ATS Corp /ATS Q3 FY2025 Earnings Call

Welcome to the ATS Corporation Third Quarter Conference Call and Webcast. This call is being recorded on February 5, 2025 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 three 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 third quarter results for fiscal '25. This was the second highest bookings quarter in company history and included strong organic growth along with contributions from acquisitions. This morning, I will update you on our business and markets and Ryan will provide his financial report, and we will both touch upon the recent developments on tariffs. Starting with our financial value drivers. Order bookings for the quarter were $883 million, up 32% in the third quarter last year. All of our market verticals contributed to this growth, with good diversification in bookings including large and small orders and contributions from our services businesses. Q3 revenues were $652 million, down 13% from Q3 last year primarily due to lower EV revenues as expected. Adjusted earnings from operations in Q3 were $66 million. Moving to our outlook. Order backlog ended the quarter at approximately $2.1 billion with our trailing 12-month book-to-bill ratio at 1.18 to 1. We are focused on expanding our market reach through our capabilities. High value applications that are complex to manufacture and where quality is critical, align very well with our strengths. By building out our standard products and equipment and adding services and digital capabilities, we are also shifting to grow our levels of recurring revenues to help offset some of the variability in bookings over time. On the recent developments on tariffs between the US and Canada, if tariffs are implemented in the next month, we would expect some complexity in the short term. Our people continue their unwavering commitment to delivering customer value and to actively planning for and addressing any disruptions that result from new tariffs and to meet customer requirements. Regardless of how the challenges ahead may develop, we rely on the strengths of our teams, our disciplined processes, and daily visual management tools to plan for and track impacts, improve our approach and pivot when necessary. ATS is built on strong businesses with empowered and driven teams. We will continue to operate in a way that is best for the company and our shareholders and which supports our employees and our customers. Moving to our outlook. Within life sciences, order backlog sits at a record 1.2 billion, an increase of 39% compared to Q3 last year, with strong bookings delivered in key sub-markets such as radiopharma, GLP-1 auto-injectors, wearables, and other medical devices. As an example of how we are expanding market reach, we booked a small order with an emerging customer in advanced robotic surgery and an order with a larger customer for a new application that also creates inroads into the surgical robotic space. Overall, our life sciences opportunity funnel is strong. We continue to build out our integrated solution set, leveraging our capabilities across our businesses to drive higher value for customers at each stage of their product lifecycle. Further, we continue to accelerate our growth strategy with the ongoing development of new products and solutions in the pharmaceutical manufacturing market to leverage Comecer's business in Spain and our core automation capabilities. In food and beverage, our funnel remains strong and we ended the quarter with a record backlog of $252 million, an increase of 22% compared to last year, supported in part by our acquisition of Paxiom. As we move ahead on our Paxiom integration, opportunities continue to emerge for customer synergies and process improvements in areas such as secondary packaging and digital solutions. In energy, our funnel remains strong, supported by refurbishment opportunities for nuclear power generation facilities and new nuclear builds, including both large scale and small modular reactors over the long term. We are well-positioned to support customers in our areas of specialization, including nuclear fuel fabrication, factory automation of modular assemblies for new nuclear builds, and nuclear waste handling. ATS is well positioned to serve as a strategic partner from the concept and design phases all the way to execution. In consumer products, our funnel remains stable with niche opportunities in areas such as automated warehouse solutions packaging. In the quarter we received a warehouse solutions booking with an additional potential to combine the capabilities and capacity of different businesses to support this customer with their emerging sustainability requirements across geographies. Within transportation, our previously announced restructuring activities continued to align our business with lower end market demand, particularly in EV. Our funnel remains stable with smaller opportunities that we have seen in prior years. However, in the quarter, we had a new EV customer win in Europe. On after sales, we expanded our higher value services incorporating our digital capabilities. We are evolving our service plan offerings to drive greater customer adoption and retention. We continue the launch of our Connected Care Hub in Cambridge, further expanding its operational capabilities and receiving several new customer orders. On our performance-based services, we are building on the success and learnings from our pilot projects as we scale with additional customers. On our digital offerings, our funnel is strong, and we remain committed to serving as a global partner for continuous productivity optimization across our customer base. Our ATS business model continues to drive a culture of continuous improvement, innovation, and resilience across the organization with strong engagement in ABM events completed across all ATS businesses and geographies. By way of example, our CFT business held the Kaizen event in November dedicated to improving project management tools and best practices, with a clear focus on data and sustainment to drive continued margin expansion. As part of these sustainability efforts, they held a follow-up event as part of our President's Kaizen Week in January, a great example of ongoing use of tools to drive steady improvement. I look forward to providing you with a broader update on our President's Kaizen events on our Q4 results call. The ABM is also a critical part of our M&A playbook, used to integrate new acquisitions and drive towards targeted ROIC. Our M&A funnel remains strong and we actively cultivate opportunities across a range of target sizes and markets. In the short term, we are focused on bringing leverage to our targeted levels while we expand our pipeline of acquisition opportunities that align with our strategic vision for long-term value creation. Integration activities are well underway on our recent acquisitions and we remain confident in their long-term contributions to our growth. On innovation, we are deploying capital and empowering our talent to create differentiated solutions that drive value for our customers. In November, we brought together thought leaders from our businesses around the world for our annual Innovation Summit, branded building an innovation powerhouse. AI's potential to drive innovation and operational efficiency was a central theme. The event accelerated our efforts to create deeper collaboration on AI-driven initiatives across ATS. This focus reflects our commitment to advancing technologies that enhance capabilities and deliver long-term value. In December, we released our fifth annual Sustainability Report, reaffirming our commitments and highlighting how we help our customers meet their sustainability goals. I encourage you to review the report where we highlight our progress over the past year, provide examples of our approach to product design, handle more sustainable packaging solutions, and increase the processing efficiency of our equipment. In summary, strong third quarter bookings combined with a sizable order backlog provide us a good foundation as we move through the final quarter of our year and look ahead to fiscal 2026. The disciplined execution of our strategy driven by our ABM tools, processes, and culture will serve us well in achieving our objectives. Our ABM continuous improvement mindset keeps our teams engaged and dedicated to delivering customer and shareholder value. Now I will turn the call over to Ryan. Ryan, over to you.

Thank you, Andrew and good morning, everyone. Beginning with our operating results for the quarter, order bookings were $883 million, an increase of 32% over Q3 last year. In life sciences, order bookings were our third highest on record following our top two life sciences bookings quarters in Q1 and Q2 of this year, respectively. In the third quarter, bookings were driven by a combination of organic growth and contributions from the recent acquisitions of Avidity, Paxiom, and Heidolph. Our trailing 12-month book-to-bill ratio at the end of Q3 was 1.18 to 1. Excluding transportation, this ratio was 1.24 to 1 with all other market verticals sustaining a book-to-bill ratio above 1. Q3 revenues of $652 million were 13.3% lower than last year. Strong year-over-year organic growth in life sciences, consumer, and food and beverage, in addition to a 6% contribution from recent acquisitions partially mitigated the expected declines in transportation. Of note, revenues increased sequentially by 6.4% as we have begun to realize on the benefits of our strong order bookings over the past several quarters. Moving to earnings. Adjusted earnings from operations in Q3 were $65.7 million, a decrease of 35% from the prior year, reflecting lower revenue volumes primarily in transportation. Excluding acquisition-related inventory fair value charges, Q3 gross margin was 30.7%, a 216-basis point improvement from last year, driven by a more favorable mix including higher margin programs and an improved supply chain environment. On SG&A, excluding acquisition-related amortization and transaction costs, as well as one-time contract settlement costs, third quarter SG&A expenses were $130.6 million, a $22.7 million increase over the prior year, primarily as a result of SG&A in our acquired companies, along with increased employee costs and foreign exchange translation. As always, we're continuing to drive efficiency into both our existing operations and new acquisitions who have joined ATS. For further context, the one-time contract settlement costs that I referenced were within one of our life sciences businesses and related to a canceled program. Excluding the mark-to-market impact related to changes in our share price, stock-based compensation expense was $3.7 million in Q3. Earnings per share was $0.32 on an adjusted basis down from last year, primarily due to lower revenue volumes. Turning to our outlook. We concluded the quarter with an order backlog of just under $2.1 billion and we expect Q4 revenues to be in the range of $650 million to $710 million. As a reminder, this assessment is updated every quarter, taking into account revenue expectations from current order backlog and new orders booked and billed within the quarter. Margin expansion remains an ongoing priority. To achieve this, we're employing ABM tools in a disciplined manner to improve processes, our supply chain, and standardization. Further, we continue to invest in innovation and services to drive growth. During the quarter, we substantially completed the reorganization plan we announced in Q1, which was primarily intended to right-size the cost structure of our transportation businesses to reflect current market activity. In the quarter, we incurred an additional $3.3 million of restructuring costs. On tariffs, as Andrew noted, we're monitoring the situation closely and are assessing potential impacts on our business. Our global footprint and decentralized operating model, along with our proven ABM tools, give us flexibility to address disruptions over the longer term. While we await further information over the next month, we're actively working with our customers and suppliers to mitigate challenges that tariffs could pose to our collective businesses. Moving to the balance sheet. In Q3, we generated cash flows from operating activities of $66.7 million. Our non-cash working capital as a percentage of revenue was 30.3%. This value remained high as a result of our previously disclosed disagreement with one of our EV customers. While work remains paused on the projects, we've continued efforts to resolve this disagreement; however, until it is resolved, working capital is expected to remain above our target level of 15% of revenues. That said, we did see good progress across the rest of our businesses on working capital efficiency, with ex-EV working capital values moving closer to our target range even with the acquisitions of higher working capital intensive product businesses. During the quarter, we invested $16.4 million in CapEx and intangible assets with an expected annual expenditure at the lower end of our previously disclosed range of $70 million to $90 million. Our innovation efforts in critical growth areas remain a priority. On leverage, at the end of the third quarter, our net debt to adjusted EBITDA ratio was 3.7 times on a pro forma basis, which includes full year contributions from our most recent acquisitions. We remain committed to bringing our leverage to our target range of two to three times. In December, we successfully completed an additional $200 million Canadian offering of senior unsecured notes as part of a single series with our August issuance of 6.5% notes due in 2032. Proceeds from this transaction were used to repay outstanding amounts under our credit facility. In summary, order bookings were strong and diversified across our markets. Record order backlog in life sciences and food and beverage gives us good revenue visibility going forward. We expect the short-term margin pressures from lower transportation revenues to continue to abate through our reorganization efforts as we drive improved volumes in transportation and continued growth in the rest of the business. Looking ahead, we're committed to building on recent positive momentum in our financial results as we finish out fiscal '25. We're encouraged by the progress our global teams are making in advancing our strategies and are confident that their efforts will generate value for customers and shareholders as we move forward. Now, we will open the call to questions from our analysts. Operator, could you please provide instructions? Thank you.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Justin Keywood from Stifel. Your line is open.

Good morning. Thanks for taking my call. On the margins, we saw a good expansion on the gross margin level year-over-year, up almost 200 bps. Should we anticipate that to start impacting the overall operating margins for fiscal Q4, or will that take a bit longer for some of the reorganization activities to mature in some of the ABM initiatives to be implemented?

Yeah. Good morning, Justin. It's Ryan. So short answer is yes, we do expect continued margin improvement. But let me give you a little bit more context in that. So looking back on the year, Q2 really reflected the low point in our financial performance and that was expected. And we did see sequential growth and margin expansion this quarter. The growth has been across all our market verticals with the exception of transportation, and that has helped drive margin improvement along with the actions we've taken to right size our cost structure. So, as we look forward, we do expect continued sequential growth to benefit our margins, but it will be modest in Q4. So, our transportation business, while it's improved from Q2, the cost structure has been right sized and we've had good bookings in Q3. The revenues aren't going to ramp in that business until we get into more advanced stages with a lot of the new business we've just won. So, we're going to see more benefit into fiscal. But again, short answer, improvement in Q4, but it's going to be modest.

Okay. Thank you. And then on the energy or nuclear segment, good bookings or backlog growth up 58%. I think there was a big jump in bookings as well. Are you able to give some additional context there? Was that from a new customer or existing customer, and what is the outlook for that segment going forward?

Let me start by discussing this segment. We are a niche player, but we provide strong value to our customers while supporting various areas in the market. The first area is CANDU reactor refurbishment, where we have observed ongoing interest from customers looking to this as a viable option for green and nuclear energy. We believe there are continued opportunities in this space, and we have seen increased bookings. In addition to this, we are involved in the development of small modular reactors (SMRs). Although it is still early, we view this as a mid to long-term focus, and we maintain a strong position in this area, collaborating with several key industry leaders. Our objective is to validate the applications and ensure they are operational to support energy needs. We are also noticing discussions about large-scale new builds, particularly with respect to refurbishment, which consists of decommissioning and recommissioning. We are equipped to handle both new builds for traditional and CANDU reactors, as well as decommissioning and maintenance. Another area we are emphasizing is fuel fabrication. As new solutions become available, this presents an opportunity for us to engage and support the development. While we are still in the early stages, we are establishing our position and believe we are well-equipped to support growth in this area. Overall, we are satisfied with our progress and growth in this segment, which we consider a strong value for our customers, even though it remains a niche market for our company.

And Justin, just to add on the specifics, there were multiple customers that contributed to bookings in the space in the quarter.

Very interesting. And just finally on the ongoing dispute with the large EV customer, the $175 million of assets that are to be invoiced or not delivered, is that equipment able to be repurchased for other projects, or is there still a view that it could eventually be delivered to the customer and paid for?

The equipment's been delivered, and to the best of our knowledge, remains in production at the customer site.

Just to be clear, is that the $165 million or the $175 million?

All of it.

Okay. Thank you very much.

Your next question comes from the line of Cherilyn Radbourne from TD Cowen. Your line is open.

Thanks very much and good morning, Andrew. I imagine that with the election of a second Trump administration, tariffs and how to locate supply chains medium to long term are top of mind issues with your customers. Can you give us some color on the volume of your customer conversations lately and the key topics?

Good morning, Cherilyn. When we talk to our customers, we recognize that the short-term situation could be somewhat unpredictable if these changes are implemented. However, in the mid to long term, this presents a significant strength for ATS. We have the capacity to build and maintain operations in our core areas, which is a real advantage for us. I mentioned a specific example earlier about the opportunity in warehouse automation, where our global presence made a considerable difference, along with our ongoing commitment to standardization and the transition to simpler products that can be manufactured in various locations. Overall, our discussions have been largely positive regarding our support capabilities, but our customers are still waiting to see how the situation develops and where they will need to focus in the future.

That makes sense. Just thinking about another Trump policy and mass deportation, do you think that could result in a short-term boost in the food and beverage area, just given that there's a lot of undocumented labor that's active in that space?

If you look specifically in the US, you'll notice that there is regulation regarding documentation requirements. When you see a change that results in the end product, like fruits or vegetables, becoming more valuable, it's important to focus on maximizing efficiency and processes. We see this as a significant opportunity. However, we consider it more of a mid to long-term perspective rather than a short-term one. We are maintaining close communication with our customers and proactively reaching out to make sure they know how we can assist them. We have also introduced tools and solutions to help them navigate current challenges. For instance, our recent acquisition, MARCO, launched a solution that enables check weighing in the field, which aligns with pack houses. This is important for our customers because it helps them track and understand their product weights to avoid overpacking, providing a real advantage. We expect to continue seeing opportunities that fit well in this area, and we believe this will play out more in the mid-term.

Thank you.

Thank you, Cherilyn.

Your next question comes from the line of Patrick Baumann from J.P. Morgan. Your line is open.

Well, hi, good morning. Thanks for taking my questions. On the orders, a couple ones here. Are there any big bookings worth calling out that benefited the quarter that you'd want to highlight? And then, thinking about the backlog and the translation into sales, can you talk about why the sales are sort of lagging, what they had, I guess, before the EV downturn? And relative to that backlog and then particularly thinking about '26 like, can some of these longer cycle orders start to translate and can you see an inorganic growth rate that's above that long-term target of mid-single digit plus?

Good morning, Patrick. I'll begin by discussing the nature of our orders and how they will be delivered, impacting our revenue. In the recent quarter, we had several significant programs, averaging around $30 million among our top 10, which were well diversified across all market verticals—this was a considerable advantage. Additionally, as Andrew mentioned in his remarks, we received numerous small and mid-size orders that further supported our performance. When we experience a strong bookings quarter, as we did this time, it typically benefits from these larger orders. Regarding revenue generation, larger orders usually have longer delivery times and might be destined for multiple locations due to the complexity of the equipment involved. Generally speaking, the average delivery period for these projects is between 12 to 18 months. The flow of revenue begins with a design phase in the first several months, which tends to generate less revenue, followed by increased revenue as the equipment goes into production and assembly in our facilities. We anticipate that the bookings and backlog from this year will positively influence our organic growth rate for the next fiscal year. However, there may be a one to two quarter delay before large bookings begin to significantly affect our revenue run rate.

And Patrick, Ryan hit a very strong bookings quarter, was pleased with the progress here and as you look our plumbers remain healthy in the core markets we support. So not only we're continuing to execute, we're looking for areas to drive expansion and I referenced a couple of those even in the prepared remarks around the surgical space. So, pleased with the progress. More to come.

Sorry, just to follow up on that $30 million figure. How does that relate to your typical top 10? I'm not sure how to contextualize that. $30 million compared to...

Yeah. No, typically we're in the $20 million range. It could be low to mid $20 million range. I'd say that's more average. If I look over the last eight quarters in terms of where we've been. This was on the higher end being $30 million and we've had sort of lower end would be mid-teens.

Got it. And then, I was wondering if you could put a finer point around the improvement you expect in fourth quarter margin. I think you had previously talked about maybe getting back to first quarter levels by the back part of the year. Wondering if you could kind of frame for us where you are relative to those expectations based on your revenue trajectory that you've guided to for the fourth quarter.

In terms of our gross margin, we've experienced a positive impact year-over-year from several areas. One significant factor is our mix; the life sciences sector typically enhances our gross margin compared to a year ago when transportation had a larger impact. Additionally, we've benefited from ongoing growth in after-sale services and acquisitions. However, we've faced some challenges in our gross margin due to underutilization in our transportation segment, and we've taken steps to address that. Looking ahead, while there's a slight headwind regarding our margin as transportation evolves from its recent performance, growth in this area will ultimately support our operating margin. Regarding our overall margin outlook, we anticipate some operating leverage challenges in our business, particularly with the revenue levels expected in Q4. Nonetheless, as our business grows and we see improvements in the transportation segment, we expect operating leverage to enhance, although we anticipate this will be more modest in Q4 as mentioned.

There isn't a clear indication of the specific margin information you would want to share to help others understand your perspective.

No, nothing that I would call it.

Okay. We'll follow up offline. Thank you very much.

Thank you.

Your next question comes from the line of Maxim Sytchev from National Bank. Your line is open.

Hi. Good morning, gentlemen.

Good morning.

Good morning.

Andrew, maybe the first question for you, I think your reference to an EV program in Europe. Do you mind maybe talking about your capability to carry out work in the geography? Because correct me if I'm wrong, a couple of years ago we had restructuring there. So, maybe some color on that side, please.

Yeah. So just a little bit more on this win. This was a customer or the end OEM is a customer from the past and it's a slightly different application on their EV shift. Very pleased with the win. And when we need to execute, we'll be using our global footprint for really building this capability out. And that means multi-region. We do have capability in Europe and we can support this customer in-region as well.

Okay, great. And then, I think maybe a couple of quarters ago, Andrew, you were talking about the grid battery storage opportunity. I'm just wondering if there's any update on that market, please.

Yeah. So, we continue to stay close in this space; I'll just say of the energy sector. Nuclear is really showing signs of strength in that space. But grid storage is something we stay close on and we're working with several of the key players. But I would say if you look at energy, nuclear is the area right now that we're seeing stronger growth.

And I guess, I mean, like all these recent announcements from obviously Darlington OPG. I mean, it looks like there's definitely an inflection point, like in terms of timing, is this kind of 12 months out or a little bit beyond that in terms of really seeing kind of like a ramp-up in revenue just so we can calibrate our expectations?

Yeah. So, we would say when the announcements are made, it's usually a pretty lengthy process, so I would say greater than 12 months, and it's one that aligns well with ATS's value. That said, these are fairly lengthy programs and processes and we engage early and focus on winning and focus on offering value for customers as they take these next steps.

Thank you. I have a quick question for Ryan. The tax rate seems to be slightly higher on a year-to-date basis. Can we expect a reversal in Q4? How should we view this? Thanks.

Yeah. So, I don't expect it in Q4, Max. And you're right; it is higher than what we had originally anticipated at the outset of the year. There's been some changes in the jurisdictions in which we operate in terms of tax legislation, and that's had an impact as well as our profitability in certain jurisdictions. So, I don't expect a change. But I mean, as always, we're looking at how our business is structured globally to ensure we're maximizing our efficiency in how we operate and finance our businesses. But in the short term, I expect it's going to remain in line with what we've seen year to date.

Okay, that's great. And then maybe if you don't mind, I'll sneak in one more. In terms of the working capital ex-healthcare, sorry, xEV, do you mind maybe providing a bit of sort of goalpost in terms of how the rest of the business is performing there? Thanks.

We are slightly above our 15% target, mainly due to transportation, which is pushing us into the 30% range currently. Aside from that, we are just above the target. This quarter, we made good progress across the business. The recent acquisitions we've made are primarily product-based, which means they have higher inventory and greater working capital intensity. This presents us with improvement opportunities. Additionally, we are focused on enhancing efficiency in various areas of the business, such as commercial terms with customers, receivables, and the entire order to cash cycle. There are several areas we're addressing to help bring us back below the 15% target.

Okay, super helpful. Thank you.

Your next question comes from the line of Sabahat Khan from RBC Capital Markets. Your line is open.

Okay, great. Thanks, and good morning. We touched on this a little bit earlier, but I guess, as we look forward to fiscal '26 and some of the questions earlier around the bookings growth maybe aligning better with revenue. Can you just talk about sort of how capital allocation evolves into next year? Sort of what's, what is the focus on sort of leverage reduction from the current levels? At what point do you need to get to for M&A? When we pick up. If you can just talk about your sort of outlook for capital allocation, leverage reduction and so forth through fiscal '26. Thank you.

Yeah. Good morning, Sabahat. So, I mean, as we talked about in our prepared remarks, our priority right now is on bringing our leverage into our target range of two to three times. We're at 3.7 today. We've deployed roughly $180 million of capital into M&A this year. But where we sit, again our focus is, is to bring that into the two to three times range. Typically, that's two, three, maybe four quarters just depending on what happens with new order flow in commercial terms on those. So, that's our focus. In terms of M&A, as Andrew talked about, we're continuing to be actively cultivating. And if there was something that materialized, we would look at different ways that we could make that happen. But for now, the priority, as I said, is to reduce our leverage.

And Sabahat, maybe I'll just add on a short point here. Look, we continue to cultivate. Our funnel is healthy. But as a reminder, even for two of the three acquisitions we did last quarter, they were multiyear cultivation efforts, and so oftentimes these take time. And we continue to stay close for the core markets, technologies, and solutions that we want as part of the future for ATS.

Okay, great. And then there's a question earlier on nuclear. I just want to maybe get some perspective on your medium-term thinking around that market. Maybe as EV moderates, obviously a lot of headlines around demand for new builds, smart refurbs, et cetera. Do you have some sort of perspective on what that energy or nuclear mix could go to in a few years as a percentage of revenue if that demand sustains at the level that we're seeing over the next little while?

I'll start by saying that we are confident in our position in the nuclear sector and appreciate the unique capabilities we offer. The CANDU reactor has been central to our efforts, and we're noticing a revival in that market. Looking ahead, while nuclear will be part of our strategy, we expect life sciences to become our largest market due to its significant size and growth potential. Food is also gaining strength, and we plan to focus on high-value niches like energy and nuclear to complement our overall strategy.

Okay, great. And then just one last quick one, I guess, sounds like the order bookings etc. quite strong in life sciences. One of the other topics that came out of the new administration was sort of the new health administration there and their views on pharma. Have you noticed any change in tone from customers at all? Like how are they thinking about planning for the next one, two, three years? Like is there maybe some projects that might be holding in their back pocket until they get a bit more visibility on the new administration's priorities around healthcare? Or do you think it's business as usual for now until your life sciences customers here? Otherwise just curious with all the political noise around the new health admin what the customers are telling you.

Certainly, this situation is continually evolving. I can assure you that we are actively engaged in outreach to ensure our customers understand that we are capable of supporting them both regionally and globally with a comprehensive suite of technology solutions for their product launches. We have not observed any significant change in their approach to capabilities. As a reminder, we collaborate closely with them on their key product launches. For instance, when it comes to auto injectors or radioisotopes used in cancer treatment, we operate in highly relevant areas for our clients. Overall, we have not noticed any notable differences in their behaviors. We are maintaining close communication and are also exploring how we can leverage our decentralized global scale to strengthen our position and better assist them in navigating these times.

Okay, great. One last actual question. I'll pass after this. A lot of discussions about tariffs earlier. Is there any exposure to other inputs or anything like that from Mexico at all within your business and maybe any product moving, finished product moving from US to Canada at all? Just trying to get perspective on just the setup of your supply chain. Thank you.

Sabahat, sorry, can you repeat the first part of that question? I missed?

Yeah, is there anything coming in from Mexico to either US whether it's inputs or things like that within your supply chain, within the tariff construct? And then, is there much finished product or inputs that come from US into Canada in terms of whether it's your COGS or finished product?

Got it. So there is some minimal movement of our finished product from the US into Canada. Regarding our supply chain, we do source materials from Mexico to the US, generally through distribution. We are currently collaborating with our key vendors to understand their supply chains and how they are structured. For instance, one of our suppliers who sources from Mexico is considering shipping directly to Canada, which would eliminate the need to go through the US. This would be advantageous for our Canadian operations. We are delving into this level of detail with our suppliers to grasp their supply chains and mitigation strategies.

Okay, great. Thanks. Appreciate the discussion. That was helpful.

Your next question comes from the line of Michael Glen from Raymond James. Your line is open.

Good morning. Ryan, maybe just to start, at a recent investor conference, you indicated that the path to that 15% margin target was something like three to four years away. I don't recall you had really given a timeframe on this trajectory. Could you just maybe speak to the path from the end of say this fiscal year towards that 15%? Like what are some of the major buckets that come into play to get you towards that level?

Certainly. Good morning, Michael. So, when we put this out, that was, I'd say pretty consistent with the general timing. And so that hasn't really shifted. A lot of what we're doing is focused on efficiency in our business, value accretive lines of business. So, supply chain capability, for example, that's a focus for us. It's been a very strong value generator for the company. Our teams have performed very well. It continues to be a focus area. Standardization is another area that isn't applicable across all of our business, but certainly in our larger project-based businesses, it is. And a good example there is all the work we're doing in auto injector. We've got a standard technology platform that gets utilized across all those solutions. So, those areas we're focused on. We're also continuing to build out higher value areas such as our after-sale services business. There's our ongoing continuous improvement activities through our ABM. So, all of those areas are factors in helping us get to that margin target. I think this year we've had headwinds largely in terms of our operating leverage with lower volumes in EV. So, we've made some corrections there. But coming out of this again, we really see that path continuing to be available to us on those margin expansion activities. And as the business continues to grow, we expect our operating leverage to continue to improve and again help support the achievement of that objective.

Okay. So, from the end of this year, would you say that the improvement is roughly balanced between gross margin and SG&A leverage, or does it lean more towards one area than the other?

Most of the areas where we've targeted are in our gross margin from getting back to, call it baseline, that's going to be operating leverage.

Okay. And just going back to the cross-border dynamics. So that was a helpful disclosure provided about the mid-teens percentage of revenue from Canada into the US. Can you give an idea what portion of that 15% could you move relatively seamlessly? I imagine some of the integration work, for example, you could move quite rapidly. Is there a way we can characterize what could be moved quickly and what would be a little more challenging to move?

I'm not sure I would describe any of it as easy. There is complexity, especially in the short term. Projects that are currently in progress within our facilities will be challenging. I emphasize that the complexity is primarily short-term. Looking ahead, we do have flexibility. Approximately one-third of our global capacity is in the US, which also hosts our largest concentration of manufacturing space worldwide. About 20% of our workforce is based in the US, indicating we have a strong presence there. We have the capacity to expand in the US, but it will be complex in the short term. This is clearly a dynamic situation. We are actively working with our customers and suppliers on response plans, and at this point, we are monitoring the situation and will make adjustments as necessary.

Okay. Can you provide an update on the large EV customer in the order? Is there any backlog remaining with them? Additionally, was there any revenue contribution from that large EV customer in the quarter?

On question two, no revenues related to the customer dispute in the quarter. In terms of backlog, there is. There is a small amount in backlog that is tied to commissioning work that has been paused.

Okay. Okay, that's it for me. Thank you.

Your next question comes from the line of David Ocampo from Cormark Securities. Your line is open.

Thanks. Good morning, everyone. Just two really quick clarification questions. Ryan, you touched a little bit on the leverage on getting dipped back down to that two to three times range, call it sometime next year on a fiscal basis. Is that under the assumption without collecting from your transportation customer? And then in the event that it isn't, does that push you well below the two times range with the collection of the call to $340 million?

So, you're correct. That excludes any movements on the amounts that are under dispute.

Okay, that's what I thought. And then, just a follow up on Patrick's question from a little bit earlier, but just diving a little bit more specifically into one area. I think a few quarters ago you guys called out GLP-1 being 20% of your life science backlog, 10% of the overall, but I think it still represents a smaller proportion of your revenue. Do you guys expect the timeline of the revenue ramp to follow that consistent pattern of the one to two-quarter lag as you work through some of the more engineering and design work? Or is there a longer ramp as it relates to those products?

It's slightly longer ramp. It just based on customer delivery requirements and the size and scope of some of the programs, but it's not materially different.

Okay. And then, as it relates to milestone payments in terms of the cash collection, is it pretty consistent with what we've seen in the past from ATS, or is it kind of tilted towards more the EV style, big milestone payments towards the end?

I'd say more consistent with what I would call our standard terms. So better than what we see in transportation. But I would also just caution on that point. With big programs, you still have big milestone payments. So even though they typically come in earlier, they're better commercial terms from that perspective, they can still be lumpy.

Okay. That's it for me. Thanks a lot for speaking me in right at the end.

And there are no further questions at this time. I will now turn the call back over to Mr. Hider for closing remarks.

Thank you, operator. And thank you everyone for joining us today. I look forward to speaking to you on our Q4 call in May. Stay safe and goodbye for now.

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