Welcome to the ATS Corporation Second Quarter Conference Call and Webcast. This call is being recorded on November 06, 2024 at 8:30 a.m. Eastern time. Following the presentation, we will conduct a question-and-answer session. I will now turn the call over to David Galison, Head of Investor Relations at ATS.

Thank you, operator, and good morning, everyone. On the call today are Andrew Hider, Chief Executive Officer of ATS; and Ryan McLeod, Chief Financial Officer. Please note that our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available at atsautomation.com. We caution that the statements made on our 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 the material factors or assumptions applied in making the statements are detailed on Slide 3 of the slide deck. Now it's my pleasure to turn the call over to Andrew.

Thank you, David. Good morning, everyone, and thank you for joining us. Today, ATS reported second quarter results for fiscal 2025 which as expected were challenged due to lower revenues and transportation where we realigned our cost structure to protect margins and drive performance improvements. We are pleased with execution across the rest of the business, notably in Life Sciences where we drove our highest ever quarterly bookings both organically and through our recent acquisitions. During the quarter, we successfully completed the acquisitions of both Paxiom and Heidolph. Both of these companies provide differentiated solutions across a range of industries that we expect will be a strong complement to our existing portfolios in food and beverage and life sciences. Today I will update you on our business and markets and Ryan will provide his financial report. In addition, as we disclose today, we have been and continue to be engaged in ongoing discussions with one of our EV customers through respect to outstanding payments owed on large EV projects. Ryan will provide additional information in his remarks. Starting with our financial value drivers. Order bookings for the quarter were $742 million, flat year-over-year as strong growth in life sciences offset lower EV bookings as expected. As we had previously noted, we expect transportation to be a smaller portion of our overall business going forward. Q2 revenues were $613 million, down 17% from Q2 last year, mainly due to expected lower EV revenues. Recent large program wins in life sciences will ramp up revenues in future periods. Adjusted earnings from operations in Q2 were $57 million. Moving to our Outlook. Order backlog ended the quarter at just over $1.8 billion with trailing 12-month book to bill ratios once again at or above one in all market verticals except transportation. By market,…

Thank you, Andrew and good morning everyone. And thank you for joining us this morning. Beginning with our operating results for the quarter, we drove solid order bookings of $742 million in line with Q2 last year. Life Sciences recorded the highest quarterly bookings in company history driven by organic growth with contributions from acquisitions primarily Avidity. Our trailing 12-month book-to-bill ratio at the end of Q2 was 1.06 to 1. Excluding transportation this ratio was 1.2 to 1 with all other market verticals maintaining a book-to-bill ratio above one. Q2 revenues were lower as expected at $613 million. This a 16.7% decrease compared to prior year. Organic growth in life sciences, consumer and energy was strong. We also realized the 6% contribution from recent acquisitions. This provided some mitigation to lower revenues in transportation following peak EV contributions from large order bookings in prior periods. In food, lower revenues were primarily a result of a tougher comp in Q2 last year when we benefited in Europe from a surge in energy costs, which drove demand for our energy-efficient solutions in primary processing for the tomato market. Moving to earnings. Q2 adjusted earnings from operations were $56.5 million, down 43% from Q2 last year, reflecting lower revenue volumes. As I noted, headwinds in transportation reduced revenues and resulted in operating losses in the quarter to those businesses, which negatively impacted overall company profitability. Q2 gross margin, excluding acquisition-related inventory fair value charges, was 29.6%, an increase of 123 basis points from the prior year driven by an improved mix of higher-margin programs and supported by an improved supply chain environment. On SG&A, excluding acquisition-related amortization and transaction costs, second quarter expenses were $120 million, a $15.4 million increase over the prior year, primarily from incremental acquisition-related costs, mostly from Avidity,…

Thank you.[Operator Instructions]. Our first question comes from the line of Sabahat Khan with RBC. Please go ahead.

Great. Thanks and good morning. Maybe if you can just give us a bit more color on some of the puts and takes in the backlog. I know Andrew, you provide a bit of color on just a broader outlook. But maybe just the moving pieces between kind of the new orders, the order that you removed. And maybe more importantly, just the discussions you're having, particularly in life sciences, food and beverage and just kind of trying to get a perspective on the outlook as we head into sort of the back half of this fiscal year per unit and into 2026. Just your confidence on sort of the next year being a bit more of a growth or an organic front. Thank you.

Yes, good morning, Sabahat. So it's Ryan. I'll start. So as we said, bookings in the quarter were $742 million. In terms of backlog adjustments, there are about $187 million in the quarter. The majority -- and that's a reduction. The majority of that relates to the large EV program that was put on hold several quarters ago, and we have now removed that from our order backlog as we don't expect the program to proceed. Other than that, there is some normal core scope changes we're content gets removed, stations, change, capacity and so forth. But nothing of note in terms of size. As we said, we feel very good about where we are from a backlog perspective. We have record order backlog in Life Sciences. It's up 32% year-over-year. Consumers up 9%. Food is up 30% and energy remains strong. It's flat year-over-year. So we are up in all markets with the exception of transportation and where energy is flat.

Yes. And Sabahat, maybe I'll just add on a little bit here. Ryan touched on it, but if you look across our business, all markets except transportation book-to-bill ratio -- 12 months is another one. So overall, a good quarter in life sciences and other parts of the business. And as expected, lower revenue and margins in transportation. And obviously, we're mitigating that risk and limiting that marketing impact. Additionally, we closed two acquisitions within the quarter. Very strategic, very much aligned with the future and where we're driving the business with Paxiom and Heidolph. So highest life sciences backlog and history, trailing 12-month book-to-bill ratio above one in all markets except transportation and funnels remain healthy.

Great. And then maybe just on the kind of the rightsizing within the transportation business. Can you maybe just share some color on what cost reductions or rightsizing or maybe reallocation you've undertaken thus far and what might still be remaining?

Yes. So as we talked about, we spent about $17 million in the quarter, primarily related to headcount reductions. We've also reallocated resources and that's both people and footprint to other parts of the business. It's primarily life sciences. From a payback perspective or an ongoing savings, it's -- the savings tied to the spend are well in excess of the spend and most of it relates to direct labor. And as we talked about, really making sure that our cost structure is aligned to the market activity in our transportation vertical. And most of the actions are complete. There is -- there are a few that do take a little bit longer to implement, and we expect those will be completed in the third quarter.

Great. And then just one last one for me. On the EV work that you're doing for your large customer, just to be clear, are you still kind of chipping away at the work for this client while you work on collections for some of the pass work? Or is that on hold? And then secondly, is there -- are you able to provide some perspective on if there's a time line on how long it may take to figure out the payments on the work already done? Thank you.

Yes. So Saba, before we address additional questions on our EV projects, just to let you know that there are some items we can't discuss. And that's including the name of the customer as well as certain contract operational and financial details beyond what's described in our disclosure materials. Now we'll be obviously forthcoming as we can. We understand that we have to draw the line just given the nature and status of customer discussions. What we can say is we've delivered equipment according to our contracts and where we fully commissioned the equipment, it's meeting or exceeding expectations. Many of our projects have a high degree of complexity and that requires ongoing discussions with our customers. In this case, very recently, our conversations have become more challenging. And we continue our discussions with the customer, and we're hopeful that we'll come to resolution, but we're prepared to exercise our rights to be paid for the work we've done.

And I'll just add on in terms of time line. As Andrew said, we are continuing discussions. We're hopeful that will come to resolution, but we're also prepared to exercise our rights to be paid for the work we've done. There's a variety of ways we could pursue resolution, but that will be dependent on how discussions go that will ultimately drive time line.

Great. Thanks very much for the color.

Our next question comes from the line of Justin Keywood with Stifel. Please go ahead.

Good morning. Thanks for taking my call. Just on the EV discussion in the opening remarks, there was some commentary expecting the EV segment to be a smaller percentage going forward. Any updated parameters on what that could be? Thank you.

So Justin, good morning. It's -- I mean as we look at it today, it's about 11% of our order backlog. So I think that's a reasonable range in the high single digits, low double digits.

And are any indication of that around 10%, how diversified would that be? Would that comprise of a number of customers? Or would that still include the large OEM?

Yes. Good morning, Justin. So if you step back and look at our funnel, our funnel is healthy. It's diversified customers and it's on a more smaller scale of projects. And I would say the large scale, while they're certainly out there, given the market dynamics, we're seeing more in line with continued execution, but a diversified customer base.

Thank you. In discussion on margins, there was also a commentary that there could be some continued impacts. But is it fair to assume that fiscal Q2 is low and there would be some progression in the back half of the year?

So Justin, yes, that is fair. And to provide a bit more color. So we've spoken about headwinds in transportation, excuse me, an EV that's impacted our revenues. We are seeing growth in our other market verticals and our book-to-bill -- excluding transportation is 1.2. So we do expect improvement as revenues continue to increase from Q2, and we'll also see the benefit of our lower cost structure in our transportation business that will benefit our margins. So yes, your assumption is correct.

Thank you. If I could just slip in one more. The expected exit leverage ratio, did you have that?

Our leverage is 3.4 times.

And is there an anticipated exit ratio for fiscal 2025?

Oh, sorry, I didn't understand your question. Well, so again, we're -- we talked about in our prepared remarks, our commitment to reducing leverage to towards range. I think outside of the working capital that is tied up on our large projects, we do expect to see improvement from where we were in the second quarter in the rest of the business. And so what I'll say is we expect improvement over the -- by the end of the year, but I'm not going to provide a precise time line on when we get there.

Okay, thank you very much.

Our next question comes from the line of David Ocampo with Cormark Securities. Please go ahead.

Hi, thanks, good morning everyone.

Good morning.

I just wanted to follow up, Justin's question, but ask it a different way as it pertains to M&A. I mean if there's any delays as it relates to the payment, I know you don't want to put a time line on it, but it does put your leverage probably closer to the top end of where you're comfortable with. Does that cause your thoughts on M&A just because you guys are always cultivating, but your leverage ratio may be quite a bit higher than where you guys would like to be post the deal?

Yes. Good morning, David, I'll start here. First and foremost, we've just added to strategic acquisitions to the business. I'm very pleased with the addition of Paxiom and Heidolph and we're actively engaged to integrate those businesses and really help them achieve their aspirations. And early indications are very positive with both businesses. So pleased with the closing of those two, and we've also added new reality. And so nice additions within the quarter. If we look at our funnel today, our funnel remains healthy. And as I said in my prepared remarks, oftentimes, cultivation takes time. And we will continue to cultivate and while we're in the process of going through that. We're going to look to delever and really build up our ability to execute for the future. So we'll continue to cultivate. Our funnel remains healthy, and we'll be balanced in the approach, but we're pleased with the additions, and we're going to execute the plan.

Okay. That sounds good. And then just the last one here for Ryan. I mean, we haven't really seen these large life science wins in the past. Maybe you can walk us through how the revenue recognition process works as it relates to -- as things get booked into the income statement here?

Yes. So I'll talk through this, but feel free to follow up. When we talk about large projects, they typically go through three phases. There's the design phase. There's the assembly phase and then they get delivered and commissioned on site. Typically, the initial design phases are lower revenue recognition periods and that just reflects we have less cost going into the projects. As we get into assembly, we start bringing materials. We have our workforce deployed in factory. That's the highest revenue recognition period and then commissioning again, is typically a lower period when it's being installed commission validated on site. The duration varies large projects typically are over a year. In some cases, they can be up to 24 months. In Life Sciences, I would say typically in the large size your 12 to 18 months in duration. And again, from a revenue recognition kind of follow that normal distribution pattern. And so in the quarter, if I look across our top 10 orders, there was a lot of life sciences in that radio pharma, drug delivery, contact lenses, wearables. There's also a consumer, there's nuclear in the top 10. So we're very pleased with the bookings. As I said, we have record order backlog in Life Sciences and are very encouraged by the funnel activity in that vertical.

Okay. That's helpful. I'll follow up off-line to make sure I have everything. All my ducks in order in terms of modeling this. Thanks very much.

Thanks, David.

Our next question comes from the line of Patrick Sullivan with TD Cowen. Please go ahead.

Hi, good morning. Thanks for taking my question. I guess life sciences currently over 60% of the backlog with everything else in that 6% to 12% range. Do you have an ideal target mix for that? I guess would you forecast food and beverage to take over like a comfortable number two position? Do you have any guideposts for the range you'd like to see there?

So not specific in guidance. What I can tell you, if you looked at M&A and if you looked at our focus on innovation and product launch, Life Sciences is a key area of focus for our business. And we're very pleased with the progress. Our biggest backlog in history. And across the board, minus transportation above a book-to-bill ratio of 1.0. With the addition of Paxiom to our food and beverage space, really excited about the potential. And Paxiom came in the food space, but we're also seeing a lot of synergy potential in our life sciences area, and our synergy funnel continues to grow in that space. So that would put parameters on it. What I can tell you is our areas at the make up, call it, ATS as we move forward is largest in life sciences, food. Nuclear continues to be an attractive piece of the business as well and in niche application and our consumer products also continues to do well. Transportation is going to be a small portion of the business.

Okay. Great. Thank you. And then I guess, Andrew has mentioned on a recent webcast that Comecer, you've roughly doubled the top line of the business since it was acquired according to certain forecast, radiopharma submarkets are expected to grow at pretty strong CAGRs out to 2028. I guess where does ATS see opportunity for that business? Is it the diagnostics versus therapeutics? And I guess, are you guys in a position to outpace some of those industry expected growth rates?

First, we actually opportunity in both areas. And boy, Comecer's continue to execute both operationally and commercially. Very pleased with the progress. This team came on, they really aligned around the ABM and taking a hard look at how they set their business up to drive expansion in their core markets. And so -- the market is an attractive space. The business executes and really drives high value for our customers. And one of the most recent wins that we had is in the therapeutics area, and we had a large order from a customer. I think it was our single largest award within the quarter. And Comecer there continues to bring high value in the space. And not only that, I actually talked a bit about their focus on technology and Modis being a new launch in their space. And so they're not only bringing value in their core. They're also innovating and designing and building out capability to really have higher value for customers as they grow and continue to launch exciting products within the cancer arena to fight and combat this area.

Okay. Great. Thank you. If I could ask one more. So I think it's been said that recurring revenue for any given segment of the business can range from 25% to 35%. Are you able to share which segments kind of index higher or lower on that scale?

So look, overall, I would say -- okay, let me walk through this one a little bit. First, I said between 25% and 35%, we're actually in the high end of that as a total enterprise. And we're pleased with the progress we've made. Now we see actually a bit of a higher level, typically in life sciences, and we've added businesses around this. So think of Avidity where they're going to be 40-plus percent. And Heidolph is going to be a very high portion of that as well. And so we see continued ability to expand here. We are targeting to get to a number in the future at or above 40%. That said, we've got some work to do. And I would say we're on the higher end of that 25% to 35% as a total corporation and we expect to continue our trajectory and launch solutions and capabilities in this area.

Okay, great. Thank you very much.

Our next question comes from the line of Maxim Sytchev with National Bank Financial. Please go ahead.

Hi, good morning, gentlemen.

Good morning, Max.

Maybe just thinking about the transportation market, a little bit sort of more removed dynamic, like in terms of the portfolio composition, kind of on a going-forward basis, do you think still that this is kind of the good market to be in? And what are your thoughts maybe as you think about especially with elections in the U.S. and I mean, arguably, EV market facing more pressure on what was known yesterday? So yes, maybe any thoughts there?

Yes, good morning, Max. So look, we have rightsized our business for the market dynamics. And we walked through that Ryan kind of provided a bit more color on the reorganization and how we've really aligned this business for the market expectation. And we expect this to be a lower portion and Ryan walked through the numbers and being roughly 10%. So net-net, we're going to continue to execute where we have high value for customers, but it will be a small portion of ATS into the future.

Okay. But -- and I guess, at this point, again, as you think about the portfolio composition, I mean are you okay with EV sort of having kind of a long-term option than anything else? Or what do you think sort of the focus on kind of health care, food energy would potentially yield better returns ultimately for the shareholders?

Yes. So if you look where our investment is and continues to be, it's a large portion of life sciences food and other areas like nuclear for the business. And if you look at where we've shifted and we right size this business. And so where we see opportunity, we'll continue to execute for the long-term market potential but it is a lower portion and we're being very kind of focused on higher value for customers, and that's where will drive that portion of the business, which is call it, a smaller segment moving forward.

Okay. Okay. Great. Thanks for the color. And then just one last question. In terms of food and beverage, so the decline year-on-year, I mean, I understand there's always sort of puts and takes, but wondering if you can provide a bit more color in terms of what's going on there? Because as you said, a funnel seems to be pretty good in that space. Thanks.

So Max, just to walk through this. First and foremost, up 30% in backlog, pleased with that progress and pleased with this business. And -- just to walk you through Q1, Q2 of last year, it's a bit of a comp discussion. And let me walk through that. So we -- as we've talked in the past, there was a bit of an energy crisis as well now in Europe. Our CFT business has a very high energy efficiency product that we saw an increased level of demand, and we executed that demand in Q1 and Q2. So we should see this normalize in Q3 of this year. And so we're pleased with the progress of the business. They continue to execute. They've continued to really drive margin as a focus. And if you look at CFT, they've been greater than 500 basis points on their bottom line, and there are solutions that they're launching and capabilities that they're launching and even highlighted one in the update around digital tomato and what that will bring as a notion set for their markets. So really pleased with the progress here, and it is a bit of a comp for Q1, Q2 and Q3 should be more normalized.

Yes, Max the only thing -- I want to add on as well, the energy-efficient solutions are primary processing. And we talked in the past, those are seasonal and require equipment deliveries around harvest seasons. And so what's in the backlog today is more on secondary processing, packaging and inspection solutions. So -- and we've talked about that being a focus to balance out the seasonality of that primary processing. So as Andrew said, we're quite pleased with the performance there.

Okay, thanks for the time.

Our next question comes from the line of Michael Glen with Raymond James. Please go ahead.

Hey good morning. So just to start on EV, can you indicate gross bookings in EV in the quarter? So excluding the $150 million adjustment, what were the gross bookings for the period?

They were in the range of $30 million, just north of $30 million.

Just north of $30 million. So on new EV bookings, I understand in the past, there were different contract structures and payment structures. Are you telling customers now that you're not willing to participate in those types of terms and you've changed the terms of new contracts in that segment?

So Michael, I mean our contracts are different customer to customer. But I would say we've got across the board, strong contracts, good payment terms, certainly relative to what we used to see in the ICE market in transportation that are more favorable from a working capital perspective. And so I would say the contract terms that we're working under are favorable.

Okay. And I'm just going to try to pull this out to you a bit more, but I mean, the contracts you're working under are favorable. Is that contract terms outside of the large customer where you're having the issue, like did they have different terms associated with them versus others in that backlog?

So let me -- okay, so let me address that piece. So as we said, with respect to those large contracts, the lines are producing where we've been able to complete commissioning procedures, they are producing at or above contracted levels. And our disagreement with the customer is really around payment for work we've done. I mean, I can't speak for the customer. But again, we know based on public reports information, let's say, in the market that North American automakers have announced delays or they've moved away from previously stated EV capacity targets. That said, we're continuing discussions. We're hopeful that will come to a resolution.

Okay. And then just on the Life Science bookings in the quarter, are you able to indicate what the organic -- because I know there's some M&A having an impact here, Avidity, Heidolph and maybe some other transactions. But what is the organic -- what was the organic bookings number in Life Sciences?

Specifically, in the quarter, it's north of 20%.

20% growth organically?

Correct. Yes, north of.

North of 20% growth. Okay. And then what -- like the margin profile of those contracts themselves. Would that be -- would you -- could you say that, that is margin accretive to -- I know your business is under some margin pressure right now, but is that margin accretive to say the 15% target margin that you've spoken to in the past?

So let me -- I'll speak to it from a gross margin perspective. And generally, Life Sciences is accretive at the gross margin level. And so what we -- the main impact, and we had a good solid gross margin in the quarter, we're up about 123 basis points, I believe, year-over-year. What that reflects is that improvement in mix. So more life sciences, more services there is a benefit from acquisition. And then there's also some offset from underutilization in our transportation businesses. So generally speaking, yes, Life Sciences is accretive. And the other impact on margins in the quarter, though, is really around operating leverage. And again, really driven by the lower revenues in our transportation vertical. And again, we've taken action around that. But that's some of the dynamics around our margins.

Okay. Then I just want to dig into just one last question for me. Like what -- I think you addressed this earlier, but just to understand it more, what's left in the transportation backlog right now that would still be -- I'm guessing, and I don't know completely, but that would still have a sizable portion. The $200 -- I think the $207 million left over in transportation backlog, like a chunk of that would still be related to the large customer where the dispute is?

There's some, but the majority is related to other customers, other scopes of work.

Okay, thank you for taking the questions.

Thank you.

[Operator Instructions] Our next question comes from the line of Patrick Baumann with JPMorgan. Please go ahead.

Thanks, good morning. I was just wondering if we could put a finer point on margins in the second half. I think you previously indicated that the company would be able to get back to the first quarter level around 15% EBITDA margin by the fourth quarter of the year. So is that still aligned with the expectation based on the costs you're taking out based on how you see the revenue trajectory playing out in the second half?

So Patrick, good morning. Generally, yes. I mean, again, this is going to depend on progression around the rest of the business and bookings and things like that. But generally, yes, we continue to expect sequential improvement into the third and then into the fourth quarter.

Okay. And on the backlog removal, I was just wondering if this had any impact on the P&L? Like did you have to book any losses on work that had already been done? And then did you choose to remove it because of the challenges on cash collections with work already done for the customer? Or was this customer-driven, like a cancellation on their part? And then lastly on this, kind of when was it decided?

So no impact on margins related to the removal of backlog. The contract has not been canceled, but it really reflects our expectation that it's not going to move forward. And as we talked about, that's based on activity in the market, also the other ongoing scopes of work with the customers. So in terms of timing, it's a recent development.

Thanks for the color. Appreciate it.

Thank you, Patrick.

Seeing no further questions at this time. I will now turn the call back to Mr. Hider for closing comments.

Great. Thank you, operator, and thank you, everyone, for joining us today. I look forward to speaking to you on our Q3 call in February. Stay safe, and goodbye for now.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.