ATS Corporation Common Shares

Good morning, ladies and gentlemen. Welcome to the ATS Automation first quarter conference call and webcast. I would like to remind you that this call is being recorded on August 14, 2019 at 10 a.m. Eastern. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has difficulty hearing the conference, please press star followed by zero for operator assistance at any time. I would now like to turn the call over to Stuart McQuaig, Vice President, General Counsel of ATS.

Thanks, operator, and good morning, everyone. Your main hosts today are Andrew Heider, Chief Executive Officer of ATS, and Maria Perrella, Chief Financial Officer. Before we begin, I'm required to make the following statement respecting forward-looking information, which is made on behalf of ATS and all of its representatives on this call. The oral statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information And the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forelooking information are contained in ATS's filings with Canadian Provincial Securities Regulators. Now it's my pleasure to turn the call over to Andrew.

Thank you, Stuart. Good morning, ladies and gentlemen, and thank you for joining us. Our first quarter performance featured growth in bookings and revenues, continued margin expansion, the advancement of our ABM, and contributions from our recent acquisitions. We finished the quarter with record order backlog. This morning, I'm going to speak to you about our Q1 performance and outlook. Maria will then provide her report. Starting with our Q1 financial value drivers, bookings were a record $423 million, up 18% over last year. Organic growth accounted for half the increase. with the other half coming from Comisar and KMW. Both of our recent acquisitions perform well. We booked a number of large programs during the quarter, including a life sciences program for a medical device application with an existing customer, and several large programs in transportation in North America and Europe, all with repeat customers. Our sales and operations teams continue to execute well. Q1 revenues were $339 million, up 13% over last year. Excluding acquisitions, our organic revenue growth was 4%. Our Q1 adjusted EBIT margin was 11%. Moving to our outlook, we ended the quarter with a record order backlog of $982 million, up 24% over last year. This provides us with a good base of business to drive growth for the remainder of the year. Looking at our funnel, Life Sciences continues to be strong, and we are seeing good opportunities in medical devices, pharma, and radiopharma. Life Sciences represents over 50% of our backlog, and we are well aligned to drive penetration in this market. Life Sciences has positive industry dynamics, high barriers to entry, including stringent regulation and high consequence of failure. These characteristics are complementary to our capabilities, which includes high-speed, high-precision solutions across a number of applications. EV activity remains healthy and represents the majority of our transportation funnel. Our proven success in EV, including battery module and pack assembly and e-motor assembly, positions us well to capitalize on the transportation market shift. In consumer and energy, we continue to pursue niche opportunities where our technologies align well with the value required by our customers. As I've stated in the past, I expect our customers will continue to exercise caution and be thorough in making their capital investment decisions, which could lead to variability in order bookings from quarter to quarter. We also continue to monitor the impact of trade disputes on customer activities and our supply chain, which has added another variable to our customers' investment decisions. On after sales services, customer receptivity is positive, and we continue to see favorable trends in attaching service sales to our CapEx business. Q1 after sales service bookings and revenues both increased at double-digit rates over last year, and our funnel for services remains strong. We have made investments in after-sales services over the past several years, both in infrastructure to grow and develop the business and in innovation to drive market leadership as with the recent launch of our IOT solution. We remain focused on growing the strategic area of our business as it drives reoccurring revenues and contributes to our margin expansion initiatives. Moving to the ATS business model, we are continuing to embed the ABM in how we do business every day. At Comasur, we introduced training on ABM fundamentals and held our first problem-solving events. Globally, we conducted 15 Kaizen events, which addressed areas such as operations, project management, human resources, and finance. Just a couple highlights from this last quarter. One division reduced lead time on a specific assembly process by over 50% through standardizing its workflow, streamlining processes, and improving daily visual management. Another division reduced a key operational process by 20% through value stream mapping, implementing standards in their process, and eliminating waste. Our ADM boot camps and weekly lean training sessions are ongoing and driving advancement of the EABM throughout the business. Employee feedback is positive as our people are engaged in making improvements in their day-to-day activities. The pace of advancement is encouraging and we have many opportunities ahead for continued improvement that I expect will support our margin expansion plans. Turning to our investment activities, During the quarter, we broke ground on the expansion of one of our facilities in Cambridge. This expansion led capacity for our life sciences business and dedicated space for our innovation teams. Our innovation activities are ongoing. Early in the first quarter, we launched Illuminate Manufacturing Intelligence, our connected factory management IoT platform that customers use to maximize their overall equipment effectiveness productivity, and quality. We continue to review our capital allocation strategy, including internal investment opportunities, acquisitions, and share buybacks to drive long-term shareholder value. Moving to Comisar. ATS Life Sciences business coupled with Comisar creates a sizable platform that we expect to grow. Integration of front-end of the business activities is progressing very well. We have built a pipeline of pursuits where the combined businesses are working together on specific opportunities to capitalize on the strong and positive momentum created in the market since the acquisition. Sales groups have been aligned internally with improved capacity for Comasur in North America. We are continuing our work to develop integrated service offerings and develop a joint go-to-market strategy for the aseptic fill and finish market. Customer receptivity is positive, and we are confident that revenue synergies will be achieved. Integration of administrative activities is expected to be largely complete over the next few months. Joint initiatives between the supply chain groups are underway to drive cost-saving synergies, which we are working to achieve over the next 12 to 24 months. In summary, We are focused on our value creation strategy, build, grow, and expand. We're off to a good start to the year with solid growth in both bookings and revenues. We have a record order backlog, and we are well positioned to drive growth in fiscal 2020. We are focused on driving continuous improvement in all aspects of our business through our ABM. Our balance sheet remains strong, which we will continue to put to work through internal investment, innovation, and strategic M&A, as well as share repurchases when appropriate, all with the goal of continuing to create long-term shareholder value. Now I'll turn the call over to Maria.

Thank you, Andrew. We continue to make good progress on our strategy as our Q1 performance demonstrated. Our operations performed well with the continued year-over-year improvement in our key financial value drivers, bookings, revenues, and adjusted earnings from operations margin, both with and without the acquired companies. Working capital as a percentage of revenue has increased this quarter, however, remains below 15%. Q1 fiscal 20 has a full quarter of Commissar and KMW results as compared to none in Q1 fiscal 19. This morning, I will discuss Q1 results and our balance sheet. I'll start with operating results. This is the first time ATS has achieved quarterly bookings greater than $400 million. Q1 bookings were $423 million, up 18% from $358 million last year. As you heard, half of the increase came organically and the other half came from acquired companies. We are pleased with this level of bookings growth considering the uncertainty in general economic conditions. We saw good bookings in both our life sciences and transportation and markets. Q1 revenues of $339 million included $27 million from Commissar and KMW. Excluding acquired companies, revenues of $312 million were 4% higher than last year's $300 million, reflecting growth in our backlog and increased services revenues. Q1 revenues were down from $349 million in Q4 due to the varying periods of performance on some of our large dollar programs, which impact time to revenue. We will continue to have quarter-to-quarter variability, however, growth in backlog will provide us with a solid base to generate year-over-year revenue growth for the fiscal year. Strong bookings in Q1 increased backlog to a record $982 million compared to last year's period and order backlog of $789 million. More comparably, this also represents a 9% increase over Q4 backlog of $904 million, which included acquired backlog. In the quarter, we had a good mix of orders ranging in size, period of performance, and end market. Looking forward, Q2 fiscal 20 revenues are estimated to be in the 30% to 35% range of backlogs. This is an estimated range that takes into account several variables, including the composition of our backlog at the end of the quarter, which includes a few longer performance period programs, one in Q1, an estimate of the impact of lower labour revenues due to peak vacation periods primarily in Europe, and our estimates of in-quarter orders, which may be booked and converted to revenue in the same quarter. Moving to margins, over the last year, we have improved our gross margins, progressing from 26% in Q1 and Q2 fiscal 19, and then to 26.6% by the end of Q4, and now 27% in Q1 fiscal 20. Note that approximately 20 basis points of the improvement in gross margin is due to IFRS 16, with the remaining 80 basis points due to improved program execution and operational utilization supported by the ongoing implementation of the ABM and our focus on continuous improvement. Excluding acquisition-related amortization expenses in both periods, C1's SG&A was $49.9 million or an $8 million increase compared to last year Q1 of $41.9 million. SG&A has increased over the prior year due primarily to the addition of Comister and KMW SG&A of approximately $4 million, and due to increased employee costs, sales-related expenses, and other costs to support organic growth. Q1 adjusted earnings from operations of $38 million were 11.2% of revenue compared to $32.6 million or 10.9% last year. The adoption of IFRS 16 provided the majority of the increase. In Q1, higher SG&A costs largely offset higher gross margins. As we have stated in the past, we do expect to improve our operating leverage and expect this will happen as we generate higher revenues from our backlogs, which will be supported by and drive leverage of our cost structure. Both KMW and Commissar's results were on plan and integration is progressing well. Moving to the balance sheet. Our non-cash working capital as a percentage of revenue increased in Q1 to 12.4%, up from 7.1% in Q4 and 10.6% in Q1 last year. Timing of deposits, program milestones, and payment of accrued liabilities caused the increase. Cash used in operations was $40.4 million in Q1 compared to last year where we had usage of $400,000. At the end of the quarter, our net debt position was $244 million compared to effectively zero last year. We continue to have strong liquidity with cash on hand of $155 million and our credit facility of which approximately $642 million is available. In Q1 fiscal 20, we generated adjusted earnings per share of 25 cents compared to 22 cents last year. The 14% year-over-year increase was due primarily to increased revenues. Our effective tax rate was 23.5% in the quarter. Going forward, our effective tax rate is expected to continue to be in the range of 25% of pre-tax earnings. In summary, we had a good start to fiscal 20 and are well positioned for the balance of the year with our record $982 million of backlog. We will continue to focus on the development of the ABM, the integration of acquired companies, and other initiatives to drive margin expansion. Our funnel remains well diversified with a mix of programs and enterprise solutions. We have a strong balance sheet with available credit, which will support our objective of profitable growth. Now, we'd like to open the call to your questions. Operator, could you please provide instructions to our listeners? Thank you.

Ladies and gentlemen, we will now conduct a question and answer session. To allow as many voices to be heard as possible, please limit yourself to two questions per turn. If you have a question, please press star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please for your first question. And your first question comes from Sherilyn Radburn from TD Securities. Your line is open.

Thanks very much and good morning. Congratulations on that bookings number. First question relates to the bookings. I guess the strength was somewhat surprising in that there weren't any large orders that were press released during the quarter. So I'm just curious if that was because there were a number of large programs booked in the quarter that just simply on an individual basis fell short of the threshold for disclosure.

Good morning, Sherilyn. So in the quarter, we did have a number of large programs. And as we say, typically to have large bookings quarters, we need orders which range in size above 20 million, so 20, 30, 40 million. And we had four such orders in the quarter, and those ranged in size from 20 to 30 million. Three of them were in transportation, and one of them was in life sciences.

Okay. And then we noticed in looking at the income statement that parts sales looked like they were particularly strong in the quarter. Is there any color that you can provide in that area?

Good morning, Sherilyn. We have seen continued strength in this area, and we're very pleased with the progress we've made. You know, we've talked often about the infrastructure that we've continued to expand on and the investment we've made. And the team for executing has performed well within the quarter. And as importantly, the funnel for the year remains healthy in this area. I often state and will continue to state there's a lot of work to do between now and year end and as we move forward, but the team is executing very well here.

All right. I think that's two, so I'll pass it along. Thank you.

Thank you.

As a reminder, if you would like to ask a question, please press star followed by the number one on your touchtone phone. Your next question comes from Justin Keywood from GMP Securities. Your line is open.

Good morning, and thanks for taking my call. Just to follow up on the transportation bookings, if I heard correctly, there was three new wins in the quarter, and were those from existing customers or new?

Good morning, Justin. All three were from existing customers.

Okay. And in general, how are you seeing the EV trend progress? Are customers still a bit hesitant there, or is it progressing better than expected?

So what we've seen on the EV trend, Justin, is when we press our customers, the investment that they're driving towards in this space is going to continue. And we're One of the three orders was on EV space. It was a repeat customer, it was a repeat order on a similar production line. The other two were on model ships in our traditional auto, which we do segment out and we focus on specific areas. But what we've seen macro is EV is continuing to invest. Where we do see some dynamics is by region that we've seen a bit more proactive approach in Europe and in North America. They are aligning around it, and there are good opportunities in that area.

Okay, that's good to hear. And just more generally, you mentioned some potential conservatism by customers due to trade or tariff fears. Could you just maybe elaborate on that? Are you seeing this as a possible near-term risk, or is it potentially an opportunity for ATS?

Yes. just to be very clear on my comment, is customers will continue and do continue to look at their investments and ensure that they are exercising caution in their investments. That, what we've seen so far, that has not changed. And therefore, when we look at the dynamics, and let's just look at the leading indicators for a second. First, very strong bookings quarter. Second, when we look at the markets that we were driving towards, the market trends on those specific markets are things we look at in detail. And third, we visit, and part of my job as CEO, I personally visit many of these customers to understand their investment plans and where they're taking their business. And we feel comfortable where we are today and our leading indicators remain positive. So all that to be said, yes, there's a lot of macro trends, areas we're focused on. We're continuing to see a strong funnel to support our business and what we stated around growth.

That's helpful. Thank you for taking my questions.

Your next question comes from Maxim Sitchev from National Bank Financial. Your line is open.

Hi, good morning.

Good morning.

Do you mind maybe providing a bit more color in terms of the progress on commercial integration? Thank you.

Good morning, Max. we are, if I were to take a step back and look at the progression of integration, we are exactly on plan. And what we're pleased about is there's been some early indication of positive areas that we focused on. For instance, we talked about the sales synergies within the business. And for one example, in Q1, We booked an order with Comiser as a joint effort with ATS of a customer that they had lost in the past where that customer didn't move forward because Comiser couldn't support the business out of North America. And so early indication and also early evidence that the joint efforts around our sales synergy are and remain positive. That said, it is still early days. And we are learning. We are working with the business to make sure that we're achieving the full potential, but it's still early days.

Right. Okay. No, that's fair enough. Thank you for that. And then maybe just a quick question for Maria. Just given the fact that, I mean, obviously, backlog has grown fairly significantly, the working capital that's needed to support this extended backlog duration, Should we think about different percentages? I mean, I know that you're reiterating the low, the 15% versus revenues, but, like, incrementally, should we expect some sort of creep there or that should normalize as the year progresses? Thank you.

I would start with saying that our target is now has been to be below 15%. With the increase in backlog, we don't expect that target to change. We're still targeting to be below 15% working capital as a percentage of revenue. And in Q1, we did see an increase versus or as compared to fiscal 19. And that just has to do with the timing of milestone payments and deposits. We expect for that working capital percentage to come down. and it'll be a function of timing of these programs that are in backlog, but we don't expect a creep as a result of what is in our backlog.

Okay, so there's no structural change dynamic. I guess that's kind of the bottom line, right?

No, no, no structural change, no.

Okay, and maybe, Andrew, if you don't mind, if I sneak in one last one. In terms of M&A opportunities, what are you guys seeing on the horizon, maybe comment around multiples, and the desire to sell on the part of, you know, the company's potential you're talking to. Thank you.

Sure. So to start, funnel is healthy on the M&A potential. And you know the four variables just to walk through, market, strategic rationale, how we're going to integrate and operate, and then our RIC. And our funnel and approach on this has been very solid and very strong. Multiple-wise, we're not seeing a huge differentiation. The multiples still are a healthy multiple for good businesses. And therefore, and I often state this, we will drive and have a very disciplined approach. And that's why we often talk about cultivation, ensuring we're talking to the right businesses, because when we add an organization and we want to really have it be part of the family, we want to maximize its potential. But overall, we're here to the healthy area, and we're going to continue to exercise caution, but yet be very proactive in our approach.

Okay. Thank you very much.

As a reminder, if you'd like to ask a question, please press star followed by the number one on your touchtone phone. Your next question comes from Sherilyn Radburn from TD Securities. Your line is open.

Thanks very much. Just to follow up for me, and I guess it's a bit of a two-parter. So last quarter, you had made the comment that in the EV market, North American customers were a little slower to pull the trigger on investments versus their counterparts. So I was kind of curious if there were any bookings that sort of slipped out of last quarter into Q2. But then conversely, Part B, in this quarter's MD&A, there's a comment about bookings in energy being down year over year. as a result of the timing of customer decisions on some larger opportunities. So, on the other side, I was wondering if anything sort of slipped out of Q1 and potentially into Q2.

So, as we step back on the total business, and we often restate that timing is variable, it aligns with our And we see, and as we've talked in the past, we see that within quarter, we see that within year. And so oftentimes we're very focused on the time with our customers. More specifically, as we look into EV, we haven't seen the trends change. Our view of the market in Europe is continuing to be, like we stated, a bit more bullish on the EV investment. In North America, we see the opportunities and we're aligned well with the opportunities. but they've been slightly delayed. I would say timing is almost what we expect, but yet we're aligning, and when we step back on an AGS point of view, we can provide the highest level of value with our customers through either situation, whether they move forward and they want to drive to have the product in the market in a very quick space, or whether they're going to analyze and ensure they've got the right product. So both play into our situation well for the EV. Nothing here, as we stated, is a niche area of the business. We're really ensuring that we provide value for the customers and the orders we have in-house. And when we see opportunities that align well with what we can provide in the market, we're going to execute.

Thank you for the time. Your next question comes from Robert Caldwell from Richardson. Your line is open. Robert Caldwell from Richardson, your line is open. As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Mr. Heider, there are no further questions at this time.

Thanks, Operator, and thank you, everyone, for joining us today. I look forward to reporting our second quarter results in November. Take care.

This concludes today's conference call. You may now disconnect.