FARO Technologies, Inc.

Good afternoon, everyone, and welcome to the Ferro Technologies third quarter 2024 earnings call. For opening remarks and introductions, I will now turn the call over to Michael Finari at Safari Investor Relations. Please go ahead.

Thank you, and good afternoon. With me today from Ferro are Peter Lau, President and Chief Executive Officer, and Matt Horwath, Chief Financial Officer. Today, after market close, the company released its financial results for the third quarter of 2024. The related press release in Form 10-Q is available on FARO's website at www.faro.com. Please note certain statements in this conference call which are not historical facts may be considered forward-looking statements that involve risks and uncertainties, some of which are beyond our control and include statements regarding future business results, product and technology development, customer demand, inventory levels, our outlook and financial guidance, economic and industry projections, or subsequent events. Various factors could cause actual results to differ materially. For more detailed description of these and other risks and uncertainties, please refer to today's press release and our annual and quarterly SEC filings. Forward-looking statements reflect our views only as of today, and except as required by law, we undertake no obligation to update or revise them. During today's conference call, management will discuss certain financial measures that are not presented in accordance with U.S. generally accepted accounting principles or non-GAAP financial measures. In the press release, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations to comparable GAAP measures. While not recognized under GAAP, management believes these non-GAAP financial measures provide investors with relevant period-to-period comparisons of core operations. However, they should not be considered in isolation or as a substitute for a measure of financial performance prepared in accordance with GAAP. Now I'd like to turn the call over to Peter Lau.

Thank you, Mike. Good afternoon and welcome everyone to our call. In the third quarter, we continued to make progress towards optimizing our operations. We again exceeded our targets on all items within our control. Non-GAAP gross margin was 56.1%, expanding 730 basis points year over year and 110 basis points sequentially over the high bar that we set in the second quarter. Non-GAAP operating expenses were $40.1 million, remaining at the lower end of our targeted guidance range of $40 to $43 million per quarter. As a result, in the third quarter, we generated 21 cents of non-GAAP EPS, which was above the high end of our guidance range and represented the sixth straight quarter of exceeding our expectations. Adjusted EBITDA was $8.9 million, or 10.7% of sales, bringing our adjusted EBITDA year-to-date up to $22.9 million and $36 million in the trailing 12 months. More importantly, we continue to demonstrate the fundamental improvement in our operating structure over the past year. EBITDA margins were above 10% for the second quarter in a row and for the first time in almost a decade. As a result, operating cash flow was again positive in the quarter, representing our fourth straight quarter of operating cash flow generation. I'm very proud of the significant improvements in our operational efficiency this year, despite the challenging macroeconomic landscape. Year to date, our gross margins have expanded by over 600 basis points, and our EBITDA margins have experienced even more rapid growth, increasing by more than 900 basis points. With our strong third quarter results, we have delivered on the margin targets that we set earlier this year well ahead of schedule. Looking ahead, we believe there is further upside over the long term as we expect to continue to optimize our operations through a number of ongoing initiatives. From a top-line perspective, in the third quarter, we achieved $82.6 million in revenue, reflecting stable demand in certain sectors such as 3D metrology, while facing ongoing challenges in others, including commercial construction in specific regions like China and Germany. Within our served markets, discretionary capital expenditure remains a key area of focus for our customers, as they assess the macroeconomic landscape and its potential impacts on their businesses. Given the ongoing conversations we're having with our customers, as well as broader industry sentiment factors, including the global PMI, we remain cautious on the outlook beyond next quarter. Geographically, demand within the Americas was consistent with the prior quarter, while demand within EMEA increased sequentially, driven by strength in France and Eastern Europe. Offsetting this, demand in Asia again declined this quarter, as economic challenges in that region persist. Operationally, our gross margin again came in ahead of expectations in the third quarter, as we continued to realize incremental savings, both from our supply chain localization plan as well as our ongoing optimization efforts. Looking ahead, we expect that we will continue to benefit from these ongoing initiatives. However, we expect that volume and mix will play a larger role in sustainably growing gross margins above the current levels. Related to operating expenses, we remain focused on developing initiatives to help drive cost containment while delivering on our near and midterm objectives. As an example, we continue to implement a series of actions that dynamically reallocates resources, both geographically and within operational functions, to better align with the opportunities we currently see ahead of us. By carefully evaluating and making incremental changes to our ongoing operational spend, we believe we'll be in a better position to continue to maximize investments in key growth and operational areas while at the same time maintaining our overall spend at current levels. Our focus on improving profitability and working capital has also led to our fourth consecutive quarter of positive operating cash flow. With the strengthening financial foundation of our business, we are increasingly confident in our ability to generate consistent earnings and cash flow. We believe this commitment is reflected in our ongoing efforts to optimize capital allocation. In the third quarter, we repurchased $10 million of our outstanding shares. Looking ahead, we'll continue to assess opportunities to redeploy our improving cash flow, whether through the remaining $8 million in our share repurchase program or by repurchasing debt like we did in the second quarter to maximize returns for our shareholders. Looking beyond our operational initiatives, we continue to focus on the strategic investments and actions we're taking around customer experience, regional diversification, and new products and technologies, which we believe will enable us to improve our growth profile beyond the growth of the underlying market itself. During the quarter, I had the opportunity to meet with dozens of customers and participate in several global events such as Energeo in Stuttgart and IMTS in Chicago. I am extremely pleased with the reception of our solutions and the reaction of customers to Ferro's service. I was also struck by the appetite from our customers for further advances in technology solutions and satisfied that our strategic priorities are very well aligned with not only the trends in the technology, but the wants and the needs of our current and future customers. With that in mind, and as a part of our commitment to our strategic plan that we outlined in March, we continue to advance our product roadmap. I'm very excited to announce that we've recently refreshed two of our major product lines, the arm with Quantum X, and our next generation of laser scanners, both of which we announced in October. We believe these updates reflect our ongoing efforts to innovate and meet the evolving needs of our customers, as well as advance our strategic growth initiatives we outlined in March, refreshing our key solutions, adding solutions that increase addressable market, and strategically adding partnerships to enhance our scale. We look forward to providing further updates on all of these growth factors in the coming quarters. Starting with our new arm offering, the Quantum X is an exciting addition to our 3D metrology portfolio and represents another step forward in the technology that we helped to pioneer. With probing and scanning designed to improve manufacturing efficiency in a configurable and scalable solution, Quantum X offers up to a 15% increase in accuracy compared to the previous Quantum Max, unlocking a range of 3D metrology opportunities for the manufacturing sector. As we've done for over 40 years, Ferro is setting the performance bar high to help our customers stay at the forefront of their industries. Moving on to our next generation of scanners. With improved technology, we've extended scanning ranges across our existing Focus portfolio, while at the same time introducing the Focus Premium Max, which adds long-range features up to 400 meters, enabling users to gather data from large outdoor environments. In addition to added range, we also simplified the full-focus portfolio, enabling all users to reduce scanning time by up to 50% through hybrid reality capture powered by our Flash technology solution that's included in each model. Flash technology is the first-of-its-kind workflow that combines the accuracy of a terrestrial laser scanner with the speed of a panoramic camera. Through listening to valuable customer feedback, we've made some significant changes to the entire capture to insights workflow. Now customers who need more extensive range capabilities and faster data collection times can feel confident in their data capture. We believe this refreshed lineup gives existing and new customers more flexibility in choosing a solution that equips them with accurate data and actionable insights. keeping the focus lineup at the forefront of laser scanning. In addition to our new offerings, in the third quarter we also saw continued success with the expansion opportunities within existing customers. For example, the Royal BAM Group, the largest construction company in the Netherlands, recently awarded us a six-figure annual license deal for our Sphere XG software. After using our solution on a project-by-project basis for the last several years, They chose to migrate to a company-wide subscription to standardize our solutions across all their teams in EMEA. With the ability to capture data on-site six times faster than traditional 2D photos and reduce data retrieval time by five times, the associated productivity gains created significant ROI for the customer. In addition, the increased productivity from Pharaoh's solution created opportunities for new use cases, such as virtual site walks with clients, and construction progress documentation. With a corporate culture of innovation and adopting new technology to provide better outcomes for our customers, FARO is helping to support Royal BAM's move toward adopting more digital tools for construction. In summary, we are very pleased with the progress we've made to date against our initial plans from mid last year and the margin targets we established earlier this year. Not only are we executing according to our strategy, but we're also exceeding our own expectations ahead of schedule. By capitalizing on our strong brand and our reputation for innovation and high performance solutions, we believe Farrow is well positioned to outpace growth in both our current markets and those we plan to enter. Coupled with our ongoing operational excellence initiatives designed to enhance profitability, we anticipate significant operating leverage as our revenue returns to growth. We are enthusiastic about our strategic direction in the coming years and are confident in our ability to drive substantial value for our shareholders. Before turning the call over to Matt, I wanted to take a quick moment to say how excited we are to have Phil Delnick join the team as Pharoah's SVP of Global Sales. Phil brings a wealth of experience in sales leadership to Pharoah. With a proven track record of driving revenue growth, profit growth, and customer satisfaction across multiple product sectors over nearly two decades at Ingersoll Rand. I look forward to working closely with Phil as we continue to execute on our growth strategy in the quarters and years ahead. With that, I'll turn it over to Matt to provide an in-depth overview of our third quarter financial results and our fourth quarter outlook.