ATS Corp (ATS) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation first-quarter conference call. I would like to remind you that this call is being recorded on August 13, 2014, at 10 AM Eastern Time. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would 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 Anthony Caputo, 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 overall 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 are 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 Anthony.

Good morning, ladies and gentlemen. I assume you've seen our press release. Maria will make some financial comments in a few minutes.

In the first quarter our performance was solid. Revenue and operating margins remained strong, and we continued to make progress with our value creation plan. After the quarter we took a significant step forward through the acquisition of M+W Process Automation, which I will refer to as PA.

Today I'll update you on our Q1 performance, conditions in the market, highlights of PA, and other M&A activity. I will then make some summary comments.

Q1 bookings were CAD160 million. Excluding IWK, bookings were CAD127 million, which were lower than our recent run rate. As I've indicated, we expect variability in our quarterly bookings due to the types of programs we pursue and when.

Our funnel has grown. By segment, both life sciences and transportation have increased approximately 10% over the last year, and consumer and energy are relatively flat.

Our overall capture rate has also improved, but we did not close as many opportunities, as some customers are taking more time to make decisions. Q1 revenues were CAD191 million, up 27% from last year due to the addition of IWK. Our Q1 consolidated EBITDA margin normalized for acquisition program-related costs was 13%, and we continue to strengthen our operations through program management, cost control, and supply chain management.

Our backlog remains strong at CAD425 million and is comprised of approximately 40% life sciences, 30% transportation, and 30% consumer products and energy. Our goal is to maintain backlog balance across our markets, and the addition of IWK and our success in nuclear has enabled us to achieve this balance.

Turning to our markets, as I noted, funnel and proposal activity remain healthy; and we continue to see considerable activity across all markets in both conventional and new technologies. Our goal is to provide value-based enterprise programs where ATS delivers enabling plantwide solutions to our customers.

In terms of outlook, our competitive position is strong, and we see significant opportunities. The health of the global economy appears to be improving. However, some uncertainty remains, and some customers continue to exercise caution with respect to their capital investments.

Turning to PA, as I said previously, we target companies based on their ability to bring market or technology leadership, scale, or opportunity. Our definition of automation includes machine systems, products, and services. As I said on our call in July, PA is a very valuable addition that expands ATS's markets, customer penetration, capability, and geography and provides a significant platform to drive organic growth.

PA serves leaders in a number of end markets, including automotive, pharma, biotech, chemicals, food, and oil and gas, typically on a recurring basis. PA has a stable business mix, with approximately 75% of its business activity relating to brownfield programs such as capacity expansion, line moves, upgrades, efficiency improvements, and factory optimizations.

PA management estimates that 60% of revenues are funded from capital budgets and 40% from operations and maintenance budgets as a result of its position -- brownfield; embedded; O&M budget exposure; MAC strategy, which is similar to ATS's enterprise solutions -- and its outstanding level of customer service, the Company has experienced strong and sustainable organic growth.

Turning to the strategic fit with ATS, from an overall ATS perspective, PA brings 51 offices and approximately 1,000 people in close proximity to customers and their equipment and ATS's equipment. This significantly increases our global presence and therefore the ability to make calls and dispatch resources on a timely basis. These offices will be augmented with sales and product support people over time.

From a revenue standpoint, both PA and ATS will have opportunities to engage their respective customers on a more comprehensive and global basis. ATS will expand this offering to its existing customers and new ones to include a host of on-site activity, including process control; software integration; MES; remote monitoring; lifecycle management; modeling and simulation; and product support.

Most of this additional activity can be delivered through augmenting the teams at existing network of offices and establishing some new ones. For ATS, PA brings an opportunity to improve our front end of the business process. PA brings an embedded engineering service and technical sales force with deep insight into customer preferences, developments, problems, and programs. These enabling relationships will be used to formulate unsolicited offerings designed to better serve our customers and further differentiate ourselves from others.

From a PA perspective, they will be part of a global company with aligned interests pursuing a shared vision. They will expand their MAC offering by utilizing ATS on a subcontractor basis to fill capability holes across a number of industries that they serve. Expanding its MAC offering is at the core of PA's growth strategy.

From a best practices standpoint, there will be learnings both ways. I believe that PA will benefit from adopting some ATS best practices, including key account management, performance management, and strategy development.

I believe ATS will benefit from having a real-time view into a new world of existing factories, customer challenges, and program funding channels. We expect this transaction will be immediately accretive to cash flow per share and accretive to EPS in the first full year post-acquisition.

Our other M&A efforts also remain active, and we dedicate considerable resources to corporate development. Our intention is to continue to make acquisitions of desired capability, a significant component of our value creation strategy. I'm as confident in this element of our strategy as I was about fixing ATS, separating solar, and then improving our approach to market.

In summary, our first-quarter operating performance was strong, and market activity is robust. We acquired PA, which is a highly complementary and a significant addition to our organic growth platform.

We have made some significant strategic advances. Over the past four years, our revenue and EBITDA compound annual growth rate has been about 16%. During the same period, and our underlying organic revenue growth, adjusted for acquisitions and FX, has been about 4.5%, and EBITDA growth about 12%. This while we fixed the business and separated solar.

We are now focused on the growth phase of our strategy. Overall our vision is to create a significant global company that delivers enabling manufacturing solutions, including machines; systems; enterprise solutions; and services to global leaders in the markets we serve. Our markets include mission-critical aspects of life sciences, transportation, energy, and consumer products. And soon we will include biotech, chemicals, food, and oil and gas.

We've become a significant company, and we will continue to execute our value creation plan. At this point I'd like to turn the call over to Maria.

Thank you, Anthony. ATS had a positive start to fiscal 2015. Operating performance was strong, and our IWK integration is now complete and yielding positive results. Subsequent to quarter-end on July 8, we announced the acquisition of PA, which we expect will close by the end of September and positively impact our results going forward.

This morning I will focus primarily on ASG and our balance sheet. I will also make a few comments on solar.

I'll start with results from continuing operations. As a reminder, Q1 last year does not include IWK. Q1 revenues of CAD191 million compared to CAD150 million last year, prior to the addition of IWK. This compares to Q4 revenues of CAD201 million.

Q1 revenues declined slightly from Q4 due to the timing of program activities and lower bookings. The CAD41 million year-over-year revenue increase is due primarily to IWK and the positive impact of translating revenues earned by foreign divisions due to the weaker Canadian dollar.

Q1 bookings were CAD160 million compared to CAD165 million last year and CAD197 million in Q4. We have said our bookings are lumpy and expect variances quarter over quarter.

As Anthony has said, our funnel is strong, and we continue to see robust activity. Due to the types and sizes of programs we are pursuing, we expect this variability to continue.

Q1 closing backlog was CAD425 million. Last quarter I said that the duration of our backlog was in the 7- to 9-month range, and we typically convert approximately 35% to 40% of our backlog to revenue within one quarter. The range is influenced by the timing and composition of new orders as well as timing on material components of work in backlog. For Q2 this profile will slightly change for the reasons mentioned, with conversion in the 40% to 45% range. The addition of PA is not expected to materially change this profile but will add to our backlog dollars.

At the gross margin level, operations continued to perform well. At 28% in Q1, gross margin improvement from 26% in Q1 last year and 27% in Q4. Restructuring activity carried out in fiscal 2014 is positively impacting results. Even so, we will continue to look at our cost structure and make adjustments when and where appropriate.

Excluding restructurings, last year Q1 SG&A costs were CAD23 million. This Q1 SG&A, normalized for the CAD3 million of incremental acquisition program-related costs, increased to CAD34 million. The increase is made up of the addition of IWK SG&A of approximately CAD8.5 million, FX translation of CAD1 million, and the remaining CAD1 million due to higher professional fees and other miscellaneous amounts.

Last quarter I said that based on current foreign exchange rates, normalized Q4 SG&A expenses of approximately CAD32 million to CAD33 million are typical of what we expect to spend going forward and compares to CAD34 million in Q1. Stock compensation expense increased by CAD1 million over last year Q1 and CAD700,000 over Q4 due to ATS stock price increases. As a result, EBIT margins were negatively impacted by just under 0.5% compared to both Q1 and Q4 of last quarter.

EBITDA, normalized for non-indicative and nonrecurring items and excluding stock compensation expense, was 13.9% this quarter compared to 12.9% in Q1 last year and 13.3% in Q4. Year-over-year EBIT margins are not comparable, as Q1 of this year now includes significant amortization of IWK intangible assets. As we continue to grow through acquisition, EBIT margins will be impacted by items not considered by management to be indicative of the business's ongoing operating performance.

Beginning this quarter, in addition to EBIT we will also speak to adjusted EBIT, a non-IFRS measure. Adjusted EBIT excludes amortization expense of acquisition-related intangible assets, acquisition-related transaction costs, restructuring charges, and certain other adjustments which would be nonrecurring in nature. Adjusted EBIT was 11% this quarter compared to 10.6% in Q1 last year and 11% in Q4.

Before moving to the balance sheet, a few comments on solar. In Q1 we received net proceeds of CAD12 million for the sale of the final three projects owned by our joint venture. This positively impacted cash by CAD12 million and discontinued earnings by CAD7 million. When the projects reach commercial operation, which is expected in calendar 2015, we expect to receive another CAD10 million.

Moving to the balance sheet, I'll review cash and working capital as a percentage of revenue. Similar to bookings, our cash generation quarter over quarter is lumpy. Overall, we expect to generate cash approximately equal to EBIT.

In Q1, our base business used cash of approximately CAD8 million, which included net proceeds of CAD8 million from the sale of a vacant facility in Canada. Overall generation of CAD3 million included CAD11 million from solar. Cash net of debt was CAD75 million.

ASG working capital as a percentage of revenue was 14.8% compared to last year Q1 of 14%. We expect to continue to operate within the 10% to 15% range for the time being.

A few words on PA: as I discussed on the PA call, we will fund the approximate CAD360 million acquisition with a new CAD600 million credit facility, to be available at closing, and possibly use some cash on hand. Leverage will be in the range of 2.5 to 3 times EBITDA, which is our post-acquisition target. We are comfortable with leverage in the 2 to 2.5 times range and willing to peak above for a few quarters after we acquire. With the expected strong cash generation from ATS and PA, we can reduce leverage over time.

Turning to profitability, beginning this quarter, in addition to earnings per share we will also speak to adjusted earnings per share, a non-IFRS measure. Adjusted EPS excludes items not considered by management to be indicative of the business's ongoing operating performance. These excluded items are the same as noted earlier in defining adjusted EBIT.

In Q1 we generated earnings per share of CAD0.10 from continuing operations and adjusted EPS of CAD0.15 from continuing operations. This compares to earnings per share of CAD0.10 from continuing operations and adjusted EPS of CAD0.13 from continuing operations in Q1 last year.

Discontinued operations EPS was CAD0.08 this quarter, reflecting gains recorded on the sale of solar assets, compared to a loss of CAD0.01 in Q4 and earnings of CAD0.12 last year. The effective tax rate for the quarter was 33%. There will be variability when there are higher earnings in jurisdictions with higher or lower tax rates, and where unrecognized deferred tax assets can be utilized to lower tax expense.

With PA, consolidated results will be materially affected, as ATS will then have a different revenue and margin profile. EBITDA margins are expected to be in the 12% to 13% range, while EBIT margins will decrease due to the amortization of intangibles. The effective tax rate is expected to be in the 30% to 35% range, with cash taxes payable at less than 50% of the expense. Combined, these factors will negatively impact EPS. Adjusted for these items, EPS is expected to increase.

In summary, ASG's Q1 performance was strong. We are focused on our growth strategy, both organically and through acquisition. We have both the foundation and resources to grow.

Now we'd like to open the call to your questions. Operator, could you please provide instructions to our listeners? Thank you.

(Operator Instructions) Justin Wu, GMP Securities.

My first question is on the order bookings, which I guess were a little lighter, and you kind of alluded to. And we understand that there is volatility quarter to quarter, but just wondering -- some of the delays that you are seeing from your customers, is that something that you expect is a prolonged thing or extended out? Or do you anticipate converting those opportunities into bookings in the relative short term?

Hi, good morning. The first part of the question -- the delays that we're seeing are not structural, and they are not across the board. They're just a function of the size of the programs that we're going after. And the volatility in bookings on a quarter-over-quarter basis will just continue. And it's just the nature of the stuff that we go after.

Okay. And in terms of -- I was wondering if you can provide an update on some of your enterprise solutions work, both in terms of potential opportunity as well as the ones that you have on hand, including Nigeria and the US healthcare contract.

Nigeria did another small bridge in the quarter, and we expect that they will do more bridges. And they expect that they will get the financial close, so it's going to be either one or the other.

The US one: we are basically at the end of the first two lines. And if that product gains acceptability in the market, then as I've said before, there is potential for follow-on.

And we do have other enterprise programs which we really haven't spoken to. We have only highlighted the bigger ones. But as a trend, approaching customers in more comprehensive way, bringing them a solution which includes our know-how and cognizance, which gives them the ability to differentiate themselves and their markets; taking a global approach with our customers, which all of those -- the sum of all those are the ingredients to enterprise -- is very well received and continues to be well received. And a company like PA gives us a more ingredients to be able to even expand that offering.

And just a question on the sales and service -- I guess the service side of the business. What was the percentage of revenue coming from service in the quarter?

About 15%, which is similar to the last few quarters since we added IWK.

And one comment I'd like to make about service and services, and -- just in terms of nomenclature and terminology. So we have two types of services. We have engineering services, and we have product support or after-sales services. And so when we think of PA, we think of PA as services, but on the engineering services side. And they get involved before automation, during automation, and after automation.

And then the question Maria just answered, the 15%, is the after-sales service. And strategically, we're trying to increase both.

15% is just the second part. But are you guys breaking out what the engineering-related -- or is that kind of bundled into your automation sales?

Right now it's bundled into our automation sales.

Okay, okay. And just in terms of the business, IWK, obviously -- and, obviously, with PA -- have a strong institutional knowledge on how to sell or bundle service with equipment sales. I'm wondering how the rollout of that knowledge or best practices, if you will, is going with the rest of the ATS divisions?

In the case of IWK, we have a number of programs that IWK and the old ATS are collaborating on. And so our approach to market is that we identify an opportunity, and then we configure ourselves in the appropriate way by bringing the appropriate divisions to bear on the solution. So approximately 70% of what we do now when we make an offering involves a lead division and one or more subcontractor divisions.

So very well with IWK, and I expect it will go very well with PA. One of the things that we have in this Company is a front-end of the business process which facilitates the integration and collaboration of new companies on the front end and our existing divisions. So, going well. And I expect it will continue to go well.

Have you guys changed the incentive structure with your salespeople do incentivize them to do more service sales?

I would say, generally speaking, that we update our incentive structure to make sure that it parallels and supports what we're trying to achieve strategically. So it's not a one-time answer, as we move our incentive program in the Company to keep pace and to advance our strategy. So, the answer is yes, and yes, and yes.

Okay, thank you very much.

David Tyerman, Canaccord Genuity.

Question is on the PA integration, or really more just what it implies going forward. Do you think at this point, it's time to stop the acquisition process and digest what you've got? Or do you think that it's sufficiently easy or you have the resources in place to digest PA and, I guess, whatever is left of IWK and continue on with the acquisition program?

The latter much, much more than the former, for a couple of reasons. One, because we designed this Company in large part to host or receive acquisitions, from an organizational point of view, from a business process point of view, from a front end of the business point of view, and from an M&A point of view. So that would be reason number one.

Reason number two is that IWK is pretty much done. And those things that I spoke about will facilitate the integration of PA. We're not doing a physical integration per se; we're doing a business integration.

Reason number two is because we buy companies that have what I call natural synergies. So when we announce the acquisition of PA, the rest of ATS is happy. And when we announce the acquisition of PA, PA is happy, because they naturally want to work together.

And point number three, because acquisitions are situational -- so we identify a number of companies that fill the capability holes that we're trying to pursue, and then we engage with them. And as you know, we can't control the other side; so they happen when they happen. But in terms of a capacity and comfort point of view, I'm very comfortable that we have both, and that we're not going to screw it up by buying a company that we can't integrate.

Okay. Okay, that's helpful. And then the second question: Anthony, with all the capabilities that you're building through the acquisitions and that you've built internally, is it possible to hazard a guess or an estimate in terms of what this can do for you from an organic growth standpoint?

I talked to the 4.5% true organic after stripping out the FX and all that kind of stuff. And, obviously, as we focus on growth pretty much exclusively, both in terms of acquisition and organic, our goal is to do better than what we did when we weren't entirely focusing on growth. So that would be answer one.

Answer two is that we went from having a backlog which had many projects that had no relationship to each other to having a backlog which have projects that have a relationship to each other, and potentially have a future.

And point number three, I talked about PA. PA is a channel to a world that ATS didn't play in: the existing world of automation. They live with the customer, and they have insight. So in a sense, they are like a technical sales force that lives with the customer. And I believe we have the processes in order to be able to harvest those synergies over time.

Okay, that's helpful. That's my two. I will get back in queue. Thank you.

(Operator Instructions) Mark Neville, Scotiabank.

I just want to follow up on one of Justin's questions. The US enterprise order, I think you mentioned, is at the end of the first two lines. When do we see follow-on orders, if that were to happen?

I spoke about it before. I didn't speak about it fully enough; so sorry, I will say the whole thing again. The US life sciences enterprise order was for a company -- is for a company whose brand you'd recognize. And it was a collaboration of a year and a half, which then gave rise to an order for two machines and potentially more.

And the two machines are pretty much at the end and in the process of being delivered, and the customer is making -- is bringing their new product into the market. If that product gains receptivity, then there will be a requirement for additional machines.

Okay. And since you've designed these machines already, do they come -- do the incremental machines come at the same amount? Or is that -- would that be negotiated?

It would be a function of market demand for the customer's product. But history would say if it's a successful product launch, it would be more than two more machines.

Yes, no, sorry. The question was -- the additional machines, would they come at the same dollar value as the first two, considering that the design work is already done in your end?

They would be -- their price would be different for a number of reasons, including the first machines would have nonrecurring costs, which subsequent machines were not. And many times when you run a product off some machines, you learn things, and you may want to tweak the follow-on machines. So they would be different than the first one.

Okay. So for Q2 you guided the revenue 40%, 45% of backlog. I'm just curious, why the increase? Is it just mix or the timing?

It has to do with mix and the type of programs that are in our backlog -- therefore, mix, and also the impact of the lower Q1 bookings, and therefore just a lower backlog number. But primarily I would say mix and the type of orders that are in our backlog, which have just decreased slightly to a lower average dollar size versus, say, three or four quarters ago.

Okay. And you also mentioned that M+W, that wouldn't change that profile much. So is that the 35% to 40%, or the 40% to 45%?

So the profile -- when I say it wouldn't change the profile much, that would be more the -- when I talk about the number of months in backlog.

Okay.

So I would say -- and I've given ranges of between seven, eight, and eight to nine. It wouldn't change that profile much. But similar to ATS, it also depends on what type of orders we receive.

And Tony talked about MAC orders, and those are similar to our ATS enterprise-type orders. And as PA does get those types of orders, as we expect, and more of those, it would change the profile. But based on what we know today and what is in backlog, we expect it wouldn't change the backlog-to-revenue profile.

Okay. So maybe just one last question. I think you called out CAD3.7 million of amortization expense from intangibles of IWK, ATW, and Sortimat this quarter. I think it's the first time that you have called out ATW and Sortimat. Have you been amortizing those intangibles previously, or is that new?

No, we've always been amortizing them. We just called them out this quarter because we were showing the adjusted earnings number. And therefore we just consolidated all of the amounts.

In the past they didn't have much of an impact to our EBIT number. And then with the addition of IWK, which accounts for, I think, over CAD2.5 million of that number, there was a material change which is causing us to consolidate that number and adjust it from our earnings.

Okay, thank you.

David Tyerman, Canaccord Genuity.

Follow-ups. Maria, on the cash tax rate, I think you said less than 50% -- cash tax, sorry -- of the reported effective. In the previous quarter you were talking about a third, I think. Has something changed here?

What's changed is the intangibles and the amortization of intangibles. And with the addition of PA, we are going to have a significant, larger amount of amortization of intangibles. And I've spoken about PA intangible amortization being in the CAD10 million to CAD14 million range.

And for tax purposes that's not deductible. So from an income tax expense reporting perspective, it would be taxed. And then, as I said, on the cash tax side we can't deduct it; and, therefore, it's increasing our cash tax as a percentage of income tax expense rate. And I would just add, of course our objective is to manage that down, but based on the numbers that we have today and the impact of PA, that is the guidance that I would give.

Right. Sorry, did you say it's not -- it's deductible from an accounting basis but not from a cash tax basis?

Correct.

Okay, thank you. And then the other question: I was just wondering if you had any insights into what you think PA would do for SG&A expenses.

Their profile is a little different than ours in that most of -- the way we understand them today, most of their costs are in cost of sales and very little in SG&A. When they become part of ATS, or before that -- right now we are looking at what the split is between cost of sales and SG&A, and we have to align it with what we do at ATS.

So right now I don't know what the impact would be. Of course, I know what the margin impact is, but I -- or that number. And the SG&A that they report today could change.

Right. Okay, fair enough. I'll just wait and see what you come up with at the end. As you said, we know the EBITDA number, which is the key one. Thank you.

Justin Wu, GMP Securities.

More follow-ups. Maria, on the Nigeria bridge: how much was that in the quarter? And what's left in backlog?

That was about CAD9 million in the quarter, and about CAD7 million of that is left in backlog.

I'm sorry, CAD7 million?

Yes.

Okay. And secondly, in terms of working capital, a pretty big change there. Most of that is in the costs over billings. Can you give us a little color on that -- if it's just timing or something else?

I would say it's just primarily timing. And these costs are sitting, as you say, on our balance sheet. And we expect to just be able to invoice and receive payment from the customer. So a lot of it is just timing related. No issues.

Do you anticipate reversing some of that, a big chunk of that, in the next quarter or two?

I would expect to reverse it in the next few quarters, or that it would be reversed in the next few quarters, yes.

Okay, thank you.

(Operator Instructions) Mark Neville, Scotiabank.

Yes, sorry. Just again on the Nigeria contract. So you were paid CAD9 million in the quarter; CAD7 million is in backlog. What does that leave that's left? Or how much?

That leaves -- and I'm just doing the math -- we had EUR45 million, and we received -- this was EUR6 million; so that would leave about EUR38 million to EUR39 million to go.

Okay. And maybe I'll try to ask this question another way on M+W. I know you've been sort of reluctant to -- not wanting to throw out a revenue synergy number, but just -- I'm trying to get -- it sounds like the opportunities are vast? So I'm just trying to get a sense of maybe how you are thinking about it.

If in year one -- if you saw CAD30 million, CAD40 million in revenue synergies, would you be ecstatic with that? Or is that something that you would maybe say, okay, that's what we expect?

That's a good question. (laughter) I will answer it the best I can answer it, which is we bought the company for revenue synergies. It's accretive on its own without any synergies, but I would say it's probably at the top of the list in terms of the most strategic -- the list of most strategic things we've done.

I'd put it way at the top of the list. It's a great acquisition. It's capability; it's embedded; it's O&M budgets; it's to the left of what we do, to the right of what we do, what ATS does. It gives fuel to their MAC offering.

Our front end of the business process modified with some of their best practices gives a new and improved approach for the entire Company. They are in two different industries. It's an organic growth platform.

Okay. Thanks.

(Operator Instructions) Mr. Caputo, there are no further questions at this time. I will turn the call over to you.

Thank you very much, everyone. Have a nice day.

This concludes today's conference call. You may now disconnect.