Started. I'm Michael Glenn, diversified industrials analyst. I cover ATS Corporation. With me today is Doug Wright, the incoming CEO of ATS, and Anne Cybulski, the interim CFO. We're gonna work through a fireside chat format for the presentation, and we'll jump directly into Q&A. Doug, perhaps as a starting point, I really wanted to give you an opportunity to introduce yourself to everybody. You've only been with ATS for a short period of time. Can you speak to us a bit about your background, where you were before ATS, and then touch on what drew your interest to the company in joining?
Thanks, Michael. I appreciate the opportunity to speak to everyone. My background is kind of a mixture of classical diversified industrial multinational experiences with a couple of private equity experiences mixed in, always in industrial technology and building automation. My most recent role was at a company called Indicor, which is a joint venture between CD&R and Roper Technologies. Before that, I was a group executive at Honeywell. I ran their building automation group. Before that, I was in private equity in optical communications out on the West Coast. Before that, I was United Technologies in building automation. Spent a good bit of my career, all of my career with them in Asia, living in Shanghai.
Before that my formative years were at Ingersoll Rand as an engineer, as a young pup, then grew into marketing and general management. I kinda bring a classical industrial background, but business model-wise, across a wide variety of big multi, you know, multibillion cap companies and small private equity-held interests.
I think that's what kinda made it a good fit for me to come to a company like ATS, which is in its adolescent years of growing into a larger organization, challenged with how to build the right, you know, management processes to drive scale, but also maintain the innovative edge that they have as having really great technology and entrepreneurial culture at the front end of the business that's driven its growth, in bringing some new ideas about how to run the trains on time to do a better job in expanding margins. It's, I think, It was a good fit for me.
I got a chance to meet our chair and our board over the, over many months, and they, we had a good meeting of the minds about the transformative opportunity that we have at ATS to create a industrial automation enterprise that can be much larger and more profitable than it is today, and that seemed like a pretty fun challenge, so I decided to join.
As you've spent your time over these early days with the different business heads and the different parts of the business, what are some of your initial thoughts into growth? Are there some specific product areas, categories, or offerings that you're particularly excited about?
Yeah. I'm pretty enthusiastic about a number of our end markets. I think our, you know, half of our company aligned toward life sciences. It's really an honor to be part of an organization that's really part of the development and support of some real life-changing therapies, whether it's in the GLP-1 class of products or in radiation oncology or medical devices. I think we're really in a great position to both be a part of those secular trends and but also, as an engineer, be part of some really interesting innovation that will shape lives. I also think that in...
We have an interesting optionality in emerging nuclear because of our heritage in the CANDU class reactors and our experience in Canada. We've gotten ourselves into a very unique position with a very significant number of the SMR players. I think that gives us a good balance to our life sciences exposure and gives us good optionality for the energy transition. Then, of course, in our food business, it's a little less, you know, the headlines are not quite as dramatic, but it's a great stable earner for us, and we see, you know, the food technology being kind of a core holding long term. We're pretty excited about, you know, all of those, all of those areas.
You, you touched on this a bit in some of your opening comments, but one of the big questions that we've received over time is what is the right margin profile for ATS? For a number of years, we worked with that 15% Adjusted EBIT target, which was always somewhat out of reach. I know it's early for you to speak about the margin target, but what's your view on the right margin for ATS, and what are some of the strategies you're going to go after to help with the margins?
Okay. I'll start, and then I'll ask Anne, our CFO, to contribute. I think that the... Let's be honest, I think one of the more, the bigger opportunities we have is to catch up on our margin profile. I think the company has demonstrated great growth trajectory, but we know that we have opportunity that's been left on the table in terms of margin expansion. This is gonna be a priority for us. It's not any magic. It's good old-fashioned Lean execution, improving our aftermarket mix, looking at commercial acumen, which is code for pricing. There's opportunities there. Anne and I will be setting a new target for the company in due course. I think I put it to you this way.
Once we're about halfway to get to the 15% goal, we'll work on setting a new target from there. It'll be, you know, I think our goal ultimately is to be, my goal is to be a top quartile performer in the industry group that I compete with. That's what my board asked me to do, so why shouldn't I set the targets aligned with, you know, what my targets are? Anne, you have any other color?
Yep. I think one of the things that I would add is we, you know, for our longer-term shareholders, we've been talking about margin expansion for a long time, what's really different. My initial observations of the way that Doug operates and what he brings to the team is just that really pragmatic focus on the laser-focused use of the tools by business, and every business is a little bit different. How we use the tools in the business, we have a really solid foundation of those Lean tools. But how we use them in each individual business may differ, and our focus is what is gonna matter here.
I think the other thing that I would add from a margin expansion perspective is the team, the senior leadership team has a really good pedigree of Lean discipline and classical Lean training. Our new life sciences executive, Sarah Moore, she comes from Danaher background, and just the way that she speaks and the way that she embeds that culture in her team is evident. We have folks from Honeywell aerospace background, where that kind of way of operating is just part of life. When I think about where ATS is on its continuous improvement journey, we have a lot of opportunities still ahead of us.
I think with Doug's background and the rest of the team and that added focus, we'll be able to drive it differently and with more intensity.
If we're thinking about the P&L right now, where do you think i-is... Should we think about margin expansion coming from the gross margin line, or should it be via the SG&A line?
Yeah, I can go first, you can layer on if you want. I think it'll be all of those things. There's opportunity to drive efficiency in our SG&A, if you look at our SG&A growth over time, it outpaced our top line growth. We probably have some work to do there. With the tools and the focus at the gross margin level, there's also opportunity there. Doug, maybe you could talk about anything I missed, but also the piece around commercial excellence and project selection and how we focus.
I think the gross margin is where there's most opportunity. I think SG&A, we'll take some option out, take some cost out there. We also wanna protect our investments in these. You know, investing in things like radiopharmaceutical and these nuclear opportunities are, you know, they require, you know, us to burn some cash to stay relevant and be ready for those markets. On the gross margin side, I think we've got really two ways to think about it. One is classical Lean thinking, reducing cost, labor productivity, material productivity, quality, et cetera. Also, you know, within each of the segments, there's a diversity within each segment in terms of the types of programs we can get associated with that improve the margin potential of the business.
If we're working on a novel radiopharmaceutical therapeutic, it clearly has a better margin profile than doing, you know, let's say a pharma packaging opportunity. I think within each segment, we'll be working through some tools about how we determine where we wanna divert our capacity within the options within that piece of the portfolio. That gives us just more, call it booked margin yield, that'll improve the margin performance over time. We'll do a little bit of both.
I'll switch over to life science. Obviously, topical today throughout the meetings has been what's happening in the GLP-1 market. Can you provide an update as to how those bookings are trending right now, your outlook for GLP-1, and perhaps speak to some of the growth categories underlying where you're having offset to GLP-1 right now?
I can take the first part. We had a high level of order intake in Fiscal Year 2025, which in the GLP-1 space is reflective of the capacity needs that our customers are looking to build out, and we'll continue to deliver on that backlog over the next 1-2 years. I think then, you know, Doug will speak to what we think that market looks like over time. The other thing that I would add is included in our backlog now, we've seen the benefit of some level of diversification, including in radiopharma, including in other areas of med device. That diversification continues to be important to us as we build out the broader life sciences space.
Yeah. I think one of the challenges that we have as a custom systems business is reducing our exposure to single event risk. Obviously, we learned that the hard way with our EV story. Within life sciences, because it's now our biggest part of our company, we're putting a lot of energy into making sure that we have a very diverse pipeline and that we don't expose ourself to any, you know, planet killers in the backlog. We've been successful in doing that. I think the team has done a nice job coming up with a lot of opportunities, even beyond the high-profile stuff like radiopharmaceutical and GLP-1, but also things like mail order pharmacy and specialized medical devices or in some cases legacy medical devices with different form factors.
I think the portfolio breadth is higher now than it was historically because we wanna try to make sure that we don't ever have ourselves exposed to, you know, a, you know, a 20% customer that can drag us down with them if they go belly up. So, that's an important part of our discipline that we're going to have. We recognize that, you know, a systems integration company doesn't earn the same multiple as an industrial tech company because it always has these exposure to these down cycles. We have to if we wanna be successful in moving up, moving up in the rankings, we have to improve our earnings volatility.
I'll open it up. Does anybody in the audience have any questions? Thinking about nuclear's
The core of the business today is really based on the backbone of our legacy CANDU reactor positioning, and this is largely refurbishment and life extension of existing facilities. However, smaller in scale, but. We don't split it out. We have material bookings now with the AP1000 class reactor as well as with not less than five SMR designs. It would range from engineering phase investments where the customer is paying us to develop tooling and automation for them, up to where we're actually building automation systems for their modular manufacturing and their fuel handling capability for the SMR class.
The way we're playing this is I think about it as we've got this base portfolio of large scale nuclear projects that's kind of effectively covering our fixed cost. Now I've got a portfolio of five or six options that I'm playing with, generally with the customer funding the investment to stay in the early stages of these next generation designs. Clearly the volatility issue is that we don't know when those regulatory approvals are going to come through and when the financing is going to come through for those. We want to try to be in a position that we're ready to take advantage of it when it happens, because the upside case will be enormous. Obviously we can't. We're certainly not going to communicate that. A lot of it has to do with.
The biggest drivers are the regulatory approval and the fuel availability. Those are the two biggest drivers to the SMR rollout. It's not electrical demand or even the local sites are wanting the facilities, but the lack of the fuel availability and getting kind of final approval on their designs, that's actually the big gating item. We don't really have a good way to project that. We certainly can't tell you what. We can't use what our customers are telling us because of course they're trying to raise money and everything's gonna be great. I do think that there's a on a probabilistic basis, one or more of those SMR designs is gonna get approved and become material to us.
how big it can be, I think it'd be too much for us to estimate at this stage.
Yeah. In the, in the near to midterm, until we see which of those designs prove out or indeed on the kind of just, large scale reactor builds, we have a good backlog to work from on the life extension projects, there'll be, you know, service capabilities that we can layer in. The backlog we're working off of right now is primarily, the CANDU life extension projects and some of this early work that Doug's referring to.
If we're thinking about these very attractive scenarios where it could become a much more meaningful part of the backlog, what would that offering be exactly that would be what you're selling to the customers? What would that be comprised primarily of?
It would be a combination of. The unique thing about SMRs is that they're built in factories, whereas traditional reactors are not built in factories. There's a manufacturing environment that we have to provision for with an SMR. The first stage would be working with the customers to build their equipment to do their manufacturing of their modular reactors. The second is in the fuel handling. This is both in the production of the fuel as well as the handling of the fuel when they're loading the reactor. That would be the primary focus, would be those systems and the services around that.
The operational side, that's probably, you know, certainly more than five years out before they're sort of, call it, you know, the type of work we do today with traditional reactor class, where we're doing refurbishments or life extension. That would be a much longer pipeline. The early days are gonna be modular manufacturing and the fuel handling. That would be both a combination of hardware and services. It's a good profile for us.
I know a lot of your business right now is in Canada. What would help accelerate your growth in the U.S. in the nuclear channel?
We've actually already secured several orders in the U.S., and the biggest change that we have to make is we are gonna build a facility in Ohio to be able to do the work in the territory. You know, that's basically the only major investment that's required. The engineering is fungible, but obviously we have to have a U.S.-based site to serve the U.S. customer base. we'll, we're actually gonna be refactoring one of our Ohio facilities, which was previously aligned to automotive to support that. That's in our current, you know, game plan.
Yeah. You know, there could be other end markets that may be attractive to us where government spending and policy is supportive, the U.K. being one of them. There's others that we would look at if and as it made sense for us.
That will segue then into. You brought up automotive. Most people in the room probably watched, what happened with that backlog over the past few years. Where do you stand on the transportation segment right now, and how should we think about that segment over the next few years?
What we're trying to do now is, you know, we have a fixed cost overhang from the wind down in our EV business. You know, we've kind of carried that. We've restructured some of that cost. We're still a little heavy. We are actively determining how we wanna provision for that part of our business. The idea being that we have some things in our pipeline that are attractive to us that are not related to automotive, but they're related to battery technologies for grid scale batteries and like Powerwall type batteries. There are some, what I would call nichey opportunities that we're loading into the backlog to keep those facilities as loaded as we can. We will not pursue any large scale EV contracts.
Unless the customer pays us cash in advance, we might consider it. I think we're not looking to kinda rebuild a scaled transportation segment, at least not with today's geopolitical environment. I actually think that there's still gonna be opportunities in the niches within the segment. 'Cause, you know, manufacturing batteries is actually pretty. We've got some challenging safety and regulatory issues. There's gonna be some small niches. It's never gonna be as big as it ever was, you know, it'll never be that large again. Now we get this question a lot: Are we gonna sell it?
Trust me, if we had a fungible business that somebody came and offered us fair value for, of course we'd be better off, you know, exiting. It's not practical. It's a business that we need to run it like we're gonna own it. In the long run, if, or medium run, if someone else wanted to be go deep into EV automotive and it was a good asset for them, then we'd certainly be open for it. It's not a high priority for us right this minute. Right now we're trying to figure out how to keep it loaded as much as we can to pre-preserve our optionality.
Hopefully, the team will find some opportunities to go after some of these niches that are sort of derived from that technical capability. If we can't, we'll have to restructure the business further and reduce our cost structure. That's kind of the work we're doing now to determine what the right path is.
Any.
The pricing opportunity. If you think about in any of our segments, just take life sciences. If you think about the, there's a wide variation in the technology stack at different parts of that pipeline, if you will. When you're dealing with first generation therapies that have to get to market fast versus maybe second or third derivative product, you know, extensions of just general capacity expansion, where there's maybe four or five competitors and maybe the schedule tension is not quite as high. There's clearly different pricing opportunities between the former versus the latter. The challenge, that's kind of academic, but I think the challenge is building the capability in the organization to actually diagnose that properly, to look at patterns, look at data from prior bids and win-loss, and all the things that we can do.
AI, quite honestly, is kind of an interesting tool to use in this vein, so that we can maximize our commercial opportunity when we, when we deserve it. We also don't on the flip side, we don't walk past opportunities if we could have gotten it for another, you know, 300 basis points of margin, we would have also been better off having a lower price. It's just a refinement of our... It's generally kind of a black art, to be honest, how you price these complicated systems. We're trying to maybe introduce a little bit of science into it so that we can do it more systematically.
Just capital allocation and the balance sheet. Can you work through where leverage is, where your leverage targets are? Give us some insights into what we should think about in terms of M&A for the business.
Yeah. I'll take the first part of it, and then Doug can kinda give his views and some, maybe some of his background and experience on M&A. We came out of Q3 right at the top end of our targeted range of 2-3x. Good progress compared to where we were. We expect to see that continue to trend down towards the end of the year to give us a bit more flexibility to execute on some of the things that we might wanna do in the near term that would be, you know, supportive of some of the areas that Doug's gonna talk about next. We're happy with the progress that we've made. We will remain disciplined in operating within that range.
We've talked previously about, you know, for the right deal going above, but I think given where we are and given, you know, given what's available out there, we'll look at the right opportunities and remain disciplined. Doug, you wanna add on some of your views on what we see in the space?
You know, by necessity, we are going to play kind of in the small to medium size bolt-on opportunities for the time being so that we can stay within the aforementioned debt framework, which the board is committed to. The bias right now will be on tuck-in acquisitions in our current end markets that allow us to expand our margin profile or expand our aftermarket mix profile. We would look at businesses that have. Right today, we're about 30% aftermarket. If we can buy a, you know, a $100 million company that has 60% aftermarket, that obviously would blend us up.
We're gonna be using discipline on the sort of how much we're able to spend, but I think where we're gonna be more creative is sort of thinking about how we can bring in the right new assets that give us either a new organic growth lever along some of the new, you know, sort of our insights on what therapies are gonna mature the fastest, et cetera. Also, I'm particularly sensitive to the aftermarket balance of the company. I think this is something that is a really important driver for ATS going forward. We think our entitlement should be over 50% service just based on the industry that we're in. Anything we can do to bring something in that gives us more service content will get to the top of the list.
There's maybe some geographic opportunities that we'll look at, but that's probably more of a medium-term opportunity. I think Asia-Pacific is underrepresented for the company, but that's maybe a bigger, a longer-term question. It'll be discipline, scale, and looking at assets that allow us to either improve the margin profile or frankly, if we improve the service profile, it probably improves the margin profile by default. That would be our focus.
In one of the meetings earlier today, you did reference that, I think in your career you've completed over 50 M&A transactions.
Can you give us some insights into your track record of acquiring, and integrating M&A, enhancing margins or anything along those lines?
Oh, they've all met their targets and done great. I would say, my experience is pretty broad. I've been geographically, pretty broad, broader than you might expect, and also at industry level services, products, regulated products, military sensitive products. I mean, I've been, I've just been lucky in my career to have been part of a couple of very interesting companies at the right time to do a lot of deal flow. I've also integrated every one of them. It's not like I was never a deal guy. I was always a general manager doing deals. I'm very sensitive to, couple of things that sometimes get overlooked by traditional corporate development teams. First is the. Particularly when you're dealing with niche small businesses.
First is the importance of human capital. You buy a service business you don't lock down the executive team of that business you're buying, you're crazy. You can't replace those guys. You can try. You can say you can, the relationships and the experience are just too damn critical. I put a lot more time than my, than the average person probably does in managing the human capital side of things, building the relationship with the principals, making sure that they feel that this is gonna be a good home, and that ATS is gonna make their company better, and that, you know, just make sure they feel positive about the experience. That's the first thing.
The other is you just have, you have to be as disciplined about doing integration management as you are about, you know, running your, doing your checkbook at home. I mean, you, you can't just wing it. You have to build a disciplined operating plan. You have to run it like you, like your life depended on it. You've gotta have discipline to say, "This was the cost I assumed I was gonna take out. This is the improvements I was gonna make. These are the dates I was gonna switch over the ERP," whatever it is. You can't. Something that's dangerous sometimes in a highly autonomous business is sometimes you can buy the business and then leave it alone. You come back six months later, you're like, "Holy crap, what happened?" You've gotta put in the time.
Every deal that we do, I will be on a monthly call with the general manager that bought it, and we're gonna do an integration review. I learned a long time ago. By the way, I've made some mistakes in my career. I mean, I've had a couple of deals that I had to go back to my board and say, "That didn't work out well." You know, it's part of. You know, you're not gonna bat 1,000. I do think that it's something that I take pretty seriously. We're deploying investor capital and, you know, while a small deal in the big scheme of things, we could probably wash out within the portfolio if we were off by $10 million or whatever.
I still think that, "Hey, we still spent $50 million of the shareholders' capital. We should be accountable for that." I take it pretty seriously.
I think we're up against our time. We're gonna continue this in the breakout room. Amaranth 2 is the breakout room.
Okay.
So-
Thank you, everyone.
Thank you.
See you soon.