Novanta Inc.

Good morning. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome everyone to Novanta Incorporated's first quarter 2024 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 telephone keypad. To withdraw your question, please press star, then two. 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 first quarter 2024 earnings conference call. I'm Ray Nash, Corporate Finance Leader for 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'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, I 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.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered great operating performance in the first quarter of 2024, I'm very pleased with how our teams delivered revenue, profit, and cash flow performance above our expectations in a dynamic market environment. For the first quarter, we delivered $231 million in revenue, which beat our previous guidance and represents reported growth of plus 5% and a decline of 4% on an organic basis. Adjusted gross margins were at 46%, which was slightly up year-over-year as our core businesses expanded margins by nearly 200 basis points year-over-year, which more than offset the dilutive effect of the motion solutions acquisition. Adjusted EBITDA was $50 million, beating our expectations and prior guidance. Operating cash flow was very strong for the third straight quarter at approximately $33 million, which represents more than 200% growth year over year. This operating performance reflects excellent execution by our teams in a challenging macroeconomic environment. The Sticky Noventa business model with diversified exposure to long lifecycle customer platforms in secular high growth markets has proven resilient under multiple geopolitical and macroeconomic scenarios. Our proprietary technologies are well positioned in medical and advanced industrial applications with long-term secular tailwinds such as robotics and automation, minimally invasive and robotic surgery, and precision medicine. In the first quarter, the broader end market themes were consistent with what we saw at the end of 2023, namely that medical technology markets continue to be robust, whereas life sciences and advanced industrial markets remain subdued due to the interest rate and regional economic challenges. Microelectronics remained stable at a lower level with some early signs of green shoots gradually appearing. As a result of this, our view of customer demand for the full year is consistent with what we said in our last earnings call. We continue to see a weaker demand environment in the first half of 2024. However, in the second half of the year, we continue to expect accelerating momentum for Noventa on the back of our new product launches. Therefore, we're staying focused on what we can control, which is reflected in our top three priorities for 2024. First, launch a record set of new products which ramp in the back half of the year. Second, expand margins and cash flow using the Noventa growth system. And third, continue to acquire additional companies that fit our strategy and attractive returns. Turning back to the first quarter, we saw strong sequential improvement in our bookings activity, with bookings growing more than 20 percent sequentially, excluding the sequential impact of the motion solutions acquisition. Our total book-to-bill was 0.87, which is also an incremental improvement versus last quarter. We see this as a sign of bookings and market stabilization, with some end markers already showing early signs of improvement. Going into more detail, for the first quarter in 2024, Sales to medical markets made up approximately 55 percent of total Noventa sales and grew 9 percent versus the prior year on a reported basis, but declined low single digits on an organic basis. We saw strong double-digit growth in multiple application areas. However, this market-based growth was offset by a few factors. First, as we discussed before, we see some timing-related impacts from some of our medical customers managing current inventory levels in the first half. to help build up demand for their product launches in the second half. In addition, we are proactively winding down some older non-strategic product categories, such as surgical displays, to relocate resources to create additional capacity and support for the significant ramp over next-generation medical insufflaters. The accelerated exit of these non-core products in close collaboration with our customers will be a one- to two-point headwind on overall Noventa sales in the second quarter and will also have an impact for the rest of the year but significantly de-risks the new product ramps in the second half. Turning to the advanced industrial markets, for the first quarter, sales to advanced industrial markets excluding microelectronics applications were up 3 percent year-over-year on a reported basis and down 1 percent on an organic basis. It made up approximately 37% of total Noventa sales. This muted sales performance across this end market was in line with our expectations due to the interest rate environment and regional economic challenges. While these trends are expected to continue in the near term, customers are using the slowdown to catch up on next generation innovations. As a reminder, Noventa plays in advanced industrial applications with long-term mid to high single-digit growth, driven by secular trends such as Industry 4.0, robotics and automation, and precision manufacturing. Finally, speaking to our microelectronics applications, these represented just 8 percent of sales in the first quarter, and sales were roughly consistent sequentially, and there was a negligible impact on year-over-year sales growth. Across all our end markets, we continue to stay focused on gaining content and share with intelligent subsystems into multiple high-growth application areas. A new product pipeline is geared towards intelligent subsystems in strategic growth applications such as minimally invasive surgery, robotic surgery, next-generation lithography, precision medicine and precision manufacturing applications, and advanced motion solutions for robotics and automation applications. We are confidently leading in with a record amount of new product launches in 2024, up 50% versus 2023, with more scheduled for 2025. This positions us to deliver greater than $50 million of incremental revenue in 2025 with strong growth in the next several years following that. Now, let me touch on some of Noventa's growth, strategic growth metrics. We remain excited by our momentum in customer wins and our strongest new product lineup in a decade. we should help to continue to deliver attractive long-term organic growth for Novanta in 2025 and beyond. For our design wins, we saw double-digit growth versus the prior year. We saw excellent design win activity in multiple businesses, particularly with our customers in medical and markets, as well as robotics and automation and markets. Our vitality index, which is sales from new products launched in the past four years, in the first quarter, we're still at about mid-teens percentage of sales. This was in line with our expectations. As stated before, we expect our Vitality Index to rebound to above 20% in late 2024, driven by our pipeline of new product launches. I want to highlight five new product platforms we have recently launched, which will begin ramping in the second half of 2024. First, new versions of our Versia laser scanner platform providing higher throughput and yield and better integration in solar, additive manufacturing, and EV battery processing applications. Second, our ultra-compact servo drive Everest S that provides world-leading power density for surgical robotics, humanoid robots, and warehouse automation. Next, our second-generation smoke evacuation insufflator Fourth, our RFID M7E reader, allowing easy integration in medical and advanced industrial applications. And fifth, our SANO four-stroke sensor, specifically designed for robotic surgery applications. We're mostly on track for the remaining product launches in 2024, with some launches depending on customer timing. Moving on, I'm pleased to see continued momentum with how our teams are using the Noventa growth system in their daily work to drive execution of our priorities. We recently held one of our annual President Kaizen Weeks, where we had more than a dozen concurrent Kaizen events happening at once, with close to 100 of our leaders and team members participating. All the events were focused on our core priorities I mentioned before, including our readiness for our upcoming new product launches, improvements to our commercial excellence tools, factory efficiency initiative, and improved customer delivery performance. NGS is truly becoming a foundational part of our operations and culture. Finally, I'd like to give you a brief update on Aventa's acquisition activities. The integration of motion solutions is on schedule. I visited the Motion Solutions team recently, and I continue to be impressed by the quality and engagement of the team, their customer intimacy, and their innovation focus. The Motion Solutions business is an excellent cultural fit with an event of family, as we all share a passion for solving demanding problems for OEM customers in the growing precision medicine space. We're pleased with how well the teams in the medical solution space are working well together, and its thesis for the transaction is intact and progressing well. In addition, acquisitions continue to remain Noventa's top priority for capital allocation. We have a strong pipeline of potential targets. Our balance sheet is strong, positioning us well to execute additional transactions. And therefore, you should expect us to continue to be active in the marketplace in 2024. In summary, in the first quarter of 2024, Noventa achieved great operating results in an uncertain macroeconomic environment. We beat expectations for sales, margins, EBITDA, and cash flows. We are on track with our product launches, which will begin to ramp later in the year, and the integration of motion solutions is progressing nicely. Overall, another strong quarter for the company. With that, I will turn the call over to Robert to provide more details on the operations and financial performance. Robert? Thank you, Matthias, and good morning, everyone.