Novanta Inc (NOVT) 2024 Q1 法說會逐字稿

Good morning. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome everyone to the Novanta Inc. First-Quarter 2024 earnings call. (Operator Instructions) 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, Finance Leader for Novanta. With me on today's call is our Chair and Chief Executive Officer, Matthijs Glastra; and our Chief Financial Officer, Robert Buckley.

If you've not received a copy of our earnings press release issued today in the appendix of 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.

Our comments today from my prepared remarks and in our responses to questions may include forward-looking statements. These involve inherent assumptions with known and unknown risks and other factors that may cause our future results to differ materially from our current expectations.

Forward-looking statements represent our views only as of the time you disclaim any obligation to update forward-looking statements in the future, even if our estimates you should not rely on 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 available as an attachment to our earnings press release, we extended a few non-GAAP financial measures during this call that are not reconciled to GAAP measures in the earnings press release. We'll provide reconciliations promptly on the Investor Relations section of our website after this call, and we often introduce the Chair and Chief Executive Officer of Novata, Matthijs Glastra.

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 gross margin performance. Composite spread completions in a dynamic market environment.

For the first quarter, we delivered $231 million in revenue, which beat our previous guidance and represents solid 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. It is operating performance reflects excellent execution by our teams in a challenging macroeconomic environment since taking over the business model with diversified exposure to long life-cycle customer platforms and 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 Houston automation, minimally invasive and robotic surgery and precision medicine in the first quarter.

The border and parking fees were consistent with what we saw at the end of 2023, mainly at medical technology markets continued to be robust whereas life sciences and advanced industrial markets remain subdued, particularly 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 from November on the back of our new product launches so therefore, we're staying focused on what we can control, which is reflected in our top three priorities for 2024.

First, plunger records set of new products, which ramped in the back half of the year. Second, expand margins and cash flow using the gross income. And third, continue to acquire additional companies that fit our strategy at its maximum.

Turning back to the first quarter, we saw strong sequential improvement in our bookings activity, with bookings growing more than 20% sequentially. Excluding the sequential impact of conversion Solutions acquisition, our total book-to-bill was [0.87], which is also an incremental improvement versus last quarter.

We see that this is a sign of market stabilization with some end market is already showing early signs of improvement going into more details. First-Quarter 2024 sales of medical markets made up approximately 55% of total sales and grew 9% versus the prior year. On a reported basis, it's slightly low single digits on an organic basis. We saw strong double-digit growth in mobile application areas. However, these 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 the product launches in the second.

In addition, we are proactively winding down some older nonstrategic product categories such as surgical displays, reallocate resources to create additional capacity and support for the significant ramp of next-generation medical and suppliers, accelerated access for these non-core products and close collaboration with our customers from day one to two point headwind on overall move into sales in the second quarter and will also have an impact for the rest of the year, significantly with 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% year over year on a reported basis and down 1% on an organic basis. It made up approximately 37% of total November sales.

(Inaudible) 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 this slowdown to catch up on next-generation innovations.

As a reminder, November plays in advanced industrial applications with long term, mid to high single digit growth, driven by secular trends such as industry called Auto, robotics and automation and precision manufacturing.

Our move into our marketing products applications represented just 8% of sales in the first quarter. Sales were roughly consistent sequentially, and that was a negligible impact on year-over-year sales growth because or in groceries, we continue to stay focused on home and then share with intelligent subsystems into multiple high-growth application areas.

Our new product line 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 leaning in with a record amount of new product launches in 2024 up to [50%] because this kind of 2023 with more scheduled for 2025. This positions us to deliver greater than $50 million of incremental revenue in 2025, strong growth in the next several years following that.

Now let me touch on some of the rental growth strategic growth metrics for. We do remain excited by our momentum in customer wins and our strongest new product lineup in a decade, which should help to continue to deliver long-term organic growth for events 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 end markets as well as robotics and automation end markets. Our vitality index, which is coming from new products launched in the last four years in the first quarter was close at about mid-teens percentage of sales was in line with our expectations.

As stated before, we expect that some of the investor rebound grew about 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, our new versions of our Versia laser scanner platform containing higher throughput and yields, better integration in solar manufacturing and easy battery processing applications.

Second, our full truckload Baxter withdraws I wish to ask it provides world-leading power density surgical robotics, humanized robots and warehouse automation. Next, our second generation smoke evacuation inflator.

Fourth, our advisory revenue leader, allowing easy integration and topical tenants, class industrial applications. (technical difficulty) specifically designed to robotic surgery applications are mostly on track for the remaining product launches in 2024 some launches, depending on our customer timing.

Moving on, I'm pleased to see continued momentum with our teams are using the no definite growth system in their day. We drive execution of our priorities recently held one of our annual President's hygiene weeks where we had more than a [dozen] concurrent kind of any events happening at once with close to 100 of our leaders and team members participating.

In 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 initiatives 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 the acquisition activities. The integration of Motorola Solutions is on schedule a visit as a moat has moved his team recently, and I continue to be impressed by the quality innovation that we've seen, customer intimacy and our innovation centers.

Motion solutions business is an excellent cultural fit with the family as we all share a passion for solving demanding Pharmos core OEM customers for the growing precision medicine space. We're pleased with how well the teams in the medical solutions are working well together, and it pleases quarterly transaction is in fact progressing well.

In addition to acquisitions, continue to remain prevents a top priority for capital allocation. We have a strong pipeline of potential targets in 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, that's great operating results in an uncertain market phenomenon environment. Our 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 Motorola 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.

Thanks, Brian, and good morning, everyone for Q4 2024 non-GAAP adjusted gross profit was $107 million or 46% adjusted gross margin compared to $101 million or 46% adjusted gross margin in the first quarter of 2023.

For the quarter, adjusted gross margins were up 35 basis points year over year, and excluding the impact of the motion solutions acquisition, our adjusted gross margins were up roughly 200 basis points. Our margin expansion continues to be largely driven by the deployment and successful adoption of the new asset growth at some productivity tools in our factories and in our operating team.

For the first quarter, R&D expenses were roughly $23 million or 10% of sales. SG&A expenses were approximately $44 million or 19% of sales. Adjusted EBITDA was approximately $50 million in the first quarter of 2024 for 22% adjusted EBITDA margin compared to $47 million in the prior year.

On the tax front, our non-GAAP tax rate for the first quarter were 16%. Our tax rate is typically lower in the first quarter, but remains on track to our estimate of 18% for the full year. Our non-GAAP adjusted earnings per share was [$0.74] compared to $0.74 last year. Our EPS growth remains muted due to both the higher interest rates and higher debt balances from the motion solutions acquisition.

First quarter operating cash flow was approximately $33 million compared to $10 million in the first quarter of 2023, an increase of greater than 200% year over year. We are pleased with the improvement in cash flow and expect to continue this momentum continuously managing our cost of capital and driving strong operating profits. We ended the first quarter gross debt at $517 million, with a gross leverage ratio of 2.6 times and our [debt was $484 million].

I'll now turn to an update of progress of our operating segments. It has been about it's been a manufacturing segment. First quarter sales declined 6% year-over-year in line with prior guidance. Profitability in this segment was [0.72], which is up sequentially but down year-over-year.

Adjusted gross margins in this segment were down slightly year over year. Comps essentially are 140 basis points. New product revenues were approximately mid-teens percent of sales in line with company average prime wins in this segment were down year over year, driven by the timing of promotional activities, which we expect to recover in the second half of the year.

Product and automation segment experienced a revenue decline of 12% year over year in the quarter, in line with our expectations and prior guidance. The overall book-to-bill ratio in this segment was [0.99]. This strong sequential improvement is indicative of a more stable demand environment across the business in a tough market bookings grew 10% year over year and 80% sequentially. Adjusted gross margins increased nearly 300 basis points, largely in line with the fourth core. Product revenue was roughly 10% of sales design wins in this segment more than doubled year over year.

Our Medical Solutions segment group reported growth of 32% year over year and 5% from organic growth figures, but that isn't our expectation. Segments of the bill of [0.68] and sort of the [29%] growth in bookings sequentially, adjusted gross margins experienced a 70 basis points year-over-year improvement. Excluding motion solutions, the margin expansion in this segment was nearly 400 basis points. The vitality index of this segment remained at 18% of sales level in line with our expectations. We expect this metric to continue to accelerate in 2024 as we ramp our new product.

(Inaudible) more than tripled year over year. Overall, our businesses performed at or better than we expected and were able to handle a variety of challenges caused by the shifting macroeconomics in terms of our hopper and our businesses the company's strategy is to deliver consistent, predictable, sustainable growth.

Turning now to guidance in our end markets, I see the same dynamic quarter for tenant for guidance for the second quarter that largely mirrors our first quarter results, which is in line with the guidance we provided back in February and continued strength in surgical equipment and hospital spending in general patient receivables growth continues to discuss geographical carcass by the health care systems, coupled with strong pipeline of innovation, largely scheduled to begin ramping in the second half was from high school as a consequence, we are taking the opportunity to accelerate access to some non-strategic product lines or surgical displays business.

It creates the need to execute for our customers and shareholders of the exit of these non-core product lines, it's likely a 200 basis points headwind on Solomon Asset growth in the second quarter, the full year and positioned us well to ensure a successful ramp for our new products in 2024.

Our customers tend to need to accelerate the precision medicine space, personalized bio processing markets. Customers continue to see a more stable environment with some signs of strengthening as we remain cautiously optimistic that spending patterns will improve. Thank you. We didn't make any predictions with that.

Turning to our advanced sensor, we continue to see signs of gradually improving capital spending environment, however, also remain focused on controlling our outcomes. So we see the best health conscious, as Matthias has discussed before, we expect to launch new products in the second half in both precision manufacturing and robotics and automation businesses. Beyond the guidance, GAAP revenue in the range of $230 million to $235 million, which represents organic revenue decline of [6% and 8%] on a year-over-year basis.

As far as your comparisons in the second quarter, we're also taking the opportunity to accelerate the end-of-life of the two product lines, including the virtual display business, as mentioned before, is from supporting these legacy product lines supporting our new product platforms helps to de-risk those launches and ensure we excel at meeting our of second half new product launches on track and in a strengthening demand environment.

At the segment level, on the second quarter, we expect precision medicine mix. Our robotic and automation segment revenues expected to decline high single digit percentage of sales year over year in the second quarter. And finally, our Medical Solutions segment is expected to keep its fourth quarter financial performance, demonstrating year-over-year double-digit reported revenue growth and the discontinuing of legacy product lines.

Moving on to adjusted gross margin, we expect it will also mirror the performance we demonstrated in the first quarter with a range of [43%]. In the segment gross margins from near the gross margins they delivered in the first quarter we expect R&D and SG&A expenses to be there. Depreciation expense was $2.5 million in the first quarter should be slightly below $4 million in the second quarter. Stock compensation plan assets, even though we expect the range of $48 million to $50 million.

Interest expense as expected, nearly $0.5 million, sorry to hear about 18% for the quarter and three more for the full year for adjusted earnings per share, we've got a range of $0.68 continued to be strong in the second quarter call and the continued momentum from Q1 as we continue to rigorously manage our inventory and net working capital levels.

Further acquisitions to either continue to use our cash flows to pay down existing debt and reduce our gross leverage, putting us in a strong position to execute the next catalyst. It does, however, in periods of the signs of an improving environment is too early to update our full year guidance.

We continue to expect that growth will return to the current premises and accelerate from there. Our conversations with our customers, particularly around our medical devices continues to give us confidence that demand of these products, we are taking steps to better position our business.

To wrap up, we are proud of this performance in the first quarter which reflected excellent execution by our teams who delivered revenue from communications in a challenging operating environment.

This performance is another testament to the resiliency of our business portfolio and tenacity of our teams to achieve great for our employees for their efforts to help us succeed in a dynamic environment. We remain grateful for our customers' confidence in our ability to deliver them the communications they need to be successful, delivering on our commitments to our employees, our customers and our shareholders.

And this concludes the prepared remarks. We'll now open the call up for questions.

(Operator Instructions) Lee Jagoda, CJS Securities.

Good morning from. Are you freeing up additional capacity or is there other reasons why we're end of lifing those products down?

Not only to increase the capacity from a operating model perspective and in the manufacturing team's ability to execute on it. But it also frees up capacity from an engineering support perspective. And so it really solidifies our ability to execute on those launches in the back half of the year and gives us the utmost confidence that we can patients particularly given the demand environment remains, it's a strong and medical side.

Got and I guess drilling down into the new product, can you speak to the variability that we should project in the model and how much of that is within your control versus or --?

Yeah. I mean, listen, I what I said in my prepared remarks is that I'd say on the overall, we gave you a product like this. There are some pluses and minuses, return margins to them and are ahead of schedule, you know, a little bit delayed, but on average, we feel very good. And the delays were primarily linked to customers' timing. But I would say overall, if you average it all out, we feel good, but we're rounding out the inter-company [up].

And then Robert, one more for me and I'll hop back in queue. I think in the last call you were saying the top end of your revenue range sort of didn't model any improvements on the sort of the status quo from a market demand standpoint. Can you update us on your expectations around the market environment and how you think about high end full year guidance?

I would say the environment has not materially changed from when we last spoke to you back in February. I think some clients remain optimistic but there's a lot of I've got a lot of noise out there. So I don't think we're ready to make any predictions on the full year. But just to say that back from when we gave the guidance in February is in seven, you really changed from there.

Okay. Sounds great. Thank you.

Brian Drab, William Blair.

Good morning. First, just wanted to ask, given we have a full quarter of some also in the numbers here, the OpEx came in a little bit below where we were modeling at $67 million. Is there kind of a steady-state number? How can you help us model OpEx line?

No. OpEx to tick up a little bit as you get into the second quarter or some part of that is in some cases, mostly in R&D expense. So just spending a little bit more money to make sure those new product launches are being done on time on schedule, I won't get into I gave some guidance around the second quarter. I think we're in the second quarter you can see that if we pick up a little bit from there, I think that will remain fairly steady state as you get into the back half of the year.

Okay. So was there anything unusual in the first quarter maybe related to that acquisition or integration or any anything there? I've hit after that it not going to later.

Our OpEx of [$67 million] in the first quarter. We're predicting say something closer to [$59 million] in the second quarter. So there's nothing specific to the motion solutions business. It really is hard to see that difference. So is oriented towards new product launches.

Understood. Related to the new products, I think you changed the language should today maybe between faster is the greater than $50 million? And I believe today, is that a change in language around your expectation for some of these new products platforms?

Yeah, I mean what we said is that the incremental revenue in 2025 is this $50 million or more and which is of the overall and which is net of, let's say, any cannibalization or let's say, end of the first flight of other products and scarring as a result of Fusion products.

So that's what we said. And that's, you know, signify a confidence in the momentum we have in leverage multiple product lines is across multiple businesses with multiple customers. So we feel so good about So diversification of risk driver and updating on a single product rotation customer here. So it's pretty (Inaudible).

Okay. And then we have sort of already open, to some extent, you're formally not mentioning anything really about time. The full year guidance that you gave previously due to a previous visit is the statement that we already gave guidance and we haven't seen the environment change that materially and just look at what we said before, is there anything that's reduced visibility on hasn't have fun that I have been communicating (technical difficulty). Thanks.

Yes, I would say from a macro or kind of industry-specific, you know, kind of capability. I don't think anything materially changed from what we gave the guidance back in February. And so I don't you know, as we look at the full year, you know there, it's still too early to say. There are things that we would do that make adjustments for the full year.

I think we'll get into the second quarter and we'll have greater visibility in the back half of the year, particularly on those and execute on those new product launches. And there are some reasons to be optimistic. It's one of the reasons why we're exiting roughly $10 million of business currently. So we can get to position for that and make sure that we have a more successful launch around those products that are not too optimistic. So I would say, you know, looking at what we said in February, and we would reiterate what we said in February.

That's understood. Thanks.

Thank you , Graham.

Rob Mason, Baird.

I guess good morning.

Good morning.

One of common refrain just as we've come through this earnings season from component suppliers. Companies like yourself has been that point. Inventory levels have been slowed or slower to come down maybe than expected taking longer. But just curious how you're seeing that is the OEM inventory levels of your customers right now, your level of visibility into that and what kind of patients that are on to and get where they need to be to trigger more productivity?

Yes. So I mean, one of the things that sort of thing and so for our business, particularly our OEMs typically don't hold a lot of them as we sell as part of their supply chain as a banker to their supply chain. In the end, the majority of business that we do is a tough time type of setup. And so the inventory commentary that's coming out there where there might be too much inventory and this value stream is really associated with their customers.

Those are commentary that you see more prevailing obviously in the semiconductor market, which is manifested in our numbers and more per gallon into the industrial side of the business, specifically things tied around robotics industry. And you have a more difficult time seeing through our customers to see how much inventory is out there in the chain.

But I was just kind of generally speaking here, I don't think things have changed from what we decide is that February profitability is built in the same the trend lines, I think, very similar to what we were anticipating until we've got it first half of the year.

Yes. Yes, funded, I would add, Rob, is that it's very end market dynamic dependent, Robert 30 cases to some color for end market. I would say medical devices, very strong rise of the same, not a lot of inventory, great plan and Australia is quite tight. So I would have thought.

Okay. And this mission as well, you're starting to see some green shoots in the microelectronics business. I'm just curious if you could elaborate here on what you're seeing and maybe how that translates as you go through the year, given that we were kind of flattish sequentially in the first quarter?

Yes, those kinds of very early. I mean, we just see some things normalization, right and higher and therefore, some customers, not everybody, but some customers queuing up for a better second half than it is segment specific customers to something that says no and across-the-board.

And that's why we said we see in the reinsurance side, it's smart. It's got everywhere business basically for some of our businesses that important has been our price achievement here sequentially, improving from here, which is what you saw in your robotics and automation settlement works for the majority of our market exposures.

So this is the last question. Just I wanted to be clear on the end-of-life of surgical displays and or the patient can continue and continue to work with your customers on that will there be any tail of that move on and carries over into 2025? Or will you should we take that from incremental step down as complete by year end?

Yes, most of this will go to the second quarter. So, you know, I would say that whatever revenue we have in the back half of the year, that material for the total company. So we're really capturing account. We have what occurred in the first quarter was down and then it's largely longer in our numbers in the back half of the year. It's no longer --.

Great Thank you .

This concludes our question and answer session. I would like to turn the conference back over to Mr. Matthijs Glastra for any closing remarks.

Thank you, operator. And so to recap, Nevada had a strong start of the year. We did our expectations for sales margins, profit and cash flows are making great progress on our four priorities not despite some challenges and uncertainty in the end markets we serve.

We also made great progress in integrating the motion solutions acquisitions, which will be an attractive growth platform for us November remains well-positioned in the Medicaid business, industrial end markets, diversified exposure to long-term secular market trends in robotics and automation, precision medicine, minimally invasive surgery and industry [Cornova]. We're excited on the large product launches starting later this year.

So we will continue to focus on additional design wins in high-growth applications as well as doubling down on the Novanta Growth System to drive strong cash flows and growth margin expansion. In closing, as always, our customers, our employees and our shareholders for their ongoing support. I continue to be especially grateful for the dedicated efforts of all of our Novanta employees who work diligently every day, taking on new challenges and striving to make the company a great place to work.

We appreciate your interest and your participation in today's call, and I look forward to joining all of you in several months on our second quarter of 2024. Thank you very much. This call is now adjourned.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.