked off and is ongoing, it's business as usual for us. We're the team the leadership team very focused on delivering on our plans for the year, which I kind of outlined some of that expectation earlier. And so that really affords the Board the time they need to find the right candidate and get the right leader.
In terms of the other thing we get asked is, do we expect some kind of strategic pivot out of this? And the short answer there is In terms of a profile of the candidate, the Board's been pretty clear on a couple of things. One is we have this very strong continuous improvement culture. And eight years ago when Andrew joined, we launched the ATS business model. And that has really become how we operate.
And so the expectation is the next CEO will be somebody who comes from that background, a lean continuous improvement background, and we'll continue to build on what's been developed at ATS. And the other characteristic is somebody with a strong track record in M and A.
It's almost like you're guiding the witness over here. I wanted to pivot to one of my favorite topics that we spent a lot of time on is M and A. And that's been integral to the business for many years now. I think you guys have done a great job acting as a compounder and adding competencies juxtapose what you do organically. The broader topic of capital allocation is important to cover and maybe start with thoughts on M and A, areas that are of focus, regions, size, capability, how are you thinking about M and A?
Yes. It really I mean, we start with we start there's four criteria that we look at, but it really starts with market. And I've kind of talked about what why do we like life sciences? It's less cyclical market. Customers are really focused on quality time to delivery time to deliver. So it's a market that we call it high consequence failure, but it's an attractive so we're going to continue to look at companies in markets that have those characteristics, life sciences, food. Next is capability.
So what does the company bring that we don't have? Is it technology, capability? Geography is typically not a big driver for us. In certain cases, if there's a way to penetrate a geographic market faster that it's a little bit so in the nuclear space, for example, there's licensing considerations. We have looked at assets in certain regions from a services standpoint where it's made sense.
But geography is not typically a big driver for us. How we're going to operate the asset is of critical importance. So some of the companies we've purchased have had continuous improvement programs. And so integrating it indeed, it becomes very seamless for us to do that. Others who haven't, it's been interesting.
Our experience is having a model and tools. Some of these companies like our ATS business model, companies, they're so eager to get access to these tools and they look at it from the outside and just the excitement of being able to do continuous improvement and have a structured way to go about it. Launching the ABM in new acquisitions is at times, we have to kind of slow them down to not overwhelm the teams. And then the fourth criteria from M and A is the financials. And number one for us is return on invested capital.
We have a double digit threshold and that has to be met. We look at EPS accretion, margin I mean all that other stuff that you're going to look at, but it has to meet that return threshold.
So I'm going to build off one of the points you made there earlier on and just now and I'll save about four or five minutes at the end for audience questions. It's obvious to me that ATS is mission critical for customers. You solve pain points for them that they can't solve themselves and they can't go to others to have the same type of solutions provided. That speaks to customer loyalty, it speaks to backlog, but it speaks to margin. Maybe for myself and the audience, how are you thinking about margin in the business and the direction you're taking that?
Yes. So we have targets around margin expansion. And there's a number of different levers that we're focused on. Operationally, there's a number of initiatives in place around material productivity, labor productivity, standardization, which kind of feeds into both of those metrics, I'll call them. And and ABM is a big part of that, ongoing continuous improvement activities.
But the way to think about these are really, to use a baseball analogy, like base hits. I mean ABM, Kaizen events, formal problem solving, you're not hitting home runs, you're really hitting base hits that over time accumulate and become very, very meaningful. So that's an important I mean, we're also looking at our offering and continuing to look to grow the higher value aspects of our offerings. So as I said, after sales services is a key focus area for us. It's typically a higher margin business and an area that offers a lot of value from a customer perspective.
We're I think there's some operating leverage within our business that we have had a step back on with some of the cyclicality in our transportation business. And so there's margin expansion available there through growth as well and leveraging some of the cost structure that we have in place today. So all of that, we've got a 15% operating margin target. We're a little ways off of that today. But that's, call it, a four to five year target that we've had in place.
We have businesses. When we put that target in place, the businesses that were part of ATS did achieve that. We've added in some dilutive businesses over the years from a value standpoint have back to my comments on ROIC, they've been very accretive from a value standpoint, but there's still work to do for us on margins.
So I watch maybe too many long form podcasts for my own good and they always end it with asking the question of what's your favorite book recommendation. I won't ask you that. Thank you. But I will end my questions here with maybe an open ended question of what are you most excited about as far as the near term outlook for the business?
Yes. I mean, we've got, as I said, very strong backlog. It's in markets that we view as highly attractive, highly strategic. Life Sciences, our Food business is on pace for a record year in terms of profitability. And while it's still early in Nuclear, the opportunity there, again, over a five year plus, five-, ten year kind of time horizon, very, very exciting.
And we offer very unique capability in all those areas that we're continuing to invest in and innovate to continue to differentiate. So it's I couldn't be more excited. The team is also very excited. We just had a leadership meeting this week where we brought everyone together and the team is well aligned to continue to deliver.
Fantastic. Everyone, I'm happy to open it up for questions. Raise your hand and we can pass the mic around. Recurring
revenue and how that has not been as much of a success as you'd like it to be and where that could go in the future?
Yes. So it's in the 30 ish percent range of our business and it's primarily after sales. It's moved. As a percentage, I'd say we're quite happy with it. We've added in businesses.
For example, we bought Heidolph a year ago. Heidolph is an equipment supplier for the lab industry. And there's not really an after sales service. It's a minimal after sales service opportunity with a business like that. And so our after sales business or after sales service business, excuse me, our digital businesses, they're growing and in line or even outpacing some of the CapEx business.
But the mix has changed as well. But as I said, it's a focus for us. What we like about it, and maybe this is very obvious, but with our automation business, we have a lot of exposure to our customers' CapEx. And as Stephen mentioned, highly strategic. We use the word partnership a lot with those customers.
What services allows us to do is offset some of that CapEx cyclicality and gives us exposure to customers' operating budgets. And from a customer value standpoint, as I said, they just want to get their products. They want to high quality, meet whatever their output efficiency targets are, and that's what services enables us to do.
From a competitive landscape perspective, can you just speak to kind of who you generally go up against? Is it kind of the larger guys like Rockwell? Or is it kind of smaller, kind of more mid cap guys? Or just any color there would be helpful.
So the short answer is it's smaller, more regional players. And it varies by industry and it varies by sometimes varies by geography. So Rockwell is one we get asked about. They are not a competitor. We purchase from them.
They're more of a a supplier to us. We're competing. So in the life sciences, tech space, primarily primarily private companies. So there's there's a business card called Haro Hofflager, private German owned business. Micron's a small Swiss based public company.
JR Automation's a North American competitor. They're owned by Hitachi, but it's a pretty it really depends on the specific area that we're talking about, but it's a pretty fragmented space.
Is the could you just give some background on the resolution of the big accounts receivable issue that you had with the auto customer? I think you negotiated a settlement there. Is all the cash on the balance sheet now? It's like how what was the actual discount to like the actual?
Well, the short answer is that's been resolved and fully paid, and that was in our last quarter. And so that's effectively behind us. I mean from a that was a multiyear program. So the discount was or over the life of the program was low double digits, call it 10% range.
Good. Well, appreciate everyone's time today. Ryan, yours in particular, thank you very much and look forward to keep