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 2023 Second 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 second quarter 2023 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 Glostra, 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 Gloster. Thank you, Ray.

Good morning, everybody, and thanks for joining our call. Noventa had a fantastic second quarter. In the quarter, we delivered $229 million in revenue, representing 7% year-over-year revenue growth on a reported basis and 5% growth on an organic basis. Our adjusted EBITDA was $52 million, and adjusted diluted earnings per share was 80 cents. These results are better than our expectations and reflect excellent operating performance by our teams in an evolving macroeconomic environment. 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 and diversification 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. Our teams made great progress reducing our past due backlog to customers by more than 46% sequentially, while still maintaining a backlog of $583 million, which is still very high by historical standards. This past due reduction was better than expected and helped us deliver stronger sales growth versus our expectations as we accelerated more shipments into the second quarter versus the third quarter. Our book to bill in the second quarter was 0.92, which is in line with our expectations. As we discussed in the last earnings call, our teams continue to reduce our lead times for our products back to historical averages and customer expectations. And yet, we continue to see strong demand from our customers represented by our strong backlog coverage for the remainder of the year. In the second quarter, sales to medical markets were very robust, growing 20% versus the prior year and making up approximately 53% of total Noventa 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, surgical robotics and DNA sequencing. These categories all saw strong double-digit growth in CILs year over year. We're seeing structural growth in these applications based on underlying secular growth drivers, such as patient surgical procedure growth rates and advancements in biopharma technologies, including next-generation DNA sequencing. We continue to expect to see two wins in these end markets for the remainder of 2023 and in 2024, further supported by post-pandemic patient backlogs, and the new product launches and cycles of our customers and ourselves. Turning to advanced industrial markets, our sales in the second quarter, excluding microelectronics applications, were up 4 percent year-over-year and made up approximately 39 percent of total Novanta sales. The slower growth was in line with our expectations and is the result of a tighter industrial capital spending macroenvironment in line with contracting PMI indices. In addition, in the quarter, we saw the start of a short-term pause in industrial robotics spending, manifesting mainly in China and countries with strong exports to China, such as Germany. This has been reported on elsewhere and is a result of some weakness in China's economy and a volatility and uncertainty in Chinese subsidies and stimulus, as well as deferral of some China-based projects around electric vehicles and battery production facilities. Noventa is seeing these impacts in our ATI business, which saw a year-over-year decrease in sales in the second quarter versus a very strong 2022. This end market pause is undoubtedly temporary, as is the economic weakness in China, as the mid- and long-term secular growth drivers of robotics and automation remain intact. But at this time, it is expected to continue for the duration of the year, with a recovery happening in 2024. Beyond industrial robotics in China, we continue to see resilient sales performance in many of our other industrial end markets, including multiple precision manufacturing applications, driven by increased overall adoption of automation-enabling technologies to address workforce shortages, business resiliency, and to address production needs for certain megatrends, such as electric vehicles and green energy investments. Overall, our industrial exposure is steadily geared towards markets with secular growth outlooks. In just our market electronics markets, which represented less than 8% of sales in the quarter, the dynamics are roughly the same as we said in our last call. In the quarter, we saw a nearly 40% decline year over year from the cyclical downturn in this market, particularly driven by our PCBA vehicle drilling business, which is now run rating at just a couple of million dollars of sales per quarter, lower than previously expected. We now estimate that the overall drop in microelectronics market will be a 300 to 400 basis point headwind on total Noventa sales growth for the full year. Yet, despite these microeconomic headwinds, Noventa's diversified end market exposure shows the strength of our strategy and focus, enabling the business to show strong growth in the second quarter. From a regional perspective, in the second quarter, sales to North America grew 24% year over year and sales in Europe declined by 6%. which reflects the market economic slowdown in this region is working through, and its connections with the China market. Sales in China, which represented about 9 percent of overall sales, declined 30 percent year over year, which was caused by the decline in market electronics revenue, the industrial robotics pause, and overall market economic weakness in China right now. These regional trends are expected to continue in the third and fourth quarter, with a recovery coming in 2024. Now, let me touch on some of Noventa's strategic growth metrics. For our design wins, year-to-date, we have had an expected year-over-year decline, which is mainly time-related. We had a tough year-over-year comparison from large design wins achieved in the first half of 2022, mainly in our minimally invasive surgery business. As we've reported previously, our MIS business won large new product platforms in early 2022, With both existing and new customers, which we expect will contribute significantly to our revenue growth in 2025 and beyond. So, despite the tough comparison for design and so far this year, we feel good about the absolute dollar wins in dollar terms and we expect to return to growth and design which year over year as the year progresses. Next, our vitality index in the second quarter was at about mid-teens percentage of sales, which was roughly the same as prior quarter and in line with our expectations. As a reminder, 2023 is a transition year for our vitality index, with several top products going beyond their four-year milestone this year. This means they are no longer tracking the index, but they continue to contribute significantly to overall sales growth. We expect our Vitality Index to stay at roughly this mid-teens level for most of 2023. But given that our R&D Brightline is the strongest in a decade, we expect this index to rebound in 2024 and beyond as we launch and ramp multiple new product platforms, both this year and next year. On that note, in 2023, year to date, we're pleased to report that we've launched multiple exciting new products across our businesses, and I will share a few highlights. First, in our precision medicine manufacturing segment, we recently launched the new Firefly 3D ScanHead subsystem, which has been specially designed for metal-based laser additive manufacturing and electric vehicle battery processing. This product combines our highest performing digital galvanometers with our proprietary beryllium optics technology. to enable the levels of extreme speed, accuracy, and low drift needed in these demanding application areas. Next, in our robotics and automation segment, we recently launched the new Denali server drive, which is the smallest and most power-dense server drive in the world. This product sets new standards for safety and efficiency for a server drive, while also being incredibly compact in size, yet easy to integrate. The Denali servo drive is designed for using robotic joints, lab automation equipment, service robotics, and haptic systems. We also launched next-generation four-stroke sensors for these same segments as well as robotic surgery. One more highlight, also in robotics and automation, is our new Series A tool changer product line. This end-of-arm technology is the latest generation of robotic tool changers, which are located in the wrist of the robot and permit single robots to be designed for multiple tasks. Series 8 is a great option for electric vehicle production lines due to the versatility it offers and an attractive price point to the end user. These are just a few examples of leading-edge products we've introduced this year. We're proud of the efforts and innovations of our talented engineering teams and their ability to design products that help create productivity and value for our customers. Moving on, I'm proud to see how our teams are doubling down on the Noventa Growth System, or NGS. During the second quarter, we brought together 100 of our leaders to meet and further accelerate NGS momentum. Results of fast backlog reduction, delivery, and quality improvement, improving time to market over new products, gross margin expansion, and cash flow conversions are all being driven and becoming apparent using the NGS tools and processes. Next, I'd like to give you a brief update on Noventa's acquisition integration activities. We are approaching our first anniversary of our acquisition of MPH medical devices, and the integration continues to progress ahead of our expectations. Customer qualification of the site are well on their way, and the team continues to ramp up its capabilities to produce Noventa's own proprietary medical consumable products at production volumes. We feel great about the progress being made and feel we are on track to achieve our plans for both capacity expansion and margin expansion, which this site is enabling for our medical solutions segment. In summary, we had a terrific second quarter and a great first half of the year. We had excellent sales growth driven by strong demand in medical and markets. We also delivered very healthy margin expansion and profit growth, which is based on great progress in deploying the Noventa Growth System. Our strong performance in the first half is helping us to balance some of the risks we're now seeing in the second half of the year. So this gives us confidence to narrow the range of our full-year guidance, which Robert will speak to in a moment. We believe Noventa's long-term strategic positioning continues to be extremely strong, and we're staying the course on executing our strategy and capital deployment model. We see continued success in attracting and retaining top talent and further establishing a thriving company culture built for the long term. With that, I will turn the call over to Robert to provide more details on our operations and financial performance. Robert.