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Good morning, ladies and gentlemen. Welcome to the ATS Automation Third Quarter Conference Call. I would like to remind you that this call is being recorded on Wednesday, February 7, 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' 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. Third quarter performance featured growth in bookings and revenues; improved adjusted profit; record order backlog; and the continued deployment of our ABM, the ATS Business Model. This morning, I'm going to speak to you about our financial value drivers, progress on the ABM and our outlook. Maria will then provide some more detail on our Q3 financials. Starting with our financial value drivers. Q3 bookings were $311 million, up 21% over Q2 and 10% over last year. Q3 bookings were strong in life sciences and consumer products, and both verticals included significant programs and new customer relationships for ATS. In consumer products, we have been engaged to produce a warehousing automation application for a new ATS customer, which they plan to deploy across their extensive global network of order fulfillment centers. Our capability, after-sales services and global footprint were critical factors in winning this work and will be utilized to deliver this important program to our customer. In life sciences, we booked an enterprise program with a new ATS customer to provide a critical manufacturing solution for an innovative product used in the treatment of diabetes. Our customer is making this investment in production capacity following a significant increase in demand for their product. Our global presence, advanced technology, capability and track record of delivering large-scale programs with on-time delivery performance were key to our win. The energy market remains strong with new programs from existing customers in both solar and nuclear markets. Transportation bookings were up from Q3 last year, and we remain positive on our funnel on EV, where the market has been strong and is growing. As you know, our goal is to drive year-over-year bookings growth despite some variability on a quarterly basis due to our project-based business. Revenues were $278 million, up 17% over last year and up 1% over Q2. Our Q3 adjusted EBIT margin was 10.6%, up over last year and up slightly on a sequential basis. As we announced last quarter, we initiated a restructuring plan that addresses the rationalization of divisions and business lines as well as leadership and management changes throughout the organization. These actions are designed to improve our cost structure, enhance capacity utilization at other facilities that will absorb work, realign resources to areas of the business where we expect to grow and improve the effectiveness of our management. The restructuring is well underway, and I expect it will be completed in the first quarter of fiscal 2019. I am confident that these changes will improve our operations and enable us to deliver increased value to our customers and shareholders. Moving to our outlook. We ended the quarter with record order backlog of $689 million, up 9% over last year. Based on customer and project schedules, we expect that our order backlog will benefit our business primarily beginning in fiscal 2019. Even so, we're in a good position to finish the year and deliver year-over-year organic growth. Our life sciences funnel continues to be strong. We are seeing good opportunities in both medical devices and pharmaceuticals. This is an attractive market with solid industry fundamentals, positive dynamics and opportunities to utilize ATS technology innovations. The transportation funnel is solid and being driven by growth in the EV market, which now represents the majority of our transportation funnel. We are expecting an increase in market activity associated with the transition to EV and fuel cell platforms. ATS is well positioned in this market with demonstrated experience and a track record of delivering value. Our niche positions in both energy and consumer have continued to positively contribute to our business, and we have opportunities in which we are uniquely qualified and positioned. On after-sales services, our positive momentum continued, and I am encouraged by the positive feedback from our customers. That said, we still have work to do to make this a more meaningful part of the business. Moving to our deployment of the ATS Business Model. We're making progress. As a reminder, the ABM is a set of tools that enable us to pursue our strategy, evolve, drive continuous improvement, outpace the markets we choose to participate in and drive sustainable, long-term value for our shareholders. Our focus is on the deployment of initial tools to standardize problem solving and continuous improvement processes. Over 90% of our global management team has now been trained on these initial tools. Our team has completed a number of kaizen events, which have targeted improvements in such areas as our coating process, which has led to reduction in engineering hours required in this critical process; and production efficiency, resulting in lower scrap rate and improved productivity at one of our businesses in Germany. This early progress is encouraging, and we have many opportunities ahead to apply the ABM and improve our business over time. Moving 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 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 services offering, drive innovation and make strategic and disciplined acquisitions that strengthen our business. In summary, third quarter performance resulted in higher bookings, significant new customer relationships and improved adjusted earnings margins. We finished with record order backlog and a strong balance sheet supporting our value-creation story -- strategy. I am pleased with the progress we've made on the rollout of our ABM. We're in the early days of this journey, and there is much work ahead of us to enable the full potential of our ABM. Now I will turn the call over to Maria.
Thank you, Andrew. Our Q3 performance demonstrated continued year-over-year and sequential improvement in all financial value drivers: bookings, revenues, adjusted earnings from operations, margin and noncash working capital as a percentage of revenues. This morning, I will discuss results for the quarter and our balance sheet. I'll start with operating results. Q3 bookings of $311 million were up from Q2 bookings of $257 million and last year's Q3 bookings of $284 million. On a year-to-date basis, bookings of $834 million were 3% higher than prior year bookings of $812 million. We generated $278 million of revenues in Q3, an increase over last year's Q3 revenues of $237 million and sequentially over Q2 revenues of $275 million. The year-over-year growth was primarily due to our order backlog of $648 million at the start of Q3, along with strong bookings in the current quarter. We ended the quarter with $689 million of order backlog, a 9% increase over last year. Based on the composition of our backlog at the end of the quarter and our estimates of in-quarter orders, which are booked and converted to revenue in the same quarter, Q4 fiscal '18 revenues are estimated to be at the higher end of the 35% to 40% range of backlog. Due to the size and timing of customer programs won in the last quarters, a lower backlog conversion rate than we have realized over the past few quarters is expected in the fourth quarter. For the year, we are in a good position to deliver year-over-year organic growth with year-to-date revenue of $817 million, up 10% over last year, and with a record order backlog. We improved our Q3 gross margin to 26% compared to 25.8% in both our prior quarter and in Q3 last year. Moving to SG&A. Excluding restructuring and amortization related to acquired intangibles in both periods, Q3's SG&A was $40.7 million or approximately $4 million higher than prior year Q3 SG&A. SG&A has increased over prior year due primarily to increased employee costs, professional fees and sales-related expenses. We expect our SG&A excluding acquisition-related intangibles and nonrecurring expenses to be in a similar range going forward. Compared to Q2, SG&A increased slightly by approximately $400,000. In both Q2 and Q3, our higher gross margins more than offset increased SG&A expenses. Q3 adjusted earnings from operations of $29.3 million were 10.6% of revenue, up from $22.5 million or 9.5% last year and up from $28.8 million or 10.5% of revenue in Q2. 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, supply chain and program management. On a year-to-date basis, adjusted earnings of $84.4 million or 10.3% of revenue have increased by 16% over the corresponding period last year, where we generated adjusted earnings of $72.6 million or 9.7% of revenue. As with bookings and revenues, our goal is to deliver year-over-year improvements in our operating margins. However, the nature of our project-based business can cause variability in our margins. Variables such as revenue levels, mix of costs, program cycle and the mix of program terms are examples of what can cause quarter-over-quarter changes. On our restructuring program, we recognize $9 million of expenses in the third quarter. We expect to incur an additional $2 million to $3 million of costs in the fourth quarter to complete the restructuring. We expect this restructuring to have a payback of approximately 18 to 24 months and start to impact in fiscal 2019. Moving to the balance sheet. Our noncash working capital as a percentage of revenue remained low in Q3 at 8.3%. This compares to 8.4% in Q2 and 15.1% at the end of Q3 last year. The decrease is due to a mix of contracts and end markets, more favorable payment terms and increased revenues. We do expect an increase going forward, but we still target to be below 15%. In Q3, cash from operations was $5 million compared to usage of cash of $14 million last year. On a year-to-date basis, we have generated cash from operations of $40 million in fiscal '18 compared to $47 million in the corresponding period a year ago, which is primarily due to increased investment in noncash operating working capital. Although we have quarter-over-quarter variability in our cash generation due to the size of our programs and significant milestone payments, we have produced good cash flows as demonstrated by our results. We finished the quarter at a marginal net debt position and an improvement of $128 million from Q3 last year. We continue to have strong liquidity with cash on hand of $308 million and a credit facility of which approximately $644 million is unused. Our capital structure also includes a fixed-interest USD 250 million bonds that matures in 2023. Our third quarter earnings per share was $0.07, the same as Q3 last year. On an adjusted earnings per share basis, we generated $0.18 in Q3, up from $0.12 last year. The increase reflected higher revenues and improved operating margins. Our effective tax rate was 23% in the quarter and on a year-to-date basis. With respect to the recently announced U.S. tax reform, we have evaluated the impact on our business and do not expect a material impact. In summary, all financial value drivers showed sequential and year-over-year improvements. We have record order backlog, a strong balance sheet, and with the ongoing deployment of the ABM, we expect to enter fiscal 2019 with a solid foundation for growth and improvement. Now we'd like to open the call to your questions. Operator, could you please provide instructions to our listeners. Thank you.
[Operator Instructions] Your first question comes from Cherilyn Radbourne from TD Securities.
I wanted to ask you to comment on U.S. tax reform from a different perspective. Just curious whether your discussions with customers would suggest that it may have a positive impact on activity levels given that, in the U.S., clients now have the ability to fully expense CapEx.
We're receiving feedback. So Cherilyn, we met with several customers on this aspect, and one of the areas that...[Technical Difficulty]
Okay. So Cherilyn, we've met with several customers on this aspect, and what we're seeing is, first and foremost, they've got continued positive outlook on the year. Their -- when we have further discussions around the level of impact that these tax reforms are going to have for their businesses, we have seen each one of them come back and say -- or excuse me, the customers [ we pulsed ] come back and say that there's -- it's too -- still too early to tell whether that's an increased level of investment within the year. That said, when we've met with them, they remained positive on the outlook for the year and their plans for capital deployment. So net-net, I would say we're still positive on next year, but it's too early to tell for what's going to impact our customers on the tax reform.
Okay, that's helpful. And then as a follow-up, in terms of the record backlog, can you give us some perspective on that? And I'm thinking just about mix by end market, mix of order sizes in there, margin profile and so forth.
Sure. In terms of what's in our backlog, size of programs, et cetera, mix is typical of what we've seen in the past. So we have enterprise programs. We have machine orders and programs in here. Margins are also similar to margins that we've had in the past. So as far as our backlog goes and impact to margins going forward, we don't see any impact as a result of what we have in our backlog. And in terms of end markets, this quarter, we received the order that Andrew spoke of. And it's a consumer order, and that bumped up our consumer backlog. And also, we've had another order in the energy market, and that bumped up that backlog also. We're slightly lower in transportation. We've had slightly lower transportation bookings, but we don't see any issue there as we are looking at the EV market.
Your next question comes from Mark Neville from Scotiabank.
Can you hear me okay?
Mark, yes. Sorry, we had a little issue on the first section, but you're coming clear -- you're coming through clearly.
All right. I guess, just on the margin, it's been 2 or 3 quarters now where you've seen some nice sequential improvements. I guess I'm just trying to get a handle on -- at this point, how much of it is execution? How much of it is from your new business model, some of the improvements you've driven there, if at all. Any way to quantify that?
Sure. So I would say that some of it is due to execution. In the past, we've talked about RED programs and how they've negatively impacted our results. And I've called out some -- or in some quarters, I've called out the fact that we had some material RED programs. And in other quarters, I've talked about where we've had good programs, and they've been able to offset those RED programs. Based on our last few quarters' results, we've been better able to manage these programs. And I think that's as a result of some work we undertook a while ago, but also with our new ATS Business Model and how we approach things, and the idea is continuous improvement and to fix things once and to work towards not having the same issues again. Now as far as the impact of the new business model and the ATS Business Model, as Andrew says, we're at the start of it, and we expect to see more impact going forward. So overall then, for the last few quarters, I'd say execution is mostly driving it, and we're starting to see some impact of the ATS Business Model.
And I guess to follow up on Cherilyn's question on the backlog and to the point you just made, I guess, so nothing -- there being nothing in backlog to impact margin, so, I guess, does that mean there's sort of no RED programs you're working on currently and the 26% is -- where you're at now is a decent starting point and then hopefully or at some point, we do start seeing improvements from the business model? Is that a reasonable way to think about it?
It's a reasonable way to look at things, but I would just add one thing on the RED programs. We've talked about RED programs, and we've said that RED programs -- or we classify programs as RED if they differ from that which was bid. And unfortunately, as -- although our objective is to minimize or eliminate, we'll always have RED programs based on our definition. So based on that definition and when we look at our backlog, there are a few, but there's -- they've come down versus, say, a couple of years ago, and they're not negatively impacting our consolidated bid margins.
Great. And Andrew you threw out a stat earlier. I think it was 90% of initial tools have been rolled out or will be rolled out. I'm just curious, I guess, of the -- of that 90% or the initial tools, was that sort of 10% of the [ dual locks ]? Or is it 30%? Just trying to, again, just get a better feel for the business model and how long it takes to deploy and how it all sort of plays out.
Thank you for the question. The -- it's actually 90% have been trained on the initial tools, and there are 2 specific tools. Mark, I'm going to -- as we talk about the ABM, this is an absolute journey, and we're going to be deploying additional tools. And it's about making sure we identify and continue to drive the tools that are going to have the biggest impact on the business, both from a value to our customer as well as executing and operational performance. And so as we move forward, there's a whole list of tools to be able to execute on, but we're being selective in the rollout and how we operate. And so we've had good momentum and we're moving in the right direction, but it's about also making sure that it becomes part of our DNA. And the ABM is how we operate both commercially as well as operationally. And so it is an absolute journey. It's going to be one we continue to look at and make sure we chart the course to ensure that we're focusing on the critical few to drive the greatest impact in the business.
Your next question comes from David Tyerman from Cormark Securities.
My first question is on margins. So when I look at the margins, and I'm thinking of the EBITDA margins, they're definitely improving, which is good. But when I look at them versus a couple of years ago, they're still down. And I'm wondering if you could give some insight into why you see that they're down over the last couple of years, and I'll leave it at that.
I think -- and David, I'm not sure where you're comparing to, but I know...
It's fiscal '14 and '15 adjusted EBITDA margin.
Yes. So what I'm thinking of then is we purchased PA in fiscal '15, I think it was. And when we purchased PA, we did say that their margins were slightly lower than the existing business, I think about 1% or so. And we -- so we still see that. So that's one of the reasons why. And I think another reason why is we have been doing some more investing in the business, investing in the business in 2 areas. One is services, and we've talked about services for a couple of years. And although we've talked about improvements and we've seen some top line growth, there's still a lot more work to do, and we want to recover that investment. And the other area that we've talked about more recently also is innovation, a little bit more spend there. Although it wouldn't materially impact our results, but there is some more spend there, and we expect to get future return or benefit on that also.
Okay, that's helpful. My second question, I was just wondering if you could talk a little bit about the M&A environment right now and how you feel about that.
Absolutely. So M&A, we remain active on this front and have increased our internal resources on this effort. We have a robust process for identifying, cultivating and assessing targets. And as I've said in the past, timing will be variable, and we're not going to acquire for the sake of acquiring. We've seen our funnel expand, and also, our view of the market continues to evolve, which means the areas that we have interest in continues to expand. I personally have visited several potential targets in the past, say, quarter, and several of these targets are privately held businesses that we need to make sure they understand the value of joining the ATS family. So that does take time. It's all about cultivation and making sure they understand what it benefits their business and how it can benefit their business, but we continue to look at this as an area to deploy capital and add value to ATS as far as our shareholders as well as our customers.
Your next question comes from Justin Keywood from GMP Securities.
Just on the new ATS customer for warehouse automation that you mentioned, I think you said that it had a network of facilities. I'm just wondering, is ATS in one of the warehouses? And is there potential to expand this? And are you able to quantify the number of potential warehouses that this could -- this opportunity represents?
So we're very excited about this opportunity. We're still assessing the niche piece of this, but what I can say is this is a region with multiple locations to start, and we believe, through the execution and drive to deliver the value to this customer, that we have devoted to expand penetration both globally as well as potential additional value to the customer. So it's -- certainly, ATS needs to prove that we can deliver the value that they see in us, and we're certainly -- we're confident in that, but it's also then how to help them expand in their global penetration on their network.
That's good to hear. And I assume this showed up in the consumer backlog in the quarter. Or is that something else contributing there?
That was -- that order is the one that primarily contributed to the higher consumer backlog in the quarter.
[Operator Instructions ] Your next question comes from Robert Caldwell from Richardson GMP.
Andrew, you made some very positive comments in your earlier remarks on the EV industry, which is obviously rapidly emerging. Can we have a little more color on perhaps how many manufacturers you may be talking to, the geographical range of those, obviously, the U.S. and perhaps Europe and beyond, and whether they're cars or SUVs or trucks? Just some color on the -- on that growing package.
Thank you for the question. So I did mention that this is now the majority of our transportation funnel, and ATS is well positioned in this space to provide a total package value to our customers. And what we're seeing is -- and you read the articles I read. The big players that are moving forward have plans on how they're going to drive this within their business and how many models they're going to launch within this space. So the typical names that you would know with EV, we're usually talking with those names. And from a regional play, that means that we're in North America, Europe as well as we -- as they move into regions like China, we can be their trusted partner as they move. Another interesting fact about this space is the size of the orders are fairly significant. And so we're seeing that customers are going to need to move in this direction. They're making bold statements about the level of production output, potential and model changes. And so we're seeing a decent size increase on our funnel, on our opportunity size. So I would end with, the typical names that you're reading in the newspaper, we're talking to. Second, it has now become the majority of our transportation funnel. And third, ATS is well aligned to provide a total value package to these customers as they move into this next phase of their production needs.
And perhaps a follow-on question, Andrew. Are the competitors you're encountering in that space the usual competitors? Or are there brand-new competitors that wouldn't have appeared before competing with ATS?
So it's a mix. And why I say it's a mix is we've seen -- based on size, we've seen some different competitors, and -- but we've also seen some of the same names. That said, again, back to size and scale, a lot of these companies want to be able to -- they need to execute on a strict time line and be able to produce certain models within a key number of production capacity requirements and that is a little bit more limiting. But certainly, we do have competitive landscape, and ATS needs to execute and drive this area to be successful.
[Operator Instructions] Next question comes from David Tyerman from Cormark Securities.
Just a follow-up on the margins. I think you've talked in the past of -- about improving margins by about 1% a year. And I'm assuming that's the EBITDA margin. Based on what you've done so far with ABM and the other things you're doing, do you think that, that is a reasonable pace to consider when we're looking at fiscal '19?
David, when we spoke the last couple of times about margins and margin improvement opportunities, as you know, we talked about the 500 basis points, but we didn't talk about -- we didn't say over what period of time or how much per annum. We -- of course, we are talking about sequential and year-over-year improvement, but we haven't been specific about what percent each year.
Okay. So for investors, is there anything you can kind of help us -- like putting 500 over no time line is kind of hard to really get an idea of what's going to happen here. For investors when they're looking at the stock, what should they consider when they're thinking about that?
I think one of the things that we did say is about 500 basis points over 5 years, but we didn't spread it out by year. There's a couple of things that we know we've been working on and we expect to take hold and have more impact as time goes on. For example, services and then also the other initiatives that we are undertaking, things that we've talked about before like standardization, our supply chain cost improvement and the ABM. And I think the ABM would be more similar to perhaps how services margins could impact, which is, as we go on, there would be more of an impact versus upfront. So I don't want to call it a -- what do you call that?
Hockey stick or back end...
[indiscernible] straight line?
No, it's not a straight line. It's a -- I can't think of the word, a curve, an upward curve. So we'll start to ramp up, and as time goes on, I think we'd see more impact.
Okay. So it's a cumulative process, it sounds like, and some of these things, like the services, are definitely going to take time.
David, from an investor standpoint, one of the items, and we continue to talk about this, is the passion and drive around the ABM. It's that continuous improvement mindset, but realize, these are base hits. We don't look for grand slams. We want every operation, every organization driving for base hits, and then the cumulative effect is the impact. And so as we're moving forward, and I was asked earlier about the level of tools, we're being very specific on the launch and ensuring that we've got execution and plans because it's about building process and sustainability. And again, our business is going to be variable and timing is going to be variable, but our organization is aligned around the ABM and ensuring that, that is the mission-critical area of how we're going to drive our organization.
Okay. Maybe just following up on the ABM. So how should we think about this? Like you've trained 90% of the managers on the first 2 tools. Does this make a large change in the prognosis for sales and margin improvement? Or are there are a lot, lot more things and it becomes a cumulative thing as all of them come together?
Okay. So good question. So we've trained the initial tool set, and it's about then deploying those and ensuring that we have our businesses running kaizen, running events. And I would say one of the areas that we're focused on right now is making sure that becomes part of the daily management within our operation. And we have businesses that are moving in a very fast pace and have been driving this and have continued to drive it, and we've got ones that we have to focus on to help them as they move down this journey. To answer your question around the number of tools, that is something that we are -- we're focused on. Once we have, again, businesses that have proven that they can move to the next step, then we launch the next phase of our tool set. We're already starting the training on that, but again, it's back to making sure we demonstrate the performance, we build it into our culture and to our DNA. And we've got a very engaged workforce that's highly technical. And so as we go through this, it's about learning the process, making it part of our everyday life and living by the ABM principles. And that's going to be success in our journey, because then, when we deploy tools, those tools take off in a very fast pace.
Got it, okay. One last question. So when you say 500 basis points, what is the base you're talking about? Like you had EBITDA margins of 11% in fiscal '17, but you had 13% in fiscal '15. What base should I be thinking of when I'm thinking about 500 basis points?
We think about fiscal '18 and where we would -- where we're going to be, and that's our starting point. So for example, if I look at year-to-date, our adjusted earnings from operation margin is 10.3%. So that's a good starting point.
Mr. Hider, there are no further questions at this time.
Great. Thank you very much, everyone, for joining us today. We look forward to reporting our fourth quarter and annual results in May. Please have a safe day. Thank you.
This concludes today's conference call. You may now disconnect.