Q1 2022 ATS Automation Tooling Systems Inc Earnings Call
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Great.
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Good morning.
Ladies and gentlemen, and welcome to the Ats automation first quarter conference call and webcast. This call is being recorded on August 11th 2021 at 830, a M. Eastern time following the presentation, we'll conduct the question and answer session and instructions will be provided at that time for you to.
Up for questions. If anyone has difficulties hearing the conference. Please press star followed by zero for operator assistance.
I'll now turn the conference over to Sherine, though how we director of Investor Relations at Ats. Please go ahead.
Thank you operator, and good morning, everyone and your main hosts today are Andrew Hider, Chief Executive Officer of Ats, and Ryan The Clark Chief Financial Officer for those who joined US by phone our remarks on accompanied by a slide deck, which is available at Ats automation Dot com before we begin I am required to provide the following.
And respecting forward looking information, which is made on behalf of Ats and all of its representatives on this call and you are cautioned that the oral statements made on this call will contain forward looking information and that involves risks and uncertainties, including those introduced by the COVID-19 pandemic. The actual results could differ materially from the <unk>.
Inclusion and forecast or projection and the forward looking information shirts.
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 and 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 forward looking information are contained and edge and <unk>.
Yes, its filings with the Canadian provincial Securities regulators.
And now it's my pleasure to turn the call over to Andrew.
Thank you Sharon.
Good morning, ladies and gentlemen, and thank you for joining us.
We're pleased to report the strong quarter for Hs.
Moving record order bookings and backlog.
With robust organic revenue.
And good progress on margin expansion with building on recent momentum.
We continue to execute our M&A agenda and close two acquisitions in the quarter started out and see our yeah.
The other is now part of our life Sciences for wood expands our capabilities and offerings for this important and market.
See I am GA of process automation solutions business and helps expand our customer and geographical reach.
We're excited to welcome both businesses to the Ats family.
Additionally, CFT.
CFT, which we acquired late in the fourth quarter is performing in line with our expectations and the integration is progressing well.
Today I will update you on business conditions, and then Ryan will provide for his report.
Starting with our financial value drivers Q1 revenues were $510 million up 57% from Q1 last year and up 28% sequentially driven by the addition of <unk>, which closed in late March 2021, as well as broad based business strength.
Organically revenues grew 28 per cent year over year.
And improvement that was augmented by the impact of COVID-19 had on Q1 revenues last year.
Q1 order bookings.
Or $637 million.
Double last year's level and up 38% sequentially.
She of tea and BARDA contributed approximately a third of order bookings growth versus Q1 last year.
And we saw strong bookings across most markets with large customer awards and life Sciences and transportation.
Our adjusted EBIT margin for the quarter was 12, 8% representing over 360 basis points of margin expansion versus Q1 of last year and over 40 basis point of the expansion sequentially.
Moving to our outlook.
Our backlog grew to $1.2 billion at the end of Q1.
Providing us with good revenue visibility and it's.
Solid business Foundation for fiscal 2022.
As vaccine Rollouts of picked up pace and a number of our global markets.
We're seeing an improvement and customer site access and reduce travel restrictions compared to the same period last year.
While the situation remains fluid and.
I'm proud of how our people have adapted and our ability to find creative ways to serve our customers.
By market.
We saw a positive conditions and life Sciences.
The strength in key sectors of medical devices.
From a and radio for the heart.
We continued to win mandates related to COVID-19, as we help our customers and the fight against the pandemic.
This work represented around 10% of our life Sciences bookings and 6% of our total bookings and Q1.
We're also seeing more traditional non COVID-19 related opportunities and the funnel of customers revived pre pandemic investment priorities.
Life Sciences represented 64% of our bookings this quarter and we expect the true manatee market for EPS.
And the.
We're seeing robust activity levels from both traditional Oems and new comers looking to expand their electrical offer.
We continue to be selective and the opportunities we pursue and one of a number of mandates and putting a large award and the quarter.
Our long track record and proven expertise and battery Assembly and test.
As a trusted partner as our customers navigate the complexities of <unk>.
Moving battery technologies.
We saw strength and food and beverage.
And with the addition of CFT, we're now separately reporting activity on this market.
And other areas of consumer we saw good activity and warehouse automation and well it cosmetics still hasn't recovered yet to pre pandemic levels.
And the energy, we continue to execute and see opportunities of nuclear for both refurbishment and decommissioning and Canada and globally.
I'd have to yourself services.
Order bookings remained healthy and revenues were up double digits versus Q1 last year and in line with our expectations.
We continue to utilize our regional service networks and.
And digital tools to facilitate access to customer sites as we navigate the pandemic travel restrictions and some geographies.
We see opportunities to expand the aftermarket services footprint to support additional areas of our business and create a better customer experience.
Yeah.
To summarize your outlook.
This is another quarter of strong order bookings.
That has led to a record order backlog.
And our funnel remains healthy and well.
Seeing a pick up and customer activity.
The pandemic environment continues to introduce some timing and approval of uncertainty when it comes to our customers' buying decisions. However, we're encouraged by recent customer demand signals.
Moving to the a b and.
Our continuous improvement playbook.
This was another busy quarter for our teams of multiple virtual kaizen and problem solving workshops held across the company with the focus on both operational and commercial improvements.
A few a b and highlights we have 15, kaizen and problem solving the workshops across the various ats divisions.
These events drove improvements in multiple areas, including bookings sales and operations.
One division and our life Sciences group used the Kaiser until eliminate approximately 600 hours, it's been and you annually and.
Non value added time by improving workflow and shop floor layouts.
At CFT, the all of the workshop aimed at improving the on time delivery of spare parts.
For implementing the daily visual management system, we expect the on time delivery to improve the 90 per cent or better and the next three months from approximately 80% today.
Our industrial automation team hosted another joint customer of that and Q1 focused on simplifying the process for handling change orders and significantly shortening the length of the process.
This is the second collaboration with customers and another positive outcome.
We also launched our second global virtual ABM boot camp on the back of a similar of that in Q1 and Q4 the received positive companywide feedback.
The tamp runs over a six week periods, and goodbye and self paced learning and we'll try and discussions with ABM leaders.
This modified virtual format enables us to continue scaling of our training and demonstrates how businesses across Ats.
Using the ABM to deliver tangible results.
On M&A.
The acquisitions continue to be and important complement the ats as the organic growth.
The integration of ex the CFT acquisition, which closed late in the fourth quarter is progressing well the performance tracking to plan.
As you know CMT scaled up of food and beverage exposure and complements our other food business Marco.
During the quarter and.
And during this first quarter, we acquired two businesses <unk> and C. I a M.
<unk> expands our life sciences capabilities, and low volume dispensing and enhances our position and the point of care and the lab automation on markets.
See I am a system integrator with a focus on industrial automation and adds to our capabilities and expand our customer base and reach and the pharma market.
She and now operates as part of our process automation solutions business.
We will continue to cultivate and evaluate acquisition opportunities consistent with our proven strategy.
Of course timing of the acquisitions would be variable and our approach to deploying our balance sheet will be disciplined.
And strategic.
In summary.
First quarter results or is that another proof point of the strength and resiliency of our business.
Going forward.
Our priorities remain unchanged.
And showing the health and safety of our employees.
Serving our customers well.
And creating value for our shareholders.
Our strong backlog provides good revenue visibility.
While our healthy balance sheet enables us to pursue our M&A playbook when strategic targets of rise.
And I will turn the call over to Ryan Ryan over the year.
Thank you Andrew.
And good morning, ladies and gentlemen.
This morning, I'll provide an overview of our Q1 operating results and future growth and revenues and operating margins and record order bookings and backlog and will then provide color on our balance sheet.
I'll start with the operating results and as an opening comment.
We are pleased with the pace of year over year growth and part of this reflected both the impacts of the pandemic on results from Q1 last year and the contribution of acquisitions.
Third our global operations and continued to execute well using our ABM playbook with strong performance delivered as a result of our ongoing focus on growth and margin improvement.
Bookings were $637 million up 96% over Q1 last year when activity levels were depressed by the onset of the pandemic.
Organic growth and bookings were 74%, partially offset by an 8% headwind from foreign exchange translation on.
Organic growth, primarily reflected new orders and life sciences headlined by a $120 million order bookings from the global medical device company for a fully automated manufacturing solution and we announced in early June.
Acquisitions contributed 30% with the majority of the incremental order book, he was coming and food and beverage due to the addition of CFT.
Compared to Q4 order bookings were up 30, 38% sequentially.
<unk> increased orders and food and beverage due to the CFT and continued strength and life Sciences.
On a trailing 12 month basis, our book to Bill ratio was 1.2, the one positioning us well for this fiscal year.
Moving to revenues Q1 revenue grew 57% compared to the prior year organic revenue growth was 28% due to higher order backlog entering the year as well as of year over year growth and services and after sales parts revenues, while foreign exchange was a 6% headwind compared to Q1 last year.
The acquired companies out of 35% for growth.
Revenues from acquired companies, primarily CFT and Biodot. We're ahead of plan due to the timing of project activities.
CFT typically experienced some seasonality and its business with higher revenues in Q1, and Q2 of the Ats as fiscal year due to targeted equipment deliveries ahead of the harvest seasons of some of its key end markets.
<unk> continued to experience favorable tailwind due to COVID-19 related activity.
Sequentially, our revenues increased 28% from Q4, primarily reflecting CFT and biodot.
Our record Q1, ending backlog of $1.2 $5 billion was 37% of higher than last year's 909 million orgs.
Organic growth and backlog was 24% due to higher order bookings through the year, partially offset by foreign exchange translation with the balance of the increase related to backlog acquired with CFT and bio done.
Life Sciences represented 59% of our period and order backlog with food and beverage representing 11% up from one per cent a year ago.
Looking forward our revenue conversion for Q2 is estimated to be and the higher end of the 35% to 40% range of backlog.
While we are pleased with the strength and resiliency of our business Covid will continue to influence the timing of customer orders and service revenues and the near term.
Moving to margins Q1 gross margin was 28, 2% up over 380 basis points from last year.
Gross margin reflected improvements made and the cost structure of our core business from a reorganization improved program execution and increased service revenues and other continuous improvement efforts.
And as expected. These improvements were partially offset by the acquired businesses, which operated with lower gross margin.
We also had lower recoveries under the Canadian emergency wage subsidy program and compared to the prior year.
Our teams have done an excellent job adapting to the current environment globally Ats operations continued to effectively address the challenges of operating with a significant portion of our work force at home the presence of extra health and safety measures and our facilities similar protocols on customer locations and travel restrictions.
Moving to SG&A expenses were $26.7 million higher than Q1 last year.
<unk> cost included $11.3 million of acquisition related amortization and $2.1 million of M&A transaction costs.
Excluding the comparable items in both periods Q1's, SG&A was $69.8 million $21.9 million higher than last year, reflecting incremental SG&A costs from acquired companies, primarily CFT for the full quarter and Biodot for one month.
First quarter of stock compensation expense was $8.7 million compared to $1.6 million last year.
Q1, adjusted earnings from operations for $65.4 million or 12, 8% compared to $29.7 million or nine 1% of last year.
The decrease in margin reflected efficiency gains made and our cost structure improve program execution and higher after sales service revenue as compared to a year ago.
Excluding acquisitions, our core business operated at a 14, 1% adjusted earnings from operations margin.
Operating margins from our acquired businesses were eight 2%.
And as a reminder, CFT operated at a low single digit EBIT margin prior to acquisition.
We expect to realize cost and revenue synergies over the next three years and will add earnings of approximately $14 million Europe consistent with our previously announced integration plan.
After operating the business for a full quarter, we are confident that we can unlock value and our state of timeframe.
With respect to Biodot as I noted part of the business is benefiting from Covid related activity.
As the Covid tailwind reduce overtime improvements to biodot business will be pursued through cost and revenue synergies, we have identified and targeted growth and it's high margin and consumables and aftermarket service business. While we're in the early stages integration activities are progressing well.
Moving to the balance sheet and Q1, we generated cash from operations of $48.4 million.
Compared to cash generation of 47 million last year.
Higher income was partially offset by an increase of the working capital investment.
Our non cash working capital as a percentage of revenue was very low at five 4% and Q1 down from 6% and Q4 and well within our target of maintaining working capital as a percentage of revenues below 15%.
While we're pleased with this result, we do expect our non cash working capital investment to increase during the fiscal 'twenty two.
We invested $14.3 million and Capex and intangible assets and Q1 compared to $5.7 million last year.
Higher investments primarily related to the expansion and improvement of certain manufacturing facilities and investments and <unk>.
As a reminder, our capex budget for fiscal 'twenty, two is $50 million to $60 million and increase over last year, reflecting our plans to add capacity to support growth and continue to invest and innovation.
We ended the quarter with good liquidity, consisting of cash of $216 million and availability on our credit facilities of approximately $664 million.
From a leverage standpoint, our June net debt to adjusted EBITDA ratio was 171, we have further room to deploy capital to pursue our strategies within our normal course target leverage range of up to two to two five times.
In summary, Q1 was a strong start to the year, including adjusted EPS of <unk> 48.
182% over of pandemic impacted the quarter last year.
The investments and improvements made and our business are driving growth resiliency and margin expansion.
Our teams executed efficiently to meet customer needs, while maintaining a safe working environment.
Through our M&A activities, we've created a block of broader platform and food and beverage on adding CFT is of components and Marco while the additions of Biodot, Ncis and provide us with new capabilities and life Sciences.
Going forward, we had a record order backlog and strong balance sheet and available liquidity of the combined to provide Acs for the solid foundation to pursue our growth strategies.
Now we will open the call to questions from our analysts operator could you. Please provide instructions. Thank you.
Ladies and gentlemen, we'll now conduct the question and answer session to allow as many voices to be heard as possible. Please limit yourself the two questions per person.
If you have a question. Please press star followed by one on your Touchtone phone your questions will be pulled and the order. They are received please ensure you lift the handset if you're using a speaker phone before pressing any keys one moment for your first question and.
And your first question comes from Mark Neville from Scotiabank bark. Please go ahead.
Hey, good morning, guys.
Great results.
Maybe just start with I just wanted to understand the margin.
I guess sort of <unk>.
Apples to apples and it looks like EBIT margin is up roughly 170 basis points sequentially.
I appreciate some of the things you mentioned, but just maybe kind of help us understand.
And what drove the quarter over quarter performance and maybe trying to piece of the part of if you could.
Yes, Hi, Hi, Mark good morning.
So so.
Compared with the so you're asking for a comparison of Q4 is that correct.
Yeah, I got the I think your 14, one this quarter ex acquisition last quarter, you were 12 four.
Let's say sort of core business, yes.
Yes, I mean, we're seeing we're seeing a couple of items. So.
And first we're realizing benefits from from <unk>.
<unk> cost structure so.
We undertook restructuring activity last year, and we're seeing the payback on that.
We've also continued to have a really good program execution and our core business.
And we've had good progress on our other margin expansion initiatives.
And so it fits.
No.
As I think about it.
It's all normal course and good.
The execution of the business.
Alright.
Sounds good.
Maybe just a question it doesn't feel like there is any impact from maybe and I'm just curious is.
You know we're hearing all of these.
And every manufacturing cover the company and cover talk about inflationary pressures supply chain issues.
I'm just curious if you're actually seeing any impact of it doesn't seem like it better and I'm curious if there's any impact.
Yeah, Hey, good morning, Mark.
But the short answer is we really haven't seen anything material to date.
And I just said our supply chain teams are remaining and their focus and being vigilant on the SaaS back end and a couple of comments just to wrap that summary, where we are seeing and impact.
And is when we've seen call. It shorter lead time products or quick turn product call. It a day or several days those have moved out of three to four weeks and and at times longer and so the shorter turn items and created a bit more of a challenge up Fortunately, we've been able to have workarounds and we know the law.
Lead times, and we can work to mitigate those those areas that we've seen and impact on additionally.
So when you think about the inflationary areas and we're not immune to those of those areas. We also have a very strong playbook and the journey of our business to go after where we want to keep driving the supply chain and and longer term strategy in place around where we're going to continue to move our supply chain, So where are we seeing price pressure.
And where we've seen call. It this area of rise, we've been able to be proactive and mitigate or even continue our trajectory and our margin expansion. So overall I would say the team has just done a terrific job and we're really pleased of the progress that said.
It is something we're being very very focused on and very vigilant around to ensure that we continue to mitigate impact across the ats.
Alright, thanks walks out of.
And a bunch of other questions and I'll jump back in queue. Thanks.
Your next question comes from Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks, very much and good morning.
So Andrew I think the supply chain disruption, resulting from Covid didn't really unprecedented and you know in terms of and the duration and severity. So first question is could we get and bit of an update on your customer interactions and and just what you're thinking in terms of.
Re shoring and other adjustments and their supply chain.
Sure and.
And good morning, Cheryl and I haven't been of pieces from on a part of all of that and I'm going to talk about.
The first and foremost the order process and we haven't seen customers pulling in or pushing out based on this and the natural area of you would go to is automotive and that would be of natural consideration.
But in our automotive and our focus has been on the <unk>.
And battery pack and tests and.
On the module part of the process, which is core to that shift and so we haven't seen an impact here from a pushout or Poland and and it's been aligned with customers' long term plans for their capital spending and capital deployment.
If we step back then and look at the onshoring of we call it onshore and supply chain Derisking and we don't separate those two we kind of bucket size on both.
And what I've talked to customers and and as you are well aware I talk to customers on a frequent basis I'd say roughly 50% are talking through this and about 2025 per cent of placed orders with our business.
Additionally.
When you look at some of the awards, we've got and while they might not be a lines of this there will be wrapped around expansion of capacity and so if you look at that $120 million order that we won on the medical device business and in Q1, which.
The big win Big order for Us and certainly has.
And then in the area that we've been aligned with this customer for some time the focus was around being able to build out their capacity to meet demand and they saw a demand increase from from this environment the situation and they aligned with our strategic direction as we need to build back capacity.
And of that demand out so we have seen some shift there I would say is it directly in line with onshoring no. It's more in line with their strategic plan and on building our capacity and capability and automation is a natural thought consideration for those for those expansion. So overall, we do think this is an area of that.
We're going to continue to support automation.
We view, it's an area that certainly it is going to be a key focus for us.
But we haven't seen costs.
The increase in demand as of yet.
Okay, and my second question and probably more for Brian on.
The year over year increase and part sales pretty math and.
Just wondering if you could speak to how much of that with the organic versus acquired and qualitatively and give some color on and what that means for.
Respective.
Yes, good morning Cherilyn so.
So part of that certainly was.
And was due to acquisition of the majority of with two of the acquisition so of CFT.
It has kind of the.
The large.
Purchase business and there was some of the was year over year organic growth and the core business as well.
And just directionally is that positive from a mix perspective.
In terms of margin are you asking yes.
Yes, so generally speaking, yes, generally speaking yes.
And that might you. Thank you.
Thank you Shannon.
Your next question comes from just and keyword from Stifel GMP Justin. Please go ahead.
Good morning, Thanks for taking my call and nice to see the results of <unk>.
For the CFT acquisition, there's a implied some good organic growth in the quarter and.
Setting up pretty well and as far as the outlook for the vertical I'm. Just wondering if you could provide some context on what the demand drivers for the food and beverage space and if the inflationary backdrop is impacting on one of the demand.
Yes, good morning, Justin.
So we have seen a nice progress here and I will just start with it's still early with DFT as part of our journey and and.
As I highlighted in my opening remarks were pleased with the the playbook that we've launched for for the integration.
And the engagement from the team.
So as I step back and look at this business they did for kaizen events during the quarter and and it just highlights the the.
The the drive for this organization to really call it continuing to improve and focus on their markets, where we've also seen as we've seen and a nice par balance around potential and.
And the strong customer engagement from on the CFT and one of the area average as the highlight is.
We identified some synergies early on on the process and while it's early and I state that directly we've only had them for several months of our business.
We have already started quoting the CFT robotics in some of our life Sciences business and so pleased with the technology and pleased with the progress and certainly it's the synergy aspect, we're seeing some real strong potential to really line around what we signed up for on the.
Delivering and the results Brian is there anything you'd add to the well yes.
So just and just to just a couple of items, so as I talked about and.
My remarks during the <unk> there is some seasonality to cft's business and so when I look at.
The margin performance.
This quarter.
And a little bit ahead of of they're executing well and and some of that is related to some of the constitutes of some of the cost of energy, we identified and and some of that as higher volumes and and part of that is related to seasonality.
Okay. Thank you for the out of context, and then for acquisition is the pipeline is still active or is the focus on integrating the recent acquisitions.
We're just completed and if you can just provide us and update on the targeted verticals that you could possibly enter if it's new or existing and also what.
You see as the capacity for additional M&A.
Sure and and headline here Justin It is and remains active.
The funnel is healthy and it's focused bolt on and on platforms as well as well as tuck ins and.
And so for instance, and the quarter, we announced <unk> and bio that book very attractive additions to Ats and the view, we can help those businesses achieve for potential.
And so the funnel remains healthy.
No no surprise on the markets that we've been targeting.
And we view that that our ability to cultivate is on the increase in cash.
Case in point.
After we acquired CFT and one of the benefits, we had with certain customers of certain certain called the competitors or in the same area of processing reached out and really aligned around whether it's a potential discussion on cultivation or around the potential partnership and and.
It's just an area that we certainly have continued to drive and and as I will always state and we are disciplined and and when we identify the right targets. We can move at a very fast pace.
And just.
To answer your question on capacity and so from from just purely balance sheet.
And we still have kind of Tam.
Ample capacity and the $500.600 million range and it really depends on on price and the financial profile of the asset, but that's the general range that we would have available today.
That's helpful and thank you for taking my questions.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
Okay. Mr. Hider, there are no further questions at this time.
Thanks, Operator before we let you go a reminder, that we will host our virtual annual meeting tomorrow, beginning at 10 a M D.
Details are available and the management information circular and on our website.
This was another strong quarter for the company.
And of Great way to start of fiscal 2022.
I would like to recognize the hard work and dedication of our teams across the Etfs that made this possible.
Thank you for joining us today I look forward to speaking to you on the Q2 call on November stay safe and Goodbye for now.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Yeah.