© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to ATS Automation First Quarter Conference Call. I would like to remind you that this call is being recorded on Wednesday, August 15, 2018, at 10:00 a.m. Eastern time. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Stewart McCuaig, Vice President, General Counsel of ATS.
Thanks, operator, and good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS; and Maria Perrella, Chief Financial Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all of its representatives on this call. The oral statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS's filings with Canadian provincial securities regulators. Now it's my pleasure to turn the call over to Andrew.
Thank you, Stewart. Good morning, ladies and gentlemen, and thank you for joining us. Our first quarter performance featured improvements in our financial value drivers, including year-over-year growth in order bookings, revenues and margin expansion. We finished the quarter with record order backlog that continued to advance the ABM. This morning, I'm going to speak to you about our Q1 performance, our outlook and our progress with the ABM. Maria will then provide more details on our first quarter financials. Starting with our Q1 financial value drivers. Bookings were $358 million, up 35% year-over-year. Q1 bookings were driven by the energy and life sciences markets. In energy, we announced a $60 million order from Bruce Power for the design and build of automated reactor component removal tools for their Major Component Replacement, MCR, project. ATS technology will be used for the critical task of removing reactor components, including fuel channels, calandria tubes and calandria tube inserts. This is a highly automated and remote-controlled system that maximizes safety while optimizing efficiency. This project will be built over the next 18 months and tested in the newly completed MCR integration facility on our ATS campus in Cambridge. The project follows on our long-standing relationship with Bruce Power to which we have provided a number of automated systems. In life sciences, Q1 bookings were strong and included a number of follow-on programs in medical devices. Our track record of delivering value to customers in this space through our proprietary technology and strategic solutions has resulted in these repeat wins. In transportation, bookings were up from last year. Transportation continues to be driven by the EV market, and we are winning opportunities with both new and existing customers. Included in our first quarter bookings was a battery assembly program for a new ATS customer. The consumer market remains solid compared to last year, although it was slightly down from Q4, when we had booked a significant program for a warehousing automation application. Our goal is to drive year-over-year bookings growth on an annual basis despite some variability from quarter-to-quarter due to our project-based business. I expect our customers will continue to exercise caution and be thorough in making their capital investment decisions. Q1 revenues were $300 million, up 14% over last year. Our Q1 adjusted EBIT margin was 11%, up from 10% in Q1 last year. Moving to our outlook. We ended the quarter with a record order backlog of $789 million, up 16% over last year. Looking at our funnel. Life sciences continues to be strong, and we are seeing good opportunities in both medical devices and pharmaceuticals. The life sciences market has positive dynamics, high barriers to entry, including stringent regulation, and high consequence of failure. These characteristics are complementary to ATS's capabilities, which include high-speed, high-precision solutions across a number of life sciences applications. EV activity is strong and accounts for the majority of our transportation funnel. EV represents a considerable changeover for the transportation industry, which I expect will result in increased market activity over time. Our proven success in the EV market, including battery module and pack assembly and e-motor assembly, positions us well to capitalized on the EV market shift and deliver value to our customers. We continue to proactively target the EV and life sciences markets for growth. Our niche positions in consumer and energy has positively contributed to our business, and we will continue to pursue select opportunities where our technologies align well with the value required by the customers. Turning to the global economy. Some jurisdictions in which we operate have been affected by trade tariffs on certain materials and ongoing trade agreement negotiations. To date, the impact on our business has not been material. However, as the trade [Audio Gap] work their way through the supply chain, we may see some pricing pressure on certain components we purchase. We do not expect this to have a material impact on our operations. From a customer perspective, we have not seen a material change in customer demand or in their capital investment plans. We will, of course, continue to monitor events and will provide an update as events warrant. Overall, I believe our global footprint will continue to serve us well as it provides us with flexibility in serving our customers and in managing our global supply chain. On after-sales services, customer receptivity has continued to be positive. Our Q1 bookings were up over last year while Q1 service revenues were down primarily due to the timing of delivery of certain services. We're focused on accelerating growth in this strategic area of our business, and it's an important part of our margin expansion plans. Moving to the development of the ABM, our ATS business model. As a reminder, the ABM is our playbook designed around our business strategies, collective strengths and commitment to performance. We continued to make progress in the first quarter. We added to our ABM team, hiring 2 regional ABM leaders. These leaders will help us accelerate the rate of adoption and expand the impact of the ABM across our business. Our team continued to drive process improvements, completing over a dozen Kaizen events. For example, one of our divisions conducted a Kaizen event in the receiving area. This led to a 50% improvement in receiving time and a 50% reduction in parts handling steps. Both will have a positive impact on productivity. A Kaizen event was conducted in another division, which removed an unnecessary machining process and streamlined the procedure. We have initiated formal problem-solving processes to drive improvements in working capital through targeted improvements in accounts receivable collections. And we're continuing to use problem solving to drive improvements in our sales funnel through improved opportunity qualification and quoting processes. Overall, the adoption of our ABM across the business is encouraging, and we have many opportunities ahead for continued improvement. We're in the early days of our journey with the ABM. To use a baseball analogy, the ABM is about base hits. The accumulation of these improvements, along with the adoption of new tools, will serve us well in driving growth and sustainable margin expansion in our business over the long term. Going forward, we're focused on executing our value creation strategy: build, grow and expand. As a reminder, build means build on the foundation of ATS, improve our core business and take our performance to the next level. Grow means grow organically through the development and implementation of ABM growth tools. And expand means broaden our reach through new markets and business platforms, expand our service offerings, drive innovation and make strategic and disciplined acquisitions that strengthen our business. In summary, our first quarter performance resulted in increased order bookings, revenues and margin expansion. We finished the quarter with record order backlog. We have continued to advance and have success with the ABM. Our balance sheet is strong, and we are well positioned to drive long-term shareholder value. Finally, I'm pleased to announce that we'll be hosting an Investor Day on Tuesday, September 18 at our headquarters in Cambridge, Ontario. We look forward to welcoming our institutional investors and equity research analysts for an update on our corporate strategy and a tour of our facility. If you're interested in attending, please contact Sonya Mehan, our Director of Investor Relations. We look forward to seeing you then. Now I'll turn the call over to Maria.
Thank you, Andrew. Our Q1 performance demonstrated continued year-over-year improvement in our key financial value drivers, bookings, revenues and adjusted earnings from operations margin, while noncash working capital as a percentage of revenues remained low. This morning, I will discuss Q1 results and our balance sheet. I'll start with operating results. Q1 bookings were $358 million, up 35% from last year's bookings of $266 million. Q1 revenues of $300 million were 14% higher than last year's $264 million and up 1% from Q4. This was primarily due to our order backlog of $746 million at the start of Q1, up from $681 million at the start of Q1 last year. Period-end order backlog increased by 16% to a record $789 million. This provides us with a strong base to generate year-over-year revenue growth going forward. Based on the composition of our backlog at the end of the quarter and our estimates of in-quarter orders, which may be booked and converted to revenue in the same quarter, Q2 fiscal '19 revenues are estimated to be at the higher end of the 35% to 40% range of backlog. On margins, we improved our Q1 gross margin to 26% compared to 25.3% in Q1 last year. The increase in gross margins was due to higher revenues, improved program execution and operational utilization, supported by the ongoing implementation of the ABM and our focus on continuous improvement. Compared to Q4, our gross margin was down approximately 30 basis points. This was primarily due to a change in revenue mix in Q1 where we generated lower revenues in after-sales services, which is typically a higher-margin business. As with bookings and revenues, our goal is to deliver year-over-year improvements in operating margins. However, the nature of our project-based business can cause variability. Factors such as revenue levels, sources of revenues, mix of costs, program cycle and the mix of program terms are examples of what can cause quarterly variability. Moving to SG&A. Excluding restructuring and acquisition-related amortization expenses in both periods, Q1's SG&A was $41.9 million, approximately $3 million higher than Q1 last year. SG&A has increased over the prior year due primarily to increased employee costs and sales-related expenses. Our higher gross margins more than offset increased SG&A costs. Excluding amortization of acquisition-related intangibles and nonrecurring expenses, we expect SG&A to be in a similar range going forward. Q1 adjusted earnings from operations of $32.6 million were 10.9% of revenue, up from $26.3 million or 10% last year. We are pleased with the continued improvement in our margins, and our goal is to drive further improvements through the deployment of our ABM, capacity utilization, supply chain management, standardization and program management. The restructuring plan implemented last year is materially complete. We expect this restructuring to have a payback of approximately 18 to 24 months, starting to impact mid-Q2. Moving to the balance sheet. Our noncash working capital as a percentage of revenue remained low in Q1 at 10.6%, up from 8.3% in Q4 and 10% in Q1 last year. Cash used in operations was $0.4 million in Q1 compared to last year, where we had usage of $3.4 million. At the end of the quarter, our net debt position was effectively 0, an improvement from last year's net debt of $41 million. We continue to have strong liquidity with cash on hand of $325 million and our credit facility, of which approximately $630 million is unused. In Q1, we generated earnings per share of $0.18, up 50% from $0.12 last year. On an adjusted earnings per share basis, we generated $0.22 in Q1, up 38% from $0.16 last year. The increase reflected higher revenues and improved operating margins. Our effective tax rate was 23% in the quarter. Going forward, our effective tax rate is expected to continue to be in the range of 25% of pretax earnings. In summary, we had a good start to fiscal '19 and are well positioned for the balance of the year with a record $789 million backlog. We will continue to focus on the adoption and development of the ABM and other initiatives to drive margin expansion going forward. Our funnel remains well diversified with a mix of programs and enterprise solutions. We have a strong balance sheet with available credit, which will support our objective of profitable growth. Now we'd like to open the call to your questions. Operator, could you please provide instructions for our listeners? Thank you.
[Operator Instructions] Your first question comes from Mark Neville from Scotiabank.
Maybe just a first question for Maria, Maria, were there any restructuring charges in the quarter? I didn't see any.
No, there weren't any restructuring charges. We took restructuring charges in Q3 and Q4, and as you know, those totaled $11 million. The only thing that happened in the quarter is cash payments on those restructuring charges that were taken in fiscal '18.
Okay. And on the Bruce contract, can you just sort of help me understand that? I mean, there was initial -- an initial order in, I think, December 2016 for $40 million; $60 million this quarter. I'm just sort of not clear if it's -- if they're both for the initial reactor or if it's for separate reactors, and how we sort of think about this going forward. Is it sort of all additive? Or is it like that's the big order and there's -- it's sort of just incremental from here? Sort of any help sort of thinking about this over the longer term would be appreciated.
Yes, Mark. Mark, so Bruce. Let me start. Very, very pleased to have this partnership with Bruce as they're going through their Major Component Refurbishment (sic) [ Major Component Replacement ]. And with this, what we want to walk through is the initial order was on the pilot program. And now we're getting into the operating tools. And so with this partnership, as we proved out with our initial pilot, the capability of ATS and our automation solution has then allowed us, as we move forward with this next step, to move into the operating tools. We're very pleased with the win and how it aligns and the value it brings to Bruce. But as we know, we need to execute and deliver that value to them and then, through the expansion of our MCR facility here in Cambridge, being able to then test out and prove that solution set in our environment. So this is in a continuation and, as I mentioned in the discussion, is a partnership with Bruce, and we're very pleased to have won this work and continue our long-standing relationship with them.
Okay. So it wouldn't be, maybe, maybe not, but correct to think that it's sort of 6x potential, like this is for reactor 1 and, again, maybe 6x larger for the rest, like that? Is that sort of the wrong way to think about it?
It is. There is more opportunity for us with Bruce as we expand both our services as well as where we can help them in their automation requirements. But there -- that is not the correct way to think through it on a 6x standpoint. That said, we are looking where we can add value to Bruce in their requirements and their need through their automation -- as they're moving through their automation requirement.
Okay. And then maybe just one last one on the aftermarket. I mean, you said some pressure on the margin in the quarter, just lower sales. Is there any backlog in that business? Or is it all sort of booked and revenued in the same quarter typically?
There is backlog, and it forms part of our total backlog of $789 million.
Okay. And can you maybe just sort of broad strokes, the size of that backlog versus where it might have been a year ago or a quarter ago? Just -- again, just broad strokes just so we can understand how it's tracking.
Yes. So very broad strokes, the backlog would be similar to the percentage of revenues or a percentage of revenue similar to backlog. And then in terms of change quarter-over-quarter or year-over-year, it has increased, and part of that increase is due to increased bookings throughout the quarters, and a little bit has to do with the slightly lower revenues in Q1.
Your next question comes from David Tyerman from Cormark Securities.
My first question is on the market conditions. I'm getting the impression from the text and your comments that there isn't much change right now. I was just wondering if you could confirm that or let me know whether things are getting better or worse.
So we -- I did comment on this in my opening comments that so far, what we've seen is a continuation. We have not seen a slowdown from our customers. We have had, as we've announced, a fairly good bookings quarter. That said, as you know with our business, timing is variable. And as we look at the year, our funnel remains healthy. But I go back to it does align around the needs and the requirements of our customer and, therefore, it will be variable.
Okay, that's helpful. And then my second question is on the backlog, the margins in it. Are there any particular directions in terms of the margin in backlog sequentially and then just overall versus what we've been seeing recently?
Based on what we have in our backlog, margins are similar to what we've seen in the last couple of quarters, so we don't really see much change there. Where, of course, we're targeting -- and we talked about our margin improvement initiatives that will work towards improving margins over time.
Okay. So just to be clear on that, Maria, sequentially similar, and it sounds like overall similar, but that gives you the backdrop to try and achieve improvements from the various strategies you have. Is that the way to think of it?
Yes, that's the right way to think about it.
[Operator Instructions] Your next question comes from Justin Keywood from GMP Securities.
I just wanted to follow up on the comments around the tariffs. And you mentioned that there may be some pricing pressure but no material change. I'm just wondering, is that an indication that some of the increased prices are passed along to customers? Or how should we view that?
Yes. So that's a good way to view it. When we put together our bids, we take into consideration what our costs are, both labor cost and third-party materials. And in most cases, we firm up prices. And our bids are valid only for a period of time, so we expect to have limited exposure and take into consideration what changes have been implemented. And then on a go-forward basis, we're not sure what could happen, but the same type of rules would apply, where we would try to minimize the impact of potential changes to tariffs.
Okay. And then I just want to come back on the after-services revenue with the higher bookings but lower revenue in the quarter. I'm just wondering what happened there. Was there maybe a large order that didn't show up in revenue in the quarter? Or what happened to that lower sales?
So as we mentioned, and we grew our bookings in the quarter and our backlog grew in the quarter for this area of the business. One of the areas that we did see was the timing of the revenue on certain aspects of the business. And again, one of our strategic areas of focus is improving our alignment with CapEx bookings and services, and that will have an impact on timing for revenue. And again, we're still learning as we go through this, but the positive is, we continued to increase our bookings and our backlog grew. We expect we're going to continue to drive that throughout the year.
Your next question comes from David Tyerman from Cormark Securities.
Just to follow up on that question actually. I'm trying to understand what causes services to go up and down. And I guess I'm wondering, what kind of services -- or how should we think about this in terms of variability of that business?
So there is variability within the services business. And that's, again, back to the initial comment around bookings were increased versus prior year. We did see some variability in revenue. And when we think through it -- and again, one of the areas we're looking at is attach rate on new CapEx equipment, and that is going to be when the CapEx typically ships, and, therefore, we are going to see some variability. It tends to be less in that market, and it's an area why we are focused on it as well as the reason that we have an increased level of impact for our customers in their automation process and also the service level within the customer's facility. So we do see some variation on the business. This was impacted in the quarter. But again, back to the bookings were solid, the backlog was solid, and it's an area that we are going to continue to drive throughout the year.
So when I think about the services area, Andrew, is this much of a backlog business? Is there -- is a lot of this sold and revenued in the same quarter, so it would depend -- what we see would depend on what was sold in that quarter and so that would jog a lot of variability?
So we -- I think Mark Neville may have asked the question. We do have backlog -- or services in our backlog, and it accounts for roughly the same percentage as when we talk about services as a percentage of revenue. We have services that are booked and revenued in the quarter also, and that happens with the rest of our business as well. And that could be a little bit higher than the rest of the business. But on average, I'd say the backlog profile is similar to the rest of the business.
Your next question comes from Mark Neville from Scotiabank.
I just had a question for -- just on CapEx. Can you help us maybe with a number for the year?
Sure. It's a bit of a broad number or range, and we're estimating to be in the $20 million to $30 million range. I think in fiscal '18, we were at about $25 million, which is higher than where we've typically been. The range has to do with capacity expansion. We are looking at areas where we do need to expand our capacity, and we'll be taking decisions. Those decisions may or may not impact in fiscal '19, in which case then we would see higher CapEx in fiscal '20.
Okay. Then maybe just the last one just on M&A. Again, we've talked about this on prior calls. So just curious as to sort of what you're seeing, how that's sort of shaping up; multiples, if they're prohibitive. Just a general -- just any discussion or commentary on that would -- again, we'd appreciate.
Sure. So Mark, we have talked about it. And not to go on the 4 criteria, but we've got our 4 criteria that we've laid out. And of that, one of them is ROIC, and we look at the financial return of the asset we're potentially buying. So multiples do play into the discussion. That said, stepping back and looking at our funnel has grown, our market areas and targets have grown, our team has grown, but we're going to be disciplined. And I've often said that we are going to ensure that the 4 criteria are met before we move forward on any M&A deal within the business. And it's going to align with strategic areas of our organization before we add the asset to our business. That said, my activity with cultivation has increased. Our team's activity with cultivation has increased. And overall multiples are still healthy, and, therefore, you'll have to look at the strategic rationale in the markets at a very [ happy ] pace. But there are areas that we're interested in. That said, we're going to be disciplined in our approach.
[Operator Instructions] Your next question comes from Robert Caldwell from Richardson GMP.
My question revolves around the backlog. And I'm wondering if we can probe just a little bit into perhaps the top 4 or 5 customers in that backlog and the dollar magnitude of their participation in the backlog other than the Ontario hydro deal, obviously.
As you know, we don't talk about our customers. No one customer in our backlog accounts for more than 10% of our backlog. I would estimate that our top 4 or 5 customers could account for 15% of our backlog. And they -- as of right now, we would have representation across most of our end markets. So definitely life sciences, energy, consumer and transportation.
And would that be much as it's been in the past, Maria?
The representation in our end markets? That part?
Yes. Yes.
I would -- we have more in Consumer today than we have had for a while, and that primarily has to do with the warehousing customer that Andrew has spoken of in the past, although we don't name names. And with the Bruce Power order, that can be a little bit higher. And so some of it just has to do with timing. But otherwise, I'd say, on average, the same.
Mr. Hider, there are no further questions at this time. Please proceed.
Thanks, operator. As a reminder, we're hosting our Annual Meeting of Shareholders tomorrow at 10:00 a.m. at the TSX conference center (sic) [ Broadcast Center ]. And as I noted, we'll be hosting an Investor Day on September 18 at our headquarters in Cambridge, Ontario. Finally, we'll be reporting our second quarter results in November. Thank you, everyone, for joining us today.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.