ATS Corp (ATS) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ATS Automation first quarter conference call and webcast.

I would like to remind you that this call is being recorded on August 12, 2020, at 10:00 a.m. Eastern Time. (Operator Instructions) I'd now like to turn the call over to Stewart McCuaig, Vice President, General Counsel of ATS. Please go ahead.

Thanks, operator, and good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS and Ryan McLeod, Chief Financial Officer. Before I begin, I'm required to provide the following statement respecting information, which is made on behalf of ATS and all this represented so on this call. You are cautioned that the oral statements made on this call will contain forward-looking information that involves risks and uncertainties, including those introduced by COVID-19 pandemic. 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 of both 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 Andy.

Thank you, Stewart. Good morning, ladies and gentlemen. The first quarter was a period of adjustment due to the pen direction. Restrictions we placed on customer plant visits, some customers temporarily closed their operations and at ATS, working from home, physical distancing in our facilities and enhanced cleaning became standard operating practice. As a result of these factors, Q1 revenues, bookings and margins were down versus last year. Even so, our teams delivered exceptional work for customers and secured new programs, including those related to the fight against COVID-19.

In this uncertain and challenging environment, the presence of a healthy backlog, strong balance sheet and resilient workforce provides an advantage for ATS. This morning, I will speak to our Q1 performance, provide comments on our outlook, which reflects somewhat improved business conditions since our last call and discussed how we are moving forward. Ryan will then provide his report.

Starting with our financial value drivers. Our revenues for the quarter were $325 million, down 4% from last year. Our Q1 adjusted EBIT margin was 9%, reflecting pandemic-related inefficiencies, partially offset by government-wage subsidies and cost containment measures, including the reorganization we completed last year. Q1 order bookings were $325 million, down 23% from last year's record Q1 bookings of $423 million. Included in our Q1 orders, those are previously announced $65 million program for the design, build and delivery of 2 automated systems that will enable the production of up to 10 million units per month of critical components for point-of-care test kits that can be used to detect COVID-19.

I'm pleased to report that our team is on track to meet this very aggressive delivery schedule. As well, ATS' Life Sciences Group and Comecer jointly on pharmaceutical program worth in excess of $10 million. It will feature the compelling combination of Comecer's isolation technology with ATS' automation capability.

Moving to our outlook. Our Q1 ending order backlog of $909 million positions us well in the current environment as an economic uncertainty accompanying the pandemic has pushed some business to a future date. By market, activity in life sciences remains relatively robust due to mandates related to COVID-19. We continue to pursue a number of COVID-related rapid response opportunities, including applications for syringe production, diagnostic test devices and pen needles. Other opportunities in medical devices, pharma and radiopharma are coming back online. Life Sciences represented over 70% of our bookings in the first quarter, and we expect this to be a strong market for us over the long term.

In EV, a significant slowdown in end-market demand has caused customers to focus their efforts on cash preservation and reexamine capital investment timing. There are select opportunities that are moving forward, but our overall market activity is slow. In consumer, activity slowed with the timing of some opportunities moving out. In energy, we continue to see activity in nuclear, including incremental demand for our digital solutions and services. Generally, we expect customers to exercise caution in making capital investment decisions until there is more clarity on the severity and duration, the economic impact of the pandemic. There will be some offset in the short-term from specific COVID-related opportunities and some highly strategic projects. And after-sales services, bookings were down low double digits in the first quarter, while revenues were down more significantly due to plant closures and travel restrictions. Despite Q1 challenges, funnel activity for services is robust, and we have realized some early wins with our new digital product offerings, including enhanced remote support and Smart Coach.

Moving forward, to focus on upgrade and maintenance opportunities to ensure customers can continue to operate at high levels of productivity in this new environment. In the short term, after-sales services will continue to be impacted while travel restrictions and physical distancing protocols are in effect. Overall and not to downplay the operating challenges ahead, but if some regions began to reopen, business conditions improved as the quarter progressed.

Moving to the ATS business model. We have now adjusted to the pandemic by leveraging the ABM in a virtual environment. In the quarter, we completed 6 virtual Kaizens, to support remote operations, including events that are driving improvement in business development, project management, finance and supply chain. Training has continued through the deployment of digital, on-demand ABM programs. We also launched forward together to document our approach to COVID. This will also provide direction for future pandemics or other global or regional concerns that impact business operations.

Turning to innovation. We've been active in applying expertise across the organization to quickly address the needs of customers, engage in the production of N95 respirators, ventilators, diagnostic test kits and syringes. We accelerated the development and deployment of our digital service product offerings, which are ideally suited to this environment. We have launched our new Symphony product in innovative, high-performance digital manufacturing technology that improves productivity of automated assembly processes by eliminating non-value-add time. This product builds on the technology that we acquired last year from Transformix, and provides a high degree of standardization and is ideal for multi-purpose production assets, having the flexibility to adapt to new products and processes. Each of these initiatives demonstrates the innovative nature of our people and our ongoing strategic focus of creating enabling solutions. Even in this COVID environment, we will prioritize investment in innovation.

Moving to M&A. We continue to engage in cultivating activities that are aligned with our stated framework. We have a strong balance sheet and are well positioned and ready for future opportunities that may arise in this new environment. While the early days of COVID made it more difficult to cultivate M&A activities have restarted. In summary, our first quarter performance reflected the challenges brought on by the pandemic, but also the resiliency of our workforce and delivering for our customers as an essential business. We have made adjustments to operate in this new climate and stand ready to do more as needed.

Going forward, we have a strong business with good backlog, our healthy balance sheet and our ABM playbook that will enable us to create long-term shareholder value. We are focused on putting our business in a position to succeed through this difficult period and emerge in a strong competitive position in a future that may need ATS' solutions more than ever. Now I will turn the call over to Ryan McLeod. This is Ryan's first call as Chief Financial Officer. As you recall, Ryan was named interim CFO effective June 26. Having worked closely with the leadership team over many years, Ryan has moved quickly and seamless in his new role. Ryan, over to you.

Thank you, Andrew, and good morning, ladies and gentlemen. Our first quarter performance was impacted by the challenging environment. We took quick and decisive measures to protect our employees, adjust our processes and maintain our strong balance sheet. That said and as expected, our financial performance, including revenues, margins and bookings reflected the challenges and inefficiencies caused by the abrupt change in the business environment, partially offset by our strong backlog awards.

This morning, I'll provide details on our financial performance and discuss our balance sheet, including our liquidity and capital structure. Starting with operating results. Our Q1 revenues declined 4% from last year to $325 million. Organically, revenues decreased by 6%, which was partially offset by 2% growth from acquisitions.

Lower revenues primarily reflected lower services and parts activity due to travel restrictions and customer closures. Q1 bookings were $325 million, reflecting opportunities moving to the right as many customers pause to assess the impact of the pandemic on their operations and deal with related health and safety issues. Our Q1 ending backlog of $909 million provides us with a solid base to mitigate some of the economic fallout of the pandemic. Of note, life sciences represented 58% of our period-end order backlog, while no industry is immune from the effects of the current environment, we believe life sciences has the potential to be more resilient.

Looking forward, our revenue conversion for Q2 is estimated to be in the lower end of the 35% to 40% range of backlog. While we are more comfortable in our outlook today than we were in April and May, market activity remains low overall. We also continue to operate with almost half of our workforce at home and the presence of extra health and safety measures in our facilities, both of which caused inefficiencies. In addition, we have a previously disclosed customer project on hold, which will not contribute to revenues until the program is fully restarted.

Moving to margins. Q1 gross margin was 24.4%, down from last year, reflecting lower volumes, including lower after-sale service revenues and operational inefficiencies. Compared to Q4, gross margin improved sequentially by 120 basis points, reflecting the completion of our organization and improved program execution, partially offset by lower after-sale service revenues. We took actions in the quarter to reduce discretionary expenses, and we also benefited from the Canadian Emergency Wage Subsidy, which positively impacted our gross margins by approximately $5.6 million.

Importantly, this program enabled us to partially protect our margins while retaining our skilled workforce, which will be important when the conditions start to normalize. As we look forward, we expect continued margin pressure from the inefficiencies and lower market activity. We are prepared to make structural changes to our cost base, depending on the length and severity of the downturn, but the reorganization undertaken last year has certainly moved us into a stronger position in this regard.

Moving to SG&A. On an adjusted basis, which excludes acquisition-related amortization expenses, Q1 SG&A of $47.9 million was lower than last year despite incremental costs from acquired businesses. Lower SG&A reflected cost containment actions, the benefits from our previously implemented reorganization and the Canadian Emergency Wage Subsidy. Stock compensation expense was $1.6 million in Q1, down from $3.6 million last year, reflecting normal course mark-to-market variability. Our effective tax rate was 24% in the quarter, consistent with our expectations. Finance costs were up by $1.1 million compared to Q1 last year, due primarily to the $250 million cash draw on our credit facility. First quarter adjusted EPS was $0.17, down from $0.25 last year. Lower revenues and gross margin accounted for most of the decrease as well as the cash draw impacted our EPS by $0.01.

Moving to the balance sheet. Our focus going into the first quarter was to preserve liquidity and maintain our strong balance sheet. As I noted, in Q4, we grew $250 million on our credit facility as a precautionary measure. Today, while there's still uncertainty in the market, and we expect pressure on working capital, we are more comfortable in our short-term outlook. And as a result, intend to repay the majority of that cash draw in the second quarter.

Our noncash working cash flow as a percentage of revenue improved in Q1 to 12%, compared to 12.3% in Q4. We benefited from good payment terms and several new short duration programs, which offset more challenging ones in other areas of our business. As well, our cash collections remained healthy in the quarter which reflect the strong and strategic relationships we have with our customers. Based on our backlog, we do expect to build in working capital over the remainder of this fiscal year that could drive the percentage to over 15%. To manage credit risk, we have a robust program in place, including the AI Insurance and the actively longer customer products and patents.

In Q1, we generated cash from operations of $47 million compared to usage of $40 million last year, reflecting more working capital investment in Q1 this year. We invested $5.7 million in CapEx and intangible assets in Q1 compared to $9.3 million last year. Higher investment spending last year related to expansions of certain facilities. As a reminder and as planned, our CapEx budget this fiscal year is in the range of $25 million to $30 million. We ended the quarter with good liquidity, consisting of cash of $399 million in availability on our primary credit facility of approximately $375 million. Subsequent to the end of the quarter, we amended our $750 million primary credit facility and extended its maturity to August of 2022. Combined with our USD 250 million bonds, which mature in June of 2023, we've solidified our credit availability for the next several years.

From a leverage standpoint, we finished the quarter with a net debt to adjusted EBITDA ratio of 1.6:1. We have further room to deploy capital to pursue our strategies to our target leverage range of up to 2 to 2.5x.

In summary, our first quarter financial performance was impacted by the difficult economic and business environment. Despite these challenges, our team has done an excellent job in meeting customer needs while maintaining a safe working environment. The investments we have made in our operations, including innovation, capacity for our life sciences business, building our service organization and training our people in ABM and continuous improvement will enable us to resume progress on our margin expansion program when conditions normalize.

The reorganization completed last year, along with our strong balance sheet and available liquidity, will continue to serve us well through this uncertain period and provide us with the ability to pursue strategic M&A opportunities.

Now we will open the call to questions from our analysts. Operator, could you please provide instructions?

(Operator Instructions) Your first question today comes from the line of Cherilyn Radbourne with TD Securities.

Andrew, in terms of the business opportunity related to COVID, just hoping you could comment on what you think the duration of that is? And to what extent is that scale-up related to COVID kind of distracting some customers from, I guess, more strategic projects in life sciences?

Cherilyn, as we look at the opportunities, both that we won and future, we're very pleased with the ability and how our team has executed. And just as a reminder, a couple of dynamics with these opportunities. First, there are very short windows of when the identified opportunity started and when we closed. And second, the condensed time line. These are urgent items that are needed to get to market. And for instance, the COVID test kit that we've talked about, very short and condensed time window and very proud that the team is on track for that. Now to answer your question, there are additional opportunities specifically related to the fight against COVID in our funnel, and we're aligned around those, and we're going to continue to drive those aspects.

Additionally, as customers are starting to change their operating process in this environment, we view this as an opportunity also for automation. And what I mean by that is a couple of things are starting to happen. And as you are aware, we have an ongoing standard work to talk with customers on a frequent basis. And about a, call it, rough number, 1/4 of them are starting to talk about their supply chain risk, areas that we can help as they're looking at their global impact, and they're identifying gaps that ATS can potentially help and fill. About a quarter of them are starting to talk about how to operate in this pandemic. And the social distancing that's required through this and ensuring that automation might be a solution. So as we look at, first, the initial on supporting our customers and their fight against COVID, there's also additional opportunities through automation in the short and midterm that we're really targeting and identifying to truly offer that value to customers.

Great. Well, very helpful color.

Cherilyn, if I could just add on to that as well. So our bookings for life sciences were healthy in the quarter, and we talked about the $265 million test kit order. We had additional COVID-related orders as well that are very important and provide a lot of value to our customers. But from a dollar standpoint, they weren't material. So if you look at our bookings overall, they were still strong in the quarter even with the COVID-related orders.

Okay. Very good. And then on the gross margin, it seems to me that there's a sales-mix impact, which is somewhat out of your control because it relates to travel and customer-site restrictions and then there are COVID-related inefficiencies in your assembly operations. So I was hoping you could help us think about the relative importance of those 2 factors? And how we should think about your ability to mitigate each one?

Yes. so those 2 factors roughly had an equal impact on the quarter. And so lower after-sale services, you're right, was challenged by travel restrictions, customer closures and customers -- also restricting visitors in their facilities and that absorption. And we talked a little bit in the remarks about some of the additional health and safety measures that we've implemented in our facilities. In terms of mitigation, if I start with services. So sequentially or through the quarter, April and May were very challenged and that was really, call it, at the height of the pandemic as economies and regions have opened up through June, we did see a sequential improvement in our services activity, which is positive. It's not back to what I would call a normal run rate or where we would expect it to be under normal conditions, but a positive indicator. In terms of absorption, in some of those inefficiencies, we continue to operate through those challenges. We -- as Andrew said in his remarks, we've applied our ATS business model, and we are improving and driving improvements through the process. But it remains a challenging environment.

Your next question today comes from the line of Mark Neville with Scotia Bank.

First question, I guess, you spoke about sort of business conditions getting a bit better. I was just curious if maybe we get life science to be robust. Maybe if you can speak to the auto, maybe sort of the cadence or sequential improvements, have you seen any? It doesn't look like any big awards in the quarter. I'm just curious as sort of the auto world goes back to work, if you see the pickup in activity or order flow.

Sure. Mark, thank you for the question. So certainly, and we talk through the life sciences aspect and some of the wins in the other markets we were to take a look at auto specifically. As you're aware, earlier in the year, we announced a strategic win in the EV process, and it was with a large OEM and their move to the EV area. That said, this market dynamic has challenges, and we globally have been staying very close to our customers to ensure they go through their assessment on their supply chain, their assessment and their operations and where they are planning to spend capital and where they might also look to conserve. It is a challenging environment. It's one that we've aligned to our review is strategic for the businesses, but there are opportunities, and we're staying very close to those opportunities.

Okay. I guess, maybe a bigger picture more holistically. You touched on this one -- curious is -- I guess, has the conversation -- again, I appreciate things are a bit slower. But how has the conversations change from the types of conversations you're having with your customers? And you mentioned building supply chain resiliency, stuff like that. I'm just curious if, at the moment, is it really -- is it just conversations? Or has there been sort of any new wins associated with that, maybe it's digital? Yes. Maybe just if you could comment on that.

Sure. In March, and I talked a bit about our standard work here, and all of our leaders are staying close with customers. And what I can state is there's a good percentage that are still trying to identify and operate in this environment and it presents a significant challenge. Even if you look at our operations, we've had to go to ship work, we've had to create an environment where we've got the distancing, but yet still can operate and deliver a solution. And so a good percentage are still going through that. And so when we talk to customers, it is a mixed reaction. It is a mixed focus around their pursuit and drive. What we can state is through the quarter, we did see a bit of that open up in the discussion. We're not -- by any means, we're not back to business as usual, but we did see a bit of it open. And customers are starting to talk about their capital investment plans and our funnel remains healthy through this. And so we view that as positive signs. The second piece, which is an interesting dynamic, and you asked about the digital aspect. And one of the things that I want to walk through this is with ATS, given our proximity of services, we view that as a competitive advantage. And we can be in region. We can be close to sites. And certainly, that's an advantage. But secondly, our teams identified that it was going to be a challenge to be on-site with customers as the pandemic unfolded, and we launched the remote support through that and as well as the Smart Coach to really help our customers. Because at the end, our customers want to build their product. They want to get it to market. They want to ensure that they can maximize their efficiencies, maximize their process. And it was ATS that really aligned around delivering that solution and helping. And I can say it's double digits on customers that utilize that digital solution, and we view that's just the start about our ability to really marry automation and the digital solution to our customers to have that full potential smart factory.

Okay. Is it still a challenge, I mean, getting into the customer facilities? And maybe not for the digital part, but just the traditional systems business to factory acceptance, site inspection, is it still a challenge for you guys to get in? I'm just curious just sort of the revenue profiles -- sort of what's actually happening in the business?

Yes. So it is still a challenge. And if I were to kind of characterize our customer sites, beginning of the pandemic, the majority no external support on site, very limited. Through this, certainly, that's opened up. But again, back to -- and I talked a little bit about this in the innovation aspect. Our teams constantly worked with customers to overcome the obstacles and just talk about factory acceptance test. And utilizing the digital aspect and our technology to help our customers, so they could sign off and see that the machines are working. And so we're constantly looking at how to innovate, how to drive continuous improvement to really overcome those obstacles.

But -- and as I stated earlier, by no means, is it business as usual, and it remains a challenge. I do view ATS' ability and capability as one of the items that is potentially going to separate us through the mid and long term.

Our next question comes from the line of Justin Keywood with Stifel GMP.

Good to see the resilience in the quarter. You had a couple of other questions on the onshoring or reshoring trend. I think if I heard correctly, customers may be reevaluating 1/4 of their supply chain, which seems quite substantial. I'm wondering, is this being driven by potential regulatory changes? Is this customer-driven maybe what areas of activity you're seeing this in as far as geographies? And also, is it applicable to other segments of your business outside of health care?

So Justin, just to clarify the earlier remarks, it's a quarter of the conversations with customers. And it is very early in this and what I'm not stating today is that every customer is going through this because they're going through dynamics, but 1/4 of our customers in the interactions have been talking about the risks and the dynamics they face through this pandemic and how to put in the ability to overcome the obstacles if something were to continue or would you already get a second phase or we were to be faced with the dynamic in the future. And as we look at that, the external that's driving this, there's certainly been talks about how things potentially are going to change, but it's early days. And these specific customers have really aligned around, we saw a gap, we saw the impact from that gap, and we view we have the ability to overcome that through using whether it's automation or utilizing our existing production facilities and expanding our capability or putting new equipment in existing facilities. And so it is a bit of a -- early on in the process, but we do view this as an area of opportunity and one that we can support customers as they assess this and make their decisions.

Okay. I appreciate that additional color. And then on the margins in the quarter, I'm wondering if it's possible to quantify any onetime costs related to the COVID-19 or social distancing protocols implemented? And also if you're able to quantify some of the inefficiencies that are resulting because of that?

So I'm not going to specifically quantify. But if I look at our gross margin relative to Q1 last year, there was 2 main impacts. One was having lower after-sales service revenues, and as we've talked about in the past, that's a higher-margin business for us. And then the second was the absorption. And that was caused by some of the inefficiencies, again, that we've talked about, roughly those were half and half in terms of impact on the quarter. We do have -- we did benefit from the reorganization that we implemented last year. And of course, we benefited from the wage subsidy payments that I talked about. And our approach through this, we took quick and decisive measures on discretionary costs. In terms of measures beyond that, that would have impacted our people. We've tried as best as possible to minimize those, and the wage subsidy certainly helped in that regard. And the reason for that is we want to -- coming out of this, we want to put ourselves in the best position possible. And so maintaining our skilled workforce is certainly an important aspect of that. So that's how we've managed through some of the inefficiencies that we faced.

I appreciate that. And is there another expected wage subsidy benefit for the next quarter?

Yes, there is. So the program has changed effective in July. We do expect to continue to benefit from the program, but it won't be at the same level that it was in the first quarter.

Our next question comes from the line of Maxim Sytchev with National Bank Financial.

Andrew, Maybe the first question for you, if you don't mind. Your comment around M&A, do you mind may be providing a bit more color in terms of what exactly are you looking at? Is it product-focused entities versus service, maybe size, multiples and maybe some of the learnings that you would have experienced over the last couple of years doing transactions? And how you're trying to apply those learnings to the current environment?

Sure. So Max, as we look at our funnel, our funnel is, first and foremost, a very healthy funnel as we look at, call it, the progression over the last 3 years. And it has a mix of both size of, call it, small, medium and large truly areas that we view are areas we want to continue to drive and focus on from an ATS perspective as well as products, machines, services and/or areas we can bolster from an integration perspective.

And so our funnel really focuses around it. And as you're well aware, we're extremely disciplined in our approach. We've got 4 key criteria. It starts with market, then goes to strategic rationale and then how we're going to operate the asset and lastly, ROIC. And so not only have we continued to build and drive that, I would say a unique learning through this pandemic is early on, certainly engaged in the cultivation, but the video caused -- that aspect really became almost a bit more prevalent through the quarter, and I'm very, very pleased with how we've adapted and engaged with certain targets that we view are attractive as an addition for ATS.

Secondly, as we look at the Board, we've also structured around the ability to have a strategic aspect around this, and it's being led by Phil Whitehead, engagement with management to ensure that as we're looking, we've got the right focus, the right energy and drive as ensuring that this is a piece of our story moving forward. And lastly, lessons learned on the acquisitions we've done. We can't be more proud of where we are with the groups that we've acquired. And I'll just start with Comecer continued drive with that business, another win as a combined joint effort with ATS with their best-in-class isolation technology as well as MARCO coming online and providing a solution in a space that we view as attractive. And so certainly a lot of lessons learned, and we're going to continue to learn through that, but I'm proud of how we've overcome those and continue to operate the businesses.

Yes. No, that's very helpful. And I guess, I mean, you're not looking at verticals that you haven't historically sort of telegraphed as an area of interest. I mean, like -- something like aerospace right now is not something that you would look at? Or given sort of the amount of uncertainty? Or is this something that potentially could pop up on the radar?

So as you're aware, we look at all 4 variables in independents and jointly and market is one of them. And so we're going to look at the cycle of the market and where it's at in its cycle. It's no secret. We like the dynamics of life sciences. We like life sciences through a short and long-term impact and the resiliency that it has over potential economic cycles. We like the regulated aspect of food and beverage, and so there are others that we look at that we identify and flex in and out of from a standpoint of engagement. But in general, that's going to be a piece that we're always looking at to ensure that we're very -- understanding and know the dynamics of the business through a cycle.

No, I agree. And then a couple of quick ones for Ryan, if I may. So the comments around the working capital, I mean, assuming -- I mean, once you kind of cycle through the EV contracts, is it fair to assume that working capital will commence to normalize? Over -- I mean, let's call it the medium-term over the next 24 months? Or are you expecting this level of investment to stay relatively elevated?

So Max, I mean, certainly, over the long term, we expect to operate within our target, which is 15% or being below 15%. We do have some contracts in our backlog that, like I talked about, are going to drive some pressure throughout the balance of the year. Beyond that, it really is going to depend on the work that we book going forward and payment terms and cash collections. And like I mentioned in my remarks, AR collections were very good in the quarter, reflecting our good strategic relationships with our customers. So we've held the line, and we had good progress in the first quarter, but there is going to be pressure on our working capital going forward.

Right. Okay. No, that's fair enough. And then in terms of the wage subsidies, is there anything in Italy and Germany that you can tap or the regulatory environment is slightly different relative to kind of Canada and the U.K. on that front?

So nothing along the same lines of what's available in Canada. There are programs in Germany around deferral tax payments and some other potential programs. But certainly nothing to the level of what's available to us in Canada.

Our next question comes from the line of Mac Whale with Cormark Securities.

You've already spoken, Andrew, about the delays, particularly on the -- some of the EV programs. Are you being told details about the timing of programs that are greenlighted? Or is this -- in other words, is this business that you are being told will be delayed, but it's coming, and so be prepared to bid on it? Or is it much more open-ended in the sense that it's -- these aren't happening at all? Give us an idea of whether there's serious delays in some of these programs or whether these are just timing issues?

And Mac, just to make sure, you're looking into the automotive-specific sector, correct?

Yes. Yes.

Yes. So it is a mixed bag on this, Mac. And when we look -- I mean, we talk a bit about this and strategic when it's aligned to where the customer is driving for instance, earlier this year. The customer will move forward, and we were able to execute quickly. On future projects, I would say it's a mix, and we have certain strategic ones where we've got insight, customers are identifying and, call it, earmarking certain investment into that. While, others, they're assessing versus other investments. And so I would say it's a bit of a mix. As you're aware, call 3 years ago, we roughly shifted our focus and not roughly, we shifted our focus to the EV and the process around EV is called battery pack assembly as well as other aspects. And that's been more of a discussion with customers as that's been more of a target and a focus. But certainly, it's a dynamic and ever-changing, and therefore, we're staying very close with our customers and making sure that we're aligned when they move forward, we're in a position to execute.

Okay. The second question is around how you're adjusting sort of on the fly, so to speak, to generating new business? For instance, where you see the opening up of access and travel? Are you jumping in there rushing right back into see clients because you expect possibly other shutdowns are coming? If we go back and we start to see sort of closures again? Like what is your sort of position tactically in the short-term about taking advantage of opportunities to see clients?

And I'm going to highlight an area that I'm very proud of the commercial side of our business through this. And I'll just say, early one, April hit, and certainly, we had to figure out the process, the approach. But our commercial organization, true to the ABM, true to continuous improvement, aligned around virtual meetings, ensuring that their outreach with customers are aligned and having that dialogue and really making that part of our standard work. And so you're right, things changed. And I would say our team really did a great job of aligning to dealing with what was in front of us, but then also focusing on the proactive aspect, improved and drove our marketing, which has been an area that we viewed as something we can really drive as well as marrying that with customers around our sales folks engaging in those conversations.

And certainly, it's one of the dynamics that has tested us on our ability to adapt, but I can probably say that the commercial team really aligned to that and have had very close conversations with existing and new customers. And that's going to continue.

So do you think longer term, there is actual -- I wouldn't call it savings, but if you're spending the same amount, do you think you can actually be as an organization more effective because maybe you reduce travel to only when it's really going to get something signed in revenue in the actual backlog? And -- or whether you think -- or do you think you can actually increase the pace of bidding and that type of thing because you're more effective in being distance, so to speak? I'm wondering if it's positive, I guess, is the bottom line of the question.

Yes. So I will say it's very early in the pandemic. And our assessment on it. And so to claim, we're going to have savings through this is, I think it's a bit early to make that call. What I can state is the engagement early on, we view as a positive. That said, it is by no means business as usual today. And so therefore, this shift I'm certain we're going to learn as we go along, and we're going to ingrain that in our approach and the engagement earlier on customer processes where you don't have to schedule on site, you can actually be a virtual, it can be a quick call, you can walk through your business, you can get engineers on that might be in different regions. We view that as an opportunity and something that as a global organization that not only can maximize our value to our customers, but then also service and support as they receive the equipment, we view that is something that ATS can really, really take a -- provide an advantage to our customer base on.

(Operator Instructions) Our next question comes from the line of Mark Neville with Scotiabank.

Just a couple of follow-ups. Maybe just on the M&A discussion. Again, I can appreciate the commentary around cultivating the funnel sort of virtually. I'm just sort of curious how comfortable you would actually be closing a deal sort of in this environment?

Yes. And this is one that certainly is going to be a focus for us, and we've in conversations, walking through, it's one that we're going to have to be comfortable and ensure that we've got the right diligence level. And so we're going to be dynamic. We're working -- not any future statements, but we're working with firms, in regions where we have teams in regions that would be part of the diligence process were required or where needed.

Okay. Sounds good. Again, maybe for Ryan, again, housekeeping. Just the backlog adjustment in the quarter, was that -- is that the transportation that's been put on hold? I think it was a transformation project, is that what that is?

So no the majority of that is foreign exchange, and we still have that program on hold in our backlog. There's some other normal core scope changes in that number, but majority is foreign exchange.

And the program on hold, is there like a timeline around that or dropped a date where it gets canceled or may get canceled and I guess removing backlog or it's sort of just wait and see?

So we're going to keep it in backlog as long as it's not canceled. That would be the trigger for us to remove it. We're continuing to work with that customer there is other related programs that are proceeding. So I mean, I can't give you a timeline as to when that might restart or otherwise.

Okay. Maybe just the last one, just sort of understanding the working capital comments. Again, it builds through the year and that just payment terms on certain projects, and that's sort of unwind or just like a couple of quarters or is it longer than that? Just kind of unsure as to sort of when the build happens and sort of, I guess, the cadence of how the investment plays out?

Yes. So it's a build of working capital, primarily related to commercial terms with our customers, and the other driver on that is revenue. So we've seen our revenues decline in the quarter, and that obviously has an impact from a percentage basis as well.

But again, the particular contracts were in the commercial terms where there's natural, again, I guess, the payment terms are longer, there's an actual investment. Is that just sort of through this year or is it longer, is it beyond that?

Yes. So these are what I would call "normal contracts". So they're in the 9 to 12 months, some of them go a little bit longer. So yes, their normal course project durations.

And there are no further questions in the queue at this time. I turn the call back to Mr. Hider for any closing remarks.

Great. Thanks, operator. We look forward to hosting our first-ever Virtual Annual Special Meeting of Shareholders tomorrow at 10:00 a.m. We hope you can join us. Otherwise, I look forward to reporting our Q2 results in November. Thank you for joining us today. Goodbye for now.

This concludes today's conference call. Thank you for your participation. You may now disconnect.