Novanta Inc.

Good morning. My name is Torben, and I will be your producer today. At this time, I would like to welcome everyone to Novanta Incorporated's second 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 touchtone telephone. 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 second quarter 2024 earnings conference call. This is Ray Nash, Corporate Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthias Flostra, 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 price 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 Glastra.

Thank you, Ray. Good morning, everybody, and thanks for joining our call. Novanta delivered another quarter of outstanding operating results in the second quarter of 2024. Our teams delivered revenue, profit, and cash flow performance above our expectations and prior guidance in a challenging market environment. For the second quarter, we delivered $236 million in revenue, which beat our previous guidance and represents reported growth of 3% and a decline of 5% on an organic basis. Adjusted growth margins were 47%. as core businesses expanded margins by over 100 basis points year over year, offsetting the dilutive effect of the motion solutions acquisition. Adjusted EBITDA was $51 million, beating our expectations and prior guidance. Rating cash flows was very strong for the fourth straight quarter at approximately $41 million, which represents 57% growth year over year. His operating performance reflects excellent execution by our teams in a difficult market economic environment. 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 killings such as robotics and automation, minimally invasive and robotic surgery, and precision medicine. At this time, we see the following themes in our end markets. Overall, we're seeing improving momentum in our business, but with mixed visibility depending on the end market. Medical device technology markets continue to be robust and appear likely to stay strong all year and into 2025. The life sciences markets, including precision medicine applications, are experiencing more prolonged weakness in capital equipment demand by our customers and their customers than previously expected. This is being reported on by many other major players. Although signs of a recovery materializing are certainly there, we expect it to start materializing in our results in 2025. Industrial capital spending overall also continues to remain muted due to the interest rate and regional economic challenges. The larger impacts are seen in Europe and China, consistent with contracting PMIs in Europe and China. At this stage, despite an improving industrial capital spending environment in the US, we're not expecting a broad-based market recovery until 2025. However, there are some bright spots appearing within advanced industry. U.S. revolutionary automation markets are seeing improved demand as evident in our recent bookings growth. And microelectronics and markets are showing solid signs of a rebound, with multiple players predicting a strong recovery ramping up at the beginning of 2025. These spots of growth, coupled with new product timing in lithography, are leading indicators of a broader recovery and therefore a stronger 2025. Our outlook for customer demand for the full year of 2024 now reflects the latest view of these end market dynamics. In the second half of the year, we continue to expect accelerating momentum for Noventa on the back of our new product launches, many of which are focused on the medical device end markets. While this momentum will not be partially offset by the more prolonged weakness in lifestyles and industrial applications, the net result still will be a return to organic growth year over year in the third and the fourth quarter, albeit at a lower growth rate than we previously expected. Despite this near-term challenge in the demand environment in 2024, the fundamentals of Novanta remain very much intact. We continue to stay focused on the things we can control, which is reflected in our top three priorities for 2024, which are, first, launch a record set of new products. 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. And I'm proud to say our teams are executing really well at expanding margins and driving profit and cash flow. As a result, despite a slower revenue ramp-up, we still expect to deliver adjusted EBITDA and adjusted DPS results for the full year, mostly in line with our previously full-year guide. Robert will cover more details on our financial guidance in a few minutes. Turning back to the second quarter, we saw further improvement in our bookings activity, with bookings growing 12% sequentially, and our book to bill was 0.95, which is up versus last quarter, driven by improved bookings in microelectronics, robotics and automation, and medical devices. Going into more detail for the second quarter of 2024, sales to medical markets made up approximately 58% of total Noventa sales and grew 13%. versus the prior year on a reported basis, and also grew 2% on an organic basis. We saw strong growth in multiple application areas, particularly in medical device technology applications. However, this was partially offset by softness in some precision medicine applications and a $2.4 million organic growth headwind after discontinuing our surgical displays product line, which we discussed in our last earnings call. Turning to advanced industrial markets, for the second quarter, sales to advanced industrial markets, excluding our microelectronics applications, were down 11% year-over-year on a reported basis and down 15% on an organic basis and made up approximately 34% of total November sales. The subdued 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 for longer, the 2025 outlook for these markets remains strong, and signs are materializing to support that view. The vendor is positioned in many attractive applications in the advanced industrial sector, which are driven by secular growth trends such as Industry 4.0, robotics and automation, and precision manufacturing. Finally, speaking to our microelectronics applications, these represented just 8% of sales in the second quarter, and sales were roughly consistent sequentially representing a modest increase in 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 area applications such as minimally invasive surgery, robotic surgery, next-generation lithography, precision medicine and manufacturing applications, in advanced motion solutions for robotics and automation applications. Now, let me touch on some of Novanta's strategic growth metrics. For our design wins, we saw solid design activity in multiple businesses, particularly with our customers in medical end markets, as well as robotics and automation end markets. For new product metrics, we continue to confidently lean in with a record amount of new product launches in 2024. up more than 50% versus 2023, with more scheduled for 2025. This positioned us to deliver our goal to $50 million of revenue in 2025 from new product launches, which are incremental to Noventa's current product offerings. We are already seeing some of its incremental revenue in 2024, as multiple new product launches are already ramping their sales. These new products should help Nevada continue to deliver attractive long-term organic growth for many years to come. Our fatality index, which is sales from new products launched in the past four years in the second quarter, was still at about mid-teens percent of sales, but it improved by several percentage points from prior quarter. Sequentially, the second quarter saw a 30% increase in new product sales versus the first quarter. This was in line with our expectations and the gradual ramp of new product launches. As stated before, we expect our fatality index to rebound to above 20% as we launch and ramp our pipeline of new products. I want to highlight five new product platforms we have launched since our last call, which we will begin ramping in the second half of 2024, and are expected to make a strong contribution to our 2025 results. First, the Precision Elephant 3, a uniquely differentiated laser scanning subsystem. This enclosed 5-axis precision subsystem, controlling both the location and angle of incidence, is uniquely positioned for precision manufacturing applications in micromachining, medical, automotive, and semiconductor markets. Second, another launch of our second-generation smoke evacuation platform by our minimally invasive surgery team, this time with a major medical OEM who is a global leader in endoscopy. At this point, we're now a vendor to every major medical endoscopy OEM in the world and are well-positioned in an exciting, accelerating growth category. Third, the launch of a new endoscopic pump platform with a smaller but fast-growing OEM. This is the first step in our strategy to expand in endoscopic pumps, where our share is still relatively low. We are leveraging our Insufflator Playbook expertise and customer relationships to drive growth in endoscopy pumps, which we expect to become one of our next growth engines beyond insufflation. Next, the smallest UFRFID module in the market, ideal for small form factor and portable rain RFID readers that are used to identify and track items in healthcare, manufacturing, and retail. And finally, our RFP miniature absolute encoder with class leading small size and ease of installation for advanced robotics applications in medical and industrial markets. We are on track for the remaining product launches in 2024, as well as some planned launches in 2025, with some launches dependent on customer timing. We will share more details as we progress further into the year. Finally, I'd like to give a brief update on Noventa's acquisition activities. The integration of Motion Solutions remains on track. We continue to be impressed with their team, their customer intimacy, and their excellent innovation capabilities, and we're pleased with how well our teams are integrating together. Although the softness in life science equipment and market is having a near-term impact on Motion Solutions product sales, we believe the thesis for the transaction is, in fact, on progressing well, And we're excited to start seeing this business realize its growth potential as the markets eventually recover. Beyond Motion Solutions, new 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 on additional transactions. Therefore, you should expect us to continue to be active in the marketplace in 2024. In summary, in the second quarter of 2024, Noventa achieved very good operating results in a difficult macroeconomic environment. We beat expectations for sales, margins, EBITDA, and cash flows. We have multiple new products which are beginning to ramp up, and the integration of motion solutions is progressing nicely. Overall, another strong quarter for the company, and we're well positioned for a strong 2025. With that, I will turn the phone over to Robert to provide more details on our operations and financial performance. Robert?