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 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 touch-tone 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 third quarter 2023 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 Glostra, and our chief financial officer, Robert Buckley. If you've 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 Glastrup.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Noventa had a solid third quarter with strong operating performance, delivering profit and cash flow above our expectations. Our revenue was in line with previously issued guidance. In the quarter, we delivered $222 million in revenue, representing a 1% year-over-year revenue decline on a reported basis, a 3% decline on an organic basis. Excluding microelectronic applications, our growth in the quarter was up low single digits. We recorded gross margins of 47% in the quarter and an adjusted EBITDA margin of nearly 24%. In addition, our cash flow was up over two times the prior year and at more than 175% conversion to net income. This operating performance reflects excellent execution by our teams in an increasingly challenging microeconomic environment. The Noventa business model, with diversified exposure to secular high-growth markets, has proven resilient under multiple geopolitical and market economic 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. Medical applications now make up nearly 60% of our sales versus single-digit percentage of sales a decade ago, which we believe provides Noventa with greater resilience during fluctuating macroeconomic conditions. We feel that our strong customer relationship with the leading OEMs in these medical and advanced industrial applications, the strength and diversification of our portfolio, and Our sticky business model will allow Noventa to deliver and drive better performance through the economic cycles. In the third quarter, the Noventa team has made excellent progress in bringing down lead times to our customers. The consequence of this change is that customers do not need to place long-term orders anymore, resulting in a book-to-bill of 0.8, which was in line with our expectations. However, this change in lead times improves customer satisfaction and allows the business to better trend with end market demand dynamics. Speaking to the business environment more broadly, in the past couple of months, we started to see more caution in some of our customers' ordering behavior. With the rapid rise in interest rates in the last months, continued weakness in China, and expanding geopolitical unrest, our OEM customers have seen their customers slow down ordering, particularly in industrial, and more recently, some life science applications. While this has clearly been evident in the global purchasing managers' indices for industrial spending, the rapid rise in interest rates has caused other capital markets to be more cautious as well, deferring purchases until the new year. Given the strong secular growth drivers behind our markets and our customers' engagement on innovation, we see these current dynamics as temporary, despite the impact on the fourth quarter. Robert will discuss these dynamics in more detail when he covers guidance. It is important to note that the Noventa playbook and business model have demonstrated the ability to effectively navigate short-term headwinds. We've accomplished this while at the same time staying focused on making investments that expand our presence in secular high-growth markets. We continue to see active engagement and urgency with our customers to ensure their new product launches are a success. As a result, we're seeing a broad new product super cycle entering late in 2024 and in 2025 and beyond with key drivers including smoke evacuation, insufflation, robotic surgery, next generation lithography, laser beam steering for advanced material processing such as laser additive manufacturing and micro machining, robotic end effector sensors, and mobile robotics. Given our sticky business model in these long lifecycle growth applications, we strongly believe the mid- and long-term outlook of our business, our end markets, and an event organic growth algorithm to be intact. Looking back to the third quarter, the broader end market themes were that medical markets continue to be strong, industrial markets are decelerating in line with the PMI indices and interest rate environment, and microelectronics is bottoming at a low level. Excluding microelectronics, Noventa revenue growth would have been up low single digits year-over-year in the quarter. Going into more detail, sales to medical markets remained strong in the quarter, growing 12% versus the prior year and making up approximately 57% of total Noventa sales. During the quarter, we saw increased shipments to many of our medical OEM customers with noteworthy strength in minimally invasive surgery equipment and consumables, surgical robotics, DNA sequencing, and integrated operating room equipment. These categories all saw double-digit growth in sales year-over-year, where long-term secular growth is driven by patient surgical procedure growth rates and advancements in biopharma technologies, including next-generation DNA sequencing. We continue to find new growth opportunities in our medical markets. For example, we see opportunities to expand our presence in DNA sequencing DNA sequencing to the broader precision medicine market, including spatial biology, multiomics, and other clinical life science applications by combining the proprietary Noventa technologies into unique solutions for our customers. In doing so, we believe we can help our customers win by shortening their time to market and enhancing their differentiation. In addition, we continue to remain very excited about the long-term secular growth and minimally and robotic surgery markets, with Noventa continuing to win with our next-generation smoke evacuation, endoscopic pump technologies, precision motion drives, and our four-stroke sensors. Turning to advanced industrial markets, our sales in the third quarter, excluding microelectronic applications, were down 6% year over year and made up approximately 36% of total Noventa sales. This sales decline was slightly more than we expected, due to the rapid rise in interest rates and continued weakness in China, impacting the industrial robotics and automotive sectors. While these trends are expected to worsen somewhat in the fourth quarter, customers remain very engaged. They're using the slowdown to catch up on next-generation innovations. As a reminder, Noventa plays in advanced industrial applications with mid- to single-digit growth, driven by secular growth trends such as Industry 4.0, robotics and automation, and precision manufacturing. Finally, our microelectronics markets were 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 nearly a 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 revenue per quarter, which is immaterial to overall company results. We estimate that the overall drop in the microelectronics market will be a 400 basis point headwind on total Noventa sales growth for the full year. Again, excluding microelectronics, Noventa revenue in the third quarter will be up low single digit year over year. As we look out into 2024 and 2025, we do, however, remain excited that the composition of our exposure to this market will be a more secular growing and less volatile business. As we mentioned in prior calls, we believe our exposure to next-generation lithography will continue to grow, positioning us well to capitalize on the less cyclical element of the industry, with at least a decade's worth of growth still ahead of us. From a regional perspective, in the third quarter, sales to North America grew 11% year-over-year and sales in Europe declined by 2%. which reflects the challenging macroeconomic conditions in this region and its connections with the China market. Sales in China, which represented about 7 percent of overall sales, declined 35 percent year-over-year, which was caused by the decline in microelectronics revenue, the industrial robotics pause, and overall microeconomic uncertainty in China right now. These regional trends are expected to continue in the fourth quarter. Now let me touch on some of Noventa's strategic growth metrics. For our design wins in the quarter, we saw significant progress with numerous large customer wins. We had another large win with the leading minimally invasive surgery OEM, where their platform will now incorporate our next generation smoke evacuation insufflator technology. Based on our design wins in this market, we expect Noventa's technology to be the standard of care for minimally invasive surgeries for at least the next decade. In addition, in the quarter, our medical solutions segment also had a large design with a leading player in the integrated operating room market, where our video and data management product will be integrated into a new platform launching in 2025. Finally, this business closer design went within the sports medicine and arthroscopy market with our proprietary pump technology, which is also expected to launch in late 2025 and expands our market share in this application. In the precision medicine and manufacturing and robotics and automation segments, we also had several exciting wins. We continue to make significant progress expanding our exposure to next-generation lithography equipment, an area which has a decade-long growth outlook. Given recent customer announcement, growth in this application is now expected in late 2024, which will accelerate in 2025. We're also very excited by recent design wins in our Forrester Center product line, which enables a sense of end-of-arm touch for robots in industrial and medical applications. After significant effort, this business has started shipping into the medical space, representing a significant milestone in the realization of a critical value driver for the ATI acquisition. In addition, within our robotics and automation segment, we recently won a new multimillion-dollar project with a leading robotics player, who is planning to integrate our miniaturized high-performance server drives into their next generation of advanced mobile robotics. This opportunity will start to ramp up in 2025. We're excited by the impressive accumulation of customer design wins and our strongest innovation pipeline in a decade. We remain highly focused on executing our new product super cycle, starting late in 2024 and into 2025, and reiterate with confidence our overall long-term growth framework of consistent mid to high single-digit organic growth through the business cycles. Next, our vitality index in the third quarter was about mid-teens percentage of sales, which is roughly the same as prior quarter and in line with our expectations. Our new product pipeline is geared towards intelligent subsystems in applications such as minimally invasive surgery, robotic surgery, Next generation precision medicine, laser beam steering for micromachining, electric vehicle, robotic tool changers, precision motion solutions for mobile robotics, and warehouse automation. After our next generation products start launching with customers in late 2024, we expect our vitality index to rebound to above 20%, driving sustained growth and secular growth markets. Moving on, I'm proud to say how our teams are embedding the Noventa Growth System, or NGS, into the way we work. During the third quarter, we held the President's Guys In Week in our medical solutions segment, bringing together dozens of our senior leaders and many other team members to focus on process improvements and problem solving in critical areas for the business, such as the ramp of manufacturing of our in-house medical consumable products at our new Czech Republic factories. We're also using NGS project management tools to compress our time to market of MPI launches and compensate for delays due to supply chain shortages in the last 18 months. A critical tool we're deploying is 80-20 portfolio management. We're using this approach to rationalize a portfolio, reducing our exposure to products that are commoditizing or nearing end of life. We're taking these actions to decrease complexity, improve profitability, in light of near-term market conditions and to allow the teams to focus more on ramping the new, the multiple new products that will be coming online late in 2024. Overall, these tools and Kaizen events are becoming a critical part of our NGS deployment, our culture, and demonstrating our commitment to continuous improvement and our ability to solve complicated problems that benefit our operating performance as well as improve customer satisfaction. Next, I'd like to give you a brief update on Noventa's acquisition activities. Acquisitions remain Noventa's top priority for capital allocation, and you should expect this to continue to be a critical part of our growth strategy. We have multiple active conversations underway today and would expect at least one of these materializing before year-end. You can expect us to lean in on expanding our presence in the megatrends I talked about earlier. We view disruptive macroeconomic environments as an opportunity to take advantage of for M&A activity as sellers change their expectations in light of higher interest rate environment. As such, we expect to be an active acquirer in this environment. In conclusion, we had a solid third quarter with excellent operating performance delivering profits and cash flow ahead of expectations of sales in line with expectations. Despite the short-term macro outlook, 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. With that, I will turn the call over to Robert to provide more details on operations and financial performance. Robert?