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?

Thank you, Matthias, and good morning, everyone. The first quarter non-GAAP adjusted gross profit was 93.8 million, or a 46% adjusted gross margin, compared to 73.1 million, or a 45% adjusted gross margin in the first quarter of 2021. For the quarter, adjusted gross margins increased approximately 90 basis points year-over-year and increased nearly 150 basis points sequentially. Considering the environment around inflation and supply chain shortages, we feel really good about this outcome. While we continue to experience supply chain shortages and inflationary pressures, most notably with semiconductor parts, we're also seeing solid productivity from the deployment of the Novanta growth system, and we're seeing the benefits of our pricing initiatives. Despite numerous challenges affecting our manufacturing performance in the first quarter, our manufacturing teams did an incredible job at mitigating these impacts and continue to drive overall productivity improvements in our factories. In addition, we also successfully passed along some of the inflationary pressures to our customers, helping us to deliver a solid first quarter outcome. Moving on to first quarter R&D expenses, we're up 20.9 million, or roughly 10% of sales. First quarter SG&A expenses were 39.4 million, or 19.3% of sales. The sequential increases in operating expenses were in line with prior guidance, were the result of the seasonal impact of variable compensation programs and their associated payroll taxes, as well as the planned R&D investments. Adjusted EBITDA was approximately $44 million in the first quarter of 2022, or a 21% EBITDA margin. Our adjusted EBITDA performance beat our expectations and previously issued guidance. On the tax front, our non-GAAP tax rate for the first quarter of 2022 was 14%. This differed from the statutory rate driven mainly by a jurisdictional mix of income. Our non-GAAP adjusted EPS was 73 cents in the quarter compared to 58 cents in the first quarter of 2021, an increase of 26% year over year. The strong increase in adjusted EPS was achieved despite higher financing costs and a much higher tax rate. First quarter operating cash flow was approximately $11 million, which was in line with our expectations. Cash flow declined year over year driven by higher variable compensation payments as 2021 had no cash bonus payments being made and an increase in working capital. Most notably driven by higher inventory purchases to help mitigate some of the supply chain disruptions. This is a temporary impact and the inventory level should normalize later in the year. Finally, we ended the year with a gross debt of $423 million and our gross leverage ratio of 2.6 times. Our net debt was $324 million. I'll now turn to an update about the performance of our operating segments. First, our start with the precision motion segment. This segment experienced 118% year-over-year revenue growth in the quarter. Reported growth was heavily impacted by the ATI and IMS acquisitions. In the first quarter, these businesses contributed approximately $33 million of sales, which was in line with our expectations. These businesses continue to perform very well, their integration is proceeding as scheduled, and they continue to offer very exciting near-term and long-term growth opportunities for Novanta. Excluding the acquisitions, Precision Motion still grew an impressive 28% year-over-year. Total bookings grew 19% year-over-year, and the overall book-to-bill ratio in this segment was 1.06 in the quarter. Excluding the impact of ATI and IMS, Precision Motion's new product revenue grew 75% year-over-year and was over 20% of total sales in this segment. And design wins for the full year were up double digits versus the prior year. Adjusted gross margins for the segment came in at 50%, in line with expectations, and up nearly 300 basis points year-over-year. The segment continues to show a very strong impact from deploying an advanced growth system to structurally improve margins. Turning to our vision segment, the segment predominantly serves the medical end market and experienced a revenue decline of 8% year-over-year, which was slightly better than our expectations. As we said in our last call, the volume of elective surgical procedures was impacted by the spike in COVID infections in the first couple months of 2022, which resulted in declines in our minimum base of surgery business line. In addition, our JDAC business experienced significant part shortages associated with a single Fortune 100 vendor. This vendor is aggressively working on qualifying second sources and should see shipments stabilized by the third quarter. We expect both these dynamics to continue to improve as the year progresses, with the minimum invasive surgery business recovering faster. The vision segment saw a healthy book-to-bill of 1.15, and the vitality index of this segment remained around 30% of sales. Design win activity in this segment declined year over year, as this segment was faced with very difficult comparatables in the prior year. as 2021 saw a record level of design win activity in the first quarter with significant customers, which we discussed in prior earnings call. This is largely a matter of timing, and we continue to see this segment as one of the largest drivers of Devanta growth over the next few years as these new customer wins ramp up into production. Finally, turning to the photonic segment, in the first quarter of 2021, our revenue was up 7% year over year, Although this is a respectful level of growth, it is far below the level of customer demand and was inhibited by both our Taunton production move and the semiconductor part shortages. Both of these dynamics should gradually improve as the year progresses, particularly because our new Taunton factory started full production this month and because our supply chain teams made strategic inventory purchases to reduce the effects of the supply chain disruption. We are fortunate that this segment continues to experience very strong customer demand in their advanced industrial applications and in DNA sequencing. The book to bill in this segment was 1.16 in the first quarter. In addition, new product revenue stayed strong at greater than 25% of sales in the first quarter, and total MPI sales were up 14% year over year. Design wins in the first quarter were up 48% year-over-year, driven by excellent platform wins in applications as laser additive manufacturing, micromachining, and EUV lithography. The photonics segment adjusted gross margins with more than 46%, which was down year-over-year as expected, but was up sequentially from the fourth quarter of 2021. Turning now to the second quarter outlook, we expect macroeconomic environment to mirror the first quarter for the most part. While the COVID-19 lockdowns in China clearly are worse in the second quarter, our guidance range factors in this risk. Starting with the revenue guidance for the second quarter of 2022, as we stand here today, we expect gap revenue in the range of $205 million to $213 million. The lower end of the range reflects a worsening China environment caused by their zero COVID-19 lockdown policy. Regardless, we are expecting to see revenue growth of 22% to 27% year over year in the second quarter. On the segment level in the second quarter, we expect 10% to 12% growth in photonics. Customer demand remains very high in this segment. And now that our new Totten factory is producing materials, we expect to deliver strong revenue growth. Precision motion segment will continue to have significant growth driven by both the continued strength of the core business, as well as the impact of acquisitions. As a consequence, the second quarter, we expect sales to grow 75% to 85% versus the prior year. Finally, our vision segment in the second quarter, we expect the business to be relatively flat year over year. This result is caused solely by the PAR shortages from a single vendor in our JDAG business. As I mentioned before, this vendor is a Fortune 100 company, and they have significantly advanced their efforts to mitigate their shortages and are quickly adding additional capacity to their production. We expect deliveries from this vendor to continue to ramp as the year progresses. Moving on to overall Novanta's adjusted gross margins, we expect gross margins in the second quarter to be in the range of 45% to 46%. The second quarter gross margin is expected to see similar dynamics as we experienced in the first quarter. In addition, thanks to strong efforts and success convincing our customers to share in the inflationary pressures and the continued progress deploying NGS, we were able to mitigate the majority of negative effects from supply chain pressures and from the production move of our Taunton manufacturing facility. R&D and SG&A expenses, which were $60 million in the first quarter, are expected to be approximately $60 million to $63 million in the second quarter, which is higher than the prior year, mainly as a consequence of recent acquisitions, as well as further ramp up of project spend in key MPI programs and the higher variable compensation. Depreciation expense was $3 million in the first quarter, which should be similar in the second quarter. Stock compensation expense which was nearly $7 million in the first quarter, is expected to be approximately $5 million in the second quarter. Adjusted EBITDA for the second quarter of 2022, we expect a range of $42 to $44 million. Interest expense, which was $3 million in the first quarter, will be similar in the second quarter. We expect non-GAAP tax rate to be around 16% for the second quarter of 2022, absent significant changes in jurisdictional mix or income, or other variability in any of our eligible tax benefits. Diluted weighted average shares outstanding will be approximately 36 million shares and adjusted diluted earnings per share, we expect a range of 69 cents to 73 cents for the second quarter. Finally, we expect operating cash flows to improve sequentially in the second quarter versus the first quarter, nearly doubling the first quarter cash flow. As always, the guidance does not assume any significant changes to foreign exchange rates Overall, the strength of our performance in the first quarter, along with a favorable outlook in the second quarter, positions us well to deliver full year results towards the upper end of our previously communicated guidance range for the full year of 2022. To recap, the first quarter of 2022 had excellent results. We nearly doubled We saw double-digit growth in sales bookings, adjusted EBITDA, and adjusted earnings per share. The company is seeing strong demand across its applications and markets, and we hit a new record high for order backlog. Our teams continue to impress with new innovations, as well as their ability to help the company manage through difficult supply chain challenges and now COVID-19 lockdowns. We also continue to see below-market labor attrition rates, and we are seeing great success at attracting top talent. And we continue to deliver strong financial results despite some fairly significant challenges with global supply chains, semiconductor shortages, inflation, China COVID-19 lockdowns, war in the Ukraine, and a general macroeconomic uncertainty. Given all this, we remain very excited about our ability to serve our customers in the medical and advanced industrial land markets and are excited about our continued innovation partnerships with our customers. We remain very proud of the performance of our employees and their tireless efforts to help us be successful in a very challenging environment. We look forward to continuing to deliver on our commitments to our employees, our customers, and most importantly, our shareholders. This concludes our prepared remarks. We now open the call up for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we will pause momentarily to assemble the roster. And our first question will come from Lee Gigota of CJS Securities. Please go ahead.

Hi, good morning. Good morning, Lee. So just starting with the medical segment, I think you had mentioned surgical robotics and DNA sequencing were both up more than 50% in the quarter. And I know you cited the JDAAC issue in terms of one of the headwinds. Can you talk to the things that may be declining and whether that decline is just a function of demand or if there's any supply change at all? Or, excuse me, a function of supply or if there's any demand change at all?

Yes. So, hi, Lee. So I commented that there's multiple drivers, right? So you rightly are quoting that. We're very excited about the surgical robotics and the DNA sequencing demand, which is up 50%. than the minimally invasive part, surgery part of our business. Let's say the demand and supply chain, you know, demand was pretty, was good, but it was still relatively subdued versus, I think, previous levels. But we see it starting to recover and rebound in the remaining part of the year as hospitals learn how to work better in the endemic situation. So it's basically elective procedures coming back online, and I think multiple players commented on that in their prepared remarks. You know, I think probably the biggest headwind was basically the JADAC supply chain shortage, right? So that's really where we're mostly gated. Robert, I think in his prepared remarks, covered that extensively. We expect the supplier to gradually improve on that situation as well. Robert, do you want to add anything else?

Yes. Definitely, Lee, in the first quarter, MIS and JDAC both declined. That will change as we get to the second quarter where only JDAC is declining. So I think – and then that's, of course, temporary. The second quarter will be probably their toughest comparable until supply really starts coming in in the third quarter. And the company that supplies us has been public about that.

Got it. And then in terms of – yeah, I guess you've sort of reiterated that full-year guidance, and we're looking at the top end. Is the best way to think about it, given that demand continues to outstrip supply – that we should expect book to bills to continue to run above one through the balance of the year, which I would think sets you up for an acceleration of growth in 2023? Yeah.

So tough question to answer. I would say that's where things are currently trending. You don't know how things will unfold as the year progresses. I mean, it's fair to say we're covered for the year already, you know, in terms of backlog. And so we feel very good. That's all non-councilable backlog. We feel good at what we can deliver, and that's why we're biasing towards the upper end of the range. Does it position us, you know, stronger? I don't want to get into 2023 with all the dynamics happening. You know, when last time we spoke to you, you know, in between that period of time, you know, there was a war started in the Ukraine, right? So I think we have to just be mindful that the environment is constantly changing.

Well, I'll just sneak one more in and let others ask. But in terms of understanding that the backlog is non-cancellable, are we thinking that customers are still ordering to current levels of demand, or are they kind of overordering or ordering ahead a little bit here?

Well, let me put it this way. We don't feel our customers are actually putting our products on the shelf. I mean, they're putting very, very hard in for the majority of our customers when we deliver basically on their demands. I mean, the products basically get included in their systems and they get moved immediately to the end market. So that's what we're seeing right now. We don't see any channel inventory build up or something.

Okay, that's helpful. Thank you.

The next question comes from Rob Mason of Baird.

Please go ahead.

Yes, good morning, gentlemen. Good morning, Rob. My question was around the second quarter guidance around gross margin, which implies basically flat to down sequentially. And I'm just wondering where you would isolate or direct us to look, you know, where we could potentially see some degradation in gross margin. And I'm curious if any of the segments would, you know, be expected to improve sequentially also.

Yeah, I mean, effectively the gross margin guide is really – is a mirror of the first quarter, right? So all else being equal, the dynamics in the segments and the dynamics for the total company – will mirror that of the first quarter in the second quarter, right? So I think the variability in the guide is really driven by the COVID-19 lockdowns in China and the potential disruptions that might have. We've been mitigating them to date, but they keep rolling around. And so I think we're prudent when it comes to adding a little contingency around that. We added a little contingency around some worsening of supply chains from where things are looking in the first quarter. I'm not sure things are materializing that way right now, but we just want to get some prudent guidance out there that says that environment does exist, and so there's a range as a consequence of that. All else being equal, it should be relatively similar to the first quarter.

Yeah, the other thing I would say, Rob, is that, yeah, it's more timing than anything else. We're not gated by demand, right? So it's more the short-term disruptions. I think we were very specific in our view for the full year, reiterating the upper end of the guide range there, despite taking some revenue out of Russia and despite, let's say, that short-term volatility that we see. We're very confident about the full year's outlook.

Sure. With respect to China, how is that impacting you or impacted you to date? Is that more direct impact on your own facilities, ability to produce in country, or is it around getting supply into those facilities or other areas of your business?

Yeah, well, in the first quarter, it was more of an impact of sales into China. In the second quarter, it's more of an impact on our operations, our manufacturing in China. is an in-China, for-China strategy. And so it's about the products we produce there being sold to customers in China. And so you can scale it from that perspective. We've had workers sleeping and living in our facility in order to keep production up and running in our Shuzhou factory. The Shuzhou factory in particular has been really good at mitigating the impacts, been very creative about getting product built and getting product out the door. We have a smaller manufacturing facility, really small, in the Beijing area. They've struggled a lot more, thankfully not as material to us. And so, you know, I think overall we've done an excellent job at mitigating it. Where we worry is the lockdowns rolling across different regions and how that might affect supply chains of materials that we need in the factories that we have in China itself. So we're working our way through that right now. I think we feel pretty good that we've been able to mitigate that to date and that we feel that we can still mitigate it to date. It just comes down to if there's any more surprises to deal with. Sure.

Okay. Just last question. So obviously a very tight supply environment. Virtually every company is talking about doing redesigns on their products, qualifying second sources, just to provide more flexibility around that. Historically, Novanta has been sole sourced on many of your design wins. I'm curious if that dynamic is opening up. Are you seeing more opportunities as a result of that second source opportunity? And conversely, I'm just curious around your own sole source position, if that's evolving as well, what you're seeing on that front.

Yeah, so listen, the best offense in defense is innovation, right? It's just having the best product and innovation out there and having close collaboration with our customers. I mean, everybody understands, and by the way, we're not the only ones, right, gating supply. So, and actually, in a lot of cases, our customers are helping to find parts, and we're working very collaboratively across the value chain. I would say we're feeling very good about the relationship we have with our customers. Actually, in many cases, we're expanding our exposure and winning designs. I mean, last year, we doubled design wins, so that keeps suggesting that you were winning share in this environment, and that's on the back of having just great innovation, which is why we continue to invest in in strengthening our competitive advantage and also our manufacturing capacity. I mean, that's one thing that you'll see is we're putting quite a bit of expansion investments into multiple production facilities as we speak to make sure we can keep up with demand. So that's how I would answer it.

Matthias, are you seeing any opportunities, though, to go back into maybe pieces of business that didn't come your way where now – Always. Always. The customers needing a second source.

Okay. Yeah, always. I mean, what we do see, maybe let me answer it this way, strategically that multiple customers have come to us and said, listen, we don't want to deal with the complexity of the supply chain anymore of individual components. You guys have intelligent subsystems. Can you guys help us? really manage that complexity for us. So basically what you do see is a trend towards higher levels of integration that customers are asking us to so that we can manage that complexity for them. So that we definitely see and we're engaged in multiple exciting conversations around capabilities both in the medical side but also in the advanced industrial side. So that we definitely see as a result of this environment. They want to do more with us given our capabilities.

Very good. Thank you. All right.

The next question comes from Brian Drab of William Blair. Please go ahead.

All right. Thank you very much. Just first, can you give me a sense for what the organic revenue growth is that's embedded in the guidance for second quarter and for the full year?

So for the... Second quarter, it'd be similar to that of the first quarter. Depending upon where the range is, you're probably looking at something closer to a repeat of 7%, 8%. 8% maybe a little bit at the higher end, and then 7%. Somewhere around that 7% to 8% range for the second quarter. The back half of the year organically should continue to hold at that. If you take the guide range, we'll hold at that for the back half of the year. We should deliver something close to 8% for the full year as well. And then really the only gaining factor there is supply of parts. But I think we're pretty good right now by the top range.

Got it. Okay. And then just to be clear about that, when your comments on the high end of the range, does that apply to revenue specifically or is it, or all the above revenue EBITDA and EPA?

All of it. Yeah. So I think that reinforces the, you know, we feel good about expanding the gross margin still that a hundred basis points, you know, we finished off last year at 45%. We'll be a hundred, at least a hundred basis points higher than that.

Okay. And then just one last topic to touch on here. You know, I think that, did you say, first of all, that DNA sequencing and robotics revenues were both up more than 50%, 5-0? That's right, 5-0. Okay. Okay. And then just, you know, follow-up questions on that. Then, you know, how do you expect that growth to trend throughout the year? Can you give us any sense for maybe even on like a combined basis, like roughly how much those business lines account for in terms of percentage of total revenue?

Yeah, I mean, we're not going to guide on kind of an individual businesses, obviously, but I mean, what I think is important, Brian, is just to, there will be optimal digits for sure, right? But I think what is strategically more important, I would say, in the long run is that penetration of both these modalities is less than 10%, actually closer to 5% of the market, right? And so, and we see strong adoption, right, of both modalities with, you know, DNA sequencing. I commented on that we're really moving from, let's say, research to clinical applications, such as oncology testing, right? which is a very strong amount of the demand right now. And another fast-developing area is the integration of genomic data into drug development and clinical trials. And so you see that modality moving rapidly into, I think, an expansion mode, which is good. So we expect it to be a strong contributor for the year, but also, you know, supports our growth thesis longer term. And the same is true for robotic surgery. Of course, multiple other players are getting in that do see this as well. And we see many different aspects of the anatomy of the human body being covered by robotic surgery. And that all forms a great opportunity for Novanta to put content into those platforms and further increase the content where There is a demand for precision motion, for sensing, haptic feedback, for vision-enabling technologies like smoke evacuation, insufflation, and so on. So you see increasing content of Novanta in multiple platforms in robotic surgery that are adopting rapidly into the medical area. So also there, we're We're very positive about the long-term growth thesis here.

And when you talk about the multiple other players, you continue to be well-positioned with players throughout the industry that are developing these devices, right? That's right.

Yeah, that's right. Yeah, we work with the leaders in the business. Of course, we cannot comment names, but we have strong partnerships with multiple people.

Okay. The call, I think, usually ends with me, so I'm going to feel okay asking one more maybe. But can you, Mattias, just elaborate a little bit on that comment you made on the endemic hospitals adjusting to operating within the endemic as it pertains to the smoke evacuation and the opportunity there? I think I understand the dynamic, but just elaborate on that.

Yeah, well, there were two separate points, right? So hospitals getting used to the endemic, meaning that we expect, as a result, elective surgical procedures to continue to rebound and be less affected by COVID surges going forward. Yeah, I think that's a widely held consensus view in the medical device area, and And so we share that view. And therefore, with the rebound of the surgical procedures, of course, there will be pool for our products. So therefore, we commented that we expect, therefore, that demand to rebound probably the second half of the year, starting already this coming quarter. So that's one remark. The other remark was around smoke evacuation in particular that we see increased or continued legislative efforts in the U.S. but also outside the U.S. about requiring smoke evacuation in the operating room because, again, if you are hospital staff or staff, you will smoke the equivalent of one pack of cigarettes if you're inhaling the surgical plume or smoke that is caused by the energy-based devices, and that smoke is toxic, and that smoke therefore needs to be evacuated, and there's more and more laws being passed that it's mandatory for hospitals to evacuate that smoke. We feel the best way to do that is by integrating that smoke evacuation through an already existing modality called insufflation, in which we're the market leader, and by integrating smoke evacuation with insufflation can actually basically guarantee a stable cavity of basically the patient, so you're not putting the patient in jeopardy. It's much better in the workflow. It's higher productivity, and it's going to be cheaper. So it's cheaper, better, faster to do it in the smoke evacuation and insufflation way, and therefore the penetration of the amount of hospitals that have smoke evacuation is still relatively low, we see the legislative and the, let's say, the functionality requirements pool, and therefore long-term, we're also bullish on further growth in this area. Perfect, got it. That's clear now.

Thank you very much.

Okay, you're welcome.

The next question comes from Andrew Bastalia of Barenburg. Please go ahead.

Hey, good morning, guys. Good morning. I was hoping you could talk a little bit more about or make a comment on some of these negative headlines we're seeing around the logistics industry and concerns around overcapacity. I know it's not huge for you, but in your non-medical vision businesses, you got some exposure there and then maybe some other areas in your business. I know things seem okay now, but I just wonder what you're seeing and how you guys feel you can weather that risk.

Are you talking about as it pertains to, just so I understand the crux of your question, as it pertains to companies like UPS, FedEx, whatnot, delivering materials to us or shipping out or neither? You're talking about them as a customer, right, Mark?

Yeah, Mark's a customer, and they've built in a big way to keep up with all this demand we're seeing, but now concerns around if demand wanes, do you see kind of a slower capex cycle?

Yeah, so those are not customers of ours. So we don't sell into any logistics end markets. We just don't have any exposure there. Our products get embedded into the systems and instrumentation that goes into either the industrial markets, which we wouldn't count logistics in that, some semiconductor markets, and then largely in the medical markets, life science, medical.

Yeah, so C is more on the factory automation side and warehouse automation side, right, that require productivity-enhancing technologies, right, to drive productivity in those factories.

In a factory, not in like an Amazon warehouse or something like that.

I see, so manufacturing broadly, okay. Yeah. I just saw, you know, logistics exposure and machine vision and, you know, your RFID. I thought probably there'd be knock-on effects or something.

Yeah, we don't have exposure there.

So our RFID, our machine vision, all goes into IVD, medical device applications. Medical stuff. Yeah, so drug dispensing, things like that.

Okay, and then... You know, I'm wondering, so you're kind of working through these acquisitions now, and the market's definitely taking a hit here. I'm wondering how it affects either the psychology you guys have for making more acquisitions going forward, or do you see it presenting a good opportunity to be acquisitive, or is this volatility kind of make you want to shy away near term?

Well, listen, I mean, the preferred way of acquisitions is in a proprietary manner where we're cultivating long-term relationships with potential sellers and founders of businesses. So these are typically a result of multi-year endeavors. So it's not like you snap your finger and suddenly you kind of wake up and find a company or something. It's a very thoughtful long-term process. Having said that, of course, increased uncertainty provides opportunity, right? So it's not a surprise that when Brexit was announced that within, let's say, an 18-month period, we actually bought two UK-based companies because it did induce uncertainty at founders of businesses. So where we said we think that actually uncertainty creates opportunity. Now, we cannot time these events, obviously, but we're very active, and you'll hear when we have an acquisition to report.

Okay, got it. Thank you.

And if you would like to ask a question, please press star, then 1.

All right.

Well, with that, I want to thank you, operator. And so to summarize, Noventa delivered strong results in the first quarter of 2022. We saw double-digit growth for sales, bookings, and profit, and a new record high backlog. We achieved all of this while managing supply chain disruptions, rising costs, and in a more uncertain macro environment. We're excited to see the continued strength in the advanced industrial sector And also in the medical sector, Noventa is well positioned in these sectors with diversified exposure to long-term secular microtrends in robotics automation, precision motion, minimally invasive surgery, and industry 4.0. In closing, as always, I would like to thank our customers, our employees, and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all our Noventa employees who work so hard every day to tackle each new challenge. We appreciate your interest in the company and your participation in today's call. I look forward to joining all of you in several months on our second quarter 2022 earnings call. Thank you very much. This call is now adjourned.