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 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 one 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 fourth quarter and full year 2023 earnings conference call. I am Ray Nash, Corporate Finance Leader for 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'm 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. Novanta delivered solid performance in 2023 in the fourth quarter and for the full year. I'm very proud. of how our teams delivered revenue and profit performance above our expectations in a dynamic market environment. For the full year of 2023, we achieved a record $882 million in revenue, expanded adjusted gross margins by over 100 basis points to 47%, and expanded adjusted EBITDA to $196 million, a 100 basis point improvement in EBITDA margins. Our sales grew 2% year-over-year on a reported basis and 1% on an organic basis, excluding microelectronics applications. Our growth for the full year was up high single digits. For the fourth quarter, we delivered $212 million in revenue, which represents a decline of 3% on a reported basis and a decline of 4% on an organic basis, excluding microelectronics our organic growth was down approximately 1%. Adjusted EBITDA was greater than $45 million, beating our expectations and prior guidance. Operating cash flow was very strong for the second straight quarter at approximately $39 million, which represents more than 300% conversion to net income. This operating performance reflects excellent execution by our teams in a challenging market economic environment. In addition to all of this, in 2023, we signed an agreement to acquire Motion Solutions, which will enhance our portfolio and further expand our presence in the highly attractive medical precision medicine space. We're happy to have completed the acquisition at the beginning of January 2024. The Sticky Noventa business model with diversified exposure to long life cycle customer platforms in secular high growth markets. has proven resilient under multiple geopolitical and market economic scenarios. Our proprietary technologies are well positioned in medical and advanced industrial applications with long-term secular children, such as robotics and automation, minimally invasive and robotic surgery, and precision medicine. Medical applications made up 54% of our sales in 2023 versus single-digit percentage of sales a decade ago, which we believe provides Nuvento with greater resilience during fluctuating macroeconomic conditions. We feel that our strong customer relationships with the leading OEMs in these secular growth applications to strengthen diversification of our portfolio and our sticky business model allow Nuvento to drive robust performance through the economic cycles. In the fourth quarter, the border end market themes were that medical markets continue to be strong, life sciences and advanced industrial markets slowed down in line with the PMI indices and interest rate environment, and microelectronics stabilized. With signs, it has now bottomed. In addition, in the fourth quarter, the team made further progress in bringing down lead times to our customers, which are now broadly at pre-pandemic levels. At the same time, some customers slowed ordering to better manage their year-end inventory levels and cash flows. This dynamic resulted in a book-to-bill of 0.7, which was in line with our expectations and should represent the bottom of our bookings trajectory with sequential improvements expected from here. Speaking to the business environment more broadly, as we head into 2024, we are feeling confident in the diversity and breadth of our business portfolio to weather a dynamic environment. As we mentioned in our last earnings call, we continue to see a somewhat weaker demand environment in the first half of 2024, in line with the growth rates we experienced in the second half of 2023. We expect the second half of 2024 to be characterized by a stabilizing interest rate environment with accelerating Noventa momentum on the back of new product launches. We are excited about and confident in the record amount of new product launches we're planning on in 2024. Going into more detail, for the full year of 2023, sales to medical markets made up approximately 54% of total Noventa sales and grew 13%. versus the prior year, driven by strong double-digit growth in minimally invasive surgery, surgical robotics, patient monitoring, in vitro diagnostics, and DNA sequencing applications. In the fourth quarter, sales to medical markets remained steady and roughly flat versus the prior year, again making up approximately 54% of total event of sales. During the quarter, we saw stable levels of shipments to many of our surgical OEM customers. We also saw some decline in our shipments to our life sciences customers, driven by the deferral of end-user orders due to a higher interest rate environment. Turning to advanced industrial markets, for the full year of 2023, sales to advanced industrial markets excluding microelectronic applications were up 1% year-over-year. As a reminder, Noventa plays in advanced industrial applications with mid- to high-single-digit long-term growth driven by secular trends such as Industry 4.0, robotics and automation, and precision manufacturing. Our advanced industrial sales in the fourth quarter were down 1% year-over-year and made approximately 38% of total Noventa sales. The sales decline was in line with our expectations due to the rapid rise in interest rates and continued weakness in China, as well as other geopolitical disruptions. While these trends are expected to continue in the first half of 2024, customers are using the slowdown to catch up on next-generation innovations. Finally, in our microelectronics markets, which represented just 7% of sales in the fourth quarter, the performance was roughly the same as we said in our last call. For the full year of 2023, the overall drop in the microelectronics market was a 700 basis point headwind on total Novanta sales growth, which was larger than we originally anticipated. To repeat from before, excluding market electronics, Noventa revenue growth for the full year was up high single-digit year-over-year. As we look out into 2024 and 2025, we remain excited that the composition of this end market exposure will shift to more secular growing and less cyclical applications, such as next-generation lithography. This application is expected to see a strong tailwind the rest of this decade as a result of global demand for artificial intelligence, electrification, and high-performance computing. We also expect the momentum in this market to sequentially improve with improving factory utilization and normalizing inventory levels. Across all our end markets, we continue to stay focused on gaining content and share with intelligent subsystems into multiple high-growth application areas. We are confidently leaning in with a record amount of new product launches in 2024, up 50% versus 2023 with more scheduled for 2025, all of which will lead to $50 million of new revenue in 2025 with strong growth in the next several years following that. As a reminder, a new product pipeline is geared towards intelligent subsystems and strategic growth applications such as minimally invasive surgery, robotic surgery, next-generation lithography, precision manufacturing applications, and precision motion solutions for robotics and automation applications. Now, let me touch on some of Noventa's strategic growth metrics. For our design wins in the fourth quarter, we saw growth of strong double digits versus prior year. We saw excellent design win activity in multiple businesses, particularly with our advanced industrial customers, which bodes well for future growth in those end markets. Although our full-year design wins were still modestly down year over year, this was partially driven by the large wins in minimally invasive surgery in 2022. Excluding those large platform wins from prior year, Noventa had double-digit design growth in 2023. Our vitality index in the fourth quarter was still at about mid-teens percentage of sales. This was in line with our expectations. We expect our fatality index to rebound to above 20% in late 2024, driven by our pipeline of new product launches. We remain very excited by our momentum in customer wins and our strongest new product lineup in a decade. Based on this, we reiterate with confidence Noventa's long-term growth framework of consistent mid- to high-single-digit organic growth through the business side. Next, I'd like to give you a brief update on Aventa's acquisition activities. As already mentioned, we were very pleased to announce that we completed the acquisition of Motion Solutions in January. As a reminder, Motion Solutions offers customized and high-precision motion subsystems and components to market-leading OEMs centered on medical and life sciences applications. They are a market-leading business, and their team shares our passion for customers, innovation, and solving complex technical challenges. The integration of Motion Solutions is on schedule, and we are seeing a high level of engagement with our team. We are impressed with the strong and sticky customer relationships they have with their OEM customers who are leaders in precision medicine and medical markets. By combining Motion Solutions with Novanta creates the potential to develop new and unique intelligent subsystems using our combined technology offerings. These joint product development activities have already gotten started, and although we are very early on, Our teams are already working seamlessly together, both on the new solutions as well as cross-selling each other's technology to our complementary customer bases. We will be including motion solutions as part of the medical solutions segment for reporting purposes because of the close alignment with the customer base in this segment. The financial outlook for motion solutions looks promising in line with our expectations, and it will be factored into the 2024 guidance with Robert which Robert will share later in this call. Even with the motion solutions transaction, acquisitions remain Noventa's top priority for capital allocation. We have a strong pipeline of potential targets. Our balance sheet is strong and can handle additional transactions. So you should expect us to continue to be active in the marketplace in 2024. Now, I'd like to share a few comments on how we continue to evolve our culture of Noventa called the Noventa Way. We believe that the Noventa Way has been a differentiator in attracting, retaining, and developing core talent. It's ultimately our talent and our culture that will make the difference. We continue to see below-market labor attrition rates, both among our leadership ranks as well as across all our company employees. We're focusing on a few factors to retain our employees, competitive pay, a great company culture, and career development and progressions. We continue to focus on improving our employee engagement scores, and we have invested heavily into leadership development initiatives and employee training on the Noventa growth system. Sustainability also remains an important topic for Noventa. We've made steady progress on our long-term journey, reducing our environmental footprint. And in a few weeks, we will be publishing our 2023 sustainability report, where we will share details on our goals and our accomplishments. One of the most critical aspects of a company culture is embedding the Noventa Growth System, or NGS, to drive excellence into the many ways we work together. In 2023, we've accelerated deployment of the Noventa Growth System deeper into the organization, completing a few dozen Kaizen events, launching many structured problem solving actions, deploying rigorous daily management routines, using 80-20 portfolio management, in utilizing project management planning activities at all levels of the organization to fundamentally improve our operating results. We trained hundreds of Noventa employees on using the NGS tools, from leaders to frontline employees. These efforts have had a dramatic impact on our operations, including throughput and yield improvement in our factories, improving our supply chain and planning processes to enhance delivery performance to our customers, accelerating material and labor productivity, reducing cycle time of back office processes, and improving time to market over new product launches. NGS is truly becoming a fundamental part of Noventa's identity, and it's helping unite our employees by giving us a common language and a common way of collaborating, which is increasing teamwork and successful problem solving. We are very excited to continue to evolve NGS as we head into 2024. In summary, Noventa delivered solid operating performance in 2023 while navigating a dynamic macroeconomic environment. We achieved record sales, strong margin expansion, delivered on our profit commitments, and improved cash flows. We've made great progress in deploying the Noventa growth systems and had continuous success at further establishing a thriving company culture. And we enhanced our portfolio with the Motion Solutions acquisition, which further expands our presence in highly attractive medical and precision medicine end markets. As we look to 2024, we have three priorities. First, launch and ramp a record set of new products. Second, expand our margins and cash flow using NGS. And third, continue to acquire additional companies that fit our strategy and attractive returns. With that, I will turn the call over to Robert to provide more details on our operations of financial performance. Robert.