Today we hosted investor meetings with the management team from ATS Corporation ("ATS"). In attendance were Andrew Hider (CEO), Ryan McLeod (CFO), and David Galison (Head of Investor Relations). Topics in focus included the opportunity set across the Life Sciences and EV (Transportation) markets, outlook for the company's major end-markets/business lines through the cycle, ATS' competitive advantage across its focus markets, and expected growth drivers. Overall, management commentary reaffirmed our positive view of ATS' shares, and we believe the company is well positioned for continued top-line growth over the medium- to long-run. We summarize our key takeaways below. For more information on ATS, see our resumption of coverage note here, as well as our note following ATS' recent Investor Day here.
EV capacity build-out remains an attractive mid- to long-term opportunity – Despite the somewhat dynamic/evolving short-term operating backdrop across the EV space over the near-term (i.e., headlines around OEMs reassessing near-term targets, evolving battery technology, etc.), management remains optimistic on the mid- to long-term opportunity. ATS continues to prioritize high- value areas of the battery manufacturing process (e.g., battery pack assembly) and invest in capabilities to help serve EV clients better (e.g., digital twins, factory floor space, etc.). As it stands, the company is executing on the sizable order backlog in its EV business (including the C$787 million of orders related to a larger enterprise program with a major EV customer), while pursuing work with additional OEMs. On the near-term outlook, while the orders in this space are likely to be lumpy, the company continues to pursue opportunities with a number of potential customers across this space. We believe the company is in the early stages of the EV opportunity and expect continued growth in this end-market over the medium- to long-run.
Well-positioned in the Life Sciences space – Life Sciences is the largest line of business within the ATS portfolio, and within Life Sciences we estimate that ~2/3 of ATS' revenue comes from medical devices. This includes autoinjectors and other injectibles, where ATS' expertise goes back over 20 years to the build-out of EpiPen production capacity. While we believe that the GLP-1 space presents an attractive opportunity for ATS over the coming years, the current Life Sciences business mix is quite diversified, and GLP-1 related work is a small but growing part of its overall mix. For context, the company noted at its most recent quarterly reporting (FQ2) that GLP-1 related orders accounted for ~10%-15% of its Life Sciences booking in the quarter (~$74MM-$111MM), marking a high for order intake in this space. Throughout today's meetings, management noted that this is a growing sub-market, and ATS is well positioned to secure further orders. For perspective, ATS works with a range of customer "types" across the GLP-1 space (pharmaceutical companies, medical device companies, etc.) and the company has developed relationships with some of these customers over decades, which we believe should position ATS as a natural partner if the industry sees continued investments in autoinjector capacity.
ATS should be relatively resilient through the cycle – Management highlighted Life Sciences, Food & Beverage, and Nuclear (which we estimate collectively accounted for ~60% of ATS' LTM revenue) as relatively resilient lines of business, while also noting that after-sales services across end-markets should be relatively stable through the cycle as well (recall ATS is targeting an after- sales services mix of 20%-30%). In comparison, Consumer Products (~10% of ATS' LTM revenue) was highlighted as an area that may be more prone to a macro slowdown. On customer cancellations, management noted that these have historically been less frequent as the customer would typically have to pay for work completed to-date. A more common way for customers to manage uncertainty is via change orders, where clients could potentially change the scope of ongoing projects to match updated demand expectations. As an offset, ATS has flexibility in its cost structure that can help address some level of moderation in overall demand (i.e., use of sub-contractors and consultants during the engineering/design and assembly/systems integration phases of projects). This enables ATS to ratchet up/down its cost structure to some extent as needed. Overall, while there has been quite a bit of investor focus on the macro outlook and its potential impact on the backlog, results over the recent quarters have been in line to ahead of expectations, which highlights the company's strong position within niche markets (which may not be correlated to macro trends and could prove to be more resilient).