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 2022 First 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 first quarter 2022 earnings conference call. I am Ray Nash, Corporate Finance Leader of Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthias 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 am now pleased to introduce the Chair and Chief Executive Officer of Novanta, Matthias Glostra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Noventa delivered another outstanding quarter to start off 2022. We hit new all-time highs for revenue and adjusted EBITDA and saw double-digit growth in bookings, adjusted EBITDA, and adjusted EPS. For the first time ever, we delivered over $200 million in quarterly sales and ended the quarter with another record level of backlog of $586 million. continue to see very robust demand from our customers in the medical and advanced industrial markets we serve. Noventa's portfolio is well positioned to benefit from medical and advanced industrial applications that have long-term secular tailwinds, such as robotics and automation, healthcare productivity, and precision medicine. And we continue to invest to strengthen our competitive advantage and manufacturing capacity to capitalize on these tailwinds. In the first quarter, our company delivered $204 million in revenue, representing 26% year-over-year revenue growth on a reported basis, and 7% growth on an organic basis, and up 3% on a sequential basis. In addition, our operating performance in the first quarter was excellent, with adjusted EBITDA of $44 million, up 33% year-over-year, and adjusted diluted earnings per share of 73 cents up 26% versus prior year. We saw strong demand and healthy orders in many of our applications and across all our segments, with each segment having solid book to bill in the quarter. In the first quarter, our overall book to bill was 1.12, with year-over-year bookings growth of 11% versus the first quarter of 2021. We are extremely pleased with and proud of how our teams drove this exceptional operating performance using the Noventa growth system tools in an incredibly uncertain and unpredictable environment. Let me take a moment to give an update about the global macroeconomic dynamics we're seeing. First, our thoughts are with the people of Ukraine, and we hope to see a peaceful resolution quickly. From a business perspective, Noventa has stopped all sales and shipments into Russia, the large majority of which is in our surgical display product category. For the full year of 2022, this will amount to roughly $5 million of revenue, so very minor. The bigger consideration is the potential microeconomic implications of the conflict and the lingering effects of the pandemic, including inflation and product supply challenges. Robert will talk to this in more detail in a few minutes, but suffice to say, given the excellent financial results, it's clear that the team did an outstanding job in what continues to be a very difficult environment. Although the market economic environment is fairly disruptive, our differentiated products and our strong customer partnerships enabled us to maintain margins. Despite the increased uncertainty in the last month or two, we remain confident in Oventa's 2022 outlook, in the overall resiliency of our company. And we now have a bias towards the upper end of our full year guidance range. Now let's turn to what we're seeing in our markets, where we see ongoing strength in multiple application areas. Noventa's sales to advanced industrial markets were 53% of total sales in the first quarter. And in the first quarter, our sales to advanced industrial markets saw 7% growth sequentially as well as 47% growth year-over-year, including acquisitions, and 10% growth year-over-year, excluding acquisitions. We continue to experience higher demand in automation and robotics markets, and specifically warehouse automation, electric vehicle production, and increased adoption of automation-enabling technologies. We believe that the penetration of robotic and automation applications is still relatively low, with adoption increasing due to multiple drivers such as increased productivity, onshoring, and labor shortages. We also continue to see microelectronics investments in cloud-based infrastructure and higher demand from EUV-based applications. Turning to our medical end market, for the first quarter of 2022, sales to medical applications were 47% of Noventa's total sales and grew 8% versus the first quarter of 2021 and roughly flat sequentially. During the quarter, we saw very strong orders and shipments to many of our medical OEM customers with particular strength in surgical robotics and DNA sequencing, both of which saw another quarter with greater than 50% growth in sales year over year. We believe that market penetration of surgical robotics and high throughput DNA sequencing is still relatively low, and we see strong adoption for both applications. We are encouraged that DNA sequencing is starting to cross the chasm from research to clinical applications, which supports our long-term growth thesis in this application. In the first quarter, our product sales into minimally invasive surgical equipment was still subdued and impacted by increased cases of the Omicron variant, as well as the supply chain shortages. We still expect that medical sales and minimally invasive surgery procedures will continue to gradually rebound throughout 2022 as hospitals learn more and more how to deal with the endemic. Also here, minimally invasive surgery penetration has long-term upside, and particularly we expect continuous legislation requiring smoke evacuation in U.S. and international hospitals, where Novanta has a unique technology offering through its integrated smoke evacuation insufflator solution. From a regional perspective, we saw strong demand across all major geographies in the first quarter, despite the various difficulties that I spoke to earlier. We saw 19% year-over-year revenue growth in China helped by our ATI acquisition, which saw strong electric vehicle production and robotic demand. Our China revenue, excluding acquisitions, declined 9% year-over-year, which was totally attributable to supply chain constraints and disruptions. Our backlog in demand in China is strong, helped by increased exposure to electric vehicle production, micro machining and electric vehicle battery production. Moving on to other regions, sales in Europe grew 12% and sales in the US grew 40% year over year. Now let me touch on some of Noventa's strategic growth metrics. As a reminder right now, these metrics exclude any impact from our ATI and IMS acquisitions. For the first quarter, our vitality index, which is revenue from new products launched in the last four years, continued to be healthy at above 25% of sales, with year-over-year NPI revenues up low single digits versus last year as high-runner NPIs rolled off and as we were supply chain constrained on newer products. As mentioned in our last call, in the near term, we've had to reallocate some of our engineering resources to help mitigate some of the supply chain difficulties that I've spoken about. Despite the modest delays this is causing to some of our programs, we do not see any material effect on the long-term growth trajectory of the company. We continue to have a strong pipeline of new products, and the lineup of 2022 product launches is very healthy. Moving on, design wins for the overall company declined versus the prior year, driven by tough comps from big wins in our minimally invasive surgery business last year. As a reminder, our design wins more than doubled last year. In the first quarter of 2022, design wins in the photonics and precision motion segments were up double digits, but were more than offsets by the decline in the MIS segment. This is just a matter of timing, and we continue to be thrilled with the platforms who are winning in attractive high-growth applications such as surgical robotics, laser additive manufacturing, micromachining, EUV, and electric vehicle battery welding. Next, I'd like to give a brief update on Novanta's acquisition and integration activities. In the first quarter, we saw strong performance for sales and bookings for the ATI and IMS businesses. We're very pleased with our contribution and strategic fit to Novanta. As for our M&A pipeline, acquisitions continue to be the primary focus of Novanta's capital deployment, and we'll continue to work on a very active pipeline of opportunities in 2022. I would also like to give an update on our organization and culture. As always, our excellent performance in the first quarter was made possible by the outstanding efforts of our talented and committed Noventa employees. We continue to invest heavily in our company culture, called the Noventa Way, which we believe has been a differentiator in a tough labor market with strong hiring performance as well as low labor attrition rates, which are still at 2019 levels. We also recently published our annual comprehensive 2021 ESG report, which captures our commitments to sustainability and diversity, equity, and inclusion, and in which we share new details about our current ESG programs and our future ESG goals. A detailed yet easy-to-understand picture of our sustainability achievements and plans can be found in a new section of our website called sustainability.novanta.com. We furthermore recently announced internally that we have organized our photonics and precision motion teams under a new leadership structure called Automation Enabling Technologies, or AET. We feel this new organizational structure opens the opportunity for a wider scope of organic growth and acquisition opportunities in the life sciences industry 4.0 and robotics and automation space. It will also provide an opportunity to serve a wider array of customers with multiple AET technologies and drive new technology and product solutions. Furthermore, the simplified leadership structure around vision and AET enables a more uniform deployment of the Noventa Way culture, including the Noventa Growth System, while building on and developing our strong talent bench. We are very pleased to announce that Chuck Ravetto has joined us to lead the Automation Enabling Technology Group as Group President. Chuck comes to Noventa after a 20-plus year successful career at Danaher, where he held various executive and leadership positions in high-tech industrial and healthcare businesses, in both hardware and software. It's great to have Chuck on the team, and in the short amount of time Chuck has been with us, he's made a strong impression, and we can't wait to see his impact to Noventa. So in summary, despite the ongoing significant short-term challenges, we feel very good about our first quarter results. and we feel positive about our momentum heading further into the year. We continue to strengthen our team and leadership bench, and we believe Noventa's long-term strategic positioning is extremely strong. We continue to broaden our exposure to medical and industrial applications that have long-term secular trends, such as robotics and automation, healthcare productivity, and precision medicine. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?