Novanta Inc.

Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated's 2020 Third 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 1 on your touchtone phone. To withdraw your question, please press star then 2. 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.

Thank you very much. Good morning and welcome to Novanta's third quarter 2020 earnings conference call. I'm 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 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 update 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'm 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 Noventa employees for how they continue to step up in this challenging environment. We're very pleased and humbled with the engagement and resiliency of our teams through the pandemic. It is great to see that the Noventa spirit is alive and that our culture has been a strong foundation to help weather this crisis. Now let's move on to our normal quarterly results review. We are pleased with Noventa's performance in the third quarter of 2020. Our teams continued to execute very well in the face of challenging circumstances and delivered above our expectations for revenue, profit, and cash flow. Our company delivered approximately $143 million in revenue, representing a 7% year-over-year revenue decline on a reported basis and a 9% decline on an organic basis. We are especially pleased with how our teams continue to manage profit decrementals. Adjusted EBITDA was $30 million or 21% of sales in the third quarter, expanding 100 basis points versus 2019. Our teams delivered record free cash flow performance in the third quarter at nearly $40 million, up over eight times year-over-year at a ratio of over 475% of gap and end income. reflecting their rigorous management of our operations and working capital. While Noventa is not immune to the impact of the pandemic, these results show that Noventa is 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. The benefits of our portfolio diversification continue to show in our results as the trough in the third quarter was less deep than expected, and we now expect the fourth quarter revenues and bookings to be up sequentially versus the third quarter. From an end market perspective, many of the trends we commented on in the second quarter played out as expected in the third quarter. Elective medical procedures and diagnostic test volumes recovered to about 90 to 95% pre-COVID levels, with steady improvement since the second quarter. And approximately 70% of the research labs partially reopened. As a reminder, medical Capital equipment purchases are trailing elective medical procedures, and Aventa is trailing our OEM customers' performance by about 90 days. As a result, and as expected, our medical and industrial businesses saw low double-digit declines in the third quarter. Our micro-electronic business was up over 50% year-over-year, driven by EUV, 5G, and cloud infrastructure equipment. We also continue to experience double-digit year-over-year growth, with our smoke evacuation medical consumables, our medical barcode solutions for ICU patient monitoring and diagnostic test equipment, and in China, we saw year-over-year growth accelerate to 46%. In the third quarter, our book-to-bill was about 0.9 and our year-to-date book-to-bill is 0.95. We are seeing booking momentum improve in September and October, and our fourth quarter backlog supports a sequential revenue improvement versus the third quarter. Robert will discuss in more detail our expectations for the fourth quarter later on in this call. While the third quarter results are better than previously thought and we remain confident about our long-term strategic positioning, we remain cautious about our immediate outlook given the uncertainty in the market and particularly given recent pandemic resurgence in Europe and the US. In managing through the pandemic, we remain focused on what we can control, which are the four guiding principles we've laid out in previous calls. First, our 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 the absenteeism of our engineers and production personnel working on site remains low. We have further expanded our safety measures with accelerated testing, technology-enabled distancing and tracing methods, as well as improved air quality and circulation in our buildings. 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. Our customers and suppliers are getting better at operating during a pandemic, and that said, we continue to see rapidly changing demand and supply patterns. Aggressive deployment of the Noventa growth system is helping to respond with agility and help to minimize profit decrementals and to deliver record free cash flows in the third quarter. Our third guiding principles ensure a bright future and emerge out of this crisis stronger with the right innovations to the right customers in our target growth markets. We continue to believe that our long-term secular growth drivers are even more relevant post-pandemic with particular focus on industrial and surgical robotics, minimally invasive surgery, precision medicine, and Industry 4.0. We have stayed the course on our innovation investments, and while some customers or MPI programs have showed some delays as a result of COVID-19, our main MPI programs continue to be very active with multiple new products launching over the next 12 to 18 months. In the third quarter, we launched a few new products. One of them, Mobia, is a compact laser beam scanning subsystem designed for coding pharma and food and beverage packages, as well as high growth micro machining applications driven by overall miniaturization and precision trends. We're also excited about another new product, the Ultra Encoder, a compact inductive encoder for position detection in surgical robots and industrial automation, which we launched three months ahead of schedule. A fantastic performance of our engineering teams during this pandemic. Our vitality index, which is revenue from new products launched in the last four years, continues to be healthy at over 25% of sales versus mid-single digit percentages a few years ago. Design wins continue to show positive growth on a year-to-date basis, although we saw a pause in the third quarter as some customers have temporarily delayed new platforms. We see this as a temporary situation, and we fully expect the fourth quarter designs to bounce back. Finally, our fourth guiding principle is to live our core values and continue to build a healthy company culture in this environment. 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. The Noventa growth system is developing rapidly with a core goal of enabling higher performance of Noventa teams in all of our sites worldwide. Over the last six months, we have deployed and trained over 2,000 of our employees on key work productivity tools such as AD problem solving, project management, MPI product execution, daily management, value stream mapping, price management, and AD20, a powerful analytic tool designed to reduce business complexity and enable stronger focus on serving our most important customers. Our vision is to transform Novanta into a learning culture anchored in continuous improvement applied to all areas of our business, including but not limited to structurally improving customer satisfaction, gross margins, inventory management and the efficiency of our manufacturing sites.