Good morning, ladies and gentlemen, welcome to the ATS Automation First Quarter Conference Call and Webcast. This call is being recorded on August 10th, 2022 at 8:30 AM Eastern Time. I'll now turn the call over to David Galison, Head of Investor Relations at ATS.

Thank you, operator and good morning everyone. On the call today are Andrew Hider, Chief Executive Officer of ATS; and Ryan McLeod, Chief Financial Officer. Please note that our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available at atsautomation.com. We caution that the statements made on the webcast and conference call may contain forward-looking information and our cautionary statement regarding such information, including the material factors that could cause actual results to differ materially from the statements and the material factors or assumptions applied in making the statements, are detailed on Slide 2 of the slide deck. Now, it's my pleasure to hand over the call to Andrew.

Thank you, David. Good morning, ladies and gentlemen, and thank you for joining us. Today, ATS reported another quarter of profitable year-over-year growth. This quarter also featured record revenues, order bookings, and order backlog, all delivered in a challenging and fluid economic and business environment. Our results reflect our focus on strategic markets and the ongoing application of the ABM playbook by our dedicated global teams. As part of our Expand strategy, integration activities progressed with all of our acquisitions from last year and we remain on target with our goals. Today, I will update you on the business and Ryan will provide his financial report. Starting with our financial value drivers. Q1 revenues were a record CAD611 million, up 20% from last year driven by a combination of acquired businesses and continued strength across our core operations. Organic revenue growth was 6% year-over-year. Order bookings for the quarter were CAD736 million, up 16% year-over-year and featured key wins in both life sciences and transportation. Our adjusted EBIT margin in Q1 was 14.3%. Moving to our outlook, we finished with approximately $1.6 billion of order backlog that includes several large enterprise programs with long durations providing a solid base of business. Our backlog remains distributed across diversified regulated industries where quality and reliability are mandatory. By market, in life sciences, conditions have remained generally positive with good activity in key sub-markets including medical devices as well as pharma and radiopharma. Life sciences represents nearly 50% of our ending backlog and it remains a key vertical for ATS. In EV, OEMs continue to drive their investment plans forward. We expect ongoing demand for EV automation as global capacity at OEMs is well below the levels required to meet the stated production targets. Despite strong growth to date, the EV industry is…

Thank you, Andrew and good morning ladies and gentlemen. This morning I will start with a review of our Q1 operating results and then provide further details on our balance sheet. Beginning with orders, bookings were CAD736 million, up 16% compared to Q1 last year. Growth was driven by acquired companies contributing 12% of the increase primarily from SP. Organic growth in bookings was 5% partially offset by a 2% headwind from foreign exchange translation. Organic growth included the initial order booking for $70 million from an existing global automotive customer that Andrew referenced in his remarks. Recall that in Q1 last year, we reported a CAD120 million life sciences order booking. Our trailing 12 months book-to-bill ratio at the end of Q1 was 1.12:1. Our Q1 revenues of CAD611 million, our top line growth was 20% over last year. Organic growth of 6% related primarily to increases in the transportation and consumer verticals. Foreign exchange translation created a 3% headwind compared to Q1 last year. Acquired companies added 17% to revenue growth with SP being the primary contributor. We remain focused on growing our after-sales services business, which grew 42% year-over-year including 34% organic growth compared to Q1 last year. Our Q1 ending backlog of CAD1.56 billion was 25% higher than Q1 last year. Looking ahead, our revenue conversion for Q2 is estimated to be at the higher-end of the 35% to 40% range of order backlog. Given the composition of our backlog and the stage of some of our enterprise orders, the expected conversion has moved back to this range for Q2. As a reminder, this estimate is based on revenue expectations for both the execution of projects from backlog and work that will be booked and billed within the quarter. Moving to margins included in Q1 gross…

We will now take our first question from David Ocampo from Cormark Securities. Please go ahead.

Andrew, I think you talked a little bit about uncertain market conditions that may potentially delay orders flowing through to your backlog, but I was wondering for the contracts that are currently in backlog, are there any risk of delays on delivery or even potential cancellations just given the uncertainty in the market right now?

Hi, David, this is Ryan. I'll start and Andrew can certainly add in. We're not seeing anything out of the ordinary in our backlog or seeing any heightened risks of cancellation or anything like that. Typically, our contracts do allow customers to cancel, but they would also be required to compensate us for any work completed. So, nothing material. We see normal course scope changes as we typically do, but we have not seen any change that would impact our order backlog today.

And David, to address the first part of the question, just a walk on where we are today. Best bookings quarter in Q1 we've had ever and our funnel remains healthy and as we look at the markets and we've known the story, but we've focused on markets that we view are more resilient during challenging times and so while we're being certainly cautious, we are cautiously optimistic around how we view the market and the value that we ATS and automation can play as customers are looking at their dynamics and the situation they face. So I would characterize my conversations as being just that when I'm having discussions with customers.

Okay, that's helpful. And then for your automotive business particularly EV, how should we be thinking about the growth there. I don't think you've laid it out in the past. Is it something similar to life sciences where it could be high-single digit just given the supply demand balance that's out there and maybe as a follow-up to that, how is competition in the automation space for EV?

Yes, so I guess I'll walk those specifically and look, I'll hit the competition piece. So there is competition. It's a different competition level as these are generally very large pieces of equipment and we at ATS, a little over five years ago, we shifted our focus on the EV space and we've been in this market for over a decade now and we have technology, we've got capability, we've got experience and maybe a strong track record of performance in this area and to be very specific on it, it's around battery pack assembly and pack out, which when you look at customers making the shift that is one of the critical areas and strategic areas that they focus on to get right and I've talked about it in the past around the number of welds and if one weld goes wrong, what it means to the EV longevity, but it is a very strategic area. And so, the growth rate in this market is fairly significant and we used the phrase around bullish of the market in last quarter and reviewed that this market has certainly a long tenure for getting the ability to meet capacity to meet demand and so ATS is well positioned to support and help to this market.

We will now take our next question from Mark Neville from Scotiabank. Please go ahead.

Good morning, guys. Very good results. If I could maybe just pick up first on the after-sales growth. I think you said -- quoted 32% organic in the quarter. Can you maybe just -- I think that's the highest rate of growth that I recall you guys talking to. So if you maybe just speak to some of the drivers behind that. If that's accelerating with some of these acquisitions. Just a little more detail around that please?

Yes, So, Mark, just to clarify, it's 34% organic growth in the quarter. And so this is an area that we've invested in, in terms of building out our capability, our ability to service customers. We've talked about different lines. We've expanded our regional presence. So all of those have factored in.

Yes. And, Mark just to walk through this and Ryan touched on it, but we've invested around really capability within the region and solutions that we can provide for our customers and I highlighted one on the call, but to be more specific on that, we're now looking at the full, not to say we haven't in the past, we are looking at solutions on the full lifecycle of our equipment whether it's new or in existence to really help our customers through operating at a more efficient level. And so we can now take the data from Illuminate from other insights and bring the ability to have a more efficient system and our teams with the investment around the marketplace with ordering, with ability to monitor machines, ability to improve efficiency to really pivot and help our customers through that transition. And lastly, what I'll just note is what we saw for the last two years is services going from a nice to have to really mission critical for our customers. And obviously, our teams really look at this as certainly strong proof point in that direction, but it's early days and more to come and we're seeing this with new acquisitions as well as with our continuation on our business today.

So I guess just to follow on to that. I think the target was 20%. Just curious if you're willing to update that now or the end of this feels like with the growth you promised that it's probably -- feels like a higher number.

So at this time, we're not updating it and here's why and when we look, we view this as strategic and a focus area across ATS and when you step back and look within our businesses, we have businesses that are close to 40% and we expect them to continue their progression and offer new digital solutions, new insights new capabilities that really help customers and we have businesses that are below our target and so it really is that progression to get there and it's not going to be an area that we slow down once we get to that level.

Got it. So maybe on lead times. You spoke to sort of increase for certain components, electrical/mechanical components. I'm just curious sort of how you're managing that and sort of what you do in the event that you're maybe short on a component or -- and then there's potentially I guess maybe people that are sort of I don't see stranded but need to be shifted around. So just curious what you're doing, how you're managing it and sort of maybe start there.

Yes, so this is an area that I would say the ABM has really been a key focus for us and just -- I think close to a year ago our teams really saw this starting to take shape and see the challenging environment and they implemented very quickly a daily visual management process and pretty much across the corporation and what that allows us to do and our supply chain teams to do is really identify those critical elements, those critical parts or shortages and have a very proactive or reactive approach to that. It allows us to then say okay, how do we expedite, how do we get this on-site work, where we can draw from and because we've invested in systems and solutions globally, we can shift around within divisions if we have the ability to and so, we've taken a data visual management approach, which allows us to understand where we have the impact. We often times know in advance that something is going to be short and we can take countermeasures and take operational measures till we mitigate that impact on ATS. And so while it is a challenging environment, our team has done an excellent job of operating in this environment.

Yes, I agree. It's quite impressive. So good on you guys. Maybe just my last question just on M&A, your stock has been pretty volatile year-to-date. I think you started the year closer to CAD50 dropped to CAD30, now back into the CAD40s. I'm just sort of curious how you sort of view your multiple your share price in the context of M&A and your willingness to do M&A?

So Mark, why don't I start and then Ryan can certainly add in around where we see our multiple, our trading multiple, but our funnel is healthy here and I will often talk about ABC, always be cultivating. We are constantly cultivating and the markets that we view are most attractive for ATS long-term and really creating long-term shareholder value and so we continue to operate in that environment. Our funnel is made up of small, medium and large potential. That said, we're extremely disciplined and we continue to ensure that it's the right value creation for ATS long-term and so certainly it's been an ongoing evolution and one that we view that we want to continue to drive.

Yes, I guess, I would just add, I mean, we've seen a reset in the multiples across the board, but generally speaking, I would say we view ourselves as undervalued versus others in our space.

We will now take our next question from Justin Keywood from Stifel GMP. Please go ahead.

Good morning. Thanks for taking my call. I was hoping to square the record bookings and backlog with the guided revenue conversion for fiscal Q2, which I believe implies a bit of a pause in organic growth and if that's just a function of project timing and if we should expect the growth to ratchet back up in the second half of the year or any commentary around that? Thanks.

Yes, so, Justin. I mean, first of all we do make this assessment every quarter and it's based on our portfolio of projects that are in backlog as well as our expectations for in-quarter bookings and revenues. We do expect in this quarter to be in the higher-end of that 35% to 40% range of backlog and really what we're seeing is and I talked on this a little bit, but we've had some larger enterprise projects recently get completed or get close to completion and while we have new ones in our backlog, they are in the early stages of their overall schedule and what happens is during those design phases before projects hit the build stage, it's relatively lower revenues that get produced during those phases. So that's really what's driving the lower conversion rate in this quarter and it's certainly nothing new. Over the long-term, as I've talked about, given the change in our business make up we've added more product sales, we've increased services, we've added more original equipment. We do expect to typically operate into that 42% to 45% range, but this is more just reflective of our current portfolio and backlog of projects.

Got it. That's helpful. And has there been any change in expectation for organic growth in the short or medium-term. I know ATS always strive to hit organic growth above the industry average.

There is no change and as you're well aware, we've targeted markets that we view are generally more resilient in these times.

Got it. And then just finally on margins, we saw a nice improvement in the quarter year-on-year and I know this has been a big part of the ABM. At this point, are you anticipating any additional margin expansion realizing the backdrop is pretty challenging, but is there an opportunity to still improve margins higher than the 500 bps call which has been essentially achieved?

So if we just step back, I'll walk through the different components. We are pleased with which where we operated this quarter year-over-year. We had expansion sequentially. As I talked about some of the issues in our gross margin or some of the factors that affected our gross margins, we did see some challenge and supply chain has been a headwind to the teams have executed very well in this environment, but it is a headwind and we also saw some challenge from mix in our programs and as I just talked about with the revenue flows, we had some higher margin enterprise projects that were completed and newer enterprise projects are in the early stages of completion today. So going forward, we still have our focus on margin expansion. It is challenging in the short-term, but we do have a continuous improvement focus to our ABM and we're confident in our ability to continue to perform well, both in the short-term and then ultimately drive margin expansion as the environment improves.

Mr. Hider, apologies. We have a follow-up question from Mark Neville from Scotiabank. Please go ahead.

Thanks again guys. Maybe just on the macro, I'm just curious sort of if you're doing any internal exercises just in the event that there would be a slowdown or sort of running any ABM around that. What you can do if there would be -- just curious if there's any change to the CapEx budget for the year. Thanks again.

Yes, so Mark, we're obviously aware of the risk and what's happening in the environment and as part of our normal course, we do discuss and develop contingency plans. As Andrew said, we're cautiously optimistic at this point that our verticals will be resilient and automation is going to continue to be an area that companies invest in to drive efficiency growth in their businesses, but that doesn't mean we would be immune to the effects of a recession or something similar. So we have a good strong backlog that gives us visibility, time to react. We've also built flexibility into our cost structure. We operate with a mix of at least in known facilities. We operate with approximately 10% of our workforce through subcontractors and that helps us manage utilization and workflow and that's part of how we operate as a project-based business. We have flexibility in other areas of our cost structure as well. In terms of CapEx, we do want to maintain investment in innovation, but we do have flexibility in other areas to ensure that again we're being competitive and efficient in our cost structure. So as I said, we have a more resilient end market mix today. We've also lowered our exposure to CapEx where we've increased services, increased our product revenue. So we're comfortable that as conditions deteriorate that we both have a strong platform and the ability to react quickly.

Got it. And maybe just to focus specifically in Europe, obviously there is a heightened risk with some of the economic data coming out of there on energy prices as well. So maybe just again a little more color around your conversations with customers in Europe, if they are any different than other parts of the world and as I guess the second part is if energy prices, sort of, a big part of the cost structure and if view it as a risk. Thanks.

Yes. So two questions, I'll take that the customer. I would say we have not seen a marked difference in discussions with customers to date. We do view this as an opportunity and one of the areas we're driving expansion on certain key markets and verticals for ATS and so we have not seen a marked difference to date in the discussion in the general tone with customers. That said, you're going to have multiple different conversations based on the markets that we're serving, but in general, I would say there is not a big difference. The second part of the question, we've really looked at our business as a whole and this energy dynamic and what would happen and so our teams have taken a proactive approach on what would happen if this were to happen and kind of just to give you a reference point, Germany energy from natural gas a little over 20% from Russia. If that were to be shut off, we have started to build our plans on what our countermeasures or what our reaction would be to that. And while it's never perfect when we are in planning mode, we're certainly starting the process to ensure that we could think about and walk through how we would continue to deliver for our customers and continue on a safe operation during that environment. So yes, it has been part of our planning process. Yes, we've been going through what the actions we'd take in that situation and how we'd continue to support our customer base.

Thanks and would the energy cost be significant? Is it a big part of the cost structure in Europe. I don't how much still be consumed.

So that cost structure would be part of our consideration in ongoing and we've built many of that thinking into our business. That said, the real discussion that we've seen a lot and will drive around is the natural gas coming from Russia and what would happen if that were to be shut off and so that has been a bigger focus and so not to get into breakdowns of every country in every region and their energy usage, but it's been one of the ones we've been looking to countermeasure.

We will now take our next question from Maxim Sytchev from National Bank Financial. Please go ahead.

Andrew, I was wondering if you don't mind providing a bit of an update in terms of integration process on SP Industries and CFT, I mean obviously different type of transactions, but if you don't mind providing a bit of an update on both. Thanks.

Yes, sure and I'll start with kind of a headline and then I'll piece it apart. Both on plan on target and I highlighted this a little bit and I'll hit SP to start. One of the areas that we're very, very pleased with is the synergy funnel and execution and it was one of the thesis around driving very much like this business and we've seen really performance towards that with Comecer and the isolation as well as the business in Spain with SP called . We are coming together and bringing that solution to a new customer as well as SP having the ability to pull through other businesses like IWK and so the team has an excellent job around that ability to bring the value to market and just to highlight the other aspects. They are on plan with their integration. They've really just taken on the ability to be the ABM in a very focused effort. A lot of folks have gone through the ABM boot camp and so, in general, I would say, we're pleased with the progress and certainly look forward to this being the real target area for ATS moving forward. As we look at CFT, same commentary. This business, the team took to the ABM to drive efficiency, to drive how they view their approach to market to really bringing the value that they can bring to customers and making that the forefront of the conversation plus stepping back and looking at their cost structure and taking critical and clear action to ensure their cost structure is aligned with the value that they can create and so while we're continuing to drive synergies from a market perspective, we're very pleased with the progress on both those organizations.

Okay, very helpful. Thank you. And then just one last question in terms of supply chain, I mean obviously some of the, I guess, peers in the space have started to say that things at least are not getting worse and I'm just curious, I know that you highlighted the electrical components being still in tight supply, but how should we think about this as the year progresses. At what point do you think that will get better and how should looking about the impact on rice specifically. Thanks.

So first, we view this as being with us for the remainder of the calendar year and so our teams have been very focused on not letting off on the daily visual management and ensuring that we can have continuity and continuation of our operation. Number two, we have seen some areas stabilized and Ryan walked through that while we've seen others be more challenge and so I do when we step back and look at the way we've performed, I think that we've performed very well, but we're not taking our foot off the gas pedal here and we do think this is going to be a dynamic environment for the remainder of the year and one that we have to continue to utilize the ABM to outpace and really drive value in the markets we serve. Ryan is there anything you would add on to that?

Yes. Maybe just a point of clarity. So, year-over-year, we've certainly seen cost inflation in our supply base. Sequentially, we have seen things start to stabilize now. It's very dynamic. We've seen pockets of improvement in certain commodities, other components of sequential increases, but generally it's been more stable sequentially. And then as I noted, lead times in summary have extended in this quarter, particularly in electrical components. So as Andrew said it's dynamic, but our mitigation efforts been we believe very effective and its helped us to navigate this period.

Okay. And then actually, just to clarify our price increases, part of the toolbox that you're using with customers right now to offset that inflationary dynamic.

Yes. Yes, we have built out a commercial ABM and price is part of that process.

And any push back Andrew in terms of those price increases that you're passing through or what's been kind of the conversation with the clients?

In large part, look, we are of high value to our customers and then we look at what we can create and how we help customers create their solution to market. They generally understand the situation and generally really ATS is a key enabler. So while we don't see this as a zero pushback, we generally think it's a high value solution to customers.

We have no further questions. Back to you, Mr. Hider.

Thank you, operator. We look forward to staying focused on our goal of creating value for our customers and shareholders alike as we continue to execute. And just before we conclude, I'd like to remind everyone that we will host our virtual annual meeting tomorrow beginning at 10:00 AM Eastern. Thank you for joining us today. I look forward to speaking to you on our Q2 call in November. Stay safe and goodbye for now.

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