Edited Transcript of ATA.TO earnings conference call or presentation 3-Feb-21 3:00pm GMT

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Q3 2021 ATS Automation Tooling Systems Inc Earnings Call Cambridge Feb 17, 2021 (Thomson StreetEvents) -- Edited Transcript of ATS Automation Tooling Systems Inc earnings conference call or presentation Wednesday, February 3, 2021 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew P. Hider ATS Automation Tooling Systems Inc. - CEO & Director * Ryan McLeod ATS Automation Tooling Systems Inc. - CFO * Shereen Zahawi ================================================================================ Conference Call Participants ================================================================================ * Cherilyn Radbourne TD Securities Equity Research - Analyst * Justin Keywood Stifel Nicolaus Canada Inc., Research Division - Director of Equity Research * MacMurray Davidson Whale Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research * Mark Neville Scotiabank Global Banking and Markets, Research Division - Analyst * Maxim Sytchev National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (technical difficulty) conference call and webcast. This call is being recorded on February 3, 2021, at 10:00 a.m. Eastern Time. (Operator Instructions) I'd now like to turn the call over to Shereen Zahawi, Director of Investor Relations at ATS. -------------------------------------------------------------------------------- Shereen Zahawi, [2] -------------------------------------------------------------------------------- Great. Thank you, operator. Good morning, everyone. Your main hosts today are Andrew Hider, Chief Executive Officer of ATS; and Ryan McLeod, Chief Financial Officer. For those who joined us by phone, all remarks are accompanied by a slide deck, which is available at atsautomation.com. Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of ATS and all its representatives 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 the 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 this inclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS' filings with the Canadian provincial securities regulators. Now it is my pleasure to turn the call over to Andrew. -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Shereen. Good morning, ladies and gentlemen, and thank you for joining us, our third quarter featured record order bookings and backlog. We continue to improve our performance in the face of challenging business conditions and drove meaningful margin expansion in line with our long-term plan. We also announced several transactions. In December, we announced our intention to pursue a tender offer to acquire CFT Group, a global supplier of automated processing and packaging equipment to the food and beverage industry, an attractive growth market for ATS. And during the quarter, we reorganized our European transportation business as planned, helping to strengthen our position and performance in an important end market. Today, I will update you on business conditions, and then Ryan will provide his report. Starting with our financial value drivers. Q2 revenues were $370 million, up 1% from Q3 last year and up 10% sequentially, primarily driven by higher contributions from our services business. Q3 order bookings were $435 million, up 18% from last year and 8% sequentially. Bookings were strong across most segments, with large customer awards in life sciences and consumer. Our adjusted EBIT margin for the quarter was 11.8%, representing a 164 basis point margin expansion versus Q3 of last year. Moving to our outlook. We are encouraged by the strong order bookings activity. As the pandemic evolves globally, we are closely monitoring customer demand signals, and it's fair to say that some customers remain cautious about approving new CapEx spend. Our order backlog of $985 million provides us with a solid base of business to offset uncertainty in the short term. By market, activity in life sciences remain robust with broad-based strength in medical devices, pharma and radiopharma. We continue to win new mandates related to COVID 19. This work represented around 18% of our life sciences bookings this quarter. Our focus on innovation and differentiated solutions is bearing fruit with new customer wins and higher share of wallet with existing accounts. Life sciences represented over 60% of our year-to-date bookings, and we expect it would be a strong market for ATS for years to come. In EV, we're starting to experience some improvement in activity levels and intend to remain selective and focused on the right projects. Given recent industry announcements and plans for future customer capital deployment in EV, we continue to be bullish on long-term opportunities, particularly in North America, where customers see the need to build capacity. In consumer, we saw strength in warehouse automation and food, while cosmetics remained a little soft. In energy, we continue to execute on our nuclear strategy and won our first major project in the U.S. This is an important development for ATS as it marks our entry into the attractive decommissioning space and the geographic diversification of the business. On after sales services, revenues were up in the high single digits year-over-year and up double digits compared to Q2, with broad-based strength across all vertical markets. Our regional service networks and the use of digital support tools, including enhanced remote support, have been instrumental in driving our ability to serve customers as travel challenges continue. Moving forward, we continue to refine our digital offerings by adding new capabilities such as e-commerce to improve customer convenience and reliance on ATS as a partner. We're also growing capacity in our regional service networks to strengthen our local presence and increase customer confidence. By being more proactive and strategic in how we embed services in our CapEx projects, we see instrumental opportunities in retrofit and maintenance. To summarize our outlook, we are encouraged by bookings this quarter, and our funnel remains healthy. Similar to last quarter, the pandemic environment continues to introduce some timing and improval uncertainty as customers exercise caution around capital deployment. Moving on, in the third quarter, we made substantial progress on the previously announced reorganization plan in our transportation business, including the sale of certain assets in Germany. This reorganization eliminates underperforming operations to protect future margins, and's allows us to bring greater focus to attractive niches in EV, where the ATS value proposition is strong and the risk reward dynamic is compelling. Moving to the ABM, our continuous improvement playbook. We are making progress by using virtual means to train and hold events. Through regular Kaizens and other initiatives, we have identified additional opportunities for improvement to support growth and margin expansion. A few ABM highlights from the quarter. We held 7 Kaizens across various ATS divisions. These events drove improvements in multiple areas, including sales, operations and customer service. One division in our life sciences group was able to achieve cost savings of 25% by identifying material savings, improving operational efficiencies and making greater reuse of engineering designs. Our team at Comecer, Netherlands was able to reduce production lead times for a key product by improving process flow and production area layout, which has led to higher customer satisfaction. In commercial ABM, we refined our marketing efforts. We identified and implemented a new process and software tool. This is expected to result in a 5% to 10% improvement in our digital-lead generation. We also hosted our first ATS Virtual EXPO in early December which showcased our automation capabilities through live presentations and more than 40 display boots showcasing ATS and our growth partners. The event was well attended with more than 1,800 participants and generated leads, which are accretive to our sales funnel. Turning to innovation. We continue to prioritize investments in differentiated solutions that positively impact our customers. Teams across ATS are pursuing next-generation ideas in areas including linear motion technology, digital services and modular and flexible manufacturing, just to name a few. ATS has also been recognized for its efforts and dedication. In the third quarter, Hologic, a key customer within our life sciences group, recognized ATS for our participation in the manufacturing scale-up of Hologic's innovative COVID-19 assay program. I'm proud of the work done on this assignment. I'm pleased to say it's one of many ways, ATS is building customer success around the world. On M&A. Acquisitions continue to be an important complement to ATS' organic growth. In the third quarter, we announced our intention to pursue the acquisition of CFT Group via a tender offer process. CFT is a global supplier of automated processing and packaging equipment and would serve as a platform for ATS in the food and beverage industry. It is well aligned with our strategy to target acquisitions in attractive and growing markets with differentiated technologies and strong positions. Its complementary technologies can be combined with our existing capabilities to create unique customer offerings. The transaction offers strong synergies, earnings accretion and an attractive return on invested capital. The transaction is expected to close in the first quarter of calendar 2021, subject to achieving a 90% take up on the voluntary takeover offer and customer regulatory approvals and closing conditions. In addition to CFT, we continue to cultivate and evaluate a number of opportunities. Of course, timing will be variable, and our approach to deploying our balance sheet will be disciplined and strategic. In summary, third quarter results demonstrated the strength of our business and our ability to adapt operations to the current climate. Booking activity is encouraging and reflects the alignment we have with our customers, and providing best-in-class solutions. Going forward, our focus remains on sharpening our execution through the application of the ABM playbook to drive better performance. Our strong backlog provides good revenue visibility during this challenging period, while our healthy balance sheet enables us to act opportunistically when strategic prospects arise. We are looking forward to closing the CFT acquisition and see a significant value creation opportunity for our customers and our shareholders. Now I will turn the call over to Ryan. Of note, Ryan was named our permanent CFO in November. Congratulations, Ryan, well deserved. Ryan, over to you. -------------------------------------------------------------------------------- Ryan McLeod, ATS Automation Tooling Systems Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Andrew, and good morning, ladies and gentlemen. Our third quarter performance featured record order bookings and backlog. And our revenues and operating margins both improved year-over-year. Starting with a review of our operating results. Our Q3 bookings were $435 million, up 18% compared to last year. The increase primarily reflected new orders in life sciences and consumer. Organic growth was strong, while acquired companies and foreign exchange provided an uplift of 2% and 3%, respectively. Compared to Q2, order bookings were up 8%, reflecting continued strength in life sciences and improvements in consumer and energy. Year-to-date, bookings were $1.16 billion with a book-to-bill ratio of 1.13:1. Q3 revenues increased 1% from last year. Organically, revenues decreased 3% due primarily to timing of program activities and third-party materials. Acquired companies and foreign exchange positively impacted revenues by 2% each. Sequentially, revenues increased 10% from Q2, primarily reflecting improved service revenues. Our record Q3 ending backlog of $985 million provides a solid base to close at the fiscal year. Life sciences represented 61% of our period end order backlog. While we are pleased with the strength and resiliency of our business, in the short term, the resurgence of COVID in many parts of the world and continued uncertainty in the economy may impact the timing of customer ordering decisions and services revenues. Looking forward, our revenue conversion for Q4 is estimated to be in the 35% to 40% range of backlog. Moving to margins. Q3 gross margin was 27.8%, up 267 basis points from last year. Higher gross margin reflected improvements made in our cost structure through our reorganization and other efforts and good program execution. Cost recoveries of $1.8 million were realized from the Canadian emergency wage subsidy. Our teams have done an excellent job adapting to the current environment. However, margins, going forward, will continue to be challenged by the inefficiencies of operating with almost half of our workforce at home and the presence of extra health and safety measures in our facilities. Moving to SG&A. Expenses were $800,000 higher than last year. This year's costs included $8.1 million of acquisition-related amortization and $2.5 million of M&A transaction costs, which were partially offset by $5.3 million gain on the sale of a facility as part of our reorganization plan. Excluding these items in both periods, Q3's SG&A was $54 million, $3.8 million higher than Q3 last year, reflecting incremental costs from acquired companies and increased employee costs partially offset by $0.5 million of recoveries from the Canadian emergency wage subsidy. Regarding the reorganization we announced in September, this plan was implemented to help mitigate the impact of a downturn in the transportation market due to COVID. Total restructuring costs incurred this year were $14 million, of which $6 million was recorded in Q3 and $8 million in Q2. Following the sale of some of our European transportation assets in October, we're now completing the final actions in this reorganization and do not expect to incur further charges. Third quarter stock compensation expense was $4.9 million, up slightly from the $4.5 million expense last year. Our effective tax rate was 24.5% in the quarter, consistent with expectations. Q3 adjusted EPS was $0.30, up 15% over last year. Our improved operating margins accounted for the increase. Moving to the balance sheet. In Q3, we generated cash from operations of $79 million compared to cash usage of $7 million last year, primarily reflecting a reduction in working capital investment and higher profitability. Year-to-date, we have generated cash from operations of $146 million, up from $10.6 million last year. Our noncash working capital as a percentage of revenue was 8.7% in Q3, down from 13.1% in Q2 and well within our goal of maintaining working capital as a percentage of revenues below 15%. Timing of deposits and program milestones have caused a decrease. Our cash collections remained strong in the quarter, reflecting the strategic relationships we have with our customers. We invested $7 million in CapEx and intangible assets in Q3 compared to $15.7 million last year. Higher investments last year related to the expansions of certain life sciences facilities. Year-to-date, we have spent $18.5 million. In Q3, we deployed $8.7 million under our normal course issuer bid. 512,000 shares were repurchased and canceled at an average price of $16.93. We will continue to deploy capital under our share repurchase program as appropriate. From a leverage standpoint, we finished the quarter with a net debt to adjusted EBITDA ratio of 0.8:1. On a pro forma basis, adjusting for the potential addition of CFT Group, our leverage would be approximately 1.9:1. We have further room to deploy capital to pursue our strategies within our normal course target leverage range of up to 2 to 2.5x. We ended the quarter with good liquidity, consisting of cash of $225 million and availability on our credit facilities of approximately $777 million. Subsequent to the end of the quarter, we completed our offering of USD 350 million 8-year senior notes. The notes were issued at par and bear interest at a rate of 4.125%. We used a portion of the proceeds from the offering to fund the redemption of the USD 250 million, 6.5% notes, which were due in 2023. Upon repayment of the 6.5% notes, we unwound our existing interest rate swaps and entered into new U.S. euro interest rate swaps to hedge a portion of our euro net investment. The swap transaction results in an effective interest rate for the new senior notes of 3.63%. In summary, our third quarter featured strong performance by our business despite the challenging environment. Our teams have continued to execute efficiently, ensuring customer needs are met while maintaining a safe working environment. The investments and improvements we have made in our business are serving us well. Driving operational improvements that have led to margin expansion. Going forward, we have a record order backlog, a strong balance sheet and available liquidity that combined to provide us with a solid foundation to pursue our growth strategies. Now we will open the call to questions from our analysts. Operator, could you please provide instructions? Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Cherilyn Radbourne with TD Securities. -------------------------------------------------------------------------------- Cherilyn Radbourne, TD Securities Equity Research - Analyst [2] -------------------------------------------------------------------------------- I was hoping that we could speak about warehouse automation a little bit. Clearly, there's a big build-out of square footage that's underway, given what the pandemic has done for e-commerce. So I was hoping you could speak a little bit more about the award in the quarter and sort of what part of that warehouse market is addressable for ATS? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Good morning, Cherilyn. When we look at this market, our solution today is a niche application, and it's really wrapped around taking multiple packages and bringing them into one singular package that would be shipped out to our consumer. And when we look at the space, although we're in a niche application, we're continuing to assess areas that we view are aligned with what ATS can provide in the market as well as where we can develop our technology. So today, it's a niche that we're focused on. We continue to assess areas for expansion. -------------------------------------------------------------------------------- Cherilyn Radbourne, TD Securities Equity Research - Analyst [4] -------------------------------------------------------------------------------- Okay. And then I was reading something interesting the other day in relation to Dubai, where apparently rapid COVID testing have been rolled out quite broadly, such that you have hotels, restaurants, stores and so forth, open without restriction. I just wonder, given the conversations that you have with multiple parties across life sciences, is that something that you can kind of foresee more generally around the world to get back to normal? And what could that mean for ATS? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Yes. So Cherilyn, I'll provide my view on this, and certainly, it's one of -- there's different dynamics that play here. And one of them is around test kits. And as you're well aware, earlier in the year, we -- or assume early last year, we announced an award in the test kit process. And our mission has always been around enabling our customers to bring those to market to serve areas around the world, and we continue to see potential. And as noted in the quarter, it was 18% of our life sciences bookings, 10% of our total bookings. And as the businesses around vaccine as well as testing continues to roll through, we view it as an area that we can really help our customers and then ultimately enable the safe return to normal operation. But as far as timing goes, it's certainly a dynamic market. And it's one that we view this is very much in line with what ATS can do to help in the economies and the customers we support as well as having a meaningful impact on the fight against COVID. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Mark Neville with Scotiabank. . -------------------------------------------------------------------------------- Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [7] -------------------------------------------------------------------------------- Ryan, congratulations on the appointment. -------------------------------------------------------------------------------- Ryan McLeod, ATS Automation Tooling Systems Inc. - CFO [8] -------------------------------------------------------------------------------- Thanks, Mark. -------------------------------------------------------------------------------- Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [9] -------------------------------------------------------------------------------- Ryan, first question for you. Just on the gross margin. I think you're up about 400 basis points year-to-date roughly. You made a comment about sort of continued pressure on margin. I just want to be clear, that's not to suggest the margin needs to come down from here. It's just sort of making us aware or sort of some of the puts and takes that are still impacting the business. Is that right? -------------------------------------------------------------------------------- Ryan McLeod, ATS Automation Tooling Systems Inc. - CFO [10] -------------------------------------------------------------------------------- Yes. So we look at this quarter specifically. So we're up, you could've call, around 270 basis points. And so the big driver, but 3 quarters of that, it is improvements in our cost structure, better program execution. And I talked a little bit about that in my prepared remarks, there is about 50 basis points, which is related to the wage subsidy. And that's -- as you're well aware, that's due to the revenue changes within our Canadian operations. But certainly, the benefit we're seeing in program management in our cost structure is sustainable. My cautionary language is really around the environment, and we've seen a number of regions that have returned to lockdowns. And that makes executing services, installations, commissioning, all that type of work more difficult, more challenging. We've done a good job overcoming and adapting to the environment to date, but it's a dynamic environment. Andrew talked about some of the tools with the regional service network and digital tools in our service organization. And those have certainly helped. But it's a challenging environment still. -------------------------------------------------------------------------------- Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [11] -------------------------------------------------------------------------------- Okay. That's fair. Maybe just on the after-sales service part of the business. Again, it sounds like it's pretty healthy growth in the quarter. I'm just sort of curious just sort of how that business is functioning now. I know there were some challenges earlier in the pandemic, so I am getting insights. It sounds like it's sort of digital, which is driving a lot of the growth. Just again, just maybe just qualitatively sort of what's happening in the business, sort of where it's at? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [12] -------------------------------------------------------------------------------- yes. So Mark, I'll start with just the obvious. In the pandemic, things are very fluid. And so certainly, obstacles continue to arise and this group continues to overcome. And I'm going to walk through that overcome. Early on in the pandemic, the team aligned and understood that it would be a challenge to be on site, and they launched several digital tools which really support our customers. And as you recall, close to last year at this time, customers really shut down and wouldn't allow us on. So remote support different aspects where we could be able to really help them through this process was viewed positively, and many of our customers utilize that capability. Now fast forward, and we continue to build out our regional network. You take, for example, like the U.K. went on big lockdown. We have a team of service folks in the U.K. They were able to utilize their skill set. So whether they were an automotive supporter or whether they're life sciences or whether they're in consumer, regardless of that specific skill set. We then now had smart glasses, which are the digital glasses. We had tablets. We also had capability and our ability to talk to the subject matter experts at core at our headquarters, and it allowed us to start to utilize that footprint to really support and help our customers. And so I would say the team certainly faced a lot of obstacles through the year, and they continue to overcome those obstacles to really enable this situation of where we're in today. And I just -- I walked through growth in the quarter versus -- sequentially, we saw a growth in the quarter versus prior year. But additionally, really building out that support structure, building out that ability to truly help our customers. All that to be said, you go back to my beginning. It is a fluid environment, and it's one we continue to look on how do we adapt and overcome. -------------------------------------------------------------------------------- Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [13] -------------------------------------------------------------------------------- So I guess just a follow-up. Will there still be parts of that business that are challenged, I guess, installation and maybe parts? And then second on the digital, when you're thinking that the gains you made in digital are sustainable sort of beyond the pandemic just showing sort of how useful they are? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [14] -------------------------------------------------------------------------------- Yes. So I'll take those in 2 pieces. Let's start with the first. And we do think if customers go into lock down, it does create a challenge. And it's one that we certainly are continuing to look at ways to support and drive. Remember, our customers oftentimes are launching products that save people's lives. And so we are very much in line with them. We talk to them frequently. We're engaged with them. But if they go into lockdown and don't let somebody on site, then it does create a unique challenge, and it's one that we look to continue to overadapt -- adapt and overcome, excuse me. As far as the digital aspect, this is an area that we are focused on and it is an enabler. And it is an area of focus for services as well of digital tools. And as we looked and we talked a little bit about the e-commerce. And this is an area that we're continuing to provide ease of use, ease of application for our customers to really make their ability to operate their business at the maximum level they can operate. And so when you look at services, when you look at PA, and it wasn't as highlighted, but PA is continuing to really enable many aspects of how to help our customers pull data from their equipment and then maximize the return, and we did a small acquisition within the quarter called the NIMCO. This is really wrapped around that ability to then draw to the cloud, utilize the data in the cloud, utilizing their specific tools to then improve efficiencies, whether it's across equipment or across plants. And it is an area that we view we can really continue to drive and an area that we view as a real opportunity for us to bring the full breadth of ATS to our markets and to our customers. -------------------------------------------------------------------------------- Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. Just one last one. On NIMCO, I think you said in the MD&A, you mentioned sort of domain expertise. I'm just curious, is this something that's used in a particular end market or vertical? Or is it sort of something you can use across your business? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [16] -------------------------------------------------------------------------------- So it is more across the business. And as you think about NIMCO, their real kind of area of expertise is being able to pull -- so think about the channel to be able to pull the information to the cloud. And then also within the cloud, they've got a standard set of packaged tools that allows them to then maximize that return. So OEE impact. And whether it's looking across multiple tools or multiple sites, that's the area of value. And we're -- we're continuing to look to build this out and PA is taking a bigger piece of this as they are very close with customers on data and on being able to maximize that value of data. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from Maxim Sytchev with National Bank Financial. -------------------------------------------------------------------------------- Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [18] -------------------------------------------------------------------------------- Andrew, just wanted to start with what I thought was an interesting post in relation to your involvement with GM and Ultium battery. I was just curious, I guess, 2-part question. Typically, you kind of shy away from talking about clients. So what was kind of the change there? And maybe do you mind maybe talking about potential, I guess, inflection point, for the lack of a better word, in terms of EV opportunities in North America specifically? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [19] -------------------------------------------------------------------------------- Yes. So with this, Jim announced publicly their approach. And with that, they also referenced ATS as a key partner in that approach and that process. And stepping back on this space, we've been in the EV shift in this specific area for greater than a decade now. And we've also referenced this on our social media sites, so you're welcome to see that. But when you step back and look at this process, it's an area that we view we can bring a strong level of value to customers. And we referenced one key item in our update, which is in these applications, oftentimes, there's 10,000 wells, 10,000. And if one of them has an issue, it could be up to 2% in efficiency. And so when we look at capability, we look at what we've invested in technology experience as well as our footprint and capability to support our customers. It is an area that -- and again, we're very focused on our niche here and our area of value, but it is an area that we view we can positively support our customers as they transition to the EV launch. In North America, we're seeing that as a potential, and we're seeing the movement. We're seeing the alignment to launching new products, and this announcement is just one of many examples of customers making the investment and moving forward and looking at their capacity and how they can improve their capacity and output. -------------------------------------------------------------------------------- Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [20] -------------------------------------------------------------------------------- Okay. That's very helpful. And then circling back on M&A opportunities/optionality. I mean, obviously, right now, you're in the process of closing the Italian transaction. But given the fact that I would assume that COVID has pressured some of the smaller potential competitors, is there an opportunity to accelerate the M&A program. Just was wondering if you don't mind providing some thoughts there. -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [21] -------------------------------------------------------------------------------- Yes. I mean -- and I'll walk through this a little bit on the opening remarks, but I'll go into a bit more specifics around it. Our funnel in M&A is very strong, and we continue to stay very close to it and cultivate. And I will state that cultivation has been a unique dynamic that now virtually, it makes ability to have meetings much quicker. And given our footprint, like the CFT discussion, we're able to be on-site when needed because we're usually in region. And so to answer your question, there is a healthy funnel. We are very selective. You know our forward criteria that we focus on strategically to drive value to ATS and our shareholders. And so there are targets that we're in discussion with and remain in discussion with. And when they become available, we're certainly in a position with our balance sheet that we can move forward as needed as long as it meets our 4 criteria. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Justin Keywood with Stifel GMP. -------------------------------------------------------------------------------- Justin Keywood, Stifel Nicolaus Canada Inc., Research Division - Director of Equity Research [23] -------------------------------------------------------------------------------- Congrats on the quarter. I had a question related to the nuclear business. It was good to see the first U.S. award. I was wondering if you had any additional color on the type of customer there opportunity for follow on orders. And in general, how you see the nuclear space evolving for ATS? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [24] -------------------------------------------------------------------------------- Justin, so let me walk through this one a little bit. Let me unpack this. So this application is decommissioning. And as you're aware, and we've talked about it, we have done a really big focus on refurbishment. And as you think about that process, decommissioning is, call it, half of that. So when you go through a refurbishment, you pull out, you decommission what was in use and then you put in the new reactor, and then it can extend the life. This is just that half piece. So we do have experience here, and what's exciting for ATS and our approach on this is this is their first real meaningful impact in the U.S. and alignment to the decommissioning space. And just to kind of walk through the high level of what this means or what it could mean. So a typical reactor is going to last anywhere from, call it, on average, between 40 and 60 years. And that's a typical lifespan. And why there are the variances, they're going to do extensions and they're going to walk through that to get extensions. But the typical lifespan is between 40 and 60. And in the U.S. alone, there's 47 reactors over the age of 40. So now let's break that even further. On the decommissioning, the total value of decommissioning is $600 million over 7 to 8 years. And of that portion with us, dismantling, et cetera, it's roughly around 40% of that. And as you look at that, of that 40%, 2/3 is labor, which is the area of impact for automation. So call it, $150 million per reactor as potential. And why this matters, why this is big for these customers is you don't want human interaction inside a nuclear reactor as much as possible, right? You want to look at automation to try and help. And so this is an area we view ATS can really help our customers. It's a critical aspect. It's a critical element. It's something that is going to continue for years to come and it's an area that ATS has built an understanding and capability. And therefore, this is a first piece we need to execute. We need to deliver. We need to show the value to this specific customer. But additionally, it's an area that we view as within our niche, within our area of focus, certainly can add value to our customers and add value to ATS. -------------------------------------------------------------------------------- Justin Keywood, Stifel Nicolaus Canada Inc., Research Division - Director of Equity Research [25] -------------------------------------------------------------------------------- I appreciate that. A few items to unpack there. For the refurbishing versus the decommissioning, would that be similar as far as an opportunity in revenue or the business side? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. So refurbishment is a bit different. And like when we talk about refurbishment, let's talk about, say, Bruce Power, and they're going through their refurbishment process. And they've gotten through the first reactor and there's 6 in the process and they're starting on 2 and 3, and it's really helping them, and it can do reactors. So it's a little different in the reactor type. Decommissioning is a different aspect and again, it's an attractive area where automation can play a part, and it can really help as they go through this process. And in both, you're going to be in the reactor. So you want to limit human interaction, you want to limit the touch points. So that's why automation can be a key enabler here. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Mac Whale with Cormark Securities. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [28] -------------------------------------------------------------------------------- Andrew, I just wanted to follow-up a little bit on the transportation segment. You talked specifically about one particular element of the expertise you bring. I was wondering can you speak to the differences in the business that you've had in Europe and how that will manifest itself in North America. And related to that, how far up the supply chain do you go? Do you -- is it really just in the battery packs? Do you go into cells? And do you go the other direction, too, into vehicle integration? -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [29] -------------------------------------------------------------------------------- Mac, so our focus is around that battery assembly area. And I say it because we do battery pack assembly, we also do pack out. And so it is in that general area of focus. And to start, we've been -- continue to be successful in Europe, and we've launched many products there, and we've announced those products. We're also in North America and launched and talked about those products. And again, we've been in the space for greater than 10 years, which allowed us to really understand the nuances and areas that we need to focus on for development and really how we can maximize our technology to really bring that value to customers. And so when you think about what matters to a customer in this, it's speed because one of the things we're finding with the EV market is not only is it speed to market. But additionally, there's changes in the batteries. So as they're coming out with the new developments, they need a customer that can really move faster then to help them enable getting those changes in because it could mean distance, it could mean an easier charging process. It could mean any of the above. And so when we look at our focus, and I did mention this in the frame-up, we've been very specific on where we want to place our area of focus for this market because we view we can have high level of impact, high level of value for these key areas. And the announcement from GM was one of them. We've had several others that we've announced around the wins in this space, and it's one that we continue to build-out. I will state we don't want to be everything to everybody in this area. And so we're very focused on our specific niche. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [30] -------------------------------------------------------------------------------- Okay. And is there -- is there opportunity -- like, do you see the opportunity as exploiting that niche with more customers or starting taking that -- starting from the niche and expanding like you do in other business segments where you basically want more space of the manufacturing facility, so to speak, right? So I'm wondering which base are you in, in terms of growth. -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [31] -------------------------------------------------------------------------------- Yes. And what I can say is it's both. We're very focused on the technology and where we can differentiate our solution. While also, we continue to engage with many customers on their journey to the EV shift. And so one of the things that's a bit different than this versus, call it, traditional ice is that reference I had around the battery changes and the continued development where the cycle for a battery is we're viewing as potentially much shorter. And therefore, as they look to automation, it would be an area that we need to continue to drive to have a solution that can be ready to market at a very fast pace. And that's what ATS does really well, and we've continued to drive that globally. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [32] -------------------------------------------------------------------------------- Okay. And just the last question I had about the M&A. You talked about the 4 criteria. Have there been any shift in the metrics you use further evaluating those 4 criteria? Like do you find in this environment, you need to ship those at all or make them narrower, so to speak? Or I'm wondering how that -- how the environment has changed the way you look at them. -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [33] -------------------------------------------------------------------------------- Yes. Certainly, market has been an interesting one for us to assess because you have to look at the impact from COVID, and there's good and bad for impact from COVID. There are businesses that have been greatly impacted on a positive and also in a negative. And so it is an area of shift that we look at in a very detailed fashion to assess to impact from COVID on the business and what that long term looks like. Number two, and we're continuing to build this out, the strategic rationale and aligning to reoccurring revenue areas that we want to drive impact were -- as we look at the food and beverage space, that is a meaningful entrance. Obviously, it needs to close and go through the process, but that allows us to look at additional add-ons in that space. And so then that goes down to the third piece, which is how we're going to operate. And I'll just state that we continue to build our confidence around the ability to integrate and operate the assets. And I referenced this on the call, but just as a reminder, with Comecer on the CFT update, we just had a quick update on Comecer. And the book-to-bill ratio on that business since acquisition is up 20%, the operating margin is up 300 basis points and the aftermarket is up 200 basis points. And it's still, call it, early days in its alignment with ATS, we're really pleased with the progress. And their base business on radiopharmaceutical continues to be an area that we're very pleased with the progress we've made as well as the opportunity for synergies. And lastly -- and this is the dynamic around multiple/ROIC, the financial aspect of the business. And so there are many out there, and we're continuing to assess. Strategically, we're looking to really build ATS around businesses that are going to add value to our shareholders in the mid and long term and ensuring that when we add a business, it is an area we want to really drive into. And so yes, certainly, it's changed. But additionally, I would say the target market has continued to grow and our ability with the addition of food and beverage space, and we've had targets reaching out to us around the potential fit. And so I would say the workload has increased, and it's a good thing. And certainly, we're going to be as focused around having that discipline to ensure it's the right level of value over the long term. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Mr. Hider, there are no further questions at this time. -------------------------------------------------------------------------------- Andrew P. Hider, ATS Automation Tooling Systems Inc. - CEO & Director [35] -------------------------------------------------------------------------------- Thanks, operator. To conclude, we are pleased with the performance this quarter and recognize the hard work and dedication of our teams across ATS that made this possible. The COVID-19 pandemic, while certainly challenging, has brought out the best in our people. And I couldn't be prouder the progress that we have made over the last year. We remain focused on delivering innovative and high-quality solutions for our customers, providing a safe work environment for our employees and creating value for our shareholders. Thank you for joining us today. I look forward to speaking to you on our Q4 call in May. Stay safe, and goodbye for now. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- This concludes today's conference call. Thank you for your participation. You may now disconnect.

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