Q2 2020 Earnings Call
Duck. The question answer session instructions will be provided at that time for you to queue up for questions.
Anyone has difficulty hearing the conference. Please press star followed by zero operator assistance at any time I would now like to turn the call over to Stewart Mcquade, Vice President General Counsel Ats.
Thanks, operator, and good morning, everyone. Your main hopes today are Andrew Fighter, Chief Executive Officer, Leach and <unk> Chief Financial Officer.
Before I begin required by the falling state with respect to forward looking information, which is made up the applebee's, yes, and all this 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 and assumptions were applied in drawing a conclusion originally 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 forecast or projection as reflected in the forward looking information are contained in nature of this filings with Canadian Central Securities regulators No. It's my pleasure to turn the call over to Andrew.
Sure.
Good morning, ladies and gentlemen, thank you for joining us.
Our second quarter performance Richard growth in revenues year over year margin expansion.
That's one of our India and contributions from our recent acquisitions.
This morning, I'm going to speak about our Q2 performance our outlook and the reorganization plan, we announced today.
Real don't provide who work.
Starting with our financial value drivers.
Revenues for the first half of the year were $680 million up 17% over last year.
Q2 revenues were $341 million up 20% over Q2 last year.
Our adjusted EBIT margins for the first half of your was 12% up from 10% last year.
Year to date order bookings were 744 million up 4% year over year for Q2 bookings were $321 million down 10% left from last year, we booked a $72 million maybe enterprise program.
This quarter, but the number of programs with repeat customers, resulting in higher bookings in both life Sciences and Nucor.
The acquisition continued to perform well contributing 26 million orders in Q2.
Moving to our outlook.
Ended the quarter with $945 million of order backlog.
Up 14% 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.
I just continues to be strong recent good opportunities and medical devices pharma and radio pharma.
As we recently announced early in Q3.
Yes, and call Mr. combined to secure 32 million dollar order and the ace uptick fill and finish market. This is a great win for our business an early indication the value Ats and promise or concrete together.
Today.
Life Sciences represents over 50% of our backlog.
We are well aligned to drive penetration in this market.
Life Sciences as positive industry dynamics high barriers to entry, including stringent regulation and high consequence of failure.
Characteristics are complimentary to our capabilities, which include high speed high precision solutions across a number that applications.
Maybe we've seen some delays and customer order activity, but the funnel remains strong there are various reasons, including continued development of the technology and in some cases delays more customers across end markets. This is not unusual given the heavy investment customers are making it easy shift.
Overall, our track record of proven success and maybe you couldn't battery module in Pakistan, We you motor Assembly positions us well as the industry shifts to electric vehicles.
In energy, we continue to win working nuclear where we're able to offer considerable value for our customers.
And consumer we continue to pursue your niche opportunities, where our technologies align well with the value required by our customers.
As I've stated in the past.
Specter customers will continue to exercise caution and be thorough and making their capital investment decisions, which leads to variability in order bookings from quarter to quarter.
We also continue to monitor the impact of trade disputes a customer activity and their supply chain.
Which is added another variable to our customers investment decisions.
And after sale services, we continue to see favorable trends and attaching service sales to our Capex business.
Q2, after sales service bookings and revenues both increased a double digit rates over last year at our funnel for services remains strong.
Good investments and after sales service over the past several years, both and infrastructure to grow and an innovation to drive market leadership.
As with the recent launch of our I O T solution.
We remain focused on growing this strategic area of our business as it drives recurring revenues and contributes to our margin expansion initiatives.
In support of our growth plans and to drive continued performance improvements today, we know its reorganization plan involving facilities that are not strategic to our future growth.
This plan is designed to reallocate capital from underperforming facilities to high performing facilities approved the overall efficiency of our operations and reduce our cost base.
Reorganization will be implemented primarily over the next two quarters at a cost approximately $25 million.
Coupled with the investment and innovation and capacity additions were making and strategic areas of the business.
This activity will prepare HTS operations globally to effectively serve customers and efficiently meet the demands of growth in our markets going forward.
Turning to our investment activities.
Our expansion plans are progressing as expected.
As a reminder, this includes additional capacity for our life Sciences business and dedicated space for innovation teams.
Our innovation activities are ongoing in the quarter converts or lost Healios, a new fully automated intercepted dispensing system for bio and syringes the radio pharma market.
As well our life Sciences group launched a new LNG you'd be adhesive during technology for bonding surgical steel needles to glass syringe barrels.
This solution replaces mercury vapor labs, which are being regulated out to conduct human health and the environment.
This innovation when combined with Super track technology forms a foundational elements of a high speed glass syringe Assembly system.
We remain focused on internal investment and innovation as an important part of our capital allocation strategy to drive shareholder value.
Moving to the Ats business model.
Uhhuh highlights from the last quarter.
One of our divisions improved the throughput the key production process through a kaizen event, resulting in a 40% reduction in average completion time.
This will drive cost efficiencies and approved lead time for the business by best programs are implemented at a number of divisions, including improvements at a division, which drove a 30% reduction in waste and specified areas.
Another division implemented daily visual management, a new standards and engineering reduce complexity and improved project management.
We've increased our training through additional bootcamps over 120 of our leaders attended boot camps in the second quarter.
Weekly lean training sessions are ongoing.
Writing advancement of the throughout the business.
Boy feedback is positive as our people are engaged in making improvements in their day to day activities.
The pace of advancement is encouraging we have many opportunities ahead for continued improvement, but I expect will support our margin expansion plans.
Moving to Coleman Sir.
Integration a front end of the business activities is progressing very well.
You bet some initial wins in both the pipeline or pursuits capitalize on Mitch and sizable platform that has been created from the combination of Hps income Sir.
We're continuing to develop integrated service offerings and refine our joint go to market strategy, the aseptic fill and finish market.
The combined sales groups have been aligned internally with improved capacity for comments are in North America.
Customer receptivity is positive we are confident that revenue synergies will continue to be achieved.
Integration of administrative activities is largely complete.
Joining initiatives between the supply chain groups are underway to direct cost saving synergies.
Another M&A activity.
During the quarter, we acquired excellent.
Small German based IP consulting and service provider specializing in business intelligence and analytics.
I, just love to be integrated into our process automation business.
Allow us to expand our digital capabilities for customers.
In summary.
On a year to date basis.
Performance included solid growth in both bookings and revenues.
We have a strong order backlog.
Well positioned to drive growth in fiscal 2020.
Our reorganization plan supports our margin expansion initiatives and reflects our disciplined approach to capital allocation.
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.
Going forward.
We are focused on our value creation strategy build grow and expand to drive growth, both organic and inorganic and margin expansion with the goal, creating long term shareholder value.
Now I'll turn the call over to Maria.
Thank you Andrew in the quarter. After the first half of the year, we achieved growth in our business and made progress on our strategy.
Q2 featured year over year improvement in our revenues and EBIT margins, both including acquired companies and honor and organic basis.
As you know year to date results include a full quarter of Coleman, Sir thank him W as compared to none last year.
Both acquired businesses performed well add on plan.
As as you noted we have also initiated a reorganization some of which was reflected in Q2, but we'll more materially impact to the next two quarters from a cost effective and next year from a payback perspective.
Good morning, I will discuss Q2 results.
Reorganization, including timing and expected impact.
Our balance sheet.
I'll start with operating results.
Q2 bookings were $321 million down from Q1's record bookings of 423 million.
We believe this is part of normal variability as our final is healthy and remain similar in size and quality in prior quarters with a good mix of opportunities.
Year to date bookings of $744 million averaged 372 million per quarter with a book to bill ratio of 1.09 to one.
Q2 revenues of 341 million included $24 million from Coleman, Sir and Kim W.
Excluding acquired companies revenues of $317 million were 12% higher than last year Q2.
Year to date organic revenue growth was 8%.
Compared to prior quarters Q2 revenues were lower as a percentage of backlog due to the impacts of vacation periods, primarily in Europe .
Q2, ending backlog of $945 million with considerably higher than prior years backlog of 830 million and decreased slightly from our record backlog in Q1 of $982 million.
Although we have quarter to quarter variability a current backlog provides us with a solid base to generate year over year revenue growth.
Looking forward Q3 revenues are estimated to be in the 35% to 40% range backlog.
Moving to gross margins, we have seen a slight decrease as compared to the improved gross margins over the last five quarters, which progressed from 26% in Q1 last year to 26.6% by the end of Q4, and then 27% in Q1 fiscal 2000.
In Q2 fiscal 2000 gross margins decreased to 26.3%, primarily due to revenue mix and the summer vacation period, which resulted in under absorption of fixed costs.
The vacation impact is more predominant in our European businesses, which come from which comprise a higher percentage of our total business compared to the last few years.
Compared to Q1 to 70 basis point decline in gross margin was approximately two thirds vacation related and one third mix related.
Mix reflected higher PA engineering services revenues, which generate lower gross margins.
Excluding acquisition related amortization expenses and restructuring costs, Q2 s, SDMA with 48.1 million or a 6 million dollar increase compared to last year Q2 s asked you need a 41.7 million.
As you name has increased over the prior year due primarily to the addition of call Mr. and Kim W of approximately $4 million as well as increased employee costs and other costs to support organic growth.
Stock compensation expense has fluctuated over the last several quarters.
Income of approximately 1 million this quarter compared to an expense of $6.6 million last year.
At this caused a greater than 200 basis points margin fluctuation and does not reflect operational performance I will speak to adjusted earnings excluding stock compensation expense.
Q2 margins were 12.2% or 100 basis points higher than last year.
We're pleased with the progress we've made on our margins despite some normal variability from quarter to quarter and we're focused on.
Continuing to improve on a year over year basis.
Book, MW and Commissaries results were on plan and as expected.
Musters revenues were lower in Q1 due to due to the summer plant shutdown.
We are excited to both the joint call Mr. Ats pharma opportunity announced two weeks ago. As this supports our revenue synergy objectives in a meaningful way.
Of note. This 32 million dollar opportunity is the largest quarter call Mr. has booked and its 40 year history, and I'll answer and Ats are contributing equally to the work scope.
Moving to our reorganization. This plan is intended to drive.
Mint in our operations from cost containment initiatives and the closure of underperforming divisions.
Part of our disciplined capital allocation strategy that is also enabling our continued investment in high performing facilities to drive growth in our strategic markets.
Restructuring costs incurred as part of the reorganization are expected to be approximately $25 million and primarily included severance and lease termination costs.
Through the reorganization period over the next two quarters, we expect some downward pressure on margins as inefficiencies in the affected facilities will cause under absorption of employee and fixed costs.
These costs are estimated to be between 3 million to 5 million per quarter.
Commencing fiscal 2021, we expect the consolidation and closure of underperforming facilities and offices will start to add an incremental $15 million to $18 million of annualized earnings.
The reorganization plan will contribute to our margin expansion as we expect a positive adjusted earnings margin impact of between 110 and 130 basis points. What's the reorganization is complete.
Moving to the balance sheet are noncash working capital as a percentage of revenue decreased in Q2 to 10.7% from 12.4% in Q1.
Timing of deposits program milestones and payments of accrued liabilities caused the difference.
Cash provided by operations was 57.6 million in Q2 compared to 39.5 million last year.
Year to date, we have invested $23 million of our plan 60 million.
Dollar fiscal 20 investment in Catholics and tangible assets.
We continue to have strong liquidity with cash on hand of ahead $191 million and our credit facility of which approximately 623 million is available.
In Q2, we generated adjusted earnings per share of 29 cents compared to 17 cents last year or 12 cents increase.
Stock compensation expense accounted for half of the increased with revenue volumes accounting substantially for the other half.
On a year to date basis adjusted EPS of 55 cents grew from 39 cents last year.
16 cents increase is due to volume contributing approximately nine cents lower stock compensation costs contributing approximately.
And margin improvement of approximately one cents.
Our effective tax rate was 23% in the quarter going forward. Our effective tax rate is expected to continue to be in the range of 25% pre tax earnings.
In summary, we completed the first half of fiscal 2000, with both organic and organic growth over the prior year.
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 profitable growth.
Now we'd like to open the call to your questions. Operator could you. Please provide instructions for listening.
Ladies ladies and gentlemen, we will now conduct a question and answer session to allow as many voice is to be heard as possible. Please limit yourself to two questions first turn if you have a question. Please press the star followed by one on your Touchtone phone your questions will be pools in the quarter. They are received petion, Sir you lift her hands.
That if you're using a speaker phone for pressing any Keith one moment. Please for your first question.
Your first question comes from the line of Sherilyn Rad born from TD Securities. Your line is open.
Thanks, very much and good morning.
I actually wanted to start with a couple of questions on the reorganization plan.
And Andrew maybe you can start by just talking a little bit more about the underlying analytical process and what you envision the network looking like post completion.
Good morning Sherlon.
You know as we are the start.
This is part of our ongoing strategic review process, and we continually review and assess our markets the performance of our businesses and outlook to ensure we maximize the by referring to our customers.
And the facilities in locations that are being part of this process have underperformed for various periods, but more importantly, we have limited prospects to drive profitable growth going forward.
And when we step back and look strategically where we want to invest.
And more importantly, where we're not going to invest moving forward. This is the consideration that are put into these decisions and so as we've announced we're investing in certain areas of our business that we drive growth profitable growth and high level value to our customers and these areas are impacted from that decision.
And so he can you say how many facilities you expect will be impacted.
It's a it's it's less than 10, and there's there's a multi whereas if we're consolidating and or exiting.
Okay, and then this one's probably from or just in terms of the incremental operating losses for the next couple of quarters as you implement the plant will those run through cost of goods sold or <unk> or some combination of both.
They will be.
But I would say the impactful primarily in our cost of sales as we will continue to have our direct people and fixed overhead.
While we wind down and perform the consolidation activities.
And we'll the $15 million to $18 million of expected savings show up in the same place on the income statement.
Not yet primarily in the same place most of these costs would be.
Our cost of sales there would be minimal SGN a impact.
Okay, Great. That's very helpful. That's all from me.
Thank you Sean.
Your next question comes from the line of Mark Nevo from Scotiabank. Your line is open.
Hi, good morning, good quarter.
Excuse me sorry.
Sorry.
Maybe just to continue on that discussion just three <unk> again, just curious are some insight into the timing I'm. Just curious if there was any particular events.
That's sort of triggered this or maybe cause the underperformance or has it been sort of just.
And ongoing issue at these two facilities.
No Oh good morning March.
As we step back.
Let me be very specific on these this is true strategic decisions on where we're going to allocate capital and when we looked at these divisions and we do this again on an ongoing process for our strategic review of Ats globally. These areas, where they didnt perform to plan and we looked at the alignment to the.
Value they bring to customers and said when we're going to make an investment we're going to line higher at higher value divisions and locations and therefore, it really is around that continued strategic review of our corporation, where we want to lighten the enterprise and where we're going to invest and also as importantly, where we're not.
And invest moving forward and unfortunately these theories that are impacted by that.
Okay is it more about the geography or about the markets they serve.
So.
When we look across this is multiple geographies in multiple markets and income.
Then one thing to know as we look at our total capacity globally through these investments, we're making and through this process, we're expanding a continuing our capacity expansion.
So when you look at the ability to serve customers. We believe this puts us in a stronger position to offer that high level service.
Okay excuse me again.
Maybe just on a macro again it feels like I am just high level, Phil maybe not your results, but again I will not grow sort of inconsistent choppy and your bookings haven't quite strong maybe a stepped on this quarter I'm, just curious sort of what you're seeing and.
I think that any sort of material change from the last 369 12 months.
You are you seeing stabilization noticed just broadly sort of just curious.
Yes, so so mark I'll start with the facts and then I'll go into some specifics and then I'll talk a highlight if our welter arm. So first effect year to date were up for greater than 4% in buckets are our backlog remains healthy and additionally, our funnel remains healthy across.
Cross or verticals and so when we when we looked at the dynamics of HTS.
We are we believe we're moving into right direction that said, we constantly challenge that and part of that as I visit customers myself my team visits customers on an ongoing basis to make sure we're aligned with the challenges they face.
And what I can tell you. This is our leading indicators remain.
Healthy there remain that we're going to be looking at growth in within the here as we stated in the my announcement.
That said, we're constantly challenging ourselves to ensure that we aligned the business for for the high some of these customers.
I also mentioned.
The shift and I wanted to I want to talk a little bit about this because one of the dynamics. We're seeing is the funnel is still very healthy in the space. We are seeing some cases, where the process has taken longer than both of those have expected from an order process.
That said and it's primarily in North America that said, we believe this allows ats to offer the highest level value to these customers because their plans and their launch they don't move.
So they want to launch a product on this certain date or a model on this certain dates we have the ability to help them execute that plan now we need to win the work, but the funnel remains healthy in the space and I'd, even as recently in the last month visited several of these customers to know that they have their plans to move forward, but they want to line rather technologies.
So we are seeing some movement, there, but as a whole the investment thesis and investment plan, an easy is still holding true.
One last one and I want to highlight this because we're very pleased with the when I'm very excited about the joint conference there and Ats win that we announced recently 32 million largest order and connoisseurs history and also shows the septic fill and finish market. The area that we have targeted is a.
As an area that we really can align around so we're very excited about that we need to execute of course and deliver that value, but very pleased and the progress you've made.
Oh. Thanks. Thanks, that's very helpful. Sorry, the I missed a question or started to sort of circle back in the restructuring.
Three to 5 million incremental costs.
Is that limited are isolated to the second half or is that sort of continue into Q on Q2 next fix fiscal year.
No, but that's isolated to the second half and providing the range just based on timing how quickly can we.
Execute these activities as so transfer programs and then finalization of social plan.
Yes.
Okay, I'm, sorry, maybe just one last one and before I turn it over.
As the after sales service.
Oh, it feels like it's been a while now or talking about double digit growth.
Just I guess I'm, just curious as to the drivers sort of be honest as it does this just better attach rates, a new equipment or is it sort of going back to your installed base or is it better product sales maybe that the reason with other vendors on an issue from your clients are just began just high level.
Crews on to that.
Sure Mark we're pleased with the progress in nature, and what I can state as we've seen an increase across the board.
Team is executing the plan and we're moving into right direction.
What I can also state is we've got a lot of work today and we're pleased with the in the team's performance.
Had multiple quarters of consecutive growth and and we've also launched and we had the recent launch of our I O T solution and as you're aware. This is a strategic area of focus for our business and we're pleased with the progress we got a lot of work ahead of us.
Alright, thanks for thanks for time.
Sure.
Thank you.
Again, if you like to ask a question. Please press star and the number one on your telephone keypad. Your next question comes from line of Justin key lift from GMP Securities. Your line is open.
Good morning, and thanks for taking my call just on the E V opportunities if the customers a planned to launch dates remained unchanged is there a near term inflection point, where these projects need to get started in order to meet the timing.
Good morning, Justin.
So.
As as we walk through this absolutely we are getting to that timing and the challenges customer space is when they when they are really looking at the product set and ensuring they've got to finalize product.
They want to make sure before the automate that they have something that is really going to be closely aligned to the final solution and so it does put a bit of timing could.
Crunch on on the order process that said this is where we believe we can offer the highest level value for these customers. We have a history in this space, we have experienced in the space and when when we were to target an area where timing constraints are important and risk is important that's really.
An opportunity for Hps to highlight where two kids ability is and how we can help these customers.
Okay. So in other words.
If this continues to be pushed out a bit more that does that strengthen ats is positioned over competitors.
And we would like to things so but at the end today. We also know that there are other competitors that want to win this work and so we believe it puts us in a better position that said we earned the work and we work every day to ensure that our solution our technology, our commitment to excellence in execution aligns with the needs of the customer.
Got it and going back to the new a pharma customer when are you able to give some additional color on the size of this customer the key criteria in selecting Ats Im curious if ats previously targeted this customer prior to a cooler sure.
So I have to be somewhat selected but I'll provide some context first.
Ats Goma, Sir I'm not willing to this customer in the past number two eight you have done its own would not have won this work.
And number three this is a fairly large customer and they want to perform the service and we believe there's follow on work from from what we're providing today. So we're very pleased with the ability for us to execute that said, we need to provide the value to this customer before we can move to the matched up but from a standpoint of a win ace.
The fill and finish has been a targeted area. We're pleased with the progress the team did a great job and knowledge on us to to provide that Doug.
That's great. Thank you for taking my questions. Thank you Justin.
Your next question comes from line of Maxims to Chan from National Bank Financial Your line is open.
Hi, good morning.
Good morning, good morning Max.
Andrew had a question for you just have a bit more them on the microsites given obviously all the trade tensions right now with China I, we're starting to see some of the capacity being moved to a euro poor or North America, especially in the life Sciences space.
Can you maybe share some observations there if any.
Yes, sure sure Max.
Let me step back when we when we looked at this we constantly monitor this and what we've seen to date.
It's not driven a difference in customer decision. What we have seen though is there are constantly monitoring to ensure that they have the right capacity in the right regions to meet the demand in the market.
And so our view is we stay close with our customers, we have capability as you're well aware and all the regions that they might move their their product too, but we have not yet seen it really drive the decision process, we've seen more the demand in the region be that the impetus for them to move forward.
So at this time it hasn't been a negative or positive, but we view. It continues as it plays into the positive side for HTS you want to show agreed and then a quick question for Maria If I may when I look at the changes are noncash working capital I think it's kind of compares to 65 million a neutral on a year.
Today basis, how should we think for kind of the totality of the year. If you don't mind updating us on that front.
Well this.
I'm going to depend.
And it's variable based on what happens with the type program that we have you seen deposits.
Yes milestone payment.
We look at working capital percentage of revenue and we know that during the year off a little higher over 12%.
Come down to 10.7% looking at our working capital as a percentage of revenue, we're targeting to be in and around 10% range and we can see being there based on what we have today.
But it's possible to get up to 50% again based on the type of work that.
And.
Schedule et cetera.
Right now because I mean, unfortunately, I think what talking about sort of two different numbers and I. Appreciate obviously that you guide on kind of a yards to revenue, but is it conceivable that you're still going to have a draw noncash working capital. This year is that how you guys are modeling.
It's.
Yes.
It's possible, but again, it's hard it's hard to.
Yes.
Okay Fair enough. Okay. That's it for me thanks very much.
You bet.
There are no further questions at this time, Andrew to turn the call back over to you for closing comments.
Thank you operator, and thank you everyone for joining us today and I look forward to reporting our third quarter results in February have a great debt.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[laughter].