ATS Corp (ATS) 2017 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 17, 2016 at 10 a.m. Eastern Time. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (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 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 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 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 HS'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 review financial highlights in a few minutes.

In the first quarter, our operating performance was solid and we continued to advance our value creation plan. Today I'll update you on our performance, after sales service, M&A and conditions in the market. I'll then make some summary comments.

Starting with Q1 results, bookings were CAD239 million, up 8% over Q1 last year and down from our record Q4 bookings. As I noted, Q4 included a large enterprise program. Our strategy is to pursue these types of programs. However, we don't expect to win them every quarter. Our ending backlog was CAD610 million.

The quality of our backlog is strong, both in terms of strategic importance to our customers and in terms of diversification. Our backlog includes a significant number of programs that have a relationship with other orders and/or a link to potential future orders. Q1 revenues were CAD265 million, up 4% from last year and 8% over Q4. Adjusted earnings margin was 11%.

Regarding the approximate $100 million enterprise program I spoke of last quarter, during the first quarter, we completed design, and the build phase of the program is underway in accordance with anticipated performance, including schedule. From an operations perspective, we continue to make progress in closing off rent programs, which impacted us last fiscal year.

We have taken action on the root causes several quarters ago, and are seeing the benefits of the changes we implemented. We also remain focused on improving program management, enhancing the utilization of our global footprint, and improving our cost structure.

Moving to after-sales service, we have a well-defined offering in channels to take our offering to new and existing customers. Our after-sales service organization is advancing our plan. Customer receptivity has been positive and we have a number of meaningful advances.

For example, we received an order to perform machine and operations audits for a large transportation customer's 12 facilities across North America. This will involve the review of both ATS and non-ATS equipment, and will leverage ATS's capability and global presence.

We have received an initial order from a customer to provide remote monitoring and analytic services for a new manufacturing facility, and we have invented over 15 resources in multiple customer locations around the world in the last three months through our newly created and launched regional service network.

As I've noted, our after-sales service offering provides a meaningful organic growth opportunity that we intend to grow beyond this current percentage of total sales. We will continue to focus on growing this aspect of our business.

On M&A, our efforts remain active as we seek to acquire capabilities that we deem to be strategic and at the appropriate price. We will continue to make acquisitions of desired capability a significant component of our value-creation strategy, and we are seeing actionable targets at appropriate valuations.

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, of course, services. We have a strong balance sheet with significant borrowing capacity and the ability to generate good cash flows to quickly delever. We remain active in this regard and I'll update you as things develop.

Turning to our markets, our funnel remains significant. We are focused on growing the funnel, which includes a number of synergy opportunities with PA, and increasingly submitting larger proposals, including some for enterprise-type programs. Customer receptivity has been positive, and the frequency of submitting enterprise proposals is increasing. At the current time we have several such proposals outstanding, waiting for customer consideration.

In terms of verticals, in transportation, we've seen some reduction in funnel size. Having said that, proposal activity is robust and we continue to pursue significant opportunities. In life sciences, we see considerable activity, and energy has been very strong but more sporadic. Funnel activity in consumer products and electronics has continued to improve. However, it remains soft relative to our other markets.

As I've noted, we expect variability in our quarterly bookings due to the types of programs we pursue and win. Over time, and with the addition of more follow-on and service-related revenue, the volatility should dampen as we continue to trend in the right direction.

In terms of outlook, our competitive position is a strong. However, as I've said before, the global economy remains uncertain, and some customers are exercising additional caution when it comes to their capital investments.

In summary, our first-quarter performance was solid. Our enterprise program strategy is yielding results; after-sales service is gaining traction; and a strong balance sheet supports our acquisition strategy. As I indicated last quarter, the new CEO selection process is underway and we will update you in due course.

Overall, our vision is to be a best-in-class global company that delivers enabling manufacturing solutions to our global customers. Our markets include mission-critical aspects of life sciences, transportation, energy, consumer products, biotech, chemicals, and food.

At this point, I'd like to turn the call over to Maria.

Thank you, Anthony. Q1 was a good start to fiscal 2017, with year-over-year gains as well as operating performance improvements from Q4 fiscal 2016. Most notable, last quarter, we spoke of the large enterprise solution of approximately $100 million, which was booked in February 2016. In Q1, we saw the benefit of this order as it positively impacted revenues and cash generation.

This morning I will discuss operating results for the quarter and our balance sheet. I'll start with operating results. Q1 bookings of CAD239 million have improved over last year's CAD222 million and are lower than fiscal 2016 average quarterly bookings of CAD268 million. We have always spoken to our order variability, which we expect will continue.

Last three quarter bookings were CAD390 million, CAD228 million and CAD230 million in Q4, Q3, and Q2, respectively. Q1 revenues were CAD265 million or CAD11 million higher than last year's CAD254 million, due primarily to foreign exchange. Last quarter, Q4 revenues were CAD247 million. Revenues were positively impacted by the enterprise program won in fiscal Q4 2016.

In Q1, adjusted earnings from operations margins were 10.5%, an improvement over our Q4 margin of 9.4%, but not where we want to be. We have spoken about our objective to improve gross margins. At 24.4% in Q1, gross margins did improve over last year. However, they are lower than the last few quarters approximate 25%.

Larger volumes of third-party materials in the quarter drove overall revenue. However, this was partially offset by lower utilization in certain divisions, due primarily to the timing of bookings and their revenue profile. We work to continually manage our cost structure and we need to balance short-term financial performance with our ability to deliver on customer programs over the long-term.

Moving to SG&A, on an adjusted basis, excluding amortization of acquisition-related intangibles, Q1 SG&A was CAD36 million compared to CAD38.4 million in Q4 and CAD31.1 million in Q1 a year ago. The increase from Q1 last year is due primarily to foreign exchange translation; higher professional fees, which include recruiting costs and M&A due diligence activity; and higher employee incentive costs. You'll recall that last year we did not accrue incentives, as program performance targets were not met.

Last quarter I had said that at current exchange rates, we expect our normal SG&A run rates to be approximately CAD35 million to CAD37 million per quarter, excluding amortization of acquisition intangibles. We were at the midpoint of this range in Q1 at CAD36 million and expect to be in the same range going forward.

Q1 closing backlog of CAD610 million is similar to last year's CAD590 million. Looking at the conversion of backlog to revenue, in recent quarters, we have ranged between 35% and 45% of backlog. The conversion changes due to the timing and composition of new orders and the timing of milestones. For Q1 I had said 35% to 40% due to timing of orders and the large Q4 enterprise order.

We realized the benefit of the compressed schedule of the enterprise order and therefore reached the higher end of the range. Based on the composition of our Q1 backlog and our estimates of in-quarter orders, which are booked and converted to revenue in the second quarter, Q2 fiscal 2017 revenues are estimated to be at the higher end of the 35% to 40% range of backlog.

Moving to the balance sheet, we continue to have good liquidity, with cash on-hand of approximately CAD223 million and a CAD750 million credit facility, of which approximately CAD650 million is available. Our capital structure also includes a seven-year fixed interest [$250 million US] bond. At the end of the first quarter, our total net debt position was CAD99 million compared to prior year's net debt of CAD191 million.

Our net debt to EBITDA ratio is 0.8 to 1, down from 1.7 to 1 last year. In terms of cash performance, the last few quarters have been strong, with Q1 cash generated from operations of CAD57.5 million; in Q4, CAD33.6 million; and CAD31.6 million in Q3. Combined, last year Q2 and Q1, we used cash of approximately CAD30 million.

Working capital as a percentage of revenue decreased from 13.6% last quarter to 10.2% in Q1 and contributed to the substantial net cash generation in the quarter. While we are pleased with this performance, we do not expect this -- we do expect this to increase in the short-term. We continue to target our working capital as a percentage of revenue below 15%, but expect the percentage will fluctuate depending on opportunities, the timing of milestone billings and payments.

Turning to net earnings, in Q1, we generated earnings-per-share of CAD0.13 compared to CAD0.11 basic from continuing operations in Q1 last year. On an adjusted earnings-per-share basis, we generated CAD0.17 compared to fiscal 2016 Q1 adjusted EPS of CAD0.18. The CAD0.01 decrease is primarily due to higher SG&A costs and interest costs.

Our effective tax rate in Q1 fiscal 2017 was 24% compared to 25% a year ago. Going forward, our effective tax rate is expected to be below 25% of earnings.

In summary, we are well-positioned for the balance of fiscal 2017, as our funnel remains well-diversified and our backlog is healthy at CAD610 million. We will continue to focus on our front-end and delivery initiatives, including our cost structure and program management, in order to improve organic growth and our margins going forward.

We have modest leverage and approximately CAD650 million available under our primary credit facility, which provides for good funding flexibility. Accordingly, we will continue to pursue our growth strategy both organically and through acquisitions.

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

(Operator Instructions) Cherilyn Radbourne, TD Securities.

Anthony, you pointed to a couple of interesting successes in terms of building the service business, but to be honest, I didn't catch all of what you said. So I wonder if you could just review the details that you gave and indicate whether the customers involved were ATS legacy customers or PA customers?

Good morning. So, I talked about three things. The first one is auditing, serving 12 facilities in the transportation area. And that survey is really an assessment of the plant and its equipment from a maintenance and from a total cost of ownership and from a capability perspective.

And then pursuant to those assessments, we'll make recommendations that potentially involve ATS equipment and non-ATS equipment. So in each of those cases -- and it's one customer, 12 facilities -- in each of those cases, it's an assessment of the entire operation. So that's example number one.

And by the way, when we deploy ATS hardware now, we offer to do that for our existing customers. So, when ATS delivers a piece of equipment, in addition to the people that install the equipment going in, the services people actually precede that group and perform such assessments.

The second example is an example of when we deploy equipment, we used to leave it alone. And then a number of quarters, I've been talking about the things that we did in order to give our equipment the ability to talk. So now we have the ability to listen. So, the second example is about -- some people call it the Internet of Things; we call it monitoring and analytics.

It's about connecting the equipment through the Internet, or whatever, to our people here that can monitor and assess and make recommendations, and maximize the total uptime of that equipment, the utilization of that equipment, et cetera, et cetera. So that's an example of that element of our strategy.

And the third one is -- and I'll get to the PA and synergy stuff -- the third one is an example of deploying -- setting up a regional service centers, some of which are located inside PA or other ATS locations, and then using those to deploy people and embed people. And so we've kind of circled the planet in part because of the 50 offices that we got through PA, and in part because we have PA people already in facilities that, from time to time, can perform the audits that I talked about in item 1.

And to answer your other question, the first example is a customer a few years old. The second example is a legacy customer, but I would say a very, very new way of dealing with that legacy customer. And the third example is a mix of new customers and legacy customers, but again a very different offering. So, sorry, that was a long answer but that's what we're doing.

No, that's great detail. Thank you. And then obviously some of the Canadian engineering and construction companies have announced some interesting business wins related to nuclear refurbishment in Ontario. Can you just indicate whether that's a business area that you are still actively submitting proposals on?

Yes, I can confirm that. We have active proposals in that area, and we have work in that area, both I would say directly and through the PC's that you might be thinking of.

Perfect. I'm sure that's two questions. That's all for me, thanks.

Mark Neville, Deutsche Bank.

A few questions. You mentioned a compressed schedule for the enterprise order. Can you just remind us how that revenue is over the next 12 months or so or however long it takes?

Yes. Last quarter, we spoke of the program being revenued -- or sorry, not last quarter; the quarter before, I believe -- we spoke of the program being revenued over six quarters. And we've done now two quarters' worth of work, and we've revenued a little less than 50%.

And as is the case with all of our large programs, the profile is sort of a bell curve where, in the middle, we have more of the revenues happening. We have four quarters left to go. The next two quarters we'll see most of the revenue coming in. And then the last two quarters where we are installing the machines, we'll just have primarily labor revenues, and therefore a smaller amount of the revenue left to go.

Okay. You mentioned two quarters. That includes, I guess, the current quarter? Or has it been two quarters already? Sorry.

That includes the current quarter. In Q4 -- and I may have mixed up my quarters -- but in Q4, we started the program, and we had primarily labor revenue. And in Q1 we had labor and a lot of materials revenues.

Okay. So is that sort of part of the third-party content you mentioned for the lower gross margin?

Yes, it is.

Okay. I guess just on the gross margin as well, you mentioned underutilized in certain facilities or certain businesses. I'm not sure of the wording, but it was a pretty strong revenue quarter. So I'm just curious, is there any additional restructuring you think that needs to be done? Or --?

As of right now, no. And as you say, it wasn't a strong revenue quarter, but the makeup of the revenues was a little bit different than what we typically have -- more material revenue. And therefore, we weren't utilizing our direct workforce fully. And we knew that going into the quarter.

And last quarter, we had said that, which is why we expected downward pressures on our gross margins. As of today, based on the restructuring that we've done, we believe we have the right workforce in place to do the work that we have. But as we always do, we looked at our backlog and our orders coming in, and if we have to do additional restructuring, we would do that.

Okay. And I guess, just given how this is going to revenue over the next couple of quarters, but based on what we said, should we expect, I guess, continued downward pressure, if you want to call it that, on gross margin?

No, we shouldn't expect that, no. And when we talked about this enterprise program before, I think we said that its profile from a cash and margin perspective was as good as or better than our business. Therefore, it's not creating any gross margin problems for us.

Okay. Maybe just to follow up on the after-sales service opportunities or the business that you mentioned, can you just maybe give us a sense of the size of those contracts, the opportunities? And whether or not that's included in backlog?

In aggregate, they are about CAD5 million, and yes, they are in the backlog.

Okay. And maybe just one last one. Anthony, you mentioned something in your prepared remarks on M&A just with targets and multiples or target and valuation multiples. I just wasn't sure. I didn't totally catch what you said, so I'm curious if you could repeat that?

I said targets are available at multiples which are acceptable.

Okay, thanks. I'll get back in queue.

Thank you.

Daniel Kim, Paradigm Capital.

Within your MD&A, you disclosed for the first time revenues from Malaysia, which had a pretty big jump year-over-year. Is that in all in relation to your enterprise contract that you've been referencing?

Yes, substantially it's in relation to that.

Okay, very good. And coming back to energy, that had obviously a big bump in the quarter -- when you talked about nuclear programs in the past, is this in all -- in recognition of the Bruce and Darlington programs that you had talked about previously?

Yes, the stuff that I -- sorry, are you asking is the enterprise program Bruce and Darlington?

No, no, no. Moving on to the revenue breakdown by industrial market, if we look at the energy-specific vertical, which had a big bump in the quarter, my question was, is that coming from Bruce and Darlington? What I was trying to understand is, the commentary within your MD&A suggesting that it may be sporadic, so I'm trying to understand how that revenue profile, which was very strong in Q1, would look for the balance of the year.

Marie will answer it, but the bump is not because of Bruce or Darlington.

The bump has to do with the enterprise program that we've been talking about and the revenue profile, as I just explained earlier to Mark.

Okay. Thank you.

Thank you.

David Tyerman, Cormark Securities.

First question is on the backlog -- or backlog conversion turnover. It was higher than I expected and I think most people expected, judging by consensus, in the quarter. And I think it was higher than the guidance range you talk about. So, the question basically is, is that because there's more in the revenue than just taking previous backlog and multiplying it by a percentage, whether it's 35% or 37% or whatever? Or was it just that you had an accelerated turnover on the large enterprise program and that pushed it higher than you expected?

It's more the latter. And the range that I provided last quarter was 35% to 40%, and we ended up at, I think, just a little bit higher than the 40% -- or 40-percent-point-something. The enterprise program, because of its size, we estimate it as well as we can, to figure out what the revenue profile could be. But just given the dollars involved, a little more happened in the quarter than what we had originally forecasted.

Okay. So just to understand, we should normally expect that to forecast the sale, to take the backlog and use the backlog turnover, there's nothing else that we should be incorporating into the sales number?

That's correct, yes.

Okay. Thank you. And then the second question I had on, the gross margin side, just looking forward, is there anything in the next couple of quarters that would push it up or down particularly?

Right now, based on our backlog, we expect to -- and I think I said we target to get back to where we were, which is in and around the 25% range. The only thing that could impact that going forward is the new orders that we receive, and how we could -- or how we may bid those.

And then also, although we try to manage it, utilization of our resources. But, as I said, we try to manage that, and we've been doing that all along. And we do that through temporary measures or sometimes permanent measures.

But there's nothing in the backlog right now that should bring it back intentionally?

No, no, no.

Okay, perfect. Thank you.

Thank you.

Deepak Kaushal, GMP Securities.

Thanks for taking my questions. The first one is just a follow-up to David's on the backlog conversion. So the expected backlog conversion for Q2 in the 35% to 40% range, at the high end of that range is somewhat lower than I was expecting end perhaps consensus is expecting, despite another strong revenue recognition quarter from the new enterprise contract.

Can you just comment on the nature of the balance of the backlog? And as you go into services, are we seeing a general lengthening of revenue recognition for the entire business and what that percentage range should be going forward? Did that question makes sense?

It makes sense. I don't know if I'll answer it correctly. But our backlog is made up of many different revenue profiles from a couple of months, which could be time and material work to these large enterprise programs, which, in this case, today we have a six-quarter one and sometimes we've had two-year programs.

So, there's nothing unusual that's going on. When we provide the guidance, we look at exactly what we have in our backlog and then we come up with this range which is between 35% and 45%. And based on what we have today, we are providing the higher end of the 35% to 40% range.

As far as services go, I'd say that could -- it depends on the type of order that we get. So if we get a two-year services order, then that could lengthen the -- or reduce the percentage conversion. And if we go the other way, then it would have the opposite effect. So, still, it all just depends on the types of orders that we receive and what those -- what the terms of those are, whether it's services work or program or enterprise work

And just to add from sort of 10,000 feet, we used to have a series of small bell curve profiles as customers came to us. And on the hardware side, the average order was like CAD1 million on the old ATS side on the hardware side.

And then we try and make the bell curves bigger to have more area under them and to overlap. And then the average size of our order became CAD7 million or CAD8 million or CAD9 million or CAD10 million. And then we looked at that funnel with a view to make it even bigger and develop enterprise programs which are sort of larger area under the curve, bell curves.

And we're trying to work with customers on an ongoing basis, and thus my comments about stuff in the backlog having relationship to other stuff or potentially future stuff, so that the bell curves kind of run into each other. So we are kind of trying to create a square wave in a quarter, which we can't yet. And we're trying to smooth the top of the curves, the bell curves, with services, so that services can potentially fill in the gap.

So that's what we're trying to do. We are trying to get to the square wave.

Larger square waves element. Thank you. Anthony, I just wanted to ask you a question. You know, as we anticipate a new CEO and a transition in leadership with ATS, I wonder if you could comment on what perhaps is your biggest piece of unfinished business before you exit? And perhaps beyond that, what would be your biggest piece of unfinished business for ATS that you leave behind as you embark on the next stage of your career?

I have no unfinished business. We achieved everything. (laughter) I think it's good that we are seeing the fruits of enterprise programs, and I think it's not luck. And I think it will get traction and I think that's great for the Company.

I think we need to do more on the services side, both on the after-sales side, which is getting traction, and also the non-after-sales side. I think there's a couple of markets that we talked about before that have characteristics that we like. They are mission-critical that we are not into that I think we need to be into.

We need to further demonstrate the revenue rationale around the PA acquisition. Like we see a lot of it here, but we haven't seen the big stuff yet. And we've seen some synergies on the services side as well. The connecting of ATS machines is cool because we have a natural channel to get into a customer's plant. We deliver a machine, then that gives us a conduit into a customer's plant.

So the question is, can we then take that beachfront and expand it? So, I would say we did a lot. And I would say that it's a good platform for going forward, including the balance sheet that Maria talked about, and our ability to deliver. But there's lots of runway, lots of stuff to do, so I think we should all look forward to more things in the future.

Great, great. Thank you again. I look forward to seeing you at the AGM tomorrow.

Thank you. See you.

(Operator Instructions) Mark Neville, Deutsche Bank.

All right. So just a few, like, follow-ups. Maria, just on the enterprise order -- not to, I guess, to do a crazy on this, but you mentioned six quarters. I think you said two quarters are already in the P&L but roughly 50% is in revenue. Is that 50% at the end of fiscal Q1? Or I guess at current -- just trying to again get a sense how much is left to flow through here?

Under 50% at the end of Q1 has been revenued.

Okay. Just on gross margins, it sounds like -- give or take 25% is sort of where you expect to be the next few quarters, at least. And I guess previously you talked about 100 basis points of improvement per year was sort of the goal or what you thought you could do. I'm just curious if you still sort of think that way? Or just given mix and everything that's changing, that maybe it's a little aggressive now?

I think we still think that way.

I don't think there's -- I agree. I don't think there's anything in the mix that makes stuff that we've said less probable.

Okay. Maybe again just on the CEO search. I know the timing that's out there. I'm just curious if there is any more -- I'll take a shot at it here -- but any more color, any additional details you could give us now on sort of how things are going or timelines or anything at all?

No, not right now, but we will. When there's something to say, we'll keep everyone informed.

Sure. All right, thank you very much.

Thank you.

Robert Caldwell, Richardson GMP.

Anthony, I appreciate your comments earlier on ongoing M&A activity. May I probe a little bit more in perhaps asking how many individuals are there, employees or contracted individuals, would be dedicated to M&A activity here in Canada? And perhaps how many are dedicated to the activity in Europe? And what kind of attendant costs do we have at an ongoing basis, an estimate for perhaps the year?

I'll answer the activity question in two ways. First to answer your question directly, we have a handful of dedicated people doing that, but we have also non-ATS employees. And these would be not people that are conducting due diligence, but people that are assisting us in conducting due diligence. And they would include lawyers and like accounting companies and so on and so forth.

So, it's A plus B. And then C would be the rest of the management that spends a meaningful amount of time on M&A. So, the answer to your question is A plus B plus C.

In terms of spend --?

In terms of spend, it's -- as Tony said, we have about a handful of dedicated people. And I won't quantify what that is, but that's in our base expenses. And then also we have the external costs, which go through. And I made mention of them in this quarter, to say that we had a little bit higher G&A because of M&A activity.

And then we actually buy something, we separate those costs out as -- or in our adjusted earnings numbers, but we only do that once we are acquiring something. Therefore, lots of variability, but there's a certain amount that is going through our expenses each quarter

Very helpful. I appreciate the color. Thank you.

You're welcome.

Thank you.

Mr. Caputo, there are no further questions at this time.

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

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