Novanta Inc.

Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated's 2020 second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Ray Nash, Corporate Finance Leader for Novanta. Please go ahead, sir.

Thank you very much. Good morning and welcome to Novanta's second quarter 2020 earnings conference call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chief Executive Officer, Matthijs Glastra, and our Chief Financial Officer, Robert Buckley. If you have not received a copy of our earnings press release issued today, You may obtain it from the Investor Relations section of our website at www.novanta.com. Please note this call is being webcast live and it will be archived on our website shortly after the call. Before we begin, we need to remind everyone of the safe harbor for forward-looking statements that we've outlined in our earnings press release issued earlier today and also those in our SEC filings. We may make some comments today, both in our prepared remarks and in our responses to questions, that may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that could cause our future results to differ materially from our current expectations. Any forward-looking statements made today represent our views only as of this time. We disclaim any obligation to state forward-looking statements in the future, even if our estimates change. So you should not rely on any of these forward-looking statements as representing our views as of any time after this call. During this call, we will be referring to certain non-GAAP financial measures A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent that we use non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release, we will provide reconciliations promptly on the investor relations section of our website after this call. I am now pleased to introduce the Chief Executive Officer of Novanta, Matthijs Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Before we start our normal quarterly results review, I would like to thank all Novanta employees for how they stepped up. Their unwavering commitment to ensure the safety of their teammates and their families, as well as to ensure business continuity to our customers, has been impressive. We are very pleased with the resiliency, engagement, and productivity of our teams through the pandemic. It's great to see that the Novanta spirit is alive. and that our culture has been a strong foundation to help weather this crisis. While Noventa is not immune to the impact of the pandemic, I would like to reiterate we are strategically and financially well positioned to weather the COVID-19 pandemic and the resulting economic weakness. Our balance sheet is strong, our innovation engine is strong, our teams are secure and safe, and our portfolio is resilient as a result of our diversification across approximately 45 different applications. with exposure to long-term secular trends in robotics and automation, healthcare productivity, and precision medicine. Now, let's move on to our normal quarterly results review. We are very pleased with Novento's performance in the second quarter of 2020. Our teams executed very well in the face of adversity and delivered above our expectations for revenue, profit, and cash flow. Our company delivered approximately $145 million in revenue, representing a 7% year-over-year revenue decline on a reported and an organic basis. We are particularly pleased with how our teams manage profit documentals. Adjusted EBITDA was $31 million in the second quarter, essentially flat versus the second quarter of 2019, and up 11% sequentially, despite 7% lower sequential revenue. The power of the diversification of our portfolio was again evident in our results. In this particular crisis, the advanced industrial part of our portfolio is obviously hard hit with high single-digit revenue declines year over year, but our medical business, which is close to 60% of our revenue year to date, as well as our exposure to the 5G, cloud infrastructure, and EUV equipment markets helped to dampen that blow. In addition, we did see some bright spots of growth. Specifically, we experienced double-digit year-over-year growth with our smoke evacuation medical consumables, our medical barcode solutions for ICU, patient monitoring, and diagnostic test equipment, our integrated operating room solutions, and our motion solutions for EUV, 5G, and cloud infrastructure equipment. We are also very pleased to see growth accelerate in China, where we saw 14% year-over-year growth. In the second quarter, our book-to-bill was 0.90, and as expected, we saw significantly reduced bookings in most of our businesses driven by the delayed demand in both the industrial and medical capital spending markets as a result of the pandemic shelter-in-place orders and economic closures. As a reminder, our revenue trails our customers' revenue by about 90 days. In addition, as we communicated in the first quarter's earnings release, Our customers pulled forward bookings into the first quarter, so our year-to-date book-to-bill is 0.98 with the strong first quarter offset by the weaker second quarter. We do feel, however, that the lower-than-normal bookings ratio in the second quarter indicates continued weakness as we head into the third quarter. This is in line with our expectations and what we have previously communicated on our last earnings call. Robert will discuss in more detail our expectations for the third quarter later on in this call. From an overall market perspective, our medical customers reported elective surgical procedures and diagnostic test volumes are at about 80% to 90% pre-COVID levels, whereas the advanced industrial market sees a wider range of dynamics with, on average, high uncertainty. While we are confident about our long-term strategic positioning and are encouraged that the second quarter results and the third quarter outlook are better than previously thought, we remain cautious about our immediate outlook given this uncertainty. In the last call, I highlighted our four guiding principles in managing through the pandemic and focusing what we can control. Let me briefly touch on each of these. First, a primary goal at Noventa continues to be the safety and well-being of our employees, their families, and the communities in which we operate. Globally, the majority of our non-production employees continue to work from home and we continue to enact and further expand rigorous safety measures in all of our sites. All of our factories remained open throughout the second quarter. Year to date, we've had only seven of our employees out of approximately 2,200 total employees contract the virus. All seven have fully recovered since. In addition, of those seven who contracted the virus, only three entered a Noventa facility. And in all three cases, our safety protocols successfully prevented the virus from spreading to others. This gives us and our employees confidence that our safety measures are working and that we're doing the right things to keep our employees safe and our factories running. We are further expanding our safety measures with accelerated testing capabilities, technology-enabled distancing and tracing methods, as well as improved air quality and circulation in our buildings. As a result, our absenteeism continues to be low, well below 1%, as we have worked hard to continue to build on the trusting relationship we have with our employees. Our second guiding principle is to maintain business continuity so we can support our customers. We take great pride in knowing that our mission-critical technologies are embedded into diagnostic and antibody test equipment detecting COVID-19, and into ICU and patient monitoring equipment used to help in the fight against the pandemic in hospitals. But I also continue to be impressed by our operations and supply chain teams who have shown agility in responding to rapidly changing demand and supply patterns with minimal disruptions to our customers. While we have experienced significantly increased costs to serve our customers and ensure their continuity of supply, We strongly believe these actions will solidify our long-term relationship with our customers and truly differentiate us from our competitors. Another critical aspect of our business continuity plan is to ensure strong cash generation. We have decisively executed on our profit decrementals and taken a number of actions to conserve or improve our cash flows. The results of both efforts were demonstrated by the strong financial performance of this quarter. Robert will provide further details here, but these results are another testament of how our teams have stepped up. Our third guiding principle is to ensure a bright future and emerge out of this crisis stronger. As mentioned in our previous call, we believe that our long-term secular growth drivers are even more relevant post-pandemic. We have the best innovation lineup that we've ever seen to catch these secular growth waves, and despite the difficult circumstances, we have not pulled back on our innovation investments or our customer engagement. During the second quarter, our teams kept our innovation programs on track. And while a few of our OEM customers have extended the timeline for their next generation product launches due to the pandemic, we believe these delays are relatively modest in the big scheme of things. So our main MPI programs continue to be very active with multiple new product launching over the next 12 to 18 months. Our Vitality Index, which is revenue from new products launched in the last four years, continues to be healthy at about 25% of sales versus mid-single-digit percentages a few years ago. DesignWinz grew over 25% in the second quarter of 2020, and while some customers have temporarily delayed new platforms, we're seeing others accelerate, which is reflected in the strong growth of DesignWinz. Finally, our fourth guiding principle is to live our core values. Now, more than ever, at Noventa, we believe that a healthy company culture is the ultimate competitive advantage in the face of opportunity and adversity. Our version of a healthy performance culture is called the Noventa way, which institutionalizes, one, how we work together in cohesive and diverse teams, two, how we behave and interact through our five core values, and finally, three, how we execute through the Noventa growth system. Now let me briefly turn to our operating segments. Starting with the vision segment, this segment predominantly serves the medical market and saw a revenue decline of 2% year-over-year. The book-to-bill in our vision segment for the second quarter was 0.92, with bookings down 5% year-over-year in the quarter. This decline in sales and the low bookings are a clear reflection of the dynamics in the medical end markets where the deferral of elective surgical procedures has caused a delay in capital investments. The Vitality Index in this segment remained above 30% of sales, with new products being a key driver of the strong growth we've seen in this segment over the previous several quarters. Within the Vision segment, we continue to see nice momentum in our WAM business unit on the back of the smoke evacuation technology we've reported on for the last few quarters. And this growth comes despite the temporary downturn in overall demand due to the pandemic. Our WAM consumables product offering saw double-digit growth in the second quarter, even as some of the other MIS products saw declines. The smoke evacuation insufflator technology is in particular high demand in today's climate. Medical staff around the world are demanding a safe COVID-free work environment, and our smoke evacuation tube set innovation helps provide hospital staff with an operating room free from contaminants during laparoscopy procedures. In addition, we continue to invest in the R&D pipeline of WAM where we have secured very exciting opportunities in insufflator and pump technology through design wins and development agreements with multiple minimally invasive and robotic surgery OEM platforms. These platforms are expected to launch in the next two to three years as they make their way through the regulatory process. While we need to thoughtfully manage the near-term demand drop in the segment, we could not be more excited about the long-term potential for our MIS business. We're also very pleased with our detection and analysis business, which grew mid-single digits year over year in the second quarter and had fantastic profit performance driven by the Noventa growth system. This business unit primarily serves the diagnostic testing and patient monitoring markets with RFID, barcode, and machine vision technologies. The counter-cyclical growth in the second quarter is being driven by the rapid uptake in PCR and molecular testing and patient monitoring equipment, which is being somewhat offset with the decline of non-COVID-19 related diagnostic tests. Turning to our precision motion segment, this segment saw 4% growth in revenue in the second quarter of 2020 with a book to bill of 1.07 and bookings grow in 32% versus the second quarter of 2019. In the second quarter, we saw very strong demand for 5G and cloud-based infrastructure as well as autonomous ground vehicles which was partially offset by reduction in industrial, satellite communications and robotic surgery. This led to excellent top line performance for this segment which helped offset some of the challenges elsewhere. Much of this growth is coming from our OEM customers based in China which is seeing the majority of the 5G base station demand right now. Sales to China nearly doubled year over year in the quarter. We continue to like the long-term secular trends of the precision motion segment, serving markets such as precision automation, robotics, and robotic surgery markets. As it relates to the surgical robotics market, we will continue to expand our content and our position with the largest players in the coming years as new platforms come to market. In the short term, recovery of big capital expenditures in hospitals are expected to take some time. but the surgical robotics market remains an attractive and long-term growth opportunity for the company. Within the precision motion segment in the second quarter, new product revenue grew more than 70% and now makes up a strong double-digit percentage of total sales in the quarter. Turning to the performance of our photonic segment for the second quarter of 2020, our revenue was down 18%, which was in line with our expectations. It's fair to say that the photonic segment is feeling the most significant impact from the economic downturn caused by the pandemic. The depressed industrial capital spending is driving a decline in sales of our beam delivery and laser products. Further, the deferred demand in medical markets is also driving lower sales, particularly in the ophthalmology segment, and production skill sequencers in the diagnostic and research space as doctors' offices and labs were closed most of the second quarter. We expect the COVID-19 pandemic to dampen demand for these type of capital investments in the short term, in line with the overall decline in hospital visits, procedures and diagnostic tests due to the pandemic. The photomic segment in the second quarter saw bookings decline year-over-year by double digits, with a book-to-bill of approximately 0.8. Despite this near-term slowdown, design wings continued their momentum and grew over 50% year-over-year in the second quarter. We continue to feel very confident in the robust innovation pipeline of our photonic segment, and as a result, we continue to invest into the headwinds here, and we still anticipate introducing multiple new product platforms in 2020 and 2021, which are expected to help us gain share in adjacent high-growth application areas. To wrap up, I'm very proud of the performance, resilience, and agility of our teams in an uncertain environment. The team managed profit documentals and cash flow extremely well while not sacrificing our innovation. Strategically, Noventa's position is favorable and our portfolio resilient to weather the COVID-19 pandemic. Close to 60% of our revenue year to date comes from medical markets, which are robust and structurally growing long term. Our balance sheet is a strong, as our innovation pipeline, and finally, our focus on portfolio diversification allows us to both increase our exposure to long-term secular growth trends in robotics and automation, healthcare, productivity, and precision medicine, which are becoming more relevant post the pandemic, while giving us the resilience to weather the economic environment caused by the pandemic. You can also expect us to lean in on acquisition opportunities, which is the primary focus of our capital deployment, provided they fit our stringent financial returns and strategic criteria. So with that, I will turn the call over to Robert to provide more details on our financial performance.