ATS - Q3 2024

Transcript

Operator (participant)

Welcome to the ATS Corporation third quarter conference call and webcast. This call is being recorded on February 7th, 2024, at 8:30AM. Eastern Time. Following the presentation, we will conduct a question and answer session. I'll now turn the call over to David Galison, Head of Investor Relations at ATS.

David Galison (Head of Investor Relations)

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 two of the slide deck. Now it's my pleasure to turn the call over to Andrew.

Andrew Hider (CEO)

Thank you, David. Good morning, everyone, and thank you for joining us. Today, we reported strong third quarter organic revenue growth, good contributions from recent acquisitions, and adjusted earnings in line with our expectations, as we built on the momentum achieved in the first half of the year. We completed the acquisition of Avidity, which further expands our life sciences products and services offerings, and it's complementary to our existing businesses. At the beginning of Q4, our PA Solutions Group completed the acquisition of ITACA, an Italian-based automation integrator with a focus on primary processing and pharmaceuticals. Avidity and ITACA are the most recent examples of how we use acquisitions to drive our strategy and evolve our portfolio. We are pleased to welcome both teams to ATS. Now, I will update you on the business and our markets, and then Ryan will provide his financial report.

Starting with our financial value drivers. Order bookings for the quarter were CAD 668 million, supported by organic growth in life sciences and strong performance in Food and Beverage. The underlying trends driving demand for ATS solutions remained favorable. Q3 revenues were CAD 752 million, up 16% from Q3 last year, including organic growth of 9%. Adjusted earnings from operations in Q3 were CAD 101 million, up 17% versus Q3 last year. Moving to our outlook. Our Backlog held strong at over CAD 1.9 billion. By market, our life sciences Backlog is up 10% compared to Q3 last year, at a record CAD 875 million, supported by wins in key areas, including auto-injectors and contact lenses. We remain focused on opportunities to provide expanded or integrated solutions to our customers.

For example, we secured a new order as a result of an innovative offering that includes BioDot's dispensing technology and SuperTrak's Smart Conveyance technology as part of a diagnostic cartridge assembly system. Our life sciences opportunity funnel remains strong, supported by market growth, including increased consumer demand for auto-injectors driven by GLP-1 drugs. In transportation, Backlog was $564 million, down 36% compared to Q3 last year, reflecting ongoing execution of large programs won in the last fiscal year, along with expected variability in program awards in this market. We are working with one of our OEM customers to support their revised timing on a portion of their existing program. While the near-term market for electric vehicles remains dynamic, as OEMs look to lower platform costs and align capacity to end market demand, the long-term fundamentals remain intact and support demand for our solutions.

Our transportation funnel is strong and reflects diversified long-term opportunities to support our customers. With ATS's proven ability to partner with customers by providing flexible solutions, we are well positioned as the EV market continues to evolve. In Food and Beverage, Q3 bookings were strong as expected, and our ending Backlog was CAD 207 million. Notably, we successfully secured our first IoT order for a tomato processing line. Our Food and Beverage businesses are focused on innovation and customer experience, including aftermarket service, as we expand our offerings to our customers. In energy, our funnel remains strong and is expected to provide opportunities for both refurbishment of existing nuclear reactors and investment in new reactors, providing sustainable, clean energy. ATS has the experience, specialized skills, and proven track record to support customers with their energy initiatives. In consumer products, our funnel is stable.

However, customers are continuing to evaluate their investments in the current and economic climate, which may impact the timing of some opportunities. On after-sales services, our consistent investment in the strategic area has included developing our digital solutions. As these solutions evolve, we are putting ourselves in a position to provide performance insights to our connected asset value chain and support our shift towards providing higher value services on both ATS and non-ATS equipment. During the quarter, we also secured a synergy win with Triad in our life sciences business to identify OEE improvement opportunities for a key customer. On our digital offerings across the automation value chain, our funnel is strong, and we remain focused on developing our capabilities, utilizing an integrated architecture to help our customers collect and analyze data in an efficient manner to drive performance.

During the quarter, a global pharma customer awarded ATS a contract to build their IoT platform for data exchange with one of their major clients. On supply chain, lead times and material cost pressures continue to challenge in some areas of the business, which our teams consistently work to offset through the use of our supply chain levers and ABM tools, while increasingly leveraging digital tools to drive insights and opportunities. ABM activity and engagement remain strong, and we measure and monitor our success to identify areas for ongoing improvement and deployment of our tools across the organization. During the quarter, we hosted our ABM global conference with a focus on ATS business model principles, processes, and tools to achieve impact on our value drivers. On M&A, we continue to expand our portfolio and our integration efforts with Avidity and Nitaka are underway and progressing according to plan.

Our M&A funnel remains active, healthy, and diversified across all target sizes. We remain disciplined in our approach and assessment of each target. On ESG, ATS Scientific Products earned a silver medal as part of the EcoVadis sustainability program, an improvement from bronze last year. This award is a testament to the SP team's commitment to promoting sustainable practices and reducing our environmental impact. Additionally, Avidity recently launched the world's first water platform system with reusable cartridges that helps customers reduce their environmental footprint. We consistently work to identify ways to demonstrate our commitment to ESG principles and priorities across the organization, as well for our customers. On innovation, we remain focused on strategically investing capital to create solutions that drive returns for our customers and a few highlights for the quarter.

In life sciences, our Comecer team developed a new software product for use by customers in the therapeutic radiopharma market, specifically to allow nuclear medicine departments to link dose preparation information directly to central hospital data systems. On Symphony, our ATS Innovation Center continues to develop new solutions for auto-injector device assembly, allowing for threaded components to be connected together at very high speeds and accuracy. In Food and Beverage, Comarch announced the launch of a 3D scanning vision system that helps to automate and speed up the inspection and sorting of kegs prior to them being filled. To drive our effort, ATS hosted its first-ever Global Innovation Summit in November, which included over 50 of ATS's top innovators, with the purpose of sharing technologies, innovation trends, and opportunities to accelerate technology development, including incorporating AI into our innovation approach and how we operate daily.

In summary, our Q3 performance included strong revenue and earnings growth. Our opportunity funnel is well diversified. Our strategic acquisitions are performing to plan, and we remain confident in our ability to continue our trajectory in creating shareholder value. We are pleased to see ATS recognized once again as one of Waterloo Region's top employers. ATS was founded in the Waterloo Region, Ontario over 45 years ago, and today, our team members continue to bring their best every day to serve our customers and grow our business. We remain guided by the ABM as our playbook, as we deliver on our shared purpose to create solutions that positively impact lives around the world. Now, I will turn the call over to Ryan. Ryan, over to you.

Ryan McLeod (CFO)

Thank you, Andrew, and good morning, everyone. ATS delivered strong financial results this quarter with organic revenue growth, margin improvement, and we finished the quarter with a strong balance sheet. Starting with our operating results for the quarter, order bookings were $668 million, down 31.8% compared to Q3 last year. As a reminder, Q3 last year included $300 million of orders from an EV customer, which were not expected to repeat this quarter.... Of note in Q3 this year, we drove year-over-year bookings growth in life sciences, including strong organic growth, in addition to contributions from recently acquired companies, including Avidity. Our trailing twelve-month book-to-bill ratio at the end of Q3 was 0.95-to-1.

By market vertical, our trailing twelve-month book-to-bill at the end of Q3 was at or greater than 1 in all markets, with the exception of transportation. We have previously noted that as we continue to execute on our large programs in the EV market, we do expect to see longer periods between ordering cycles. On revenues, Q3 revenues were CAD 752 million, up 16.2% over Q3 last year. Organic revenue growth was 9.1% in the quarter. Recently acquired companies added approximately 5% to revenue growth, and foreign exchange translation had a positive impact of 2.5% compared to Q3 last year. We finished Q3 with just over CAD 1.9 billion of order Backlog. Looking ahead, our revenue conversion for Q4 is estimated to be in the 36%-39% range of order Backlog.

As a reminder, this assessment is updated every quarter based on revenue expectations from existing Backlog and new orders booked and billed within the quarter. This conversion range also factors in the impact of approximately $200 million of transportation order Backlog with one of our EV customers that has been delayed. Moving to earnings, Q3 adjusted earnings from operations were $101.2 million, up 17% from Q3 last year, primarily due to revenue growth. Adjusted earnings from operations margin was 13.5% in the quarter, up 13 basis points compared to last year, reflecting improved operating leverage. Our Q3 gross margin, excluding acquisition-related inventory fair value charges, was 28.5%, up 12 basis points from Q3 last year, reflecting higher volumes and acquisitions.

Going forward, with an EV customer realigning its production schedule, resulting in a delay of ATS's execution on this contract in our Backlog, we expect to see some near-term margin pressure in this part of our business. We are actively mitigating this utilization pressure by redeploying resources onto other programs, including in our life sciences business. Our expectation is for this program to restart in the first quarter of our fiscal 2025. On supply chain, material cost pressure is still present for some categories of spend, most notably for electrical and mechanical parts, where lead times remain a challenge. Lead times have generally improved in other areas. As we've previously noted, short-term inefficiencies caused by extended lead times in our supply chain impact our ability to drive margin expansion. Despite these ongoing challenges, our teams are well-equipped to drive performance and mitigate these impacts for our customers.

Moving to SG&A, expenses were CAD 6.9 million higher than Q3 last year and included CAD 17.1 million of acquisition-related amortization and CAD 900 thousand of acquisition-related transaction costs, partially offset by a CAD 11.7 million gain on the sale of 2 redundant facilities. Excluding these items, Q3's SG&A was CAD 107.9 million, CAD 14.7 million higher than last year, primarily due to increased employee costs, incremental SG&A expenses from acquisition, and foreign exchange translation impacts. Stock-based compensation expense for Q3 was CAD 4.7 million. Excluding the mark-to-market impact related to changes in our share price, stock-based compensation expense was CAD 5.3 million in Q3, compared to an expense of CAD 4.3 million last year. On earnings per share, our EPS was CAD 0.48 in Q3, up 50% over last year.

Our adjusted EPS was up 16.1% to $0.65 in Q3, primarily reflecting growth in revenues. We've begun to implement our previously announced reorganization plan. In Q3, we incurred $16.2 million of costs, with total expected costs of approximately $20 million. The majority of the remaining costs are expected to be incurred in the fourth quarter. We anticipate that these targeted cost reductions will allow us to invest further into accelerating growth in areas of the business that provide opportunity for higher returns in support of our strategic growth plans. Next, moving to the balance sheet. In Q3, cash flows generated by operating activities were $110.5 million, reflecting the timing of project progress and milestone billings and payments, primarily on our large EV programs.

Non-cash working capital as a percentage of revenue was 17.8% at the end of Q3, down from 18.4% at the end of Q2. Again, primarily reflecting a reduction in working capital investments in our large EV programs. In the short term, we continue to expect working capital to remain variable. Total year-to-date investments in CapEx and intangible assets were $62.5 million, which included $17.7 million in Q3. Our planned fiscal 2024 CapEx investment of $80 million-$100 million has flexibility, and we expect to be in the lower end of this range for the year. On leverage, our net debt to adjusted EBITDA ratio was 2.3 to 1 as of the end of Q3, in line with our target leverage range of 2-3 times net debt to adjusted EBITDA.

In the quarter, we funded the acquisition of Avidity with cash on hand and by drawing on our credit facility.

... It's early days, and integration efforts are progressing as planned. We look forward to our continued work with the Avidity team, along with ITACA. In summary, our quarterly performance once again highlighted the strength of our diversified and evolving portfolio, and positions in strategic end markets. Going forward, we will continue applying measures to combat challenges, including those still lingering in our supply chain. Strong order Backlog in our key markets once again provides good revenue visibility over the next several quarters. We remain confident in our team's ability to drive our strategy, supported by the ABM, which will continue to unite our people across ATS as we remain focused on our employees, our customers, and long-term value creation for our shareholders. Now, we will open the call to questions from our analysts. Operator, could you please provide instructions? Thank you.

Operator (participant)

Certainly. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. Your first question comes from Cherilyn Radbourne with TD Cowen. Please go ahead.

Patrick Sullivan (VP of Equity Resarch)

Good morning, everyone. Thank you for taking my questions. This is Pat Sullivan on the line on behalf of Cherilyn. I think last, last quarter, you were able to give us a breakdown on auto injector bookings. I'm wondering if you're able to comment on the level of auto injector bookings this quarter. And then if you're able to provide a breakdown with respect to the competition of those bookings by customers, I guess, what is the level of competition you're seeing in that end market?

Andrew Hider (CEO)

Yeah, good, good morning. We actually won a key award within the quarter, and well, it's an existing customer. It's a new production line for this customer, and we continue to see this as a real area of opportunity. And, you know, to walk this a bit more specific, and to give you some guidance as to ATS's position, 'cause it will help as we talk about competition, as we in the competitive landscape. ATS invested in a technology with Symphony, and it's our platform that allows us to do... When you're building a process, you can do it in motion. And why that matters is when you look at output, it allows us to actually be up to almost three times the output at roughly half the footprint.

And it's a real key enabler, and it's, you know, just one of the areas that we look at from a standpoint of how innovation allows us to differentiate and really offer high value for our customers as they continue to look at maximizing their launch and maximizing their impact. And to give you a bit more context on the market, and certainly there's multiple reports out about this space, whether it's, you know, the J.P. Morgan structure around going from $18 billion to $100 billion, or even Morgan Stanley, and significant level of increase. Our mission has always been really enabling our customers to maximize their launch. And with our solution set, with our capability on a global scale, it affords us the ability to be a leader in that space.

So, I'm pleased with the progress, pleased with the performance, and we do view this as a market that's going to continue to evolve. And Patrick, just the specifics. So it was a low single—this was a low single-digit % of our bookings in the quarter.

Patrick Sullivan (VP of Equity Resarch)

Okay. Thank you very much. And if I could ask one more. You know, there's been a lot of recent announcements in the Canadian nuclear energy sector, Capital Power and OPG assessing viability of SMRs, and then the more recent announcement of the refurbishment and retrofitting at Pickering Nuclear Generating Station. So I guess, can you comment on what you're seeing in your funnel with respect to, to opportunities like this? Are there any opportunities for ATS with respect to those two mentioned developments? And any idea, I guess, what kind of time frames you'd be looking at from an RFP to actual execution perspective?

Andrew Hider (CEO)

Yeah, absolutely. So, headline, market is favorable. And, you know, to give you some context, our trailing twelve months is 1.16 on this space. And so we're not only seeing really favorable end market trends and dynamics, we're also performing and continuing to execute and offer high value for the markets. As far as SMR, you know, our portfolio remains healthy. This is still early in its journey, and ATS is, you know, our view is we're a high-value provider, and we're staying close with the opportunities as they unfold. As far as the CANDU reactor and refurbishment programs, look, this is early.

That said, it is very in line with what ATS offers for high value for this type of work, and we're staying very close. We're in early days of review of the application, and we do view this as something that will be right in line with what we can offer and have high contribution towards. So, you know, to get back to your initial, there is favorable market dynamics on a global scale. This is a green energy that ATS supports, and really one that we offer high value for in our niche capability, and we continue to launch technology and solutions that enable us a strong position.

Patrick Sullivan (VP of Equity Resarch)

Okay, thank you very much.

Operator (participant)

Your next question comes from David Ocampo with Cormark Securities. Please go ahead.

David Ocampo (Head of Investor Relations)

Thanks. Good morning, everyone. On the $200 million of EV order Backlog that got delayed, curious if you guys see any risks if that portion get pushed out further to the right? And ultimately, when that program does restart in fiscal Q1, will that be at the normal run rate or lower than your initial projections of order deliveries and order execution?

Ryan McLeod (CFO)

Good morning, David. It's Ryan. So, I mean, our expectation is this, as we laid out in our prepared remarks and disclosure materials, our expectation is this resumes in Q1 of fiscal 2025. You know, customers have the ability to certainly change that dynamic, but that's not our expectation. In terms of run rate, you know, at this point, we would expect it to resume as it had been originally planned and wouldn't see any ongoing impact. I mean, that's our expectations.

David Ocampo (Head of Investor Relations)

Okay, got it. And then my last one's just on the supply chain issues. I mean, this is something that's been hurting you guys, at least for the last several quarters. Are you guys seeing any positive indicators relating to electrical components, and those issues easing? And what are your expectations on the timing of margin improvement once supply chain begins to normalize?

Ryan McLeod (CFO)

Yeah, again, David, it's Ryan. This is interesting. I mean, you know, the suppliers are talking about improvements. I would say we've seen some incremental improvements, but when we look at data around quoted lead times, particularly in electrical and mechanical components, we have not seen a material improvement. So you know, that really, you know, when we talk about the challenges, that's really it. It's lead time's a primary challenge, and that has an impact on our ability to reduce costs and supply chain and offset some of those dynamics.

You know, in terms of when it shifts, certainly, you know, this is something we stay very close to, but it will take, you know, 1-2 quarters for it to work its way through our programs and until we see a benefit in terms of what we can do from a margin perspective.

David Ocampo (Head of Investor Relations)

And if I could just follow up on that, if you had to put a number on it, how much do you think supply chain has negatively impacted your gross margins? 'Cause you guys have been in that 28%-29% range for six, seven quarters.

Ryan McLeod (CFO)

Yeah, I mean, it's not as much. I mean, we've been able to offset a lot of it through pricing and other areas. So it's not a headwind, but it's a barrier from us expanding margins. So our typical playbook is when we get an order in, you know, when we do the design work, and we look for efficiencies, and one of those areas is through supply chain. So whether it's finding alternative suppliers, whether it's reengineering to find cheaper components, sometimes they have less features, but they do the job that we need. You know, sometimes it's pulling similar or same components across multiple programs. And with extended lead times, that really limits our ability to exercise all of those levers.

So, it's not as much a headwind today as it, you know, or a negative impact on our margins as something that is limiting our ability to expand margins when we do get programs in-house.

David Ocampo (Head of Investor Relations)

If that makes sense, I'll hand the call over.

Operator (participant)

Your next question comes from Michael Doumet with Scotiabank. Please go ahead.

Michael Doumet (Equity Research Analyst)

Hey, good morning, guys. Wondering if you could just elaborate on the margin pressure as it relates to the delayed EV program. You know, is it strictly a result of, you know, operating de-leveraging due to the deferral? And then, I guess longer term, the question is, you know, how do you manage potentially what could be some lumpiness in transportation, and the overall capacity in that business?

Ryan McLeod (CFO)

Yeah. Good morning, Michael. So I mean, I'll give you... So the answer to your question is, yeah, it's primarily de-leveraging, and I'll give you a bit of context. So we've been converting approximately 25%-30% of our Backlog, and I'm excluding orders that get booked and billed within the quarter. So that provides you with a sense of the revenue challenge, and with EV, it's more towards the lower end of that range. So in terms of what we're doing to mitigate, I talked about repurposing capacity where we can, including into some life science programs. We've scaled back on contractors, but we are maintaining our cost structure as our expectation is for this program to restart, as we talked about in the first quarter of fiscal 2025.

So, you know, that's gonna drive the temporary inefficiencies and, you know, call it utilization, but that's where we're gonna see the negative impact on margins in the fourth quarter.

Michael Doumet (Equity Research Analyst)

Ryan, can you maybe just give us a sense for the magnitude of the margin pressure in Q4 based on the lower utilization?

Ryan McLeod (CFO)

... Yeah, so I mean, I kind of laid out the revenue headwind. And, so- ... you know, I mean, you know, if you think about our typical cost structure or our cost structure, it's roughly half labor and half materials, so the materials doesn't have an impact. And what we're dealing with is the labor inefficiency. And then, you know, like I said, we're able to offset some of that, but there's gonna be an impact.

Michael Doumet (Equity Research Analyst)

Okay, that's helpful. And then just maybe more broadly on life sciences. You know, organic growth, it was still negative in the quarter, which is a little bit of a surprise given some of the bookings that you called out last quarter. What is the visibility on an acceleration in organic growth in that end market? And where really are you just in terms of the ramp overall for GLP-1? Just trying to get a sense for, you know, how much GLP-1s can really move the needle going forward.

Ryan McLeod (CFO)

Yeah. Sorry, Michael, you're asking about revenue growth in life sciences?

Michael Doumet (Equity Research Analyst)

Yeah, exactly.

Ryan McLeod (CFO)

Yeah. So we did have positive organic growth in life science revenues in the quarter. It was low single digit, but there was positive revenue growth. And-

Michael Doumet (Equity Research Analyst)

All right.

Andrew Hider (CEO)

You know, as we look at-

Michael Doumet (Equity Research Analyst)

Just, yeah, I just thought. Yeah.

Andrew Hider (CEO)

So, your question is more around where are we in this GLP-1 progression, or what would you like to understand from a context around that space, that market?

Michael Doumet (Equity Research Analyst)

Yeah. So sorry for the confusion there on the organic growth, but the question in terms of where you are on the round and overall GLP, the ability to move the needle overall for life sciences.

Andrew Hider (CEO)

You know, look, and there are multiple reports out there, and I cited a little bit earlier on in the discussion around whether it's, you know, Morgan Stanley or whether it's JPMorgan. The net result is this is a significant growth area for this solution set. And whether it's going from, you know, $18.8 billion in 2023 to $100 billion in 2030 or, you know, a different magnitude, the growth profile is real. And it's really tied to US obesity and, you know, the market there is also a significant growth profile. So, you know, net, it's an opportunity, a significant opportunity for ATS to drive high impact.

As we look at where it is in its journey, we view it still early in its journey. While it's made progress. To give you some context around progress, last year of approvals, it was the second highest approval year in the last 10 years of Novo drugs, basically new molecules. So, we're seeing continued approval in areas to support growth. We're seeing that auto-injector is an area that offers high value for end customers or end patients, and ATS has a strong play and the ability to support. That said, it's only one piece of our life sciences offering, and we have multiple offerings that we like.

As a reminder, you know, last quarter, our contact lenses was one of the largest orders within the space. So while we like this area, we're also involved in radiopharmaceuticals, which is identification and treatment of cancer. We're involved in wearables and the treatment of diabetes. We're involved in many areas that offer high value for customers and very strategic for customers and product launches.

Michael Doumet (Equity Research Analyst)

Super helpful. Thank you, Andrew.

Operator (participant)

Your next question comes from Patrick Baumann with JP Morgan. Please go ahead.

Patrick Baumann (Equity Research Analyst)

Oh, hi, good morning. Thanks for queuing me in. Just wondering if you can give an update on the funnel for orders across EVs and Food and Beverage. I think you just talked about life sciences, but really specifically about calendar year 2024, not so much your fiscal year. Curious how to think about orders over the next year. And then more near term, you do have, you had a really tough comp in the third quarter here, so obviously, orders being down shouldn't be a surprise to people. But the fourth quarter looks like the comp is a little bit easier. Do you have line of sight to some growth there, or should we expect, you know, a book-to-bill to remain below one kind of in the short term?

Andrew Hider (CEO)

Multiple questions on that, and we'll see if I can, if I can answer all of them, but I'll, I'll go in order.

Patrick Baumann (Equity Research Analyst)

Sorry. Okay.

Andrew Hider (CEO)

I'll walk EV first to kind of get line of sight, and then I'll go into regulated food, and then we can talk a bit more around other areas. But look, I said this in my prepared remarks. Our funnel in the mid to long term remains strong. And while we're staying very close with customers, while our, you know, certainly near term will be impacted by current market dynamics. And, you know, the customers are faced with many more areas, you know, whether it's technology and technology development or cost structure that they're looking to offset, or even just matching capacity to consumer demand. We're staying close. And, you know, when we look at areas that ATS has differentiated ourselves, we...

We put ourselves in a position that when our customers come out and they get back to a more measured pace, we're in a position to offer high value. And you think of the solutions like the digital twin that we've launched, really enable us to maximize their impact, to launch their product. And, you know, the discussions we've had with our customers is they're focused on EV being a key piece of their investment for CapEx, and ATS offers high value for this space. One more area, just as a reference, while we certainly still have a large customer, we are working with you know, roughly 10 customers in this space right now.

Varying degrees of where they are in their journey for EV launch, it continues to be an opportunity and strategic for the value we can create for our customer base. Moving on to regulated food. Look, this was a strong quarter. We are pleased with the performance of the business. Yes, last year was, you know, a big comp to kind of reference against or comp against. It had a large order of roughly, call it CAD 20 million last year in Q3. The team continues to execute. You know, we are aligned around technology, innovation, and really bringing our customers solutions to market. It's an example of just the way that we think about and utilize innovation.

Our business worked with AI and utilizing AI with vision and with our Raytec business. And we're providing the capability to really do an assessment to understand tomatoes when they're peeled, to look for areas that maybe have been missed and then kick out. So it offers higher yield, higher ability, and energy continues to be a discussion point. So, you know, pleased with the progress on that group, pleased with the performance, and one that we view we can continue to really offer high value for our customers.

Patrick Baumann (Equity Research Analyst)

Then, I guess, the fourth quarter, should we expect some growth there, or is it, or should book-to-bill, you know, you think can kind of be around one in the fourth quarter?

Ryan McLeod (CFO)

Yeah, Patrick, so this is Ryan. It's, you know, we don't typically provide forward-looking on our bookings. And, you know, with some of these large programs, there's variability, and if something comes in, you know, the last two weeks of March or the first two weeks of April, that can drive some, you know, a different discussion. And that's why when we're looking at bookings, we're looking at trailing twelve months and over a longer period to understand directionally where businesses is trending. And, you know, our funnel, our Backlog rather, you know, typically goes out about three quarters. So in EV, it's a little bit longer, given the duration of those programs. And then we have some shorter cycle businesses that have been added in.

But that, you know, is really how we look at the business from a quarter-to-quarter perspective. And just to add on a little bit to there.

Patrick Baumann (Equity Research Analyst)

Yeah.

Andrew Hider (CEO)

You know, we've been very focused on strategic end markets and being well-positioned in those areas. And so, you know, you think of areas like... And we talked a bit about life sciences around, you know, and our focus on key niches that offer high value. Our addition with Avidity and the value that that brings, and by the way, think about it from a standpoint of now we're in the lab, so you can almost follow the molecule. We're in the lab all the way to production, to, you know, energy and the ability and resurgence of nuclear being, you know, a green energy supporting really the energy challenges on a global scale. So while we don't provide that, we have been very strategic in the markets we support and have been very focused.

So not immune to end market, our target's always been to out-execute and really drive performance in the business through our ABM and our playbook.

Patrick Baumann (Equity Research Analyst)

Okay, great. Makes a ton of sense. Thanks for bearing with me with that short-term question. I'm kind of new to this, new to the call, so we'll keep that in mind going forward. Thanks so much. Best of luck.

Andrew Hider (CEO)

Great. Thanks, Patrick.

Operator (participant)

Your next question comes from Michael Glen with Raymond James. Please go ahead.

Michael Glen (Managing Director of Consumer and Diversified Industrials)

Hey, good morning. So over the past two days, we've seen some pretty strong indications from two of the largest players in the obesity drug market regarding these capacity constraints they're facing. So can you help us draw the connection between what they are referencing specifically and how this plays into your auto-injector product offering? Like, can you often reference these order funnels. Can you say whether the order funnel has grown in that market sequentially from last quarter to this quarter? Can you and can you give some indication, like, when should we think about timing of these orders coming into play?

Andrew Hider (CEO)

Yeah. So, Michael, just to kind of give you some real walk down approach here. As I mentioned in my prepared remarks, the life sciences funnel is strong and our Backlog is very strong. The growth of our funnel continues to build, and I would say as has grown in our opportunities. We view the big moves really is generally favorable. And it's an area that we can offer high value. And when I talk about strategic end markets and strategic products for our customers. When our customers are launching a solution and their demand is significant, they're looking to folks like ATS to really help them provide that value to the market.

I walked through, excuse me, I walked through our Symphony Technology and really the impact that this has, but also what it allows us to do, is to take a more standard approach to a customized solution. Let me, let me put a little more meat on the bone, sir. This allows us to really take this, this standard product set, this, this, this standard capability and bring it to multiple customers. You know, as customers ramp, they wanna go with the, the, the provider that, that offers them the highest capability and highest ability to launch their solution on time, on quality, on budget, and oh, by the way, to be able to continue to increase as their demand increases.

So, while I mentioned earlier in the discussion and call, this is earlier in its journey. We do view we are well positioned to really maximize our impact and maximize our customers' ability to meet the market demands.

Michael Glen (Managing Director of Consumer and Diversified Industrials)

Okay, and then if we think about last quarter, the indication you provided was something in the, in the ballpark of $100 million of orders for auto injectors, and this quarter it was down, it was low single digit. If we think about that number in the context of what you're talking about market size, the $18 billion going to $100 billion, like, that... What, what, what, what's your, what's your piece of the, of the, of the pie in those numbers? Are you able to give some type of assessment on that? What, what, what, what's the size of the piece you're going for in that market?

Ryan McLeod (CFO)

So, Michael, I'll start. Just on orders, I mean, the numbers you referenced are directionally accurate. But keep in mind, with orders, they are lumpy, regardless of market. They're gonna, you know, the size of them, the timing, those aren't gonna be, you know, a steady straight line up into the right. It's going to be, you know, more lumpy, just it, or call it variable. And, you know, we're talking dollar versus percent, but as you look at the ramp, and it's not always a one-for-one as far as an increase as in percent of the business, but the general growth profile will follow the profile of the investment.

Andrew Hider (CEO)

So, not my information, to be very clear, and I did mention that that was a JPMorgan/Morgan Stanley estimate on the market. Regardless, whether you read it from those banks or others, the market growth profile is very strong, and ATS is well positioned to support that space. Timing will be variable. Customers will be looking at their launches when they get approval, so it will certainly be variable. We are in a position, and we're working with customers to ensure that they're successful in the launch. You know, one last minor one here.

We've been in this space for over two decades, and while it's new and exciting and an area that we can support the drive, we've also been in this market, and we have a strong reputation in the space to really help our customers execute.

Michael Glen (Managing Director of Consumer and Diversified Industrials)

Okay, thanks for taking the question.

Operator (participant)

Your next question comes from Justin Keywood with Stifel. Please go ahead.

Justin Keywood (Managing Director of Healthcare, Industrials, and Technology)

Good morning. We saw some deleveraging in the quarter. Balance sheet's at two point three times. That could suggest a reasonable capacity for further M&A. Are you able to update us on the pipeline, target verticals, and potential size of deals that you're looking at?

Andrew Hider (CEO)

Good morning, Justin. Look, we are in a position, and I'll just say, you know, if I just step back, and I did mention this, our funnel remains healthy. And when we look at our funnel, it is a mixture of sizes, small, medium, and large, aligned around very strategic products and technologies for end markets that we view are strong end markets and strategic end markets. And so, we're pleased with where we sit. We've added now Avidity, we've added ITACA, two very good additions to the family. Our position, you know, in the ability to continue to cultivate is strong, and we continue to have very strong or very good dialogues with potential targets.

That said, we're patient, and when we find high value for our customers and shareholders, we're in a position to move quickly.

Justin Keywood (Managing Director of Healthcare, Industrials, and Technology)

Understood. And then a follow-up to GLP-1. We saw Novo announce an acquisition of Catalent to shore up manufacturing capacity for fill-finish. One question is if ATS offers fill-finish, and does that take away the opportunity? And then also, just on the GLP-1 Backlog, if we're able to characterize the percentage. I know it was at a record level in the current quarter.

Andrew Hider (CEO)

... To walk through the acquisition, we generally view that as positive for ATS. And it's just one more proof point of the constraint to get product to market. And, you know, exciting times for our ability to support, but also, you know, and I referenced this on the call as a highlight for innovation. We launched an IoT solution set for a customer, and it was around a pharma customer to work with a contract manufacturer to really do data processing. And it's just how we can continue to evolve and really support customers as they move in these directions to really bring their product to market and understand all the data variables to support those launches. Ryan will touch upon the second part of the question.

Ryan McLeod (CFO)

Yeah. So it's low double digits as a percentage of our Backlog.

Justin Keywood (Managing Director of Healthcare, Industrials, and Technology)

Just to clarify, low single digits for bookings, but double digits for Backlog?

Ryan McLeod (CFO)

Correct.

Justin Keywood (Managing Director of Healthcare, Industrials, and Technology)

Thank you.

Ryan McLeod (CFO)

So and Justin, just to clarify, so to keep in mind, these programs are in the range of 12 months from timing of order to execution and delivery. So the orders that we booked last quarter, sorry, back in our fiscal Q2, are still in relatively early stages, and so most of that is still in our Backlog.

Justin Keywood (Managing Director of Healthcare, Industrials, and Technology)

Understood. Thank you for taking my call.

Ryan McLeod (CFO)

Thank you, Justin.

Operator (participant)

Your next question comes from Maxim Sytchev with National Bank. Please go ahead.

Maxim Sytchev (Managing Director of Research and Industrial Products)

Hi, good morning, gentlemen.

Andrew Hider (CEO)

Morning, Max.

Maxim Sytchev (Managing Director of Research and Industrial Products)

Andrew, maybe just one kind of, you know, methodology/philosophical question for you. When we think about kind of return on invested capital by vertical, you know, when you look at, you know, transports, obviously, you know, more lumpiness, more working capital intensity. Like, when you look across the portfolio, how does it stack versus other verticals within ATS? And, you know, over the long term, should we assume that kind of the preferred route would be to get to, I don't know, like, 80% healthcare in 10 years, or how should we think about that level of composition, maybe? And any comments from you would be super helpful. Thanks.

Andrew Hider (CEO)

Yeah, so Max, as you're well aware, we're, we have a very focused strategy around capital allocation, and it is very aligned to return on invested capital. You know, if you just take a step back and look at our M&A pipeline and what we've announced, it really aligns around... Just take the last few, digital, life sciences, regulated food, and areas that we offer high impact on an external perspective. When we look internally, we look at investment to return and ensure that the return on where we're focused is at the level and threshold we would expect. So while every market is gonna have an opportunity, certain markets are gonna have higher returns.

That's how we align for innovation, that's how we align for technology development. You know, there's no shortage of opportunity for life sciences and our continued expansion. You know, I referenced a few of these on the call. We invested and launched a new life sciences system around auto-injectors, around capability building within the space to even continue to improve our output. We talked about a capability development in radiopharmaceutical around dose calibration and utilizing IoT as a support structure. We talked about really the launch of a IoT solution within the pharma space. You know, as we look at our investments, we expect a strong return. We also expect a strong penetration to support our growth in strategic end markets.

Ryan McLeod (CFO)

Maxim, just to add on a little bit here too. So, you know, the transport and EV business is primarily an organic play for us. So from a return perspective, and we've talked about this, look at return on investment. Typically, internal investments generate a higher return and reach our thresholds more quickly. So even though this is a higher investment in working capital in this business, from a return on invested capital, the fact that it's organic really puts it at a similar playing field with the rest of the verticals.

Maxim Sytchev (Managing Director of Research and Industrial Products)

Okay, that's super helpful. And actually, you might have had squeezed in one more. I think last quarter, you mentioned that you had some pilot programs with other auto OEMs. Just curious to see if there is any potential directional update you can provide on those; that'd be helpful. Thanks.

Andrew Hider (CEO)

Yeah, I mean, so they're progressing to plan, and, you know, we have no other delays in our program. So they're progressing to plan, and we're staying close with our customers around their investment and their long-term view on the market. And so, you know, it's— I would just say it's ongoing progress and one we're aligned around.

Maxim Sytchev (Managing Director of Research and Industrial Products)

Okay. Okay, excellent. That's what... Thank you so much.

Andrew Hider (CEO)

Thank you, Max.

Operator (participant)

Again, if you, if you would like to ask a question, please press star one now. Your next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan (Managing Director)

... Great. Thanks and good morning. Just a clarification question. I think I just want to tie off the comment in the press release about the CAD 200 million of delayed Backlog. I guess, should we assume that if the delay hadn't happened, kind of revenue would have been higher by CAD 2 million for this next quarter? Or is that CAD 200 million revenue impact maybe going to be split somewhat in this upcoming quarter and maybe a bit after that? Thanks.

Ryan McLeod (CFO)

Yeah, good morning, Sava. It's Ryan. So the CAD 200 million Backlog is like the rest of our projects, would be executed over a period of time and, you know, call it roughly 12 months, what would have been remaining on that program. So I mentioned this earlier, but from our Backlog, we typically revenue in the range of 25%-30%. And in this case, with EV being longer duration programs, it would have been more towards the lower end of that.

Sabahat Khan (Managing Director)

Okay, great. And then, you know, there was a little bit of discussion earlier on your participation in kind of the nuclear space. I'm just wondering, I guess, given the role that you're playing in some of the elements of whether it's refurbishment or things like that, kind of are you working on becoming more involved in other parts of it? Like, you know, if new builds were to start tomorrow morning, do you have kind of the capacity and the capability to get involved, or is there some R&D and other capabilities that you're looking to add to maybe partake in this, or what seems to be more of like a five, 10, 15 year type runway here for that side of the business? Just curious, you know, what capabilities or where you can play today versus maybe three, five years from now.

Andrew Hider (CEO)

You know, so a couple of things. First, we like our niche position, and we like the value it creates. We are continuing to expand that value creation. And, you know, you look at the SMR space that we're supporting. You look at what we can do on refurbishment, you look at what we can do on decommissioning and even in areas around new and identifying. So it is an area that, when we step back, we like the strategic position we are today. We like the opportunities that we can build into, and we can do that both from an innovation perspective as well as really supporting our customers through different technologies.

It's an area that I would say we're going to continue to highlight and continue to drive.

Sabahat Khan (Managing Director)

Great. And then just one last one, I guess, on the EV side. Given some of the discussions you're having with one of your larger customer here, are some of the other—other, I guess, OEMs that were in the pipeline that were doing some test runs or trying out your capabilities. I guess, how are the discussions progressing there? Any update on the timelines that those other potential customers are thinking about?

Andrew Hider (CEO)

You know, I would say the mid to long-term narrative hasn't changed dramatically. What I can tell you is what we do view is that, you know, the net result will be customers are going to be a bit measured in their pace of investment and really looking at this over long periods of time. That said, when we talk about CapEx spend and focus for CapEx spend, EV is a key priority. And so while the near term we do view is impacted, and we've talked a bit about that, so I don't need to dwell further. Our customers focused around technology, innovation, profitability being a key focus, and then matching capacity.

These are areas where ATS does well and supports in a strong way as far as our capability through Digital twin, through making modifications, through really testing it. To give you context of Digital twin, what it allows us to do, and there's an old adage of, right, measure twice, cut once. Well, with Digital twin, we can measure 50, 100, 1,000 times, cut once. It allows us to do really real-time view of what these changes will impact, how it will align around their production launch, and then support their ability to modify change and really minimize impact on their launch.

So, our view is we continue to offer high value in this space, and while it's certainly going to have some dynamics over the next short term, you know, quarter or two, we're going to be very focused on offering customers high value through that cycle.

Sabahat Khan (Managing Director)

Great. Thanks very much for the color.

Operator (participant)

Mr. Hider, there are no other questions. Back to you for closing remarks.

Andrew Hider (CEO)

Thank you, operator. We look forward to continuing to execute on our goal of creating value for our customers and shareholders. Thanks for joining us today. I look forward to speaking to you on our year-end call in May. Stay safe and goodbye for now.

Operator (participant)

This concludes today's conference. You may now disconnect.