ATS Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Acquisitions: Completed acquisition of Avidity and ITACA, expanding the portfolio. Avidity expands life sciences offerings, and ITACA is an Italian automation integrator focused on primary processing and pharmaceuticals.
• Financial Performance: Q3 revenues were $752 million, up 16% from Q3 last year; adjusted earnings from operations were $101 million, up 17% versus Q3 last year. Organic revenue growth was 9%, and recently acquired companies added approximately 5% to revenue growth.
• Backlog: Over $1.9 billion in backlog, with life sciences backlog at a record $875 million and transportation backlog down 36% from last year.
• Innovation: Developed new software for therapeutic radiopharma, a 3D scanning vision system for food and beverage, and held a Global Innovation Summit with a focus on AI integration.
• ESG: ATS scientific products earned a silver medal in the EcoVadis sustainability program, and Avidity launched a water platform system with reusable cartridges.

Segment Performance

• Life Sciences: Q3 revenues contributed, backlog up 10% to $875 million, with organic growth and contributions from acquisitions like Avidity. Life sciences backlog is at a record $875 million, supported by wins in areas like auto-injectors and contact lenses.
• Transportation: Backlog was $564 million, down 36% from Q3 last year, reflecting execution of large programs from the previous fiscal year and EV market dynamics. The near-term EV market is dynamic, but long-term fundamentals remain intact.
• Food and Beverage: Q3 bookings were strong, ending backlog was $207 million, and successfully secured the first IoT order for a tomato processing line.
• Energy: Funnel remains strong, with opportunities in nuclear reactor refurbishment and new builds for sustainable clean energy.
• Consumer Products: Funnel is stable, but economic climate may impact timing of opportunities.
• After Sales Services: Investment in digital solutions for performance insights, with development of connected asset value chain.

Guidance

• Revenue Conversion: Q4 revenue conversion estimated at 36%-39% of order backlog, factoring in a $200 million delay in transportation order backlog with an EV customer.
• EV Market: Long-term fundamentals of the EV market remain intact, but near-term market is dynamic. A program with an EV customer is expected to restart in Q1 2025.
• Supply Chain: Lead times and material costs remain challenging, but teams are working to offset impacts, with margin expansion potentially taking 1-2 quarters to benefit from supply chain normalization.

Risks

• Supply Chain: Lead times and material cost pressures continue to challenge the business, impacting margin expansion.
• EV Program Delay: Near-term margin pressure due to a delay in execution of an EV contract in the backlog.
• Market Dynamics: Variability in program awards, and economic climate impacting the timing of opportunities in the consumer products funnel.

Question and Answer

Q: Comment on the level of auto-injector bookings this quarter and competition in the end market.

A: Won a key award within the quarter with an existing customer, using Symphoni technology for differentiation. The market for auto-injectors is growing significantly, with ATS positioned as a leader due to innovation and global capability.

Q: Comment on nuclear energy opportunities and timeframes for execution.

A: Funnel in nuclear energy is healthy, with favorable market dynamics. ATS is close with opportunities in SMRs and CANDU reactor refurbishment, with early stages of review for applications.

Q: Impact of the $200 million EV order backlog delay.

A: Expected to resume in Q1 2025, with run rate as originally planned and no ongoing impact expected.

Q: Supply chain impact on gross margins.

A: Lead times in electrical and mechanical parts remain a challenge, limiting margin expansion, but offsetting through pricing and other areas.

Q: Visibility on organic growth in life sciences.

A: Positive organic growth in life sciences, with GLP-1 market growth significant and early in its journey.

Q: Fourth quarter book-to-bill expectations.

A: No forward-looking booking guidance, with backlog typically out 3 quarters and variability in large programs.

Q: GLP-1 market share and order lumps.

A: GLP-1 backlog is low-double digits of backlog, with orders lumpy and not a steady straight line.

Q: M&A pipeline and GLP-1 backlog.

A: M&A is favorable, with GLP-1 backlog at low-single digits of bookings and double digits of backlog.

Q: Return on invested capital by vertical.

A: Focus on capital allocation for ROI, with life sciences investments expected to have strong returns.

Q: EV pilot programs with other OEMs.

A: Progressing to plan, with customers measured in investment pace but EV remaining a key CapEx priority.

Q: Nuclear space capabilities and future opportunities.

A: Continue to expand value creation in nuclear space, with opportunities in refurbishment, new builds, and decommissioning.

Q: EV other OEMs discussions.

A: Mid to long-term narrative unchanged, with customers focused on technology, CapEx, and matching capacity.