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 Novanta Incorporated's 2022 Fourth Quarter and Full Year 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 touchstone phone. To throw out 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. Welcome to Novanta's fourth quarter and full year 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 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. If 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 Kloster.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered record results in 2022. For the full year, we achieved all-time highs for sales, adjusted EBITDA, and adjusted EPS, with each showing strong double-digit growth over prior year results. We continue to see strong demand from our customers in the medical and advanced industrial markets we serve, and our teams are delivering great results. In the fourth quarter, we delivered $218 million in revenue, representing 10 percent year-over-year revenue growth on a reported basis and 14 percent growth on an organic basis. Our operating profit in the fourth quarter was also strong, with adjusted EBITDA of $46 million and adjusted diluted earnings per share of 75 cents. For the full year, we delivered $861 million in revenue, representing 22 percent year-over-year revenue growth on a reported basis and 14% growth on an organic basis. Adjusted EBITDA for the full year was $184 million, up more than 20% versus 2021, and adjusted EPS of $3.07, up 17%. I'm incredibly proud of how our team exceeded our financial objectives and progressed our strategic initiatives, driving strong operating performance in an evolving microeconomic environment. At Noventa, our mission is to deliver innovation that matters. We serve as a trusted, full-source technology partner to our OEM customers, providing unique mission-critical functionality that enables our customers to differentiate The Noventa business model with diversified exposure to high-growth medical and advanced industrial markets has proven resilient under multiple geopolitical and macroeconomic scenarios. Our proprietary products and technologies are 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 that the strength of our portfolio and business model, combined with our winning growth strategy, focused on where we play and how we win, drives our 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 a near-record backlog of $612 million. As expected and as discussed in our last earnings call, we are seeing a return to more normalized ordering behavior from our customers. Our book to bill in the fourth quarter was 0.91, and our book to bill for the full year was 1.07. As we see further easing of supply chain shortages and gradual improvement of delivery lead times, our customers are normalizing their order patterns and returning to a lower level of backlog coverage. This normalization is expected and healthy after the record orders we received throughout 2021 and 2022. In the fourth quarter, sales to medical sales continued to accelerate, growing 19% versus the fourth quarter of 2021, making up approximately 53% of total Novanta sales. During the quarter, we saw very strong orders and shipments to many of our medical OEM customers, with noteworthy strength in minimally invasive surgery equipment and consumables, in vitro diagnostics and patient monitoring equipment, and DNA sequencing. 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 are tracking with the broader gradual improvement in elective surgical procedures and reduction in hospital labor shortages. For the full year, our sales to medical markets grew by 16% and made up approximately 49% of total Novanta sales. Turning to advanced industrial markets, our sales in the quarter, excluding microelectronics applications, were up 9% year-over-year and made up approximately 38% of total Novanta sales. 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, 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. For the full year, our sales to advanced industrial markets, excluding microelectronics applications, grew by 41 percent and made up approximately 39 percent of total Novanta sales. Looking at just our microelectronics markets, which represented just 9 percent of sales in the fourth quarter, these include products that are designed into waiver fab, semiconductor waiver fab equipment, semiconductor packaging equipment, PCBA vehicle drilling equipment, and other equipment used to produce electronics. In the quarter, we continue to see double-digit declines from the cyclical downturn in this market, which we reported on in our prior earnings call. Consistent with last quarter, the largest decline manifested in our technology offerings for the PCBA vehicle drilling equipment market. From a regional perspective, in the fourth quarter, sales in Europe grew 4%, despite the Russian Ukraine conflict and associated inflationary and market economic challenges displaced on the region. In addition, sales to North America grew 31 percent year-over-year. China, which represented about 10 percent of overall sales, declined 39 percent year-over-year, which was predominantly caused by the decline in market electronic revenue. For the full year, the regional dynamics were similar, with double-digit growth in Europe and the United States and roughly flat growth for China. Now let me touch on some of Noventa's strategic growth metrics. For the fourth quarter and full year, 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 NPR revenue up low double digits versus last year, driven by new product revenue in DNA sequencing, smoke evacuation insufflaters, and detection and analysis for in vitro diagnostics. Our R&D teams continue to make good progress on our new product pipeline, which remains very healthy, with particular focus on robotic surgery, precision robotics, minimally invasive surgery, deep and extreme UV, electric vehicle production and battery processing, laser additive manufacturing, and micromachining. For example, yesterday we officially launched the Denali servo driver in our precision motion segment. Servo Drives are the brains in intelligent motion control, and Denali represents the tireless efforts and unwavering dedication of our amazing team. The Denali Servo Drive is the smallest Servo Drive designed specifically for service robots in medical and non-medical spaces, which help us to enter into this attractive adjacency for Noventa. We continue to invest in R&D in order to capture the many mid- and long-term opportunities with differentiated offerings in high-growth markets. Moving on to design wins, for the full year of 2022, we experienced the expected year-over-year decline due to tough comparables from the 2021 large design wins in our minimally invasive surgery business. As discussed on our last calls, in this business, we want very large new product platforms in 2021 and early 2022. with both existing and new customers, which we expect will contribute $50 million of incremental revenue growth by 2025. In other words, we won the bulk of what we believe we could win and are now in the final development and commercial launch phase of our new product introductions in robotic surgery, smoke evacuation insufflaters, and pumps, with products expected to begin selling in 2024. We continue to demonstrate strong traction with innovative new products outside MIS, focused on attractive high-growth applications such as laser additive manufacturing, micromachining, extreme UV, and electric vehicle battery welding. Next, I'd like to give you a brief update on Mevento's acquisition and integration activities. Our integration of MPH medical devices is on track. I visited the site two weeks ago and was very pleased with the pace and trajectory of the progress being made. We continue to prepare the site to successfully manufacture Noventa's own proprietary medical consumable products at high volumes in 2024 and beyond, allowing us to accelerate our revenue growth and margin expansion opportunities. With this integration well underway, we continue to focus our capital deployment strategy on identifying and acquiring high growth and high cash flow businesses. This remains our primary focus with Noventa's capital deployment, and we feel good that we have a strong pipeline of opportunities despite the higher interest rate environment. Now I'd like to share a few comments on how we continue to evolve the culture of Noventa and the health of our organization and our people. We continue to invest in our culture called the Noventa Way. We believe the Noventa Way has been a differentiator in attracting, retaining, and developing core talent. We continue to see below-market labor attrition rates, both among our leadership ranks as well as across all company employees. We're focusing on a few factors to retain our employees, competitive pay, a great company culture, and career development and progression. In 2022, we strengthened our leadership team with the addition of Chuck Rivetto, Group President of our Automation Enabling Technologies segment, which represents our photonics and precision motion segments, and we added our first general counsel, Michelle Welsh. We have progressed the deployment of the Novanta growth system with hundreds of Novanta employees trained on and using the tools. We have a regular cadence of Kaizen events, structured problem-solving sessions, and other process improvement activities at all levels of the organization to fundamentally improve our operating results. These include reductional cycle and lead times, improving our supply chain and planning processes to enhance delivery performance to our customers, accelerating material and labor productivity, and improving time to market of our new product launches. We also have strengthened our Noventa Way culture, improving our employee engagement scores, gaining great traction with our diversity, equity, and inclusion efforts, and investing more in leadership development initiatives. In 2022, we stood up three employee resource groups and have expanded our community efforts, which we feel have improved engagement, inclusion, and a sense of belonging at Noventa. Sustainability also remains an important topic for Noventa. As a global organization with a wide-reaching customer and supplier base, our products touch lives up and down the value chain. We have the opportunity and responsibility to not only deliver mission-critical innovation, but do so in a way that positively impacts the environment, our communities, and the economy. Most of our sites are now ISO 14001 certified, and under the leadership of our Sustainability Board, we have defined a roadmap to reduce our environmental footprint. In a few weeks, we will be publishing our 2022 ESG report, where we will share details on our goals and accomplishments and what's coming next for Noventa. In wrapping up, Noventa had a landmark year in 2022. We had excellent sales growth and attractive end markets, strong operating performance and profit growth, great progress in deploying the Noventa growth system, and continued success at further establishing a thriving company culture. We believe Noventa's long-term strategic position is extremely strong. We continue to broaden our exposure to medical and advanced industrial applications that have long-term secular growth trends, such as robotics and automation, healthcare productivity, and precision medicine. In 2023, we see strong tailwinds in our medical businesses, which will help to offset headwinds in our microelectronics market. And we will continue to focus on new product development, design wins and high-growth applications, driving cash flows, and institutionalizing the Noventa growth system. So with that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert?