Great. Moving along here with Dover, CEO Rich Tobin. Rich, thanks for coming.
Thanks for being here, Steve.
I know how much you love March this time of year in New York. It's beautiful. Seeing everybody. Maybe just kick it off with a bit of a, you know, state of affairs in the near term. I think you had said at a recent conference that the order rates in the first quarter, you know, I guess what happened in the fourth quarter flowed into the first quarter from an order rate perspective, I believe was the comment. Maybe just update us on what you're seeing out there given everybody is, you know, a little nervous about the macro.
Yeah, I mean, that was three weeks ago now. We just closed February. Order rates are on the same trajectory. We were pretty much exactly where we thought we were going to be, two-thirds of the way through the quarter. So far, so good.
All right. Great. Any questions? No, just kidding. On the businesses, maybe we can delve into just starting with maybe the refrigeration, the, you know, food refrigeration segment, kind of a bit of a Tale of Two Cities over the last year. Maybe talk about the growth business there and then the ones that are lagging and what you're seeing in that segment as a start.
Sure. On the core refrigeration business or the traditional business that we had, which is retail refrigeration equipment, Q1 tends to be a little bit slow. We expect to be fully booked for Q2 and Q3, probably by the end of this month. On the CO2 systems trajectory, I think we targeted for that business to go from what was zero 18 months ago to close to $300 million in revenue, and we're on track to deliver that. As the year progresses with the volume on the refrigeration, mopping up the fixed cost and the margin mix on the CO2, it will be a good year for that business.
I guess on the refrigeration side, is that an area where you'd think you'd see potential deferrals and things from customers given the uncertain environment? Which one of those businesses?
Yeah, I mean, at the end of the day, in uncertain environments, the businesses that we have that are levered towards CapEx are the ones that we would worry about, right? Because at the end of the day, kind of the ongoing replacement and consumption types of businesses that we have, those are for installed operating units. It just gets consumed. A lot of that goes through distribution. It's the CapEx-related business, whether that's vehicle wash or refrigeration equipment, some of those, those are the watchouts. If the short-term issues that we see with the equity markets get our clients overly concerned, we'll keep an eye on it. We don't, like I said, we don't see it at all right now.
Order rates are good and a reflection of how we closed last year and what we said at the beginning or at the end of January, when we put our guidance out there. They are watch items at the end of the day, but right now they are not reflected on our order books.
When it comes to the other businesses there, you know, Belvac, which is the can-making equipment, as well as European heat exchangers, the SWEP business, those were two of the weak ones last year. Are you seeing any signs of life, stability, any risk of downside in those?
I mean, they're two different kind of stories at the end of the day. Belvac was 100% levered towards can-making equipment, CapEx. Generally speaking, the can makers spend money at the same time, and then they stop spending money at the same time. What I can say about Belvac is for all the money that we made from 2019 to 2023-ish, we've bottomed now. The comp on Belvac this year is relatively easy, meaning it's not a headwind that we've got to deal with. On the heat exchanger business, I'm sure that you all understand what's been going on in the heat pump market. We rode that up with everybody else and then rode it down from, I guess, August of 2023 through 2024. Again, we called the bottom of that market in Q4 of last year.
Our book-to-bill is over one in that business now, and we'll follow along with the heat pump manufacturers as we go from there. You know, at its peak, heat pump revenue in that segment was about 38-40% at peak. It's not the entire business. There are other portions of the business, whether it's district heating, whether it's data centers, and a variety of other products that are actually growing and growing quite well. I think what we said at the end of January is that SWEP has got a tough comp in Q1, and at that point, we'll roll it over and we'll comp pretty good for the balance of the year.
In this segment, it feels like this is emblematic of where you guys are with the growth businesses, like the CO2 business continuing. I would assume you have some pretty good visibility on pretty strong growth there this year, double-digit growth in CO2.
Without question.
Right. The growth business is growing and, you know, some of the other businesses, you know, more stable and less of a drag. Similarly, on the pump side, this business has gotten a lot of attention over the years given the high margins. What are you seeing at Colder just to start off on the growth side?
Looks great. I mean, right now on the biopharma side, we had been projecting in the low teens of growth. We're actually clocking at a better pace than that. Now, it remains to be seen how that goes from here, whether that is a kind of a restocking after multiple years of destocking at this point, but we'll take it as it is at low double digits right now. On thermal connectors, I think that we're up at 80% or 90% right now. That business is the thermal connectors that go into data centers. It's doing really well. Both those businesses, the biopharma is margin accretive to the segment. The thermal businesses will become margin accretive as we expand the capacity. We have enough standing capacity to supply even the most buoyant projections about data center CapEx going through the next couple of years.
How are you seeing that business ebb and flow? You've talked about the lead times. You know, you've got visibility on the construction of these things, but the lead times of the actual equipment that's purchased can be pretty short. What are you seeing there?
Yeah, I mean, it's super interesting. At the end of the day, you would think that that amount of capital being deployed would be organized capital that you would want to make sure that you had all the component parts you needed in the system to make the delivery dates. That's not really how it's turned out because everybody's trying to find their space between the builders or the deployers of that capital and then the EPCs that are actually building subcomponents of these big systems. It's actually turned out to be a very short cycle business. That's not particularly problematic for us because we had built a special purpose plant almost a year in advance of it. Right now, lead times is a critical factor, and we have the shortest lead times in the industry.
On the polymer processing side, the MOG business, that's also been a headwind. Kind of similar to the other segment, you have a pretty nice growth business and then one that was down last year. Are you seeing any risk there, or is that pretty stable?
It's not going to shrink in 2025, and it's basically been that's been built into our forecast. We still love the segment. We would like to be an acquirer in the segment. The margin profile in our particular position is a leadership position there. We can take some limit about a cyclicality because it is CapEx-driven at the end of the day. The business from a top-line perspective is not a headwind that we have to overcome.
Moving on to clean energy. This is the retail fueling side as well as your cryo business. Again, another segment where there's, you know, I guess probably a bit more growth than the others. There's not the drag businesses that you had last year at least. Maybe talk about those two segments and what you're expecting and seeing there. Any signs of risk of CapEx on this side of the house outside of car wash?
Nothing's riskless at the end of the day because a portion of the business is CapEx-driven. Having said that, we've got a lot of wind in our sails that are not revenue-related. A lot of the restructuring that we did in 2024 is in this particular segment. The roll forward, we'll see in 2025. We've purchased a variety of different companies in the cryogenic space. We believe that we're co-leaders, I guess, is the way I would put it, globally in terms of the components there. We are going to enter into a phase now where we start extracting synergy value out of all those acquisitions. Generally speaking, we buy relatively small companies that are a lot of times single-product companies. We leave them sit for a period of time. We upgrade their IT systems. We do things because we're a public company.
We want to hold on to the management team, and we want to get an understanding of the customer relationships. Once we've got that stabilized, we can move into the synergy extraction phase. In this particular case, there's a lot of things that we're working on footprint-wise, right, because we've got a lot of small companies that we're building a platform with. My expectation is that we're going to have good growth in that segment this year. We're very interested to see what the outcome of the big meetings in Houston that are going on this week in terms of CapEx plans for our customers. I would expect that you're going to see us taking some restructuring charges in the back half of this year, which will be a benefit to 2025 and beyond.
The growth drivers there, any risk in this segment or opportunities, frankly, from the change in administration and, you know, whether the IRA gets cut or, you know, these EV mandates, you know, and any kind of influence on your business that you're watching?
Like I said, I mean, the administration is in Houston today. I would expect that at current pricing, there needs to be something the administration does to kind of drive the growth of the investment they're looking for. Things like bonus depreciation and things like that are very important to the energy sector. Whether it's pipelines and approvals or bonus depreciation, I would expect that coming out of the meeting in Houston this week, we'll have a lot of positive answers about that. Now, we have not built that into our forecast. That was built into our entry in a bigger way into the gas complex because you hear a lot about electrification. You hear a lot about a variety of different themes. At the end of the day, we're making a bet that the low-cost precursor of energy demand is gas.
That is why we've spent the last three years deploying a lot of capital there.
That business is still, the cryo business still has a nice growth trajectory out in front of it, double-digit?
Absolutely.
You're not seeing any major air pockets or risk there or anything like that?
Okay. I mean, like any business, it's choppy at the end of the day, but we're making a decade bet here in terms of the market positioning and what we think the growth is going to be for the gas complex in total. Yeah, I think that our expectation and part of what's driving our guidance on the top line, a big portion of that is driven by that particular segment.
For engineered products, what's left of engineered products? This would seem to be, you know, probably a bit more of a cyclical segment. What are you guys seeing there for this year?
Look, we divested a big piece of it last year at arguably a very good price. We monetized that asset, which is the reason that we've got so much liquidity in our balance sheet right now. I think that the military business that's in there is going to do really well over the next couple of years, all things being equal. The vehicle lift business is a little bit of a watch point because back to your earlier questions, that's kind of CapEx-related and probably one of the few businesses that we have that has exposure to the consumer at the end of the day. We are keeping an eye on that. What we had built into the forecast for 2025 there was not dramatic at the end of the day.
I think that even if that was to be a little bit weak, we'd be able to handle it.
Are all of these somewhat within this 3-5% range? Any of these segments outliers as you look out to 2025 and as you evaluate, you know, the order rates that have come in so far in the first quarter?
Outliers?
Yeah.
Look, I mean, at the end of the day, any growth that we get out of Pumps & Process Solutions because of the conversion rate, it's worth a dollar and a half of $2 of revenue in any other particular segment. To the extent that we can drive that portion of the portfolio, it's meaningful to the bottom line.
To the extent that you have these orders continuing here into the first quarter, you know, are you confident enough if the orders hold up that, you know, you'd start to talk about the higher end of the range on growth? Because you have insinuated in the last call, you talked about how you probably could have raised the guide, but there was some FX headwind and things like that.
Implicitly, we did raise the guide, right? We had 150 basis points of FX headwind, and we did not reduce the guidance that we put out back in November of 2024. I would rather look at it that way rather than we could have raised it again. Look, it is quarter- by- quarter. We are booking into Q2 now. We are, you know, other than the really, really short-term, short-cycle businesses, we are booked for the quarter right now. All we have to do is deliver the quarter, hit our numbers, and we will move on to the next one. Let us not get excited about talking up the full year until we at least close one quarter.
Are you seeing any elongated delivery requests or anything like that? I mean, 3M was just in here talking about that. You guys obviously have a very different, you know, type of business. Anything like that that you saw through the end of February here?
I mean, the administration has made the weekends, you know, interesting with the tariffs on, tariffs off. Whether that has been time well spent or not, we'll see. No, we don't really see a lot of pre-buy. We haven't done ourselves a lot of pre-buy. The only thing that we did is at the end of Q3 of last year and the beginning of Q4 of last year, we went long in metals. So copper, stainless steel, and a variety of because we had built our forecasts and gave our guidance, we said, "You know what? Let's..." At the time, historically, metal prices were pretty advantageous. We went long, and we're covered now largely through the end of Q3 of this year.
No matter what happens with tariffs, at least right now, we've got financial instruments that allow us to deal with that if that becomes a headwind.
Can we just talk a bit about tariffs?
Sure.
What is your exposure? You know, how are you reacting?
Generally speaking, we're a proximity manufacturer, so we don't have long supply chains. We tend to look at tariffs [Foreign language] our competitive set at the end of the day. Each individual business has a group of competitors. We look at, are we advantaged or disadvantaged [Foreign language] those competitors? Can we take advantage of situations where we can, or if we're disadvantaged, what are we going to do about it at the end of the day? We've tried to monetize all the traps of what we bring out of China and Mexico so far and begun to run the numbers on Europe. I can tell you that we don't import anything from Canada of any quantum. The Mexico one, we could either eat it or pass along a price. It's not that large at the end of the day.
We would expect from China, we're pretty much in the same boat as all of our competitors because where else are you going to get basic electronic goods? I mean, it comes from China. It doesn't come from anywhere at all. From an advantageous point of view, there are certain businesses that we have that we saw from the first time of the Trump tariffs that we were in an advantaged position by being a proximity manufacturer. To the extent that we can take advantage of it, that's terrific. We'll see.
Where would that, you know, as far as having an advantage, where?
We've got competitors. Yeah, we've got competitors in certain business lines that 70% of their production is in Mexico. And it's virtually all exported into North America. If you believe those tariffs are real and we're a domestic manufacturer, then we've got an opportunity there. It's super granular, but we don't have to go business by business. We look at that at the end of the day.
Any impact that you guys have from a federal funding perspective? Anything you'd look at and say, you know, we're exposed to a market that could get pared back?
Oh, not that I'm aware.
No question.
No, no Dover issues that I'm aware of. Other than military equipment, we don't sell anything to the government of any quantum.
You guys had talked also a couple of weeks ago about your incremental margins. You know, historically, 25-35% was, I think, the algorithm you guys had guided to. You kind of clipped off the low end of that range and are now talking probably more like 30-35%. You're doing 40% on a core basis this year. What was the driver of that change? Maybe just talk about the building blocks for that algorithm.
Sure. If we do everything right, which unfortunately, we never do everything right, but the way that we run the portfolio, every year we should be working on self-help actions to drive productivity that have an impact on margins in the next year. We should always be building a bank of, you can call it restructuring or whatever you want or efficiency or anything else that we get the roll forward benefits. Last year, we did a lot of restructuring in our European footprint in Clean Energy & Fueling. We have a roll forward of $25 million, which is pure profit to the extent that it all, you know, the roll forward would happen. That is part of the reason that is driving margin this year. Either through M&A or organic investment or growth platforms, those are all margin accretive businesses. This notion of mixing up.
Where we're deploying capital, if we're doing this correctly, should be margin accretive to the consolidated margins of Dover. If you go look at what we've done in M&A and what we've done in CapEx, you know, we pretty much have done that over the last five years. Over time, we would have the mix-up benefit. We'd have the restructuring benefit on the roll forward. I guess the other portion would be if we were to do a disposal and it was a margin dilutive business, then again, you would get that roll forward. That's a playbook that, subject to timing and availability, that's the way we run this portfolio of businesses.
As far as the pricing aspect of that, what do you assume in there, you know, every year?
Yeah, I mean, we haven't, if you go back and look over the post-COVID pricing, we have not been leaders in that regard. We manufacture a lot of sub-components. We don't have a lot of consumer-facing businesses at the end of the day. The consumer is the one that's really been eating all this inflation in terms of pricing. We've been price-cost positive post-COVID. When we comp ourselves to some of the other industrial companies out there that have consumer-facing businesses, we're not by nearly a leader there. Our expectation this year is to be price-cost positive. All the pricing's out and has been out of the market. It's not like it's on the come at the end of the day. Like anybody else, we use pricing as a way to kind of manage backlog at the end of the day, right?
Meaning kind of price increases that become effective in June, can you drive the backlog to get the industrial absorption? Whether you realize the price or not becomes irrelevant because you're actually getting the benefit of managing the industrial base more efficiently.
When it comes to portfolio, you guys have been active on both sides. You have a pretty significant opportunity to deploy a few billion of capital over time. I think it's four plus if you add some appropriate leverage. What's the current state of affairs in the M&A pipeline just to start?
Sure. The pipeline is full, but I described it as like a lot of salmon waiting at the bottom of the river and waiting for somebody to basically set expectations for multiples going into 2025. We have had really one meaningful transaction in the industrial world this year. I think it went off at between 15 and 16 x EBITDA, so a pretty healthy price at the end of the day.
You're talking about the Sun 9 deal?
A deal that's out there. That's pretty healthy pricing. That was kind of pre-equity markets moving lower. Does that put a brake on it? We'll see. The good news is a lot of that stuff has to come. A lot of it's coming out of PE. It's probably two years too late coming to the marketplace. We shall see. We've got our fingers in a variety of different pies of the ones that kind of everybody knows about, for lack of a better word. We, for the most part, do a lot of proprietary deals that don't come to auction. We've got a good handful of those. We're going to be as disciplined as we always have been in terms of M&A, in terms of the pricing. You know, we are highly liquid right now.
It's not like we're constrained from a balance sheet point of view.
As far as that decision to either do a deal or buy back stock, I mean, your stock has pulled back a decent amount. Does that get more attractive here? Historically, you've been pretty aggressive and done ASRs. What's the mindset around buybacks?
I think that what we said when we sold ESG at the end of Q3 last year and gave our guidance that our priority would have been our hierarchy of priority is always internal investment. If you go look at our growth platforms, I think four out of the five are organic investment that we did not buy. One is inorganic at the end of the day. The second priority would be M&A. The third priority would be capital return. I think what I described it at the time was going into 2025 that we had a very good insurance policy if there was to be a dislocation in the capital markets and that we would be opportunistic as we have been in the past. I think that that is absolutely on the table.
Okay. As far as divestitures are concerned?
We're not a forced seller at the end of the day. To the extent, we have a very clear-eyed view of what every business in our portfolio is worth. If you're willing to engage on that basis as opposed to, boy, if you sell this, your margin will go up and then you'll trade higher kind of stuff that we generally get that we reject at the end of the day. Yeah, look, at the end of the day, we sold more in revenue than we bought last year. I think that if you take a look at the multiples that we got for those businesses, they were above what we would see to be the sum of parts analysis in the particular portfolio.
I guess in your view, is that portfolio churn necessary to get yourself to, you know, a bit higher multiple over time?
Necessary, no, because you can just outgrow issues at the end of the day, right? I mean, there are businesses that are perceived to be low-margin businesses but do not require any working capital. So their ROIC is actually terrific. Right, that is kind of why we fought off the sell refrigeration mantra for five years around here because the ROIC on that business is, especially at the margins it is today, really good. That is the way that we view everything in the portfolio. If it is margin dilutive, we can grow away from it over time. Does that accelerate? If you monetize, sure it does. We are not going to accelerate it just to dress up the optics of the margin of the total portfolio and leave value on the table, I guess, is the way I would put it.
The only time that we would do that would be if we were to lever up because of M&A, then you would have optionality of delevering by monetizing assets in the portfolio. Clearly, we are very far away from that scenario.
How much of the portfolio do you think is stuff that you would, you know, if I gave you a good price for it today, you'd be willing to, you know, part up?
I guess it depends. All of it. Really, I mean, you know, it depends.
You know what I mean?
I know what you mean, but I'm giving you the honest answer, right? I mean, we have got very portions of portfolio that are worth a lot of money. And if you want to pay a 45% premium on that, I can't not say no.
Got it. Okay. Any questions out there? Yep, right here first. And then there next.
Hey, just on the heat pump side, do you have a sense of how much the IRA tax credits pulled forward demand and kind of what the other side of that could be if those tax credits were taken away?
You're talking about U.S.? Our volume of U.S. and heat pumps is marginal at best. The vast amount of the volume is in Europe. That is legislated country by country. It's all over the map right now. What happens going into the future? We shall see. I think that the current administration, we'll see what their posture is. I mean, the bottom line is there needs to be some efficient, there needs to be some scale built in North America for heat pumps to get to a price point. You'd have to have energy costs come up, and you'd have to have volume leverage bring down. Then you get into break-even in terms of transitioning without IRA or anything else. We're a little bit away from that right now.
I mean, energy costs are just not going the right way for heat pump adoption other than like the Canada and the upper belt of the U.S. where it's really cold. Yeah, look, we've got for us, we're capacitized for the North American market. Right now, it's not heat pump driven. It's a lot of bigger units that go into district heating and into data centers right now. We've got capacity in Tulsa to the extent that it grows. We can support the who's who would talk about bringing heat pump technology to North America and a meaningful scale.
Thanks for taking the question. I came in a little late. Sorry. I apologize if this question was addressed. About a month ago at a competitor conference, you made some fairly positive comments about short-cycle orders and sort of said, "Hey, things are continuing." It was not just a blip in January. Are you still feeling that way given all the volatility we have seen? Has the needle moved a little bit?
You could imagine that was Steve's first question, but I'll repeat.
Apologize. Sorry. My morning meeting.
Yeah. I mean, we just closed February, and orders are at the same trajectory that we exited last year and what we saw in January. So far, so good.
It was question one through six. You know, what's your take as a, you know, esteemed business leader in this country? What's your take on what's going on out there? How do you, you know, and your board discuss a playbook or just how are you approaching all this?
Fundamentally, I think that what is being tried is correct. It's always the messaging is always messy. I think the second time around, I think everybody's a little bit more comfortable with the messiness of the messaging at the end of the day. You know, you and I have talked about this before. If you go back and look at core growth in industrials, it's a general comment, right? There's outliers up and down in there. You look at unitary volume growth over the last couple of years, it's been marginal, right? There's been a lot of price that's gone through and not much in units. At the end of the day, what we need is demand, right?
I think that what is being done in terms of trying to deal with the deficit and dealing with government spending being the driver of GDP is not a sustainable economic platform. Yeah, at the end of the day, I don't want to spend my weekends talking about what's our exposure between Mexico and the U.S. and then Monday morning being told, "Never mind." I think fundamentally what is being tried is I would agree with it in total. At the end, we would like to see real kind of business activity GDP growth rather than kind of here's a bunch of cash floating into from the ether or from the treasury into the economy because that's not sustainable.
I guess from that perspective, it feels to me like, you know, less confidence in near term because of just all the uncertainty. But like as a capital allocator and decision maker, you do have some, you know, for lack of a better term, faith, which, you know, you think it's the right move. You think things will work out. And so you're probably less apt to like really turn the screws and cut things today and see how it plays out, which, you know, is kind of the feedback loop that people are worried about.
Look, I think that we were early in calling basically rising interest rates. We're going to become a problem when we cut production relatively early in the cycle and took our lumps for it. We were decisive there. I don't see a need to do that presently. I think that if it just gets noisy for a couple of quarters here, we're willing to kind of deal with that. I look at it from maybe a bit of a longer-term perspective. We've done a lot of work on this portfolio in terms of which is reflected in the margins of the business over time. It's as good as I've ever seen it in terms of what our market exposures are, our competitive position, what we've done in terms of productivity. We're still spending CapEx this year.
Over the next 90 days, barring a debacle, we're not going to take our foot off the gas because we think that we really built some leadership positions that we can monetize over the next five to ten years. We kind of, despite all the angst, will kind of put our pedal to the metal here. Having said that, if you look at the individual pieces of our portfolio, these are medium-sized companies, right? These do not have long supply chains that you've got to make. These are not automotive factories where you have to make decisions nine months in advance. We can toggle up and toggle down relatively quickly. We've demonstrated that before either going into COVID or coming out to COVID. If you look at our margin performance versus our peers, we outperformed. It's not because we're geniuses.
It's just because of the fact that it's easier to flex smaller enterprises than it is to flex big global enterprises. You know, if we have a couple of quarters where there's a lot of noise and people start pushing around orders a little bit, I mean, we're not going to panic here. I think that we're in a, you know, a very healthy position. If we've got to defend the equity because the equity markets overreact, then, like I said, we have an insurance policy going into this year, and we'll take advantage of it.
Great. I think that's it. Rich, thanks a lot.
Great. Thanks, Steve.
Appreciate it.
Good morning, everyone. My name is Patrick Baumann. I'm on the multi-industry and electrical equipment team at JP 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, you know, let Andrew, you know, for a few minutes here, just give kind of a quick overview for those that are new to this story. We are 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 and 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. 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 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 are in radiopharmaceuticals.
That's cancer identification, cancer treatment. We're also in contact lens manufacturing. We're not 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. Last quarter we announced that we had our second largest bookings quarter in company history. Certainly these times are choppy, and we'll walk through that. Our customers continue to look to Dover 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, you know, sustainability of the recent orders activity, particularly in life sciences, and whether there was any kind of large bookings that influenced, you know, recent results.
Yeah. You know, 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 are 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 are telling us is they are not taking their eyesight off of launching their critical products to meet their demand. They might be looking at their global footprint differently, but that is an area where ATS has strength. We can help you in North America, 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's 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, you know, with a, you know, 1.35 book-to-bill last quarter, the backlog is looking really good, you know, exiting your fiscal year, which ends, you know, 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, you know, 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 like for things, obviously, EV has had a tough, you know, 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 out beyond one year. There are some longer-term programs. A lot of that is driven by customer delivery schedules. They've ordered multiple lines. You know, 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, you know, 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, you know, we're thinking about it in that high single digit. You know, 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.
Yeah. 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+ y ears. Auto injector is the enablement for the GLP-1 drugs. We look at not only 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, you know, and you think about radiopharmaceutical manufacturing, they're now looking at drugs like actinium-225 or lutetium. There are many more that they're looking to launch in the fight against cancer. That's all good for us. 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, you know, 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 ComaCare. ComaCare does radiolysotope 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, short term, it is going to be choppy and we are 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. We are 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 are 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, you know, obviously, as a company that's headquartered in Canada, 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., so equipment that we're producing in Canada that moves into the U.S. For that revenue stream, I mean, first of all, we haven't seen sort of 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. You know, 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, you know, again, the customer in this case is happy to bear because it's a more efficient cost than a 25% tariff.
That is 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, you know, 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 is 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 do not expect it's going to be a material impact.
It is something that our supply chain team is very actively engaged on.
25% goes through in April. The impact to you is what next year? Like, 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, you know, 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, like, 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 is a bit of a mix at this point. We have lost some operating leverage this year with headwinds that have impacted our transportation business. If you had asked me that question a year ago, most of the improvement that we are targeting would affect our gross margins. It is areas like our supply chain where we have 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 is a big lever that we have seen a lot of impact from and continue to see a lot of opportunity. Number two, standardization.
Standardization, excuse me, you know, 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 ten 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 Symphony platform. It uses our SuperTrack 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's 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. It's, you know, 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 is internal investment. We've continued to increase that investment.
We've launched new products, new solutions, like the Symphony 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: Paxium, Hyde Off, 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 are 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, you know, and we've talked, Kandy, 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, you know, 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, you know, there's the outside equity preferred, PE preferred, that kind of thing, you know, 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 re-accelerates 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. They do not need the capacity. That is 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, you know, to put a timeframe on it is several months, the next several months. Failing that, you know, 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, like, I think it's a few hundred million dollars. Is there a way to think about, like, in the past, precedents around, like, haircuts that suppliers have had to take, you know, 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 on the 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, you know, 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 Comech Air, 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 listed in the U.S. and I guess I'm just wondering, is there a next step in terms of the evolution of the company, you know, whether that be, you know, reporting in U.S. currency at some point or, you know, 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, like, what the bogey is in a given year. 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, 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. You know, 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. You know, I think a lot of our business is U.S.-based. That is something that we are looking at and, you know, could be within the realm.
Helpful. We got a minute left. Just wanted to follow up on the, you know, the use of equity capital for M&A. Like, can you walk through kind of how you think about the trade-offs, how we should think about it? Like, what are the parameters around when you would use, you know, 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 is the number one criteria. I mean, we look at accretion. We'll look at, of course, the margin profile, you know, 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, you know, as long as it ticks that ROIC box. It is more complicated from an investor standpoint if the multiples do not line up. I mean, 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. Thank you, Patrick.