So I'm Michael Glenn, Diversified Industrials Analyst. I cover ATS Corporation. With me today is Doug Wright, the incoming CEO of ATS, and Anne Cebulski, the interim CFO. So we're going to work through a fireside chat format for the presentation, and we'll jump directly into Q&A. So Doug, perhaps as a starting point i really wanted to give you an opportunity to introduce yourself to everybody you've only been with ats for a short period of time can you speak to us a bit about your background where you were before ats and then touch on what drew your interest to the
company in joining so thanks michael i appreciate the opportunity to speak to everyone so my My background is kind of a mixture of kind of classical diversified industrial multinational experiences with a couple of private equity experiences mixed in, always in industrial technology and building automation. My most recent role was at a company called Indicore, which is a joint venture between CDNR and Roper Technologies. Before that, I was a group executive at Honeywell. I ran their building automation group. Before that, I was in private equity in optical communications out on the West Coast. Before that, I was United Technologies in building automation. Spent a good bit of my career, well, all of my career with them in Asia, living in Shanghai. And then before that, my formative years were at Ingersoll Rand as an engineer, as a young pup, and then grew into marketing and general management. So I kind of bring a classical industrial background, but business model-wise across a wide variety of big multi-billion cap companies and small private equity-held interests. And I think that's what kind of made it a good fit for me to come to a company like ATS, which is in its adolescent years of growing into a larger organization challenged with how to build the right you know management processes to to drive scale but also maintain the innovative edge that they have is having really great technology and entrepreneurial culture at the front end of the business that's driven its growth and bringing some new ideas about how to run the trains on time to do a better job in expanding margins. So I think it was a good fit for me. I got a chance to meet our chair and our board over many months. And we had a good meeting of the minds about the transformative opportunity that we have at ATS to create a industrial automation enterprise that can be much larger and more profitable than it is today. and that seemed like a pretty fun challenge, so I decided to join.
And as you've spent your time over these early days with the different business heads and the different parts of the business, what are some of your initial thoughts into growth? Are there some specific product areas, categories, or offerings that you're particularly excited about?
Yeah, I'm pretty enthusiastic about a number of our end markets. I think half of our company align toward life sciences, and it's really an honor to be part of an organization that's really part of the development and support of some real life-changing therapies, whether it's in the GLP-1 class of products or in radio oncology or medical devices i think we're really in a great position to both be a part of those secular trends and but also as an engineer be part of some real really interesting innovation that that will that will shape shape shape lives i also think that in we have an interesting optionality in emerging nuclear because of our heritage in the can-do class reactors and our experience in Canada. We've gotten ourselves into a very unique position with a very significant number of the SMR players, and I think that gives us a good balance to our life sciences exposure and gives us good optionology for the energy transition. And then, of course, in our food business, It's a little less, you know, the headlines are not quite as dramatic, but it's a great stable earner for us. And we see, you know, the food technology being kind of a core holding long term. So we're pretty excited about, you know, all of those areas.
And you touched on this a bit in some of your opening comments. But one of the big questions that we've received over time is what is the right margin profile for ATS for a number of years? We worked with that 15% adjusted EBIT target, which was always somewhat out of reach. I know it's early for you to speak about the margin target, but what's your view on the right margin for ATS, and what are some of the strategies you're going to go after to help with the margins?
Okay, I'll start, and then I'll ask Anne, our CFO, to contribute. um i think that the um let's be honest i think one of the more the bigger opportunities we have is to catch up on our margin profile i think the company has demonstrated great growth trajectory but uh we know that we have opportunity that's been left on the table in terms of margin expansion so this is going to be a priority for us um it's not any magic it's good old-fashioned lean execution, improving our aftermarket mix, looking at commercial acumen, which is code for pricing. So there's opportunities there. Anne and I will be setting a new target for the company in due course. I think I put it to you this way, once we're about halfway to get to the 15% goal, we'll work on setting a new target from there. And it'll be, you know, I think our goal ultimately is to be, my goal is to be a top quartile performer in the industry group that I compete with. That's what my board asked me to do, so why shouldn't I set the targets aligned with what my targets are? Ann, you have any other color?
Yep. So I think one of the things that I would add is we, you know, for our longer-term shareholders, we've been talking about margin expansion for a long time, and so what's really different. So my initial observations of the way that Doug operates and what he brings to the team is just that really pragmatic focus on the laser focused use of the tools by business and every business is a little bit different and so how we use the tools in the business we have a really solid foundation of those lean tools so but how we use them in each individual business may differ and our focus is what is going to matter here I think the other thing that I would add from a margin expansion perspective is the team that the senior leadership team is as a really good pedigree of lean discipline and classical lean training. So our new life sciences executive, Sarah Moore, she comes from Danaher background, and just the way that she speaks and the way that she embeds that culture in her team is evident. So we have folks from Honeywell, aerospace background, where that kind of way of operating is just part of life. And when I think about where ATS is on its continuous improvement journey, we have a lot of a lot of opportunities still ahead of us and i think with doug's background and the rest of the team and that added focus we'll we'll be able to to drive uh drive it differently and and with more
intensity and if we're thinking about the pnl right now where do you think is should we think about margin expansion coming from the gross margin line or should it be via the sgna line
Yeah, I can go first and you can layer on if you want, but I think it'll be, it'll be all of those things. There's opportunity to drive efficiency in our SG&A and if you look at our SG&A growth over time, there's, it's outpaced our top line growth, so we probably have some work to do there, but with the tools and the focus at the gross margin level, there's also opportunity and then doug maybe you can talk about anything i missed but also the piece around commercial excellence and project selection and how we focus yeah i think i think the gross margin is where
there's most opportunity i think at sgna we'll we'll take some some option take some cost out there but we also want to protect our investments uh in these because you know investing in things like radio pharma and these nuclear opportunities are you know they require you know us to to burn some cash to to stay relevant and be ready for those markets but on the gross margin side i think we've got really two ways to think about it one is classical lean thinking reducing cost labor productivity material productivity quality etc but also you know within each of the segments there's a diverse diversity within each segment in terms of the types of programs we can get associated with that improve the margin potential of the business so if we're working on a novel radiopharma therapeutic it clearly has a better margin profile than doing you know let's say a pharma packaging opportunity so I think within each segment we'll be working through some tools about how we determine where we want to divert our capacity within the options within that piece of the portfolio and that gives us just more call it booked margin yield that'll improve the margin performance over time so we'll do a little bit of both i'll switch over to life
science and obviously topical today throughout the meetings has been what's happening in the glp1 market so can you provide an update as to how those bookings are trending right now your outlook for GLP-1, and then perhaps speak to some of the growth categories underlying where you're having offset to GLP-1 right now.
Yeah, I can take the first part. We had a high level of order intake in fiscal 25, which in the GLP-1 space is reflective of the capacity needs that our customers are looking to build out, and we'll continue to deliver on that backlog over the next one to two years. And I think then, you know, Doug will speak to what we think that market looks like over time. But the other thing that I would add is included in our backlog now, we've seen the benefit of some level of diversification, including in radiopharma, including in other areas of med device. And so that diversification continues to be important to us as we build out the broader life sciences space.
I THINK ONE OF THE CHALLENGES THAT WE HAVE AS A CUSTOM SYSTEMS BUSINESS IS REDUCING OUR EXPOSURE TO SINGLE EVENT RISK AND OBVIOUSLY WE LEARN THAT THE HARD WAY WITH OUR EV STORY. SO WITHIN LIFE SCIENCES, BECAUSE IT'S NOW OUR BIGGEST PART OF OUR COMPANY, WE'RE PUTTING A LOT OF ENERGY INTO MAKING SURE THAT WE HAVE A VERY DIVERSE PIPELINE and that we don't expose ourselves to any, you know, planet killers in the backlog. And we've been successful in doing that. I think the team has done a nice job coming up with a lot of opportunities, even beyond the high-profile stuff like Radio Pharma and GLP-1, but also things like mail-order pharmacy and specialized medical devices, or in some cases, legacy medical devices with different form factors. So I think the portfolio breadth is higher now than it was historically because we want to try to make sure that we don't ever have ourselves exposed to, you know, a 20% customer that can drag us down with them if they go belly up. So that's an important part of our discipline that we're going to have. We recognize that, you know, a systems integration company doesn't earn the same multiple as an industrial tech company because it always has these exposure to these down cycles. And we have to, if we want to be successful in moving up in the rankings, we have to improve our earnings volatility.
I'll open it up. Does anybody in the audience have any questions?
Okay. So the core of the business today is really based on the backbone of our legacy can do reactor positioning, and this is largely refurbishment and life extension of existing facilities. However, smaller in scale, and we don't split it out, but we have material bookings now with the AP1000 class reactor as well as with not less than five SMR designs, and it would range from engineering phase investments where the customer is paying us to develop tooling and automation for them up to where we're actually building automation systems for their modular manufacturing and their fuel handling capability for the SMR class. So the way we're playing this is I think about it as we've got this base portfolio of large scale nuclear projects that's kind of effectively covering our fixed cost and i've got a portfolio or five or six options that i'm playing with generally with the customer funding the investment to stay in the early stages of these next generation designs because clearly the volatility issue is that we don't know when those regulatory approvals are going to come through and when the financing is going to come through for those so we want to try to be in a position that we're ready to take advantage of it when it happens because the upside case will be enormous but obviously we can't we can't we're certainly not going to communicate that so a lot of it has to do with the biggest the biggest drivers are the regulatory approval and the fuel availability those are the two biggest drivers to the smr rollout it's not electrical demand or even even the the local sites are wanting the wanting to do the facilities but the lack of the fuel availability and getting kind of final approval in their designs that's actually the big gating item and I don't we don't really have a good way to project that we certainly can't tell you what we can't use what our customers are telling us because of course they're trying to raise money and they're going to everything's going to be great but I do think that there's a on a probabilistic basis one of one or more of those SMR designs is going to get approved and become material to us and how big it can be I think we'd be it'd be too much for us to estimate at this
stage yeah in the in the near to midterm until we see you which which of those designs prove out or indeed on the kind of just large-scale reactor builds we have a good backlog to work from on the life extension projects and then there be you know service capabilities that we can layer in so the backlog we're working off of right now is primarily we can do life extension projects and some of this early early work that Doug's referring to and if we're thinking about
these very attractive scenarios where it could become a much more meaningful part of the backlog but would what would that offering be exactly that would be what you're selling to the customers what would that be comprised primarily of so
it would be a combination of autumn the unique thing about smr's is that they're built in factories whereas traditional reactors are not built in factories so there's a manufacturing environment that we have to provision for with smr so the first stage would be working with the customers to build their equipment to do their manufacturing of their modular reactors the second is in the fuel handling so this is both in the production of the fuel as well as the handling of the fuel when they're loading the reactor that would be the primary focus would be those systems and the services around that the operational side that's probably you know certainly more than five years out before they're sort of call it you know the type of work we do today with the traditional reactor class we're doing refurbishments or life extension that would be a much longer pipeline but the early days are going to be modular manufacturing and fuel handling and that would be both a combination of hardware and and services
so it's a good it's a good profile for us and i i know a lot of your business right now is in canada what would help accelerate your growth in the u.s in the nuclear channel so we've actually
already secured several orders in the u.s and the biggest change that we have to make is where we are going to build a facility in ohio to be able to do the work in the in in the territory so you know that's basically the only major investment that's required the engineering is fungible but obviously we have to have a u.s based site to serve the u.s customer base uh so we'll we'll we'll we're actually going to be refactoring one of our ohio facilities which was previously aligned to automotive uh to support that that's our that's in our current you know game plan
Yeah, and there could be other end markets that may be attractive to us where government spending and policy is supportive, the UK being one of them, but there's others that we would look at if and as it made sense for us.
So that will segue then into, you brought up automotive, most people in the room probably watched what happened with that backlog over the past few years. where do you stand on the transportation segment right now and how should we think about that segment over the next few years?
So what we're trying to do now is, you know, we have a fixed cost overhang from the wind down in our EV business and, you know, we've kind of carried that. We've restructured some of that cost, but we're still a little heavy. So we are actively determining how we want our provision FOR THAT PART OF OUR BUSINESS, THE IDEA BEING THAT WE HAVE SOME THINGS IN OUR PIPELINE THAT ARE ATTRACTIVE TO US THAT ARE NOT RELATED TO AUTOMOTIVE, BUT THEY'RE RELATED TO BATTERY TECHNOLOGIES FOR GRID-SCALE BATTERIES AND POWERWALL-TYPE BATTERIES. THERE ARE SOME NICHY OPPORTUNITIES THAT WE'RE LOADING INTO THE BACKLOG TO KEEP THOSE facilities as loaded as we can we will not pursue any large-scale EV contracts unless the customer pays us cash in advance we might consider it but I think we would we're not looking to kind of rebuild a scaled transportation segment at least not with today's geopolitical environment but there are I actually THINK THAT THERE'S STILL GOING TO BE OPPORTUNITIES IN THE NICHES WITHIN THE SEGMENT, YOU KNOW, MANUFACTURING BATTERIES IS ACTUALLY PRETTY, WE'VE GOT SOME CHALLENGING SAFETY AND REGULATORY ISSUES, SO THERE'S GOING TO BE SOME SMALL NICHES, BUT IT'S NEVER GOING TO BE A MATERIAL, IT'S NEVER GOING TO BE AS BIG AS IT EVER WAS BEFORE, YOU KNOW, IT'LL NEVER BE THAT LARGE AGAIN. NOW WE GET THIS QUESTION A LOT, ARE WE GOING TO SELL IT? TRUST ME, IF WE HAD A FUNGIBLE BUSINESS that somebody came and offered us fair value for of course we'd be better off you know uh exiting but it's not practical uh it's a business that needs to we need to run it like we're going to own it and in the long run if or medium run if someone else wanted to wanted to be a to go deep into ev automotive and it was a good asset for them then we'd certainly be open for it but it's not a it's not a high priority for us right this minute right now we're trying to figure out how to keep it keep it keep it loaded as much as we can to preserve our optionality hopefully the team will find some opportunities to go after some of these niches that are sort of derived from that technical capability and if we can't we'll have to restructure the business further and and reduce our cost structure so that's kind of the work we're doing now to determine what the right path is any uh the pricing opportunity so if you think about in any of our segments just take life sciences if you think about the the there's a wide variation in the technology stack at different parts of that pipeline if you will so when you're dealing with first generation therapies that have to get to market fast versus maybe second or third derivative product, you know, extensions of just general capacity expansion where there's maybe four or five competitors and maybe the schedule tension is not quite as high. There's clearly different pricing opportunities between the former versus the latter. The challenge, that's kind of academic, but I think the challenge is building the capability ability in the organization to actually diagnose that properly, to look at patterns, look at data from prior bids and win-loss and all the things that we can do. And AI, quite honestly, is kind of an interesting tool to use in this vein so that we can maximize our commercial opportunity when we deserve it. And we also don't, on the flip side, we don't walk past opportunities if we could have gotten it for another you know 300 basis points of margin we would have also been better off having a lower price so it's just a refinement of our generally kind of a black art to be honest how you price these complicated systems we're trying to maybe introduce a little bit of science into it so that we can do it more systematically just capital
allocation in the balance sheet can you work through where leverage is where your leverage targets are, and then give us some insights into what we should think about in terms of M&A for the business.
Yeah, so I'll take the first part of it, and then Doug can kind of give his views and maybe some of his background and experience on M&A. So we came out of Q3 right at the top end of our targeted range of two to three times. Good progress compared to where we were, and we expect to see that continue to trend down towards the end of the year to give us a bit more flexibility to execute on some of the things that we might want to do in the near term that would be supportive of some of the areas that Doug's going to talk about next. So we're happy with the progress that we've made and we will remain disciplined in operating within that range. We've talked previously about for the right deal going above, but I think given where we are and given what's available out there, we'll look at the right opportunities and and remain disciplined doug you want to add on some
of your your views on what we see in the space yeah so you know by necessity we are going to play kind of in the small to medium size bolt-on opportunities for the time being so that we can stay within the aforementioned debt framework which we're the board is committed to the The bias right now will be on tuck-in acquisitions in our current end markets that allow us to expand our margin profile or expand our aftermarket mix profile. So we would look at businesses that have, right today we're about 30% aftermarket. If we can buy a $100 million company that has 60% aftermarket, then that obviously would blend us up. So we're going to be using discipline on sort of how much we're able to spend, but I think where we're going to be more creative is sort of thinking about how we can bring in the right new assets that give us either a new organic growth lever along some of the new, you know, sort of our insights on what therapies are going to mature the fastest, et cetera, but also look at our particularly I'm particularly sensitive to the aftermarket balance of the company I think this is something that is a really important driver for ATS going forward we think our entitlement should be over 50% service just based on the industry that we're in so anything we can do to bring something in that gives us more service content we'll get to the top of the list there's maybe some geographic opportunities that we'll look at but that's probably more of a medium term opportunity i think asia pacific is underrepresented for the company but that's maybe a bigger a longer term question so it'll be discipline scale and looking at assets that allow us to either improve the margin profile or frankly if we improve the service profile it probably improves the margin profile by default but that would be our that would be our focus
in one of the meetings earlier today you did reference that i think in your career you've completed over 50 M&A transactions. Can you give us some insights into your track record of acquiring and integrating M&A, enhancing margins, or anything along those lines?
They've all met their targets and done great. I would say my experience is pretty broad. I've been geographically pretty broad, broader than you might expect, and also industry-level services, products, regulated products, military-sensitive products. So, I mean, I think I've just been lucky in my career to have been part of a couple of very interesting companies at the right time to do a lot of deal flow. But I've also integrated every one of them. I was never a deal guy. I was always a general manager doing deals. So I'm very sensitive to a couple of things that sometimes get overlooked by traditional corporate development teams first is the particularly when you're dealing with niche small businesses first is the importance of human capital you buy a service business so you don't lock down the executive team of that business you're buying you're crazy you can't replace those guys you can try you can say you can but the the relationships and the experience are just too damn critical so a lot of it more i put a lot more time than my than the average person probably does in managing the human capital side of things building the relationship with the principles making sure that they feel that this is going to be a good home and that ats is going to make their company better and that you know just make sure they under they feel positive about the experience so that's first thing the other is you just have you have to be as disciplined about doing integration management as you are about you know running your doing your checkbook at home i mean you you can't just wing it you have to build a disciplined operating plan you have to run it like you like your life depended on it you've got to have discipline to say this was the cost I assumed I was going to take out this is the improvements I was going to make these are the dates I was going to switch over the ERP whatever it is you can't this one something is dangerous sometimes in a highly autonomous businesses sometimes you can buy the business and then leave it alone you come back six months later like holy crap what happened you've got to put in the time so every deal that we do I will be on a monthly call with the general manager that bought it and we're do an integration review uh so i learned a long time ago by the way i've made some mistakes in my career i mean i've had a couple of couple of deals that i had to go back to my board and say that didn't work out well um you know it's part of you know you're not going to bat a thousand but i do think that it's something that um i take pretty seriously we're deploying investor capital and you know while a small deal in the big scheme of things we could probably wash out with within the portfolio if we were off by 10 million bucks or whatever but i still think that hey we still spent 50 million dollars of the shareholders capital we should be accountable for that so i
take it pretty pretty seriously i think we're up against our time uh we're going to continue this in the breakout room amaranth two is the breakout room so thank you everyone thank you