Novanta Inc.

Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Incorporated's 2022 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 now would 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 2022 earnings conference call. I'm 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 web 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 chair and chief executive officer of Novanta, Matthias Glastrup.

Matthias Glastrup Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta achieved record results in the third quarter of 2022. We delivered another quarter of terrific financial performance. with double-digit growth in revenue and adjusted EBITDA, as well as solid growth for adjusted EPS. We ended the quarter with our backlog still at near record level, as we continue to see strong demand from our customers in the medical and advanced industrial markets we serve. In the third quarter, we delivered a new record high $223 million in revenue, representing 25% year-over-year revenue growth on a reported basis and 21% growth on an organic basis and up 4% on a sequential basis. In addition, our operating profit in the third quarter was fantastic, with adjusted EBITDA of $49 million, up 22% year-over-year and adjusted diluting earnings per share, of 81 cents, up 8% versus tougher comps in the prior year. The excellent year-to-date financial performance means we will once again raise our full year 2022 financial guidance, which Robert will cover in detail in a few minutes. We are extremely pleased with our company's performance and the resilience of our portfolio in an ever-changing and challenging macro environment. Noventa's portfolio is well-positioned in medical and advanced industrial applications with long-term secular tailwinds such as robotics and automation, healthcare productivity, and precision medicine. We feel good about our strategy and we're staying focused on where we play and how we win. We continue to build and grow quality businesses with proprietary IP and attractive secular growth markets with a vibrant culture and great talent. And I continue to be very proud of our teams around the world who are using the Noventa Growth System to drive exceptional operating performance no matter the environment. Now let's turn to what we're seeing in our markets and our customer activity. We continue to see strong ongoing demand from our customers in many application areas, and we ended the quarter with still near record backlog of $626 million. At the same time, and as indicated in our last call, we have started to see a return to more normalized ordering behavior from our customers. This was expected after a period of record orders and a seven consecutive quarters of positive book to bill, which resulted in a cumulative book to bill of approximately 1.3 over that time. We're also seeing some easing of supply chain shortages, and this gradual improvement of delivery lead times is consistent with a normalizing of customer order patterns. While our year-to-date book-to-bill is well above 1 at 1.12, the third quarter book-to-bill normalized to 0.91 in the quarter for Noventa overall. In the third quarter, our sales to advanced industrial markets saw 33 percent growth year-over-year and 5 percent growth sequentially. In the quarter, we continue to see strong sales performance in automation and robotics markets driven by continued underlying demand for factory automation, battery and electric vehicle production, extreme UV lithography, and increased overall 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, higher robot utility, onshoring, and labor shortages. In the quarter, we did start to see a rapid downturn in the microelectronics markets, which is now being widely reported on by other companies. Only approximately 10% of Noventa sales are in this area, and we delivered terrific operating results in the third quarter, despite the impact of this downturn. Although it's clear that overall industry output is decelerating across most major economies, it matters where you play. Noventa's portfolio is geared towards secular growth trends, and our sales so far have been nicely resilient. We continue to see strong pull-through from our OEM customers to fulfill our backlog to them as they continue to sell through to their end markets. Turning to our medical end market, for the third quarter of 2022, sales to medical applications grew 19% versus the third quarter of 2021 and 6% sequentially. During the quarter, we saw very strong orders and shipments to many of our medical OEM customers with noteworthy strength in surgical robotics, DNA sequencing, and minimally invasive surgery equipment and consumables. These categories also strong double-digit growth in sales year over year. It was positive to see further growth in our minimally invasive surgery product categories, which is tracking with the broader gradual improvement in elective surgical procedures. While demand signals demonstrate that this market continues to accelerate heading into 2023, it is important to recognize that hospitals are still battling staff shortages to some extent. Therefore, some near-term volatility in ordering should be expected. Our longer-term outlook, though, on the minimally invasive surgery market remains bullish, particularly with our unique product offering of integrated smoke evacuation insufflators and also next-generation endoscopic pumps. From a regional perspective, we saw strong demand across all major geographies in the third quarter. Sales in Europe grew 15 percent, and sales in the United States grew 36 percent year-over-year. We experienced 9 percent year-over-year revenue growth in China, help our ATI acquisition, which saw strong electric vehicle production and robotic demand. Our China revenue, excluding acquisitions, was down double-digit year-over-year, which reflects the microelectronics downturn I spoke to earlier. as we have several large customers in microelectronics who are based in China. As a reminder, our China revenue is relatively low percentage of total Noventa revenue. Now, let me touch on some of Noventa's strategic growth metrics. For the third quarter, our vitality index, which is the revenue from new products launched in the last four years, continues to be healthy at about 25% of sales, with year-over-year MPI revenues up high single digits versus the last year. Our R&D teams continue to make good progress on our new product pipeline, which remains very healthy, and we continue to invest in R&D in order to capture the many and mid- and longer-term opportunities with differentiated offerings in high-growth markets. Moving on, in the third quarter, design wins for the overall company increased more than 20 percent versus the prior year. We saw solid design wins in the majority of our businesses, including another exciting win in our minimally invasive surgery business. We're excited about the platforms we're winning and attractive high-growth applications such as minimally invasive surgery, surgical robotics, laser additive manufacturing, micro-machining, extreme UV, and electric vehicle battery welding. Now, I would like to spend a moment on our minimally invasive surgery business, which is part of our vision segment. In the last few years, we have secured a leading position in insufflator and pump technology through design wins and development agreements with multiple minimally invasive and robotic surgery OEMs who have platforms which we expect to launch in the next two years. We're gaining share in our smoke evacuation insufflator in the endoscopy market while also expanding in robotic surgery. In addition, we're successfully expanding into arthroscopy with our proprietary pump technology. As indicated in prior calls, these business wins are why we have stepped up our R&D investments in the MIS business. Based on the business one to date, we expect the incremental business opportunity to be approximately $50 million revenue in 2025, with consumables kicking in exponentially after that. We believe that the penetration rate of these technologies is still relatively low, with an attractive long-term growth trajectory, and with November content steadily increasing in these attractive applications. Based on the anticipated growth and our gross margin expectations for this business, we expect to significantly expand our medical consumables manufacturing capacity and capability in our lower-cost region. To that extent, I'm pleased to announce that in the third quarter, we close a small but important acquisition called MPH Medical Devices. This is a single-site medical consumables manufacturing company located in the Czech Republic, which will be integrated into our MIS business. MPH manufactures medical consumable tube set products very similar to the products that already get sold alongside our insufflator and endoscopic pumps in the MIS business. This new FDA registered factory offers us a lower cost option with well-trained talent, available talent, and a state-of-the-art facility to manufacture more of our proprietary medical consumable products in-house improving our margin profile, and creating much-needed capacity expansion as we ramp up volumes over the next few years. The near-term sales contribution for this site is negligible, but will grow rapidly in the coming years. We are thrilled to welcome the FDH employees to be part of the Novanta family, and we are excited for the way this new site will help us achieve our long-term strategic goals for gross margin expansion and sales growth. Next, I'd like to give you a brief update on Noventa's other acquisition and integration activities. Our ATI and IMS businesses have now passed their first anniversary of being part of Noventa. Both businesses saw strong performance for sales and bookings in the third quarter. We are extremely happy with the contribution of these businesses and their strategic fit with Noventa. At this point, a large portion of the integration activities have been successfully completed. We're now focused on capitalizing on the mid- and longer-term opportunities these businesses have brought to us. As for the rest of our M&A activities, acquisitions continue to be the primary focus of an eventless capital deployment. We'll continue to work on an active pipeline of opportunities, and we'll share updates as we make progress on new opportunities. So, in summary, we feel terrific about our third quarter results, and we continue to see strength in the remainder of the year. We believe Noventa's long-term strategic positioning is extremely strong, and we continue to broaden our exposure to medical and industrial applications that have long-term secular growth threats, 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.