ATS Corporation 2027 Q1 Earnings Call

Thank you, operator, and good morning, everyone. On the call today are Doug Wright, Chief Executive Officer, and Anne Cybulski, Interim 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 in slide three of the slide deck. With that, it's my pleasure to turn the call over to Doug.

Doug, over to you. Thank you, David, and good morning, everyone.

Today, we reported first quarter results for fiscal 2027. Before discussing the quarter, I want to provide an update on conclusions from my portfolio review, the long-term demand profile in our chosen end markets, and our path to margin expansion. Since joining ATS, I've completed a comprehensive portfolio review and site assessments across the organization. This process gave me a clear view of both the strengths of the portfolio and the opportunities ahead, and reinforced my confidence in the quality and commitment of our people, the depth of our technical expertise, and the strength of our customer relationships. I was particularly impressed by the importance of our work our teams do every day. They solve complex scientific and manufacturing problems, help improve patient outcomes, support safe and high-quality food production, and contribute to energy security.

I am confident in the growth profile and the underlying markets in which we solve such problems and have such impact. Across all of our solutions and end markets, artificial intelligence is creating opportunities for ATS, both as a demand driver and as a capability that we are uniquely able to harness in our solutions because of our deep domain expertise. My overall optimism is reflected in positive outcomes across several areas of the business. In life sciences, the trailing 12-month book to bill, excluding GLP-1-related activity, was approximately 1.1 times, driven by strength in radiopharmaceuticals. We also delivered 11% year-over-year growth in service-related revenues across the company. I have even more conviction today than I did in coming to ATS on the opportunities this company has in the markets in which we compete.

It is this conviction that tells me that over time, we can operate above our stated operating margin target of 15% while continuing strong secular top-line growth. What will turn this conviction into performance are the frameworks that we are now applying across the business. First, through the application of a disciplined cash return on investment framework, we expect to achieve approximately half of the margin improvement required to achieve our 15% target, primarily through a Fixed-Cost Transformation Program. Second, through growth in higher-margin aftermarket services, stronger commercial discipline, and innovation and improved application of our ABM tools, we expect to deliver the remainder of the improvement needed to achieve and exceed our 15% target. On Fixed-Cost Transformation, we've initiated an 18-month program to simplify our operations, improve efficiency, and strengthen the foundation for long-term profitable growth and shareholder returns.

The program will include reductions in facility overhead, indirect expenses in SG&A. The first phase focuses on Europe, where our review identified excess capacity and operating infrastructure that are not generating returns consistent with our requirements. We are consolidating certain facilities and transferring select technical capabilities to other ATS locations, where existing capacity and capabilities can support customer requirements more efficiently. Given the nature of these actions, the implementation and realization of benefits are expected to occur over several quarters. We estimate the initial phase of the European Fixed-Cost Transformation Program to generate annualized savings in the range of CAD 20 million, which is approximately 30% of the savings opportunities we anticipate from the overall Fixed-Cost Transformation Program. On the broader transformation program, we will provide updates on the expected cost out opportunity as these are finalized, along with the cost of the entire program.

This program, together with our ABM, expansion of our aftermarket services business, and our focus on regulated markets, is intended to make ATS into an even more attractive company, capable of driving sustained earnings power over time. Now over to Q1. On near-term performance, Anne will discuss the quarter results in more detail in her prepared remarks. In brief, Q1 adjusted revenues were down 5% versus last year, reflecting a lower opening order backlog, the timing of project execution, and a planned reduction in large-scale automotive work. Despite this, we continue to see healthy levels of customer engagement across our markets, particularly in radiopharma. Against this backdrop, profitability in the quarter also reflected the lower revenue base. On profitability, adjusted earnings from operations were CAD 68 million, down 13% compared with Q1 last year.

Turning to our end markets, we entered the first quarter with approximately CAD 1.9 billion in order backlog. Within life sciences, our opportunity funnel is active and well-diversified across radiopharma, pharmaceuticals, and medical device applications. Radiopharma remains an attractive growth opportunity supported by increasing adoption of therapeutic applications, ongoing investment in isotope production, and a shift toward more decentralized manufacturing to support timely patient access to treatment. As programs advance toward commercialization, we continue to observe broader market activity aimed at securing capacity, enhancing supply chain resilience, and supporting reliable operations in highly regulated environments. Our work with TerraPower Isotopes reflects this investment as customers expand isotope production capacity to support future therapeutic demand. Our differentiated capabilities in containment systems, automation, and lifecycle support position us to participate in multiple phases of this capacity build-out.

Beyond Radiopharma, the life sciences funnel includes opportunities in automated visual inspection, lab automation, contact lenses, and wearable devices. In food and beverage, our funnel remains strong despite lower order activity in certain markets, following elevated investment levels in recent years. We continue to see opportunities across core and adjacent end markets, including fresh food processing, secondary processing, and packaging applications. Equipment replacement requirements may also support investment activity over time. In energy, our funnel remains strong, driven by industry investment in energy security, infrastructure modernization, and new power generation capacity to support data center needs. Within nuclear, ATS has a strong track record supporting CANDU reactor refurbishment and life extension programs. Looking ahead, our opportunity set is broadening. In Canada and the U.S., we are engaged with reactor technology companies in early engineering, systems design, and prototype equipment development for small modular reactors and next-generation large reactor programs.

For reference, on a single nuclear reactor build, our portion of the project may represent a low single-digit percentage of the customer's total CapEx. For us, this could represent revenue of CAD 50 million to CAD 150 million based on the application. Within industrial and consumer, funnel activity remains stable, with opportunities across warehouse and packaging systems and specialized industrial applications. On capital allocation, leverage remains within our target range, and our acquisition funnel remains active. Over the past 12 months, we have significantly strengthened our balance sheet, providing greater flexibility as we evaluate opportunities. We remain patient and disciplined, focused on opportunities that are strategically aligned and capable of creating meaningful shareholder value. We will remain selective, but when opportunities align with our strategic priorities and meet our return requirements, we have the flexibility to pursue them while remaining disciplined stewards of capital.

Before I summarize the opportunity I have in front of us, I will turn the call over to Anne for her financial report.

Anne, over to you. Thank you, Doug, and good morning, everyone.

Before turning to our operating results, I'll provide some additional context. We are driving improvements to our costs through our previously announced restructuring plan, and those actions are underway. In addition, we plan to take structural costs out of the business as part of our Fixed-Cost Transformation Program. In the near term, revenue mix and volume influence our reported operating margin. However, we made some progress during the quarter. For example, in Q1, adjusted gross margin improved both sequentially and year-over-year, which we see as early evidence that some of our focused actions are working, particularly on aftermarket services. In Q1, we incurred restructuring costs of CAD 5.7 million against a first quarter expected spend of CAD 10 million to CAD 15 million.