Q3 2023 ATS Corp Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, welcome to the ETS Corporation third quarter conference call and webcast.
This call is being recorded on February nine 2023 at 830, a M eastern time.
Following the presentation, we will conduct a question and answer session and.
Instructions will be provided at that time for you to queue up for questions.
If anyone has any difficulties hearing the conference. Please press star followed by zero for operator assistance at any time.
I'll now turn the call over to David Galison.
Head of Investor Relations at Etfs.
Thank you operator, and good morning, everyone.
On the call today are Andrew Hider, Chief Executive Officer of Etfs, and Brian Mcguire Wood, Chief Financial Officer.
Please note that our remarks today are accompanied by a slide deck, which can be viewed via our <unk>.
Webcast and available at Etfs automation Dot com.
<unk> cautions that the statements made on the webcast and conference call may contain forward looking information.
And our cautionary statement regarding such information, including the material factors that could cause actual results to differ materially from the statements and material factors or assumptions applied in making these statements are detailed on slide two of the slide deck.
Now, it's my pleasure to turn the call over to Andrew.
Thank you David.
Good morning, ladies and gentlemen, and thank you for joining us.
Hs is proud to report another quarter.
Our record bookings backlog and revenues.
Adjusted earnings were in line with our expectation.
And as anticipated.
Cash generation was strong as EV programs progressed.
Despite continued economic volatility.
Our performance in this environment demonstrates the strength of our strategy and market focus.
And then unwavering commitment to the Ats business model.
Was it which is at the core everything we do.
In the quarter, we announced two acquisitions.
<unk> made further progress on current integrations and.
And published our sustainability report.
We also completed a corporate name change and rebranding.
To reflect the evolution of Hs is a diversified.
I think logically advanced organization delivering solutions that positively impact lives around the world.
Our new name <unk>.
<unk> Corporation under.
Under the new trading symbol <unk>.
Better reflects the company we are today.
And create consistency in our brand presence.
Today, I will update you on the business and Ryan to provide his financial report.
Starting with our financial value drivers.
Q3 revenues were $647 million.
Up 18% from Q3 last year.
By a combination of acquired businesses and continued strength across our core operations.
Organic revenue growth was 10% year over year, reflecting good execution across our strategic markets.
Order bookings for the quarter of $979 million were another record.
Up 46% year over year.
Putting $355 million of life sciences bookings and $392 million from transportation.
Our adjusted EBIT margin in Q3 was 12, 5%.
Moving to our outlook.
We finished the quarter with a record backlog of over $2 1 billion.
Our backlog once again provides us with a solid base to work from in key markets.
Life Sciences backlog was $739 million in the quarter, we drove strong organic bookings growth versus last year.
Our funnel has been aggressively strengthen throughout the year.
We're also building our integrated funnel across life sciences businesses, and see momentum continuing to build with great. Examples of ongoing collaboration between SP co.
<unk> life Sciences systems and BARDA.
For example, this quarter SP partnered with commentary and booked an integrated solution that included a flexible filling line for vials syringes and cartridges with an isolator.
Synergies like this support our direction and the value proposition of our integrated life Sciences group.
Transportation ending backlog was $887 million.
Up 350% year over year drip.
Driven by the shift to electrification of vehicles.
Subsequent to the end of the quarter, we announced another $120 million U S and follow on work from EV.
Our experience in this space combined with market dynamics creates further opportunity for us to support key customers and the challenges they are facing and transforming their production capacity.
In food and beverage, we're seeing a strong funnel.
Typically in the produce processing and TEG filling spaces.
Our backlog is now at its highest level since we entered this space our energy efficient solutions continue to be in demand and a higher energy cost environment, particularly in Europe .
And energy governments are moving to Decarbonize and boost energy security our focus remains on supporting nuclear customers as well as those working in such areas as grid battery storage.
In Q3 received an order from a leading small modular reactor customer in the U S, which sets us up for additional orders for their production plants.
Consumer products, our backlog and funnel remains stable, however, inflationary pressures in this market can impact and consumer buying habits, which drives our customers automation needs.
On our digital journey.
Productivity visualization and data analytics can it can improve production outcomes for our customers by capturing and leveraging data in new ways and converting it to meaningful actions.
With our existing and expanded capabilities in.
Along with other HTS offerings, such as illuminate.
We are providing new opportunities for our aftermarket service teams to deliver collaborative value added services.
Aftermarket services remains an area of strategic focus across all parts of the business.
Our funnel remains strong and our regional networks are now supporting more of our acquired businesses, including CFT NSP and.
In addition to all of their operations.
On supply chain.
We are still experiencing higher prices.
Despite some improvement in lead times within the quarter overall lead times remain extended and the situation remains challenging.
Some of our component suppliers are experiencing gradual improvement that said, we expect continued pressure. So they are able to work through their backlogs.
We are prepared to operate with ongoing volatility in our supply chain and our teams remain focused on minimizing disruption to schedules and budgets through ABM savings workshops and other events.
Our ABM continues to drive the business forward during.
During the quarter, we completed 37, AVM events across all business segments and affecting all of our value drivers.
Key events in Q3 targeted on time delivery with a focus on process improvements and time savings as.
As well as margin expansion with a focus on material usage and cost savings.
As you know.
Events are directly aligned to enhance our eight value drivers.
<unk> also creates a continuous improvement culture that underpins our focus on profitable growth.
On M&A.
Integration of previous acquisitions across the business is progressing to plan.
And our funnel development remains active and healthy.
During the quarter, our peer group announced and finalized the acquisition of <unk> group based in Belgium.
And agreed to acquire <unk>, a well established automation systems integrator in southeast Asia and Australia.
These acquisitions add to our advanced process optimization and digital solutions.
And further strengthen our position in key regions and markets.
On sustainability report that we released in Q3 highlighted our 2030 targets.
Including three new ESG goals, and strengthen our commitments to our employees customers and shareholders.
Encourage you to review our report if you have not done so already.
On innovation.
We constantly work to strategically deploy capital and talent to create differentiated enabling solutions and drive return.
A few highlights and energy we are developing a manipulator system prototypes for fueling small modular nuclear reactors as part of the order I mentioned earlier.
Within food and beverage right Jack launched two new specialized machines to provide better imaging of produce lead generation for both is positive.
Within <unk>, we're testing a new solution for faster decontamination of Ace uptick pharmaceutical ice letters and hot cells.
So would be additive to our radiopharmaceutical product and technology portfolio.
And finally.
We held our fifth global innovate day.
The event featured over 100 people from for participating divisions, plus participation from a local college as part of our focus on community outreach.
Winning idea is expected to allow us to add laser marking laser marking functionality to our high speed simply platform.
All teams focused on ROI and quickly advancing concepts to refresh our innovation funnel in a single day.
Innovate day is a powerful way to bring our teams together to drive creative fast turn innovation.
In summary.
We are encouraged by Q3 performance.
Including our record bookings and revenue.
Notably our order backlog gives us an extended platform work on hand that contains high value mission critical work for customers.
We are pleased to be recognized again as both the best employer in Canada by Forbes magazine.
As well as a Waterloo region top employer.
And in Chicago, Hff's was recognized as being one of the best and brightest companies to work for by the National Association for business resources.
These are meaningful acknowledgements to help us retain and recruit top talent and drive further growth.
We're excited to refine and improve the ABM.
As a truly drives a competitive advantage for us.
Despite economic uncertainty our performance is validating our strategy and we remain confident in our ability to generate profitable growth across the business.
We look forward to continuing to deliver on our commitments to our customers and our shareholders.
Now I will turn the call over to Red Robin over to you.
Thank you Andrew and good morning, everyone I'll start with a review of our Q3 operating results and then provide details on our balance sheet.
Beginning with orders bookings were $979 million up 46% compared to Q3 last year.
The increase was driven by organic growth of 38% the.
The additional 6% growth from acquired companies and a 2% benefit due to foreign exchange translation.
During the quarter ETS booked another $221 million U S dollars and EDI orders from existing global automotive customer is an expansion of their program.
Bookings were up sequentially by $175 million compared to Q2 of this year.
Our trailing 12 month book to Bill ratio for Q3 was 191 positioning us well for continued revenue growth.
With Q3 revenues of $647 million total topline growth was 18, 3% over last year.
Unit growth was strong at nine 6% and related primarily to increases in the transportation and consumer verticals.
Card companies added seven 5% to revenue growth and foreign exchange translation created a one 2% benefit compared to Q3 last year.
Sequentially revenues were up nine 9% compared to Q2 of this year and were in range with our backlog conversion expectations based on program timing, including stage of completion of some of our large enterprise orders.
Our Q3, ending backlog of $2 4 billion.
Was 45% higher than Q3 last year.
With continued positive growth in our order backlog our revenue conversion for Q4 is estimated to be in the 29% to 32% range of backlog.
We make this assessment every quarter based on revenue expectations for both the execution of projects from backlog and work that will be booked and billed in the quarter.
Strong growth in our order backlog combined with the presence of longer duration enterprise programs has changed the Ranger backlog conversion for this quarter overall, the increased size and duration of our backlog serves as well.
Q3 gross margin of 28, 4% 140 basis points lower than adjusted gross margin in Q3 last year.
The year over year change was primarily due to the timing of execution of higher margin programs in Q3 last year as well as higher than normal inflation and longer lead times to your supply chain. This year.
Sequentially.
Adjusted gross margin compared to Q2 was up 30 basis points as we continued to effectively address challenges in our supply chain.
During the quarter, we saw some reductions in lead times on several key components and some price relief on raw materials from Q2.
However, electrical mechanical and fabricated parts were impacted by inflationary pressures and lead times remain longer than normal.
We expect the environment to remain volatile through Q4, and we are seeing continued price increases in some areas as I've noted previously over time, we were able to pass along many of these increases through our pricing and we are actively mitigating in other ways, including accelerating vendor order timing passing along increased pricing.
Contractually where possible and securing alternative sources of supply.
Moving to SG&A, excluding acquisition related amortization and transaction costs as well as $10 5 million of restructuring costs Q3's, SG&A was $93 2 million $13 3 million higher than last year, primarily reflecting incremental SG&A costs from acquired companies.
Third quarter stock based compensation expense was $9 9 million down $2 8 million from Q3 last year.
Sequentially stock based compensation expenses increased by $4 6 million as a reminder, our stock based compensation expense is subject to mark to market adjustments and is impacted by approximately $1 million.
For every $1 change in our share price.
Q3, adjusted earnings from operations were $80 6 million or 12, 5%.
Up $10 2 million compared to last year and up $5 $5 million sequentially.
Compared to both periods was primarily reflected revenue growth, partially offset by increased SG&A.
On restructuring actions are underway to implement our previously announced plan to improve our cost structure and efficiency, primarily through management head count and other cost reductions.
We expense $10 5 million in Q3 and of the total estimated cost of 20% to $25 million of this plan.
A majority of the remaining costs are expected to be incurred in the fourth quarter. Our estimated payback period is approximately 18 months.
Moving to the balance sheet in Q3 cash flows generated from operating activities were $116 million as we reduced our working capital primarily driven by timing of receipts against key billing milestones on some of our large <unk> projects.
Our noncash working capital as a percentage of revenue was 13% in Q3.
This was better than our stated target of 15% and an improvement from 16, 1% in Q2.
Over the next several quarters, we expect our period end working capital to fluctuate as we continue to work through large program milestones. This may cause some variability to our working capital percentage over the next several quarters.
We invested $25 5 million in Capex and intangible assets in Q3 compared to $11 3 million last year.
Had incremental spend this year to support our growth.
Our year to date spend is approximately $47 million and we expect to spend around $80 million to $90 million for the entire year based on the needs of the business and timing of projects.
Our leverage since our acquisition of <unk> in December of 'twenty, one when our net debt to adjusted EBITDA ratio was $3 one to one our leverage has reduced to $2 eight to one as of the end of Q3.
As noted in previous quarters, we generally target to be in the range of two to three times, but are willing to increase our leverage for acquisitions or for short term working capital needs.
During the quarter, we extended our $750 million revolving credit facility to November of 2026. We also added a two year $300 million term loan to our capital structure in order to provide flexibility and support our growth.
Our focus is on maintaining a strong balance sheet.
Giving us the flexibility to execute our strategies and drive long term value creation for our shareholders.
In summary, Ats produced another quarter of record revenue and bookings as well as adjusted earnings in line with our expectations.
We ended the period with record order backlog to support sustained growth and our global teams are working hard to pursue new opportunities to continue to drive this growth.
Through our commitment to the ABM, our objective remains clear to deliver value for our customers and our shareholders.
Now we will open the call to questions from our analysts operator could you please provide instructions.
Thank you ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press star followed by the one on your Touchtone phone.
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If youre using a speakerphone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Cherilyn Radbourne TD Securities. Please go ahead.
Good morning, Thanks for taking my question. This is Patrick Sullivan on behalf of show and Rod born in.
In the commentary around gross margins. It was mentioned that execution of higher margin programs in the prior period and some of the supply chain headwinds and.
And inflation played apart on the slight year over year decline looking at next quarter for the next quarters would you again be comparing to higher margin programs executing the prior period and I think you said that youre still seeing price increases, but would you would you say that the length of lead times.
As peaked or is moderating.
Hi, Good morning, Patrick So so a couple of items and I'll try and address all the points, but if I Miss one. Please please come back so.
First of all on on the comparison the year over year.
Youll recall, we booked.
A large life Sciences program, a year ago, and as I said most of that was.
So you did over the last year.
And so that's that's really what we're referring to in terms of year over year and so that was part of our Q4 results as well in terms of going forward.
If we if we start with where we are in Q3 as a jump off point in terms of margins.
The environment and the dynamics, we're dealing with today are similar to what we had in Q3. So we're in the early stages of some of these newer large enterprise projects.
Which will be additive and improve margins over time <unk>.
Supply chain challenges do remain.
A part of what we're dealing with in the short term and that's both from a cost and lead time perspective.
We've mitigated a lot of this to date, but it is still.
What I would characterize as a dynamic environment.
Our target.
Remains to Kurt.
Perform and drive margin expansion over the long term.
And certainly as the environment improves that is our expectation.
Okay. Thank you very much if I can have another one so sticking with the supply chain team.
You've mentioned in prior periods that food and beverage saw elevated impacts based on the need for certain materials stainless steels.
As we begin executing on more of these these large EV orders is there any anything specific to those projects that may be impacted from a parts or material availability standpoint.
The short answer is no nothing of note.
With food, we talked about in the past was there's a higher exposure to raw materials and as an example.
That business is a consumer uses a lot of high grade stainless steel.
Within what we're doing in <unk>, we don't have that same raw material exposure.
Good morning, the agenda just to add we have a very collaborative discussion with the customer on when Theres challenges how we both.
Come together to ensure that we minimize impact and so while there is certainly challenges we look to overcome those.
I've mentioned this in the past, but just as a reminder.
We go to daily visual management across the board here, we've aligned around ensuring that we look at short term midterm and long term countermeasures and the team continues to drive to minimize any impact across Ats.
Thank you very much.
Thank you. The next question comes from David Ocampo of Cormack Securities. Please go ahead.
Hi, Thanks, good morning, everyone.
Andrew if I take a look at all your your large <unk> awards, they've all been for one program with one North American OEM.
And you guys are opening up a second facility in Ohio, So I'm guessing that that facility and just for your one customer.
So maybe you could speak to where you are with other Oems as it relates to battery pack Assembly.
Absolutely and good morning.
Look we have we have an important customer and we continue to execute and as we look at the work. We've done we're very very proud of what we've accomplished to date and continuing to execute to align around.
This specific customer shifts that Chad as Youre, well aware, we have been in this market for over a decade.
<unk>, one work and executed work in Europe , we have multiple customers in the U S and therefore, while we're very pleased with our progress and our continued alignment with a value for this specific customer.
We work with many of the.
Mmm that are moving into this area in this space.
And when does that second facility in Ohio, coming up I know you broke ground last year.
Yes, so it will be.
Likely early April .
Okay.
And then Ryan I missed this.
On the call.
Cutoff for me, but the backlog turnover remains low just because of the EV related awards.
How should we be thinking about the range in terms of turnover as a go forward basis I'm, just trying to get a better sense on what we should be running through our models not just for the upcoming quarter, but for future quarters as well.
Yes.
Yes, David.
It's going to continue to be a little bit variable and it's really going to depend on on future bookings duration of bookings and so forth.
There has been.
A shift in the portfolio given given the growth in EV.
And these are longer duration projects than what we.
It would have typically have in our backlog in the past. So these are.
From start to finish typically 18 months to 24 months where is.
The average prior would've been in the 12 nine to 12 month range. So.
As these are part of our backlog is generally expected to remain lower now we also have shorter cycle business, we had product services.
Original equipment, which is more standard that does hub.
A shorter book to Bill cycle.
All of that work is growing but the growth in these large programs.
Cause this shift in the conversion rate.
Got it.
Thanks, guys.
Thank you.
Thank you.
Question comes from Michael Glen with Raymond James. Please go ahead.
Okay.
Thanks, Good morning.
I just wanted to start with the life Sciences segment. So if we're thinking.
You don't provide specific guidance, but if we're thinking over fiscal 'twenty four and 'twenty five.
You referred to the strong front I'm just wondering how you think that translates into organic revenue growth in the segment.
Hey, Michael.
Minor correction, it's actually $73 million in backlog in this area and I did comment around the strong funnel and let me, let me kind of walk a bit.
As you step back on this market we've seen.
Bookings growth.
More specifically some of the areas we're seeing around this is.
Auto injectors continues to be a strength area and if you're following some of the FDA approvals around the obesity aspect. Certainly this is an area that will help in an area that ats can can really support as customers drive here.
We're also seeing an impact and continued kind of alignment on growth on eye care and then in our radiopharmaceutical space.
There is a new radioisotopes, it's coming out of 202 five that we view, we've got a position that can really help customers at this new license job helps with the discovery and treatment of cancer.
And then as you step back and I talked a bit about this.
Total impact of our life Sciences group together.
And what that means on pharma and other other industries in other spaces, we've seen an increased growth in our in our funnel across whether it's RSP working with common share which was in my prepared remarks, as well as as well as we're seeing the likes of <unk> engage and really align around this with biodot.
And our life Sciences systems group really bringing higher level value to our customers. So overall, we view this as a key market for Etfs, one that we see and I mentioned it continued increase in our funnel and areas that we really can help our customers as they navigate and launch products on time.
On budget at the highest level of quality.
Michael.
But yes, sorry, I just want to add a bit of color around some numbers too so.
<unk> been a large part of our growth but.
Life Sciences order bookings also grew 30% organically in the quarter. So we are very pleased with the performance there.
The book to Bill over the last six months has been 111 to one so.
The business is performing very well.
Still.
It's still 40% of our of our total corporations bookings over the last four quarters.
Okay.
And just on.
Switching over to some additional <unk> and so on on the EV business. So a couple of questions.
We do receive frequently on this topic. So I mean, as we think about you referred to these milestone payments that come in from the Oems.
Can you identify what some of those specific milestone items are that trigger payment and then the other part of the question to us.
I know that you do look to mitigate cost when you build out programs or bookings.
Are you able to secure.
The cost input so youre comfortable with the margin profile on these on these larger programs.
Yes, so ill.
Third on milestones and and it's not unique to two EV. This is.
When we're doing turnkey.
Or even any equipment build we have milestone payments in all those contracts and they do vary from from from contract to contract or customer to customer but.
Typical milestones will be.
There could be an upfront deposit there could be a milestone around completion of design there could be.
Milestones related to receipt of materials.
Power on.
Completing the equipment in our factory or factory acceptance testing then of course site acceptance testing.
The level of milestone or the percentage of the total contracts associated with each does vary with a little bit unique.
As we do get we get milestones but.
Typically these contracts don't have an initial deposit so as we take orders and there is a working capital build and.
Some of the bookings we won earlier in the year so back in Q1 Q2.
We have received milestone payments on those.
As we look forward and some of the bookings we did in the most recent quarter or the last three months.
Those will get into billing milestones.
In the short term.
So all of that drives drive some variability and given the size of these EV orders, we do as I said expect some variability there.
In terms of your cost question. So our typical process is to go out and when we're when we're bidding on work in quoting work, we are going out to suppliers at that time and locking in.
<unk> on major components and.
It varies from contract to contract, but typically it's in the $60 to 80% range of materials that we are locking in and that gives us.
A lot of cost certainty on these contracts.
There's other things we do to so if a customer.
Requires us to use a certain component or a certain supplier we will build in.
Terms in the contract that allow us to pass on any any changes in pricing.
And so.
For these longer term projects, yes, we are able to mitigate a lot of that margin risks from inflation and.
And we also we also build in expectations around our own costs due to whether it's labor increases and so forth.
Well, we don't do a 100% it's not practical.
At that bidding stage, we havent done the complete design, but we do.
Get good coverage through that process.
Thanks for the information.
Welcome.
Thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
Our next question comes from Joseph <unk> of Stifel. Please go ahead.
Good morning, Thanks for taking my call and nice to see the momentum continue in the business.
On M&A, we saw two relatively smaller acquisitions contribute in the quarter.
Wondering in a more broad sense, how would you describe the funnel currently if theres been any changes and multiples and any possible verticals of focus that you would be looking to acquire into.
Yeah, Hey, good morning, Justin.
<unk>.
So look if I step back and characterize our funnel I would characterize it as is and remains healthy.
And as you've heard me talk in the past our focus has always been around how do we cultivate and strategic areas of focus and what we've seen and what we've seen in the evolution of Etfs and our leadership is our leaders are now driving that cultivation and their businesses and their divisions and so.
Not only do we do it from a corporate perspective. We also are aligning this with our leadership in just a case in point.
Z Rguest was really aligned with the business and they cultivated and they aligned with with.
Talking with this this new AD still need to close to the Ats group and convincing them that they should be a part of the family.
And so our funnel remains healthy we have key targeted areas no secret, we like life Sciences, we like regulated food and beverage.
The digital journey and continuing to add to the digital journey.
And we have done that we've continued to align around that.
Youre going to see us really continuing to monitor build out and stay very close with companies and technologies that we view will help ags and continuing to create strong shareholder value as.
As far as multiples, we haven't seen a marked difference as of today.
We have four criteria and our financial criteria is around ROIC. So that takes that into account and for the right acquisitions right areas of focus we would move forward.
Thank you I appreciate that and we saw the good cash generation in the quarter.
And we also saw some large EV contracts get announced subsequent to the quarter.
Maybe a question for Ryan is how do you see the working capital needs.
Moving into Q4, and next year and if it will remain below the target range.
Yes, good morning, Jeff So Q3.
Where the good cash generating quarter for us as we expected.
I would say, we do expect variability going forward in this and the contracts that we announced.
Early.
Early or late last quarter early this quarter.
Those will have an initial working capital build with them.
And some of those milestone payments associated with those will fall right around quarter ends and so.
If we get cash payments and the March 31 or April one it can drive a pretty big difference in that working capital percentage. So over the over the six months build longer term period, we do expect to continue to operate.
In the range of that target, but we certainly could see that target exceeded at a particular quarter and as we as we saw last quarter.
Understood and we saw the deleveraging occur in the quarter.
Orion is there a comfort range that you target or.
The leverage ratio could come up a bit on potential M&A.
Yes.
We talked about two to three times.
And operating within that and.
With with the.
The ability to go above four or certain M&A targets.
In order for us to do that.
And it's part of our normal diligence process, but.
In particular in this kind of environment, where there is a little bit more uncertainty.
Going to have to be really comfortable on the target and where they are.
And their cycle their working capital needs or Capex requirements.
<unk> ability.
But assuming we could we could get comfortable and tick all those boxes, we would be willing to add leverage to the balance sheet up into the into the mid threes.
Understood and thank you for taking my questions.
Thank you Justin.
Thank you. The next question comes from <unk> Khan of RBC capital markets. Please go ahead.
Great. Thanks, and good morning, just I guess, a question on sort of the EV side and M&A.
It is becoming a larger category for you and as you look at M&A is there a potential that maybe you look at other.
Opportunities to get involved within the EV space, maybe just beyond kind of the battery side or is the focus still really on some of your legacy.
<unk>.
Categories like life Sciences, food and beverage just curious how youre thinking about this sort of a growing business.
Yes, good morning.
Our funnel to FERC for M&A has has many industries and EDI is a portion of that and I would say.
We do look for to be very specific for mission critical areas and when I step back and look at where we are today with battery pack of somebody in pack out we would view this as a mission critical niche with a lot of potential.
And so we would look for those are continuing to build on that area. As we view that really does allow us to have a unique value into the markets and so yes.
If and when that becomes available we would be in a position to move where patient and you know we look at the four criteria, we want to ensure that any new AD will check all four and really align with longer term shareholder value creation.
Okay, Great and then alright, I think you've provided some color earlier on just how the milestone payments work.
Big Picture question, I guess, a typical project that I think some of these <unk> orders in over a course of 18 to 24 months, how many milestone payments are there over that period starting to understand how we should think about maybe cash flow.
From some of these larger projects are the orders.
Yes, good morning, Saba, So on average it's going to be in the 4% to six range.
Great.
The variation outside of that as well, but that would be the best way to think about it.
And sorry, if its done that I guess the four to six is typically across most major orders or this is particular to the EV space.
Yes that applies across all orders.
Great. Thanks very much.
Welcome.
Thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
Our next question comes from Maxim <unk>.
From National Bank financial Please go ahead.
And gentlemen.
Good morning, Matt.
Andrew I was wondering if you don't mind, providing a bit of an update in terms of the CSP.
Asset integration and how the cost base has been adjusts up there.
Yes. Thank you.
Yeah look we're.
Headline here.
On track on plan for this business and I will just tell you.
And the team have done a very nice job of lining this organization around the ABM continuous improvement.
They were part of a recent fairly large kaizen events across all of the Etfs.
This team.
To make progress we measure things aligned around when we do an integration around 30 call. It 30 days 90 days six months and we have a year look back and I would say they are on track on plan and we're pleased with the progress and Brian can provide a little more specifics around performance now.
Yes, good morning Max.
From a cost synergy perspective.
Well on track so.
Some of the some of the areas. We've targeted I mean, there is some day one cost from from the public company that are out there.
There has been improvements made in our cost structure through some of the reorganization and rationalization actions we've taken.
Their supply chain savings funnel is very strong and we've seen really good alignment with our team there.
It's made good year over year progress.
Up several hundred basis points from a margin standpoint.
As Andrew said really benefiting from the ABM.
Okay Super helpful. Thank you and then Andrew I, just wanted to circle back to one of the earlier comments you made around storage.
Just curious if you tried to.
Potentially wrap your head around sort of the scale of this opportunity to just given the.
They need for <unk>.
For that.
Obviously, I presume decline basis going to be somewhat different.
Go to market.
Strategy is going to be different relative to.
Oems on the EV.
EV side of things just maybe any color there. Thanks.
Yeah, Good morning Max.
So.
But let me start by walking a little bit around this market and we're able to utilize the know how that we've created.
For the EV shift, it's really benefit.
The customers that we're working with on this on this shift.
And so that allows us to take the experience and Knowhow the strong brand presence with our service support.
And technology to this market and so while it's early in its journey and it is early in its journey.
Do view that there is.
I would say nice upside for the potential growth, but it's early and I would say when we think about this this space and I used the phrase mission critical we would be considered mission critical on this move to this area and so early days.
Not giving you exact number on market size, because the market is new and it's growing significantly, but we need to execute and deliver the value for that for our customers.
But so you have secured work in this space will reconcile is it fair to say.
Correct, we have.
Okay. Okay. Thank you so much that's it for me.
Yes.
Thank you. Our next question is a follow up from Patrick Sullivan at TD Securities. Please go ahead.
Thank you for taking my follow up.
So many many months ago discussions around nuclear specifically opportunities within nuclear decommissioning, we're being had I was wonder if you can talk about.
The opportunities Youre seeing there or more recent world events and focus on security has shifted the context of those questions. It sounds like from your prepared remarks that the answer might be yes. So can you just talk a little bit about that thank.
Thank you.
Yeah, Hey, good morning, Patrick So while we've continued to see potential.
Potential in this in this area in this space I would say as a whole we've continued to expand around offering value into the refurbishment and we've just signed a longer term service agreement.
That space and the.
The recent award our second award in the small modular reactors is really taking shape and so decommissioning will certainly be an area of continued focus but we're pleased with our ability to expand into this new area and again early days, but certainly one as governments go.
Into either Decarbonising or energy security and when you step back and look at that nuclear.
<unk> is viewed as a greener option to be able to provide that that energy efficiency.
<unk> usage and so.
Pleased with the progress more work to do here. This is a niche area for Ats and it's one that we view that debt when aligned can offer high value for our customers.
Thank you very much.
That's all from me.
Thank you. The next question comes from Michael <unk> of Raymond James. Please go ahead.
Hey, Thanks for taking the follow up so just to come back in on that.
<unk> discussion so if <unk>.
Based on the work that you see right now I guess, you have a pretty good sense of where the margins fit.
And I think the verbiage.
I've used is that this will be margin enhancing.
Her time at that scale. So can you give us some idea of.
The path towards.
That work being.
Enhancing overall to your margins.
Yes.
Hi, Michael so.
Okay.
I'll speak to this in a couple of different areas just to be clear. So from a gross margin perspective. This is a key.
The business was it is generally in line with where we are from a corporate average, but it will drive operating leverage in that part of our business over time.
<unk>.
In the short term as I've talked about.
Theres a lot of dynamics that we're dealing with and so forth.
But what we're doing for customers here as Anders talked about its strategic and so it has enabled.
A different a different conversation commercially with them.
Okay.
It stands right now are the margins Youre seeing are they are they in line with the overall company average or some.
Somewhat meaningfully different.
They are in line.
They are in line, Okay, and the Capex guide was.
80% to $90 million was that the guidance that was given.
That's correct and.
As I noted or as it came up on the call we have a.
A couple of expansion initiatives underway, one is at a facility, which we expect to come online.
Early in the next fiscal year.
And.
That's what's driving a lot of a lot of the spend there those growth initiatives.
Okay. Thank you.
Thank you. The next question is from.
RBC capital markets. Please go ahead.
Thanks.
Andrew if I could maybe just follow up on some of the commentary earlier about nuclear I think.
You mentioned a couple of times some of the work Youre doing on the SMS side, we've recently heard.
One of the companies involved in this space talk about the Tam could be very very large globally.
Maybe you can just share some color on the type of work or the type of involvement you could have on the SME side obviously.
Still.
A lot of uncertainty there, but just curious kind of the work youre doing there and if youre.
Youre involved with the recent project Terra announced in Ontario as well.
So let me work backwards on that so the recent announcement is potential.
I'll just leave it at that it has potential.
Look it's early in this market journey and while it's been around for a while it's got a bit of a resurgence and again, we've had more than one award in this space the <unk> space.
And our mission is to really help these customers in this most recent customer prove out their technology prove out their capability.
And.
Pleased with the order we do view this has nice upside for Ats.
That said, we need to ensure that they can prove the technology before we start to build out kind of the full thinking on the markets, but if you step back what do we do.
And if you could see me right now.
Like Theres multiple tubes, we actually enable and help that as they are changing out the refueling process.
It utilizes ags core experience Knowhow capability. It's one that is really aligned with what we can provide for strong value into this space.
And really aligned to their ability to execute what they set out to execute and so.
We do view this as as having nice upside, but the technology needs to be proven and the capabilities to be proven.
Okay, great. Thanks, so much for that.
Thank you our last question comes from Justin Kew of Stifel. Please go ahead.
Thanks for the follow up on the aftermarket services I know there's been good progress in this area are you able to provide the growth in the quarter and what percentage. The aftermarket services is overall for the overall sales. Thank you.
Yes, good morning.
Justin so.
<unk> sales in the quarter. It grew in the low double digit range.
As a percentage it is it as high teens.
And is there a target on what the aftermarket services could get to as a percentage of sales.
So so Justin.
You are well aware I mean, our target is to be over 'twenty and then continue to drive this we have divisions and our businesses that.
We are close to 40.
And so when we and we have others that are under the mark of where they need to be and so our view is is this is strategic it's an area we've invested in.
And when you look at the customer behaviors.
Covid has gone from this as a nice to have two mission critical so our customers look to us to really drive this value and drive their ability to get their product on time on.
On budget and at the highest quality.
And we've invested here, we now have a north American service Center, we have a European service Center, we've got digital tools, we've got an online ordering process.
So all of that to be said, we do view this as a growth engine of growth driver. It is one that we would acquire a business. It becomes one of the core things we bring in early on in the integration because it's one we can help with and our teams in these regions can do different markets different capabilities and.
Help expand that penetration itself, while we're pleased with the progress <unk> low double digits in growth in the quarter.
Early days in our journey and one we think we can continue to drive.
Good to hear thank you for the follow up.
Thank you Mr. Hydro there are no further questions back to you for closing comments.
Great. Thank you operator.
We look forward to staying focused on our goal of creating value for our customers and shareholders as we continue to execute.
Thank you for joining us today.
I look forward to speaking to you on our year end in May.
Stay safe and goodbye for now.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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