Yahoo Finance ATS Corporation (NYSE:ATS) Q3 2024 Earnings Call Transcript
ATS Corporation (NYSE:ATS) Q3 2024 Earnings Call Transcript February 7, 2024
ATS Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the ATS Corporation Third Quarter Conference Call and Webcast. This call is being recorded on February 07, 2024 at 8.30 a.m. Eastern time. Following the presentation, we will conduct a question-and-answer session. I'll now turn the call over to David Galison, Head of Investor Relations at ATS.
David Galison: 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 cautioned 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 the material factors or assumptions applied in making the statements are detailed on Slide 2 of the slide deck. Now, it's my pleasure to turn the call over to Andrew.
Andrew Hider: Thank you, David. Good morning, everyone, and thank you for joining us. Today, we reported strong third quarter organic revenue growth, good contributions from recent acquisitions and adjusted earnings in line with our expectations as we've built on the momentum achieved in the first half of the year. We completed the acquisition of Avidity, which further expands our life sciences products and services offerings and this complementary to our existing businesses. At the beginning of Q4, our PA Solutions Group completed the acquisition of ITACA, an Italian based automation integrator with a focus on primary processing and pharmaceuticals. Avidity and ITACA are the most recent examples of how we use acquisitions to drive our strategy and evolve our portfolio.
We are pleased to welcome both teams to ATS. Now I will update you on the business and our markets, and then Ryan will provide his financial report. Starting with our financial value drivers. Order bookings for the quarter were $668 million, supported by organic growth in life sciences and strong performance in food and beverage. The underlying trends driving demand for ATS solutions remain favorable. Q3 revenues were $752 million, up 16% from Q3 last year, including organic growth of 9%. Adjusted earnings from operations in Q3 were $101 million, up 17% versus Q3 last year. Moving to our outlook. Our backlog held strong at over $1.9 billion. By market, our life sciences backlog is up 10% compared to Q3 last year at a record $875 million supported by wins in key areas, including auto-injectors and contact lenses.
We remain focused on opportunities to provide expanded or integrated solutions to our customers. For example, we secured a new order as a result of an innovative offering that includes BioDot's dispensing technology and SuperTrak Smart Conveyance technology, as part of a diagnostic cartridge assembly system. Our life sciences opportunity funnel remains strong, supported by market growth, including increased consumer demand for auto-injectors driven by GLP-1 drugs. In Transportation, backlog was $564 million, down 36% compared to Q3 last year, reflecting ongoing execution of large programs won in the last fiscal year along with expected variability in program awards in this market. We are working with one of our OEM customers to support their revised timing on a portion of their existing program.
While the near-term market for electric vehicles remains dynamic, as OEMs look to lower platform costs and align capacity to end-market demand, the long-term fundamentals remain intact and support demand for our solutions. Our transportation funnel is strong and reflects diversified long-term opportunities to support our customers. With ATS' proven ability to partner with customers by providing flexible solutions, we are well positioned as the EV market continues to evolve. In Food and Beverage, Q3 bookings were strong as expected and our ending backlog was $207 million. Notably, we successfully secured our first iOT order for a tomato processing line. Our food and beverage businesses are focused on innovation and customer experience, including aftermarket service as we expand our offerings to our customers.
In Energy, our funnel remains strong and is expected to provide opportunities for both refurbishment of existing nuclear reactors and investment in new reactors, providing sustainable clean energy. ATS has the experience, specialized skills and proven track record to support customers with their energy initiatives. In consumer products, our funnel is stable. However, customers are continuing to evaluate their investments in the current and economic climate, which may impact the timing of some opportunities. On after sales services, our consistent investment in the strategic area has included developing our digital solutions. As these solutions evolve, we are putting ourselves in a position to provide performance insights through our connected asset value chain, and support our shift towards providing higher value services on both ATS and non-ATS equipment.
During the quarter, we also security synergy win with Triad and our life sciences business to identify OEE improvement opportunities for a key customer. On our digital offerings across the automation value chain, our funnel is strong and we remain focused on developing our capabilities, utilizing an integrated architecture to help our customers collect and analyze data in an efficient manner to drive performance. During the quarter, a global pharma customer awarded ATS a contract to build their iOT platform for data exchange with one of their major clients. On supply chain, lead times and material cost pressures continue to challenge in some areas of the business, which our teams consistently work to offset to the use of our supply chain levers and ABM tools, while increasingly leveraging digital tools to drive insights and opportunities.
ABM activity and engagement remains strong, and we measure and monitor our success to identify areas for ongoing improvement and deployment of our tools across the organization. During the quarter, we hosted our ABM Global Conference with a focus on ATS business model principles, processes, and tools to achieve impact on our value drivers. On M&A, we continue to expand our portfolio and our integration efforts with Avidity and ITACA are underway and progressing according to plan. Our M&A funnel remains active, healthy, and diversified across all target sizes. We remain disciplined in our approach and assessment of each target. On ESG, ATS scientific products earned a silver medal as part of the EcoVadis sustainability program, an improvement from bronze last year.
This award is a testament to the SP team's commitment to promoting sustainable practices and reducing our environmental impact. Additionally, Avidity recently launched the world's first water platform system with reusable cartridges that helps customers reduce their environmental footprint. We consistently work to identify ways to demonstrate our commitment to ESG principles and priorities across the organization as well for our customers. On innovation, we remain focused on strategically investing capital to create solutions that drive returns for our customers. And a few highlights for the quarter. In life sciences, our Comecer team developed a new software product for use by customers in the therapeutic radiopharma market, specifically to allow nuclear medicine departments to link dose preparation information directly to central hospital data systems.
On Symphoni, our ATS Innovation Center continues to develop new solutions for auto-injector device assembly, allowing for threaded components to be connected together at very high speeds and accuracy. In food and beverage, Comac announced the launch of a 3D scanning vision system that helps to automate and speed up the inspection and sorting of kegs prior to them being filled. And to drive our effort, ATS hosted its first ever Global Innovation Summit in November, which included over 50 of ATS’s top innovators with the purpose of sharing technologies, innovation trends and opportunities to accelerate technology development, including incorporating AI into our innovation approach and how we operate daily. In summary, our Q3 performance included strong revenue and earnings growth.
Our opportunity funnel is well diversified. Our strategic acquisitions are performing to plan, and we remain confident in our ability to continue our trajectory in creating shareholder value. We are pleased to see ATS recognize once again as one of Waterloo region's top employers. ATS was founded in the Waterloo, Ontario region over 45 years ago, and today, our team members continue to bring their best every day to serve our customers and grow our business. We remain guided by the ABM as our playbook, as we deliver on our shared purpose to create solutions that positively impact lives around the world. Now I will turn the call over to Ryan. Ryan, over to you.
Ryan McLeod: Thank you, Andrew, and good morning, everyone. ATS delivered strong financial results this quarter with organic revenue growth, margin improvement, and we finished the quarter with a strong balance sheet. Starting with our operating results for the quarter. Order bookings were $668 million, down 31.8% compared to Q3 last year. As a reminder, Q3 last year included $300 million of orders from an EV customer, which we are not expected to repeat this quarter. Of note in Q3 this year, we drove year-over-year bookings growth in life sciences, including strong organic growth in addition to contributions from recently acquired companies, including Avidity. Our trailing 12-month book-to-bill ratio at the end of Q3 was 0.95 to 1.
By market vertical, our trailing 12-month book-to-bill at the end of Q3 was at or greater than 1 in all markets with the exception of transportation. We have previously noted that as we continue to execute on our large programs in the EV market, we do expect to see longer periods between ordering cycles. On revenues, Q3 revenues were $752 million up 16.2% over Q3 last year. Organic revenue growth was 9.1% in the quarter. Recently acquired companies added approximately 5% to revenue growth and foreign exchange translation had a positive impact of 2.5% compared to Q3 last year. We finished Q3 with just over $1.9 billion of order backlog. Looking ahead, our revenue conversion for Q4 is estimated to be in the 36% to 39% range of order backlog. As a reminder, this assessment is updated every quarter based on revenue expectations from existing backlog and new orders booked and billed within the quarter.
This conversion range also factors in the impact of approximately $200 million of transportation order backlog with one of our EV customers that has been delayed. Moving to earnings. Q3 adjusted earnings from operations were $101.2 million up 17% from Q3 last year, primarily due to revenue growth. Adjusted earnings from operations margin was 13.5% in the quarter, up 13 basis points compared to last year reflecting improved operating leverage. Our Q3 gross margin, excluding acquisition-related inventory fair value charges was 28.5% up 12 basis points from Q3 last year, reflecting higher volumes and acquisitions. Going forward, with an EV customer realigning its production schedule resulting in a delay of ATS’ execution on this contract in our backlog, we expect to see some near-term margin pressure in this part of our business.
We are actively mitigating this utilization pressure by redeploying resources onto other programs, including in our life sciences business. Our expectation is for this program to restart the first quarter of our fiscal 2025. On supply chain, material cost pressure is still present for some categories of spend, most notably for electrical and mechanical parts where lead times remain a challenge. Lead times have generally improved in other areas. As we previously noted, short-term inefficiencies caused by extended lead times in our supply chain impact our ability to drive margin expansion. Despite these ongoing challenges, our teams are well equipped to drive performance and mitigate these impacts for our customers. Moving to SG&A. Expenses were $6.9 million higher than Q3 last year and included $17.1 million of acquisition-related amortization and $900,000 of acquisition-related transaction costs, partially offset by an $11.7 million gain on the sale of two redundant facilities.
Excluding these items, Q3's SG&A was $107.9 million, $14.7 million higher than last year, primarily due to increased employee costs, incremental SG&A expenses from acquisitions and foreign exchange translation impacts. Stock-based compensation expense for Q3 was $4.7 million. Excluding the mark-to-market impact related to changes in our share price, stock-based compensation expense was $5.3 million in Q3 compared to an expense of $4.3 million last year. On earnings per share, our EPS was $0.48 in Q3, up 50% over last year. Our adjusted EPS was up 16.1% to $0.65 in Q3, primarily reflecting growth in revenues. We've begun to implement our previously announced reorganization plan. In Q3, we incurred $16.2 million of costs with total expected costs of approximately $20 million.
The majority of the remaining costs are expected to be incurred in the fourth quarter. We anticipate that these targeted cost reductions will allow us to invest further into accelerating growth in areas of the business to provide opportunity for higher returns in support of our strategic growth plans. Next, moving to the balance sheet. In Q3, cash flows generated by operating activities were $110.5 million, reflecting the timing of project progress and milestone billings and payments primarily on our large EV programs. Non-cash working capital as a percentage of revenue was 17.8% at the end of Q3, down from 18.4% at the end of Q2, again, primarily reflecting a reduction in working capital investments and our large EV programs. In the short-term, we continue to expect working capital to remain variable.
Total year-to-date investments in CapEx and intangible assets were $62.5 million, which included $17.7 million in Q3. Our planned fiscal 2024 CapEx investment of $80 million to $100 million has flexibility and we expect to be in the lower end of this range for the year. On leverage, our net debt to adjusted EBITDA ratio was 2.3 to 1 as of the end of Q3 in line with our target leverage range of 2x to 3x net debt to adjusted EBITDA. In the quarter, we funded the acquisition of Avidity with cash on hand and by drawing on our credit facility. As early days, integration efforts are progressing as planned and we look forward to our continued work with the Avidity team along with ITACA. In summary, our quarterly performance once again highlighted the strength of our diversified and evolving portfolio and positions in strategic end markets.
Going forward, we will continue applying measures to combat challenges, including those still lingering in our supply chain. Strong order backlog in our key markets once again provides good revenue visibility over the next several quarters. We remain confident in our team's ability to drive our strategy supported by the ABM, which will continue to unite our people across ATS as we remain focused on our employees, our customers, and long-term value creation for our shareholders. Now, we will open the call to questions from our analysts. Operator, could you please provide instructions? Thank you.
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