We hosted Ryan McLeod, Chief Financial Officer, and David Galison, Head of IR, at day one of RBC's Global Industrials Conference. Overall, our discussion highlighted ATS' focus on the Life Sciences end-market and specific sub-segments that are a strategic focus for the company (e.g., autoinjectors), demand trends across ATS' different businesses, the runway for margin improvement going forward, and management's updated thoughts on capital allocation. We rate ATS Outperform with a C$55 price target.
We highlight key takeaways from our discussion:
Core focus on Life Sciences – For context, Life Sciences has historically been ATS' most important end-market as a % of overall revenue. Our discussion today dove deeper into ATS' strategic focus on this market and the opportunity set across some of the company's key sub-segments (i.e., GLP-1 autoinjectors as described below). At a high level, the Life Sciences Automation market is "US$10s of billions" in size, with ATS specializing in niches such as medical devices (i.e., autoinjectors, syringes, lab testing, etc.) and radiopharma (which is growing in the ~LDD% range). Key features of the Life Sciences end-market include customer focus on quality given the high cost of failure of products (i.e., customers with ~70%-90% gross margins are not price-sensitive relatively speaking, particularly given the regulatory backdrop and risk of patient illness/death) and the often demanding timelines to get products to market quickly (which creates additional barriers to entry for all but the most experienced Automation businesses).
Well positioned for the GLP-1 opportunity – In terms of key sub-segments, ATS is particularly focused on GLP-1, which management expects will represent ~HSD%-LDD% of ATS' overall revenue over the coming years. For perspective, management noted this end-market is growing in the ~20%-30%+ range annually, where customers typically place equipment orders every few years to support their own growth (in comparison, other end-markets tend to have longer replacement cycles). Recall that autoinjectors (currently the preferred delivery method for GLP-1 drugs) are part of ATS' "bread and butter", with the company advertising 2-3x production capacity at half the footprint vs. what competitors can offer.
Focused on managing the business through the cycle – Our discussion highlighted that most (+75%) of ATS' core businesses are relatively stable through the cycle, anchored by strong market positions in Life Sciences, Food & Beverage, and Energy/Nuclear. While the Transportation/EV business is relatively more cyclical (particularly over the past few quarters), management highlighted that it is poised to shrink as a % of revenue going forward (to the ~HSD%-LDD% range), noting ATS has already begun reallocating resources to other areas of the business (the company is also currently undertaking a cost/headcount restructuring exercise).
Runway for margin improvement – While ATS has already achieved a 15% EBIT margin in its underlying/core businesses (a long- term target set several years ago), the company has since acquired businesses that carry a lower margin profile, which ATS is working to expand to match the company's underlying margin profile. The key levers to achieving this include leveraging ATS' combined procurement/buying power (ATS operates as a decentralized organization with centralized purchasing; this scale helps lower input costs for acquired businesses) and a continued focus on growing ATS' after-sales services/software offerings (noting the company has been shifting away from systems integration/SI work toward equipment sales and after-sales services for several years; SI now accounts for ~45% of revenue vs. 90% historically).
Organic investments and M&A are core uses of capital – Management believes that organic investments remain ATS' highest- returning investments, followed by M&A that fits the company's well-defined strategic framework (target DD% ROIC within 5 years of acquisition). Beyond this, management considers share buybacks opportunistically, and ATS does not have a dividend.